E-mini futures are fractionally lower this morning (0.08%) after Apple's surge helped the DJIA climb above 22,000 for the first time on Wednesday; Global shares declined for the first time in 4 days pressured by tech stocks: Asian shares fell, while Europe pared opening losses to trade unchanged.
Global markets fell on Thursday, as the MSCI All-Country World Index declined for the first time in four days, led by a tumble in tech shares as investors locked in recent gains after Wall Street's Dow Jones Industrial Average broke the 22,000 barrier for the first tim. Despite the Dow's record close above 22,000, caution crept into Asian trading as the MSCI's index of Asia-Pacific shares ex-Japan fell 0.7%, with China, HK, Japan and Australia all down, while South Korean stocks plunged 1.7%, the biggest drop since November on plans to raise taxes for big corporations. The Kospi index fell as much as 2.2 percent, the most since Nov. 9. Samsung Electronics Co., which has the largest weighting on the index, dropped 2.5 percent. Japan’s Topix index closed little changed near a two-year high as investors parse through recent earnings results. Australia’s S&P/ASX 200 Index lost 0.2 percent as Rio Tinto shares tracked their London stock lower. Hong Kong’s Hang Seng Index was down 0.3 percent and the Shanghai Composite Index fell 0.4 percent.
"We haven't seen a major correction in tech shares so far this year so they may be hitting a speed bump," said Nobuhiko Kuramochi, chief strategist at Mizuho Securities.
In Europe, stock markets opened broadly lower, with Germany's DAX slipping 0.6 percent and France's CAC 0.4 percent lower, however initial losses have been since recouped with energy shares dragging as investors digested a rebound in American oil output that had crude prices fluctuating. Germany's DAX falls 0.5%, testing 3-month lows hit on Tuesday, with heavyweight Siemens dropping 2.8% after posting mixed quarterly results. Furthermore, Germany's July composite PMI slid to 54.7, the lowest since September, vs the flash reading of 55.1, well below the euro-area July composite PMI at 55.7. Data show Germany trailed euro-area peers for first time in 12 years. Technology stocks in Europe slipped 0.3 percent. "I don't see too much in the way of downside for European stocks because economic data is strong - take a look at the Italian data today," said Michael Hewson, chief market analyst at CMC Markets. The British pound strengthened before a rates decision.
The Bloomberg Dollar Spot index held near a 15-month low ahead of Friday’s U.S. payrolls data. In the overnight session, both the Aussie and Kiwi slid against the dollar as investors prepared for the RBA statement Friday, and RBNZ meeting on Aug. 10, as the dollar keeps trying to recover from a 31-month low against euro. In Europe, the pound rose to the highest level since September against the dollar amid bets for a hawkish tilt in BOE’s rates outlook. The dollar inched away from a 15-month low versus a basket of currencies, but was still looking wobbly due to doubts about whether there will be another U.S. interest rate rise this year. The dollar index, which measures the greenback's value against a basket of six major currencies, rose about 0.12 percent to 92.951. On Wednesday, it slid to 92.548, its weakest level since May 2016.
Of note, the ruble extended its drop against the dollar to a sixth day as oil fell and U.S. President Donald Trump signed into law Russian sanctions aimed at squeezing financing of the country’s energy industry. The Russian currency dropped 0.2% to 60.72 per dollar, taking losses over the past six sessions to 2.4%. While immediate market impact of the new law is “negligible,” and most of the longer term impacts are “theoretical and debatable,” some negative market impact due to worsened perceptions of Russian political risk for international investors is still possible, Sberbank CIB analysts Cole Akeson and Andrey Kuznetsov write in research note.
European government bond yields edged slightly higher, with Germany’s 10-year yield rising less than one basis point to 0.49% . The yield on 10-year Treasuries dipped one basis point to 2.26%. The U.K.’s FTSE 100 Index gained less than 0.1 percent.
As Bloomberg notes, while corporate results have been largely dominating sentiment this week, Friday’s report on the U.S. employment market may provide the next inflection point. Investors are looking for clues on the strength of the world’s largest economy and the Federal Reserve’s next policy move, not least to see if the dollar will get any respite.
“Despite the recent pull back, the dollar remains broadly overvalued, and the starting point matters,” UBS strategists including Manik Narain wrote in a client note. “Expensive valuation reduces the likelihood of a further broad dollar rally.”
