Futures Flat As China Charges Higher; Ruble, Lira, Kiwi Collapse

If yesterday global stocks largely ignored Wednesday's slump in Chinese stocks, today they are doing the mirror image, barely responding as the Shanghai Composite rebounds strongly from near 2018 lows. European shares slid while U.S. index futures were mostly flat following a positive session in Asia that saw Chinese equities shrug off the latest tariff escalation between DC and Beijing. European stock markets struggled on Thursday with trade war worries, Russia’s ruble tumbled after the United States imposed fresh sanctions on the country and Turkey’s lira dropped to a new low.

Energy majors led the drop in Europe's Stoxx 600 Index following yesterday's sharp drop in crude. European equities traded lower (Eurostoxx 50 -0.1%) with heavier underperformance in the FTSE 100 following a plethora of large cap ex-dividends, as well as the abovementioned weakness in energy names. Consumer discretionary outperforms on the back of Adidas (+8.2%) lifting the sector and supporting the DAX 30 (Unch) amid earnings.

Chinese and Hong Kong stocks pushed firmer earlier, while Japanese shares dropped. China's Shanghai Composite surged 1.8%, reversing yesterday's losses, led by technology stocks after the government set up a group led by Premier Li Keqiang to develop the sector. The news that China set up the government-sanctioned body has encouraged investors to buy tech-related shares, said Dai Ming, Shanghai- based fund manager with Hengsheng Asset Management; investors eager to bet on a rebound after earlier corrections are quite sensitive to such news.  The ChiNext Index of small-cap and technology closes 3.4% higher for best day since June 29, while six of the top gainers on MSCI China Index are tech stocks; Kingdee International +11%, ZTE Corp. H shares +8.7%, Hangzhou Hikvision +10%

Helping boost local sentiment, China’s factory inflation held up in July even as commodity prices eased, and consumer prices gained slightly more than expected: PPI rose 4.6% from a year earlier, compared with consensus estimates of 4.5%. CPI rose 2.1%, also beating fractionally consensus of a 2.0% increase.

July CPI inflation up while PPI inflation down

Early on Thursday, China’s state broadcaster said the country must counteract U.S. tariffs and that Beijing had the  confidence to protect its own interests as well as the means to do so. China had already announced additional tariffs of 25 percent on $16 billion worth of U.S. imports from fuel to autos. The tariffs will apply to billions of dollars in U.S. gasoline, diesel and other oil products, though not crude.

Elsewhere in Asia, Japan’s Nikkei slipped 0.2 percent, in part because core machinery orders fell. Shares in Mazda Motor Corp, Suzuki Motor Corp and Yamaha Motor Co also fell on news they conducted improper fuel economy and emissions tests on their vehicles. Japan will try to avert steep tariffs on its car exports and fend off U.S. demands for a free-trade agreement at talks in Washington later.

In the US, stock futures were little changed as investors awaited job and PPI data. Tesla remained in focus on reports Musk sought SoftBank money and the SEC is now looking into his tweets. Morgan Stanley added to its recent pessimism, officially turning bearish on U.S. semiconductors, saying the sector now has the poorest risk-reward ratio in three years as cyclical risks are piling up. Rite Aid will also be in the spotlight after the company and Albertsons agreed to scrap a merger that would have helped reshape the U.S. retail and health-care industries.

A decline in the MSCI Emerging Market Currency Index has stalled since the middle of the year after retracing around half of its rally from late 2016 to March 2018 according to Bloomberg data. A rebound is possible if U.S.-China trade frictions don’t escalate and the yuan recovers, said Khoon Goh, analyst at ANZ

Emerging-market currencies weakened for a second day, with Turkey’s lira and Russia’s ruble extending their slump as disputes with the U.S. deepened. As a reminder, on Wednesday, the Trump administration said it was imposing new sanctions to punish Russia for the March 4 nerve-agent attack on former spy Sergei Skripal and his daughter in the U.K., sending the ruble tumbling as low as 66.712 against the dollar, a fresh two-year low, and a 3-day drop of nearly 4%.

Turkey’s lira, bond and stocks markets were also taking a pounding after meetings between officials in Washington looked to have made little progress in mending a row over Ankara’s jailing of an American pastor. The lira touched a record low of 5.44 against the dollar, weakening some 2.5% from Wednesday’s close. There was widespread selling in the country’s bond markets and Istanbul stocks dropped 1 percent.

The Bloomberg Dollar Spot Index rose for the first day amid renewed geopolitical tensions between the U.S. and other countries amid continued tariff escalation: the greenback starts out on a stronger footing against emerging-market currencies before getting traction across the board, with the Bloomberg Dollar Spot Index rising as much as 0.2% while the yen swung into a loss as traders adjusted positions ahead of the U.S.-Japan trade discussion.

With the U.S. waging a trade war on several fronts, economists are starting to take seriously the idea that President Donald Trump could act on his preference for a weak dollar.

