It has been the case that every single day for months, the market's mood is determined by whether trade tensions are better or worse (however subjectively this is determined). And judging by the bloodbath in the market snapshot below, today they are much worse.
For those who missed it, this is the key driver of overnight's risk off: President Trump asked Lighthizer to consider 25% tariffs on USD 200bln of Chinese goods, while officials also commented that stronger actions are needed on China but added that President Trump is open to negotiating with the Chinese President. China Commerce Ministry said China will immediately retaliate to defend its dignity and people's interests.
The resulting market hot takes were familiar: "fears of an escalating trade dispute between the United States and China" blasted numerous sellside notes and financial websites. And sure enough, following Trump's threat to hike tariff rates from 10% to 25% on $200BN in Chinese imports - which incidentally was first reported on Tuesday - stocks from Asia to Europe tumbled, with S&P500 futures joining and sliding to session lows, dragging the S&P back under 2,800. The dollar climbed and bonds were mixed with central bank policy high on the agenda.
Germany’s DAX index, which is seen by as trade war proxy, fell 1.1% about an hour after the open while the broader Europe STOXX 600 was down about 0.5%, dropping for a second day, tracking sharp declines in China and Hong Kong share indexes which were triggered by Trump telling the US trade representative to consider hiking tariffs on $200 billion worth of Chinese goods as early as next month. MSCI’s index of Asia-Pacific shares ex-Japan closed 1.6% down, dragged down by a 1.8 percent fall in Chinese H-shares and a 2% plunge in the Shanghai Composite whose 2-day selloff has taken it back under 2,800.
Then shortly before 6am EDT, Beijing responded that it was ready to retaliate, sending China’s onshore yuan tumbling to 6.8676 per dollar, the weakest level in more than a year.
There was more turbulence, when as reported earlier, 10Y JGB yields touched the highest since February 2017 before paring gains as the Bank of Japan made an unscheduled offer to buy 400 billion yen in bonds.
Following the "risk off" sentiment, and thanks to the BOJ intervention, US Treasuries climbed and were trading near session lows of 2.98% after falling on Wednesday when the Fed decided to leave rates unchanged while making it clear borrowing costs are heading higher. In sympathy, Euro zone government bond yields edged down with borrowing costs in Germany and France pulling back from seven-week highs as demand for safe-haven debt grew.
The Bloomberg Dollar Spot Index extended its advance into a third day as heightened trade tensions and the Federal Reserve’s commitment Wednesday to gradual tightening helped buoy the U.S. currency. The yen pared an earlier gain, while the pound weakened even as BOE policy makers were forecast to raise rates for only the second time since the financial crisis. Turkey’s lira tumbled to a record low after the U.S. imposed sanctions on two ministers. Core euro-area bonds edged higher with Treasuries, while gilts slipped.
In commodities, oil steadied around a two-week low after a surprise gain in American crude inventories exacerbated supply concerns. Gold rose and copper extended a decline. Emerging-market currencies sold off, with South Africa’s rand dropping.
- STOXX Europe 600 down 0.5% to 387.86
- MXAP down 1.2% to 165.30
- MXAPJ down 1.6% to 532.97
- Nikkei down 1% to 22,512.53
- Topix down 1% to 1,752.09
- Hang Seng Index down 2.2% to 27,714.56
- Shanghai Composite down 2% to 2,768.02
- Sensex down 0.7% to 37,277.64
- Australia S&P/ASX 200 down 0.6% to 6,240.86
- Kospi down 1.6% to 2,270.20
- German 10Y yield fell 0.2 bps to 0.476%
- Euro down 0.3% to $1.1625
- Brent Futures down 0.1% to $72.31/bbl
- Italian 10Y yield rose 6.9 bps to 2.521%
- Spanish 10Y yield fell 0.8 bps to 1.446%
Top overnight news
- The Trump administration said it’s weighing whether to increase the proposed tariff on $200 billion of Chinese goods to 25 percent from 10 percent, stepping up pressure on Beijing to change its trade practices. China said it was ready to retaliate after latest U.S. tariff threat
- Turkish markets are plunging deeper into the wild. Unprecedented sanctions imposed by the U.S., its NATO ally, have added to the cross-currents buffeting investors. They’ve already been despairing at policy makers’ failure to contain inflation and stem the slide in the lira under pressure from President Recep Tayyip Erdogan to bolster growth
- The Bank of England is set to raise interest rates for only the second time since the financial crisis, even though Brexit threatens to prove a rough ride for the U.K. economy
- The Bank of Japan is showing just what it means by being flexible with bond purchases. The central bank unexpectedly offered to buy 400 billion yen ($3.6 billion) of five- to 10-year bonds Thursday to stem a selloff that saw the 10-year yield touch an 18-month high of 0.145 percent
- Federal Reserve officials left the benchmark interest rate unchanged while reiterating their plan to gradually lift borrowing costs to keep the economy expanding at a healthy pace
- The aim of the latest steps taken by Japan’s central bank is to strengthen the sustainability of its current easing policy, taking into account its side-effects, Bank of Japan Deputy Governor Masayoshi Amamiya tells business leaders in Kyoto
- The lira slumped to a record low as the U.S. imposed sanctions on two Turkish ministers over the continued detention of an American pastor
- OPEC’s crude output increased last month as Saudi Arabia pumped near-record volumes to make good on a pledge to consumers that demand would be met
Asian equity markets were weaker across the board with sentiment weighed by increased global trade tensions after officials confirmed US President Trump instructed Trade Representative Lighthizer to consider a higher tariff of 25% on USD 200bln of goods from China which had earlier warned of retaliation. ASX 200 (-0.5%) and Nikkei 225 (-1.1%) were lower with the mining sector the worst performer in Australia amid losses in Rio Tinto following a miss on earnings, while a firmer currency, various corporate updates and weak US sales among automakers dampened Tokyo trade. Elsewhere, Hang Seng (-2.2%) and Shanghai Comp. (-2.0%) took the brunt of the increased US tariff threats as well as further inaction by the PBoC which refrained from conducting reverse repos for a 10th consecutive occasion. 10yr JGBs were choppy and initially continued on from yesterday’s slump at the open as the 10yr yield rose to its highest since February last year of 0.145%. However, yields then pulled back to provide much needed reprieve for JGBs which were also supported amid safe-haven flows. In addition, the latest securities flows data showed foreign investors upped their purchases of Japanese bonds by around 9-fold from the prior week, while Daiwa also suggested there should be good demand for 10yr JGBs at yields between 0.15%-0.20% at least until next BoJ policy meeting. Today’s 10yr year auction was another catalyst for price action with all metrics pointing to a weaker result which saw 10yr JGBs decline nearly 30 ticks, before bouncing back towards 150.00.