Today's main event is the BoE inflation report and rate decision (no change overwhelmingly expect). The focus is likely to be on how the members voted and clues on inflation and rates outlook. Back in the June meeting, the 5-3 vote was more hawkish than expected, partly given growing concerns that the inflation overshoot was more pronounced than expected. Since then, macro data has not changed much, but Q2 CPI was actually more in-line with the BOE May inflation report, which should partly reduce the weight of the hawkish argument on inflation. Further, the composition of the committee is also changing, with Silvana Tenreyro now replacing Kisten Forbes who previously favoured a hike. For now, analysts do not expect BOE to tighten rates until Brexit related uncertainties have been sufficiently reduced. We shall get more clues shortly.
In commodities, West Texas Intermediate crude increased 0.4 percent to $49.78 a barrel after falling as much as 1 percent. Gold fell 0.3 percent to $1,263.44 an ounce, heading for a fourth day of declines after a second day in a row of slamdowns just after 7pm ET.
Today's economic data include initial jobless claims, durable goods orders, Markit PMI readings. Earnings from Kraft Heinz, Allergan, Viacom Inc. and Yum! Brands , Duke Energy are due.
Bulletin Headline Summary from RanSquawk
- European bourses pare opening losses to trade relatively mixed.
- GBP rises after better than expected Services PMI.
- Looking ahead, highlights include the BoE QIR.
- S&P 500 futures down 0.2% to 2,469.75
- STOXX Europe 600 down 0.2% to 377.93
- MSCI Asia down 0.6% to 160.49
- MSCI Asia ex Japan down 0.7% to 527.52
- Nikkei down 0.3% to 20,029.26
- Topix down 0.03% to 1,633.82
- Hang Seng Index down 0.3% to 27,531.01
- Shanghai Composite down 0.4% to 3,272.93
- Sensex down 0.4% to 32,337.95
- Australia S&P/ASX 200 down 0.2% to 5,735.12
- Kospi down 1.7% to 2,386.85
- German 10Y yield rose 0.9 bps to 0.495%
- Euro down 0.2% to 1.1837 per US$
- Italian 10Y yield fell 0.4 bps to 1.723%
- Spanish 10Y yield rose 2.1 bps to 1.479%
- Gold spot down 0.4% to $1,261.58
- Brent Futures unchanged at $52.36/bbl
- U.S. Dollar Index up 0.2% to 92.97
- Germany’s economy slowed more than initially estimated at the start of the third quarter, leaving it trailing the euro region’s other large nations
- Britain’s economy has moved into a phase of “steady but sluggish” growth and is at risk of a further slowdown, according to IHS Markit.
- Iceland’s central bank is ready and willing to lower its guard against fast cash with the country’s balance sheet on a firm footing and a stimulus unwinding underway in global capital markets
- China Tries to Calm U.S. Trade Spat While Readying Retaliation
- Fed Front-Runner Cohn Could Be Trump’s Bulldog in Egghead World
- Tronox Sells Alkali Chemicals to Genesis Energy for $1.325B
- Guggenheim Is Said to Be in Fund Sale Talks With Invesco
- Costco July Comp Sales up 6.2%, Est. Up 5%
- GM China July Vehicle Sales Rise 6.3% on Year
- Venator Materials Prices IPO at $20.00/Share: Huntsman Corp
- Glaxosmithkline Moves China Neuroscience Research to U.S
- Fox Is Said in Talks With Ion Media to Operate Local TV Stations
- Goldman Highlights Call Strategy That Has Done ‘Unusually Well’
- Sibanye May Cut 7,400 Jobs as It Restructures Gold Operations
- U.K. Shows ‘Steady But Sluggish’ Growth as Services Expand
The momentum from the DJIA's 22,000 milestone was lost on Asia as the region traded negative across the board, with sentiment dampened amid earnings and a miss by the Chinese Caixin Services PMI:
- Chinese Caixin Services PMI (Jul) 51.5 vs. Exp. 51.9 (Prey. 51.6). (Newswires)
ASX 200 (-0.16%) was subdued by commodity names with Rio Tinto (-2.49%) shares down after the Co. missed on H1 underlying profit, while Nikkei 225 (-0.25%) was also lower and eyed a test of the 20,000 level to the downside. KOSPI (-1.68%) was the worst performer on tighter regulation to cool the housing sector, coupled with continued geopolitical concerns after the US told its citizens to leave North Korea by September 1st amid a travel ban and reports the US tested an intercontinental ballistic missile from California, which officials denied was in response to provocation from North Korea. Hang Seng (-0.28%) and Shanghai Comp (-0.37%) also conformed to the down beat tone following the miss on Chinese Services PMI and the PBoC cutting its liquidity injection by half. Finally, 10yr JGBs only saw minimal gains despite the dampened risk sentiment in the region, with upside capped by a weaker 10yr inflation-indexed auction.