“While not our base case scenario, we cannot rule out a turn toward a more interventionist currency policy, particularly since the current administration has, at times, hinted at a preference for dollar weakness or objected to perceived Chinese currency manipulation,” JPM chief economist Michael Feroli said in a research note this week.

In central bank news, overnight the RBNZ kept the Official Cash Rate unchanged at 1.75% as unanimously expected and stated that it expects to maintain OCR at this level into 2020. RBNZ repeated rates are to stay expansionary for a considerable time and the next move could be up or down, while it also stated that recent growth moderation could persist for longer. Furthermore, it lowered its forecast for OCR to 1.8% from 1.9% for both September 2019 and December 2019 and lowered TWI NZD forecast to 72.8% from 74.0%, while RBNZ Governor Orr later stated the OCR could be lowered if growth slows further.

While volumes in the major currencies remained low in spot and options markets, there was much pain for three specific currencies:

  • NewZealand's kiwi fell to $0.6641, the lowest since March 2016, and the nation’s bond yields and swap rates also declined after the RBNZ pushed back its forecast for an interest-rate increase to late 2020 and lowered its estimate for economic growth over the coming year.
  • The Russian ruble hit a two-year low after the U.S. announced new sanctions on Russia over the March 4 nerve-agent attack on a former double agent in the U.K.
  • Turkey’s lira plunged to a record low and bond yields climbed as a dispute over the detention of an American pastor dragged on and added to investor concern about double-digit inflation.

Treasuries steadied before a 30-year auction after a record, $27 billion 10-Year auction on Wednesday was easily digested by the market; Italian bonds led gains for European debt.

Oil pared some of yesterday’s drop, though held near a seven-week low after China’s decision to slap 25 percent duties on U.S. imports including petroleum products.  WTI (Unch) and Brent (Unch) are trading within the prior day’s range, with WTI futures breaching USD 67/bbl to the upside. Brent initially flip-flopped either side of USD 72/bbl before grasping a firmer footing north of the level. News flow has been light for the complex. Elsewhere gold continues to move off intraday highs of USD 1216.29 as the dollar strengthens in European trade. Copper takes a breather having surged overnight, stabilising around USD 2.765/oz.

In geopolitical news, the White House is reportedly drafting an executive order that would permit placing sanctions on foreign nationals that interfere with US elections.

Elsewhere, the Russian embassy said the new US sanctions are "draconian" and not backed by facts or evidence, while there were reports Russia may respond to the US with the use of countersanctions law.

Economic data include initial jobless claims, PPI readings, wholesale inventories. Brookfield Asset Management, Microchip are among companies reporting earnings.

Market Snapshot

  • S&P 500 futures up 0.1% at 2,857.50
  • STOXX Europe 600 down 0.2% to 388.80
  • MXAP up 0.09% to 166.99
  • MXAPJ up 0.4% to 542.21
  • Nikkei down 0.2% to 22,598.39
  • Topix down 0.3% to 1,740.16
  • Hang Seng Index up 0.9% to 28,607.30
  • Shanghai Composite up 1.8% to 2,794.38
  • Sensex up 0.4% to 38,041.61
  • Australia S&P/ASX 200 up 0.5% to 6,297.65
  • Kospi up 0.1% to 2,303.71
  • German 10Y yield fell 1.1 bps to 0.387%
  • Euro down 0.2% to $1.1585
  • Italian 10Y yield rose 4.4 bps to 2.644%
  • Spanish 10Y yield fell 0.3 bps to 1.404%
  • Brent Futures up 0.1% to $72.36/bbl
  • Gold spot down 0.2% to $1,211.40
  • U.S. Dollar Index up 0.2% to 95.28

Top Overnight News from Bloomberg

  • The trade dispute with the U.S. is causing a rift in the Chinese government, hitting a close aide to President Xi Jinping, Reuters reported, citing unidentified people close to the administration. Wang Huning’s approach is being criticized by some as excessively nationalistic and needlessly provocative to Washington, Reuters said
  • Russia threatened to retaliate for the new round of sanctions announced by the U.S., but stopped short of specific measures pending more details on the American plans. Officials said Russia may respond by imposing restrictions on trade with the U.S. under a law passed earlier this year in response to an earlier wave of restrictions
  • China’s factory inflation held up in July even as commodity prices eased, and consumer prices gained slightly more than expected. The producer price index rose 4.6 percent from a year earlier, compared with the projected 4.5 percent rise seen in a Bloomberg survey. The consumer price index rose 2.1 percent, the statistics bureau said, versus the forecast 2 percent increase
  • A Turkish delegation to Washington refused to commit to releasing the American pastor Andrew Brunson, as both sides sought a way out of an escalating feud, a U.S. official said
  • Oil held a loss near a seven-week low as China vowed to retaliate against the U.S. administration’s latest tariffs, raising trade tensions between the world’s two biggest economies
  • The U.K. housing market remained listless in July as Brexit uncertainty intensified and Britons braced ahead of the BOE’s Aug. 2 interest-rate increase, according to the Royal Institution of Chartered Surveyors
  • China confirmed that it will impose 25 percent tariffs on an additional $16 billion worth of imports from the U.S. from Aug. 23, matching an earlier move from Washington in another ratchet higher for the trade war between the two nations