Top Asian News
- Trump’s Tariff Threats Erase $220 Billion From Asia Stock Values
- Citi Sees Sensex Doing Pretty Much Nothing From Now Until March
- House of Fraser Seeks Lifeline After C.Banner Ends Buyout Talks
- Metro Pacific Buys 12% of Air21; to Expand Warehouse Capacity
European equities trade firmly in the red (Eurostoxx 50 -1.3%) as sentiment is soured amid the rise in global trade tensions after officials confirmed US President Trump instructed Trade Representative Lighthizer to consider a higher tariff of 25% on USD 200bln of goods from China which had earlier warned of retaliation. China’s MOFCOM replied that China will fight back to defend its people’s interests and dignity. Germany’s DAX 30 is heavily underperforming, dragged down by heavyweight Siemens (-4.8%) following earnings, while Commerzbank (-4.5%), Deutsche Bank (-3.3%) and the German auto names also pressure the index. Material names continue to underperform, on the back of softer base metal prices. As such, we see UK miners resting at the bottom of the FTSE. Other notable post-earning movers include: LSE (+2.6%), Altice (-14.5%), Hugo Boss (-6.0%) and Inmarsat (-4.9%)
Top European News
- BOE Rate Hike Seen Despite Brexit on Horizon: Decision Day Guide
- U.K. Construction Growth Unexpectedly Jumps to Highest in a Year
- ECB’s Rimsevics Says Can’t Name Substitute for Governing Council
- Dialog Semi Stock Gives Up Gains as Apple Concerns Persist
In FX, The Greenback is broadly firmer in wake of the latest FOMC statement that saw growth, inflation and labour market assessments all upgraded to underpin September rate hike expectations and keep the Fed on track to deliver another ¼ point tightening by year end. Heightened trade and other global tensions have also boosted the Buck as the DXY nudges back up to95.000 having hit lows very close to the big figure below just 2 days ago. EUR - The single currency has lost more traction vs the Usd on the downturn in risk sentiment, and retreated further from 1.1700 towards 1.1600 having breached Fib support near 1.1616 and a daily cloud base at 1.1648 on the way down. However, more layered expiry interest in decent size between 1.1600-10 and 1.1625-35 (both in 1.1 bn) could exert some directional influence ahead of and into the NY cut. EM -Broad losses vs the generally bid Usd, but the Lira’s almost inevitable further depreciation on latest US sanction proposals down through 5.0000 is eye-catching as the Try tumbles to fresh all time lows (circa 5.0900 at one stage).
In commodities, WTI and Brent slip lower with the complex pressured by USD strength following the latest tariff news. Energy news flow remains light, however, sources reported that Russia, the largest oil producer, is forecasting an output around 11.2mln bpd to the yearend. Of note: Russia’s July oil production stood at 11.2mln bpd (vs. June output of 10.93mln bpd). Meanwhile, the Shanghai International Energy Exchange are looking into the possibility of setting up a market maker scheme for crude oil futures after the exchange asked brokers to help boost trading volumes and liquidity. Spot gold is flat as USD strength outweighs safe-haven flows. Copper continues its decline amid demand concerns fuelled by the rise in trade tensions.
US Event Calendar
- 7:30am: Challenger Job Cuts YoY, prior 19.6%
- 8:30am: Initial Jobless Claims, est. 220,000, prior 217,000
- 8:30am: Continuing Claims, est. 1.75m, prior 1.75m
- 9:45am: Bloomberg Consumer Comfort, prior 59
- 10am: Factory Orders, est. 0.7%, prior 0.4%; Factory Orders Ex Trans, prior 0.7%
- 10am: Durable Goods Orders, prior 1.0%; Durables Ex Transportation, prior 0.4%
- 10am: Cap Goods Orders Nondef Ex Air, prior 0.6%; 10am: Cap Goods Ship Nondef Ex Air, prior 1.0%