Top Asian News
- The Conglomerate That Troubles China
- Korea Stocks Slump Most This Year as Rally Wanes on Moon Reforms
- Copper’s Rally Has Room to Run as Chinese Demand Accelerates
- Taiwan Futures Plunge 10 Percent After Brokerage’s Algo Error
- Global Bond Selloff Risk Puts Japan’s Chiba Bank on Defense
- Hong Kong’s Tiny Flats Pile Up as Property Market Dangers Grow
- Kishida Exits Japan Cabinet, Paving Way for Him to Challenge Abe
- Macquarie, GIC Bid $1.3 Billion for Philippine Renewable Stake
European bourses trade mixed. Sector specific energy continues to lag despite the recent bullish pressure in oil, with European equity earnings being the large driver in markets. The Dax companies highlighted the morning, with earnings form the likes of Deutsche Telekom, Siemens and Adidas all influencing the continued to see down days, with a test of 1255.00 seen overnight. German major. Deutsche Telekom's beat in Adj. EBITA and revenues leave the telecoms giant to outperform in the Dax, however, a weak report from Siemens leaves the Dax in the red. European Composite and Services PMI data has largely been ignored by markets, with EGBs finding little direction. Peripheral debt have recovered following firm results in today's Spanish auction with the GE/ES spread tightening slightly.
Top European News
- Macron Vows Millionaire Minister Will Cut Worker Protection
- UniCredit CEO Defies Doubters With Surprise Profit Surge
- French Budget Minister Rejoices at Neymar’s Taxes Prospect
- ECB Says Incoming Data Point to Solid, Broad-Based Growth Ahead
- Nomura’s Buckley Sees Multiple Reasons for BOE Rate Hike
- Next’s Shares Surge as Sales Rebound Unnerves Short Sellers
In currencies, the lack of price action from today's European services and composite data is evident in the anticipation on the BoE. FX trade has been subdued through the European morning, with much of the volatility seen overnight and through yesterday's US trade. GBP did see a slight bid following the slightly higher than expected Market Services and PMI data, aided by the +0.30% GDP growth. GBP/USD broke through yesterday's high tripping some stops on the way through.
In comodities, a recent bid has been seen in WTI and Brent crude futures with no fundamental news. However, the price has broken yesterday's high of 49.65 getting closer towards the USD 50/barrel, which may be a target to test. Global demand for gold fell 14% in the first half of this year, largely due to a decline in the purchasing of the yellow metal by exchange traded funds.
Looking at the day ahead, Thursday’s will round out July PMI data for the week. In Europe we get the final July services and composite PMIs for France , Germany and the Eurozone as well as a first look at UK’s service and composite PMI and other European countries. Thereafter, focus should shift to the BoE policy meeting (no change expected). Over in the US we should also get jobless claims data followed by the ISM non-manufacturing composite for July (56.9 expected). Thereafter we will get factory orders data as well as the final readings for durable and capital goods orders for June. Onto other events, the ECB will publish its economic bulletin. Notable US companies reporting include: Allergan, Viacom, Aetna, Kraft, Kellogg and ICE. Notable European companies reporting include: Siemens, Deutsche Telecom, ING and Adidas
US Event Calendar
- 7:30am: Challenger Job Cuts YoY, prior -19.3%
- 8:30am: Initial Jobless Claims, est. 243,000, prior 244,000; Continuing Claims, est. 1.96m, prior 1.96m
- 9:45am: Bloomberg Consumer Comfort, prior 48.6
- 9:45am: Markit US Services PMI, est. 54.2, prior 54.2; Markit US Composite PMI, prior 54.2
- 10am: ISM Non-Manf. Composite, est. 56.9, prior 57.4
- 10am: Factory Orders, est. 3.0%, prior -0.8%; Factory Orders Ex Trans, prior -0.3%
- Durable Goods Orders, est. 0.0%, prior 6.5%; Durables Ex Transportation, prior 0.2%
- Cap Goods Orders Nondef Ex Air, prior -0.1%; Cap Goods Ship Nondef Ex Air, prior 0.2%
DB's Jim Reid concludes the overnight wrap
In the first 41 years of my life I bought one car at a total cost of around £12k. When I saw some of my peers and colleagues spend multiples of that on a regular basis I shook my head and wondered why you ever needed anything more extravagant to get you from A to B. I also made a mental note to rub it into these people when I retired many years before they did due to my frugal car habit. Then I got married, then I got a dog, then I had my first child and now the twins are coming in the next month. As a result yesterday saw me buy my second car in two years!! One for me and now a big family one. In doing so I broke another of my golden rules and that is to never buy a brand new car. Sigh! Part of the reason is that there is only one car we like with 3 isofixes in one row and that's the Audi Q7. However only the latest model has this configuration so it could only be around 18 months old max. We did look at second hand ones but then a dealer gave us a spectacular deal if we took out finance on a new one! To be honest it was so crazy that it makes me particular worried about how easy and cheap it is to buy a car on credit in this country. It really does leave you a little worried about consumer debt. Anyway let's hope I'm 3 and done. I'll leave it to you to decide whether I mean kids or cars. On balance I think my wife would want it to be the first and me the second.
Maybe one shouldn't be so worried about cheap and plentiful credit when the US equity market is setting a new record of some kind virtually every day. Or maybe that's when you should be worried. Yesterday saw the Dow (+0.3%) clear 22000 for the first time, meaning that Mr Trump can now add it to his collection of stock market landmarks on his watch. The Dow first touched 19000 just over a week after his election victory. The S&P 500 (+0.05%) edged higher but both were slightly flattered by Apple (+4.73%) after its optimistic guidance the previous evening. Of the S&P 500, 299 stocks actually declined.
Interesting Bloomberg reported that yesterday marked 3 months (70 trading sessions) since the S&P 500 increased by more than 1% in any one day. So this leg of the rally has been pretty steady but relentless. This is the longest such stretch since the 79-day stretch back between November 2006 - March 2007. As we'll see below, European equities aren't quite keeping up at the moment and this morning our European equity strategist Sebastian Raedler highlights that European equities have fallen by around 5% from their May peak. He expects the tactical pull-back to continue to 360 on the Stoxx 600 (around 5% below current levels), as Euro area PMIs fade from elevated levels and euro strength weighs on European earnings. He re-iterates his long-standing year-end target of 375 on the Stoxx 600 (around 1% below current levels), as lower projected EPS growth (8% versus the previous forecast of 10% and consensus at 12.5%) is offset by a higher P/E target (14.6x, up from the previous target of 14.2x, due to our economists’ recent growth upgrade). He also lowers his FTSE 100 target (from 7,750 to 7,500, 1% upside from current levels) and raises his DAX target (from 11,800 to 12,400, 1% above current levels). See the following link for more details.
Moving onto today, we have the services PMIs and ISM to look forward to (preview at the end). Elsewhere we have the BoE inflation report and rate decision (no change overwhelmingly expect). The focus is likely to be on how the members voted and clues on inflation and rates outlook. Back in the June meeting, the 5-3 vote was more hawkish than expected, partly given growing concerns that the inflation overshoot was more pronounced than expected. Since then, macro data has not changed much, but Q2 CPI was actually more in-line with the BOE May inflation report, which should partly reduce the weight of the hawkish argument on inflation. Further, the composition of the committee is also changing, with Silvana Tenreyro now replacing Kisten Forbes who previously favoured a hike. For now, DB’s strategist do not expect BOE to tighten rates until Brexit related uncertainties have been sufficiently reduced. We shall get more clues this afternoon.
Onto the markets, US bourses continue to edge ahead as noted earlier. Within the S&P, losses in telco (-1.3%) and real estate (-0.5%) were broadly offset by gains in the IT, utilities and industrials sectors. The Stoxx 600 fell 0.4%, impacted by the rising EUR as well as weakness in materials and banks (StanChart -6%; SocGen -4% after results). Across the region, markets also softened, with the DAX (-0.6%), FTSE 100 (-0.2%), CAC (-0.4%) and Italian FTSE MIB (-0.2%). Turning to currency, the Euro continues to strengthen against the greenback, up 0.5% yesterday to another 30 month high. Sterling gained 0.2%, while the US dollar index continues to fall (-0.2%).
Government bond yields were little changed post Tuesday’s larger moves lower. USTs (2Y: unch; 10Y: -1bps), Bunds (2Y: +1bp; 10Y: -1bps), BTPs (2Y: unch; 10Y: unch) and OATs (2Y: unch; 10Y: unch) were broadly flat although Gilt yields were slightly higher (2Y: +2bp; 10Y: +2bps).
In commodities, WTI oil gained 0.9%, following the latest EIA report pointing to lower US crude inventories. This somewhat contradicts reports of higher oil supply from the American Petroleum Institute report and Reuters July survey the day before. As we type, oil has dipped 0.3% this morning. Elsewhere, precious metals were broadly unchanged (Gold -0.2%; Silver -0.1%) while industrial metals were slightly higher (Copper +0.1%; Aluminium +1%).
Away from the markets, two Fed Chiefs have updated the market on their latest thinking. San Francisco Fed Chief Williams has said overnight that inflation should close in on the Fed's 2% target "within the next year or two", while Cleveland’s Fed Chief Mester sees it approaching that level "over the next year", but wanted to see more data (on Fed's preferred measure, the PCE deflator, inflation is 1.4% currently). On balance sheet unwind, Williams acknowledged that to keep the economy on a sustainable path of growth, we need to gradually reduce the monetary stimulus and that it will be appropriate to start unwinding the balance sheet this autumn, noting the normalisation process should take four years. On the interest rates outlook, both reiterated the gradual path FOMC has communicated is appropriate and Williams thought the ‘new normal’ interest rate is around 2.5%.
Elsewhere, on the US debt ceiling, a leading House conservative has backed away from his earlier demands that any increase should be paired with steep spending cuts. Now, Republican Meadows just wants to “get it done sooner rather than later”. Turning to tax reform, expect the news-flow to slowly build but in an interview yesterday, representative Yoho said “there is no detail (on the tax reform)…it is a problem…”. For now, we wait and see. The market will hope it doesn't end up being a replica of the healthcare bill in terms of ability to pass.
This morning Asian equity markets have broadly softened, the Kospi fell 1.5% impacted by Samsung (-3%) and property shares given additional government measures to cool the housing market. Elsewhere, the Nikkei (-0.3%), Hang Seng (-0.2%) and two of the Chinese bourses were down ~0.2%.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the headline ADP employment change for July was lower than expectations at 178k (vs. 190k expected), although the underlying trends are still solid given the June figure has been revised upwards by 33k. With US growth having picked up in 2Q, but inflation continuing to disappoint, DB’s Peter Hooper updated his outlook for the US economy and sees growth ahead slightly softer than prior expectations and the pace of rate hikes slightly slower. More details here. Over in Europe, the Eurozone PPI for June was in line with expectations at -0.1% mom (vs. -0.1% expected) and 2.5% yoy (vs. 2.5% expected). However, UK’s CIPS construction PMI for July missed expectations at 51.9 (vs. 54 expected), partly reflecting the uncertainty associated with Brexit.
Looking at the day ahead, Thursday’s will round out July PMI data for the week. In Europe we get the final July services and composite PMIs for France (55.7 expected for composite), Germany (55.1 expected for composite) and the Eurozone (55.8 expected for composite) as well as a first look at UK’s service and composite PMI (53.6 and 53.8 expected respectively) and other European countries. Thereafter, focus should shift to the BoE policy meeting (no change expected). Over in the US we should also get jobless claims data followed by the ISM non-manufacturing composite for July (56.9 expected). Thereafter we will get factory orders data as well as the final readings for durable and capital goods orders for June. Onto other events, the ECB will publish its economic bulletin. Notable US companies reporting include: Allergan, Viacom, Aetna, Kraft, Kellogg and ICE. Notable European companies reporting include: Siemens, Deutsche Telecom, ING and Adidas