Asian equity markets were eventually mostly higher after bourses recovered from the initial trade-related losses  triggered by China’s retaliation announcement of 25% tariffs on USD 16bln of US goods. This initially weighed across the region with underperformance in the Nikkei 225 (-0.2%) after disappointing Machine Orders which declined at the fastest pace YTD and as automakers reeled from fresh reports of improper testing. ASX 200 (+0.5%) was also subdued at the open with Australia’s energy sector dragged by a slump in crude, although the index then recovered amid strength in the largest weighted financials sector with Suncorp underpinned by a deal to sell its Australia life insurance unit and after it declared a special dividend. Elsewhere, both Hang Seng (+0.9%) and Shanghai Comp. (+1.8%) opened negative on the trade tensions, but then rebounded with a vengeance alongside a broad recovery in the region and after Chinese inflation data topped estimates to suggest stronger than anticipated activity. Finally, 10yr JGBs were flat amid a lack of drivers and choppy sentiment in the region, while the 30yr auction also failed to spur demand with all metrics weaker than prior.

Top Asian News

  • China’s Key Tasks Suggest CDRs Are Slipping Down Priority List
  • Philippines Delivers 50 Basis-Point Rate Hike in Aggressive Move
  • China Tech Shares Surge as Govt Sets up Body to Develop Industry

European equities trade flat-to-lower (Eurostoxx 50 unch) with heavier underperformance in the FTSE 100 following a plethora of large cap ex-dividends. Softer oil prices also weigh on index’s energy giants while the sector as a whole lags. Consumer discretionary outperforms on the back of Adidas (+8.2%) lifting the sector and supporting the DAX 30 (Unch) amid earnings. Of note: Deutsche Bank upgraded the European auto sector to overweight from benchmark, while the firm downgraded European pharma and consumer staples.

Top European News

  • Italian Bond Roller Coaster May Just Be Approaching Its Zenith
  • Italy’s Conte Sees 5 Yrs to Complete Flat Tax, Citizen’s Income
  • Di Maio Vows Italy to Use Tough Tactics in EU Budget Battle
  • TUI’s Slowing Sales Show Europeans Have Had Enough of the Sun

In currencies, NZD was by far the biggest G10 loser as the RBNZ tweaked OCR rate projections out to the end of next year and stressed that a hike is firmly off the table given increased risks of a cut. The Kiwi has nosedived in response and further on dovish comments from deputy Governor McDermott to test support around 0.6650 vs its US counterpart and 1.1175 vs its AUD antipodean peer, which is holding up better with the YUAN in wake of stronger than expected Chinese CPI and PPI data overnight (Aud/Usd between 0.7415-55). TRY/RUB - Bringing up the rear again in the EM area, as US sanctions continue to bite and investors take flight, while the Rouble is also losing more ground due to ongoing weakness in oil prices. Usd/Try is just off a new all time high circa 5.4475 and Usd/Rub a fresh ytd peak around 66.7100. GBP/EUR - Broad risk aversion due to ongoing global trade and diplomatic spats from the US to China, EU, Turkey, Russia, Saudi Arabia and Canada, plus heightened risks of a no deal Brexit continue to take their toll on Sterling and the single currency to varying degrees. Indeed, Cable has fallen again and through 1.2850 for what seems to be daily 2018 lows, but Eur/Gbp is not extending too much further above 0.9000, for now, as the single currency also fails to maintain gains over 1.1600 vs the Greenback ahead of key technical resistance levels.

In commodities, WTI (Unch) and Brent (Unch) are trading within the prior day’s range, with WTI futures breaching USD 67/bbl to the upside. Brent initially flip-flopped either side of USD 72/bbl before grasping a firmer footing north of the level. News flow has been light for the complex. Elsewhere gold continues to move off intraday highs of USD 1216.29 as the dollar strengthens in European trade. Copper takes a breather having surged overnight, stabilising around USD 2.765/oz.

Looking at the day ahead, in Europe the ECB will publish the latest economic bulletin. In the US, we get the July core PPI report (0.2% mom and 2.8% yoy expected) along with final June wholesale inventories data and the latest weekly initial jobless claims data. Merck and Adidas will also report earnings.

US Event Calendar

  • 8:30am: Initial Jobless Claims, est. 220,000, prior 218,000
  • 8:30am: Continuing Claims, est. 1.73m, prior 1.72m
  • 8:30am: PPI Final Demand MoM, est. 0.2%, prior 0.3%; PPI Ex Food and Energy MoM, est. 0.2%, prior 0.3%;
    • PPI Final Demand YoY, est. 3.4%, prior 3.4%; PPI Ex Food and Energy YoY, est. 2.8%, prior 2.8%
  • 8:45am: Bloomberg Aug. United States Economic Survey
  • 9:45am: Bloomberg Consumer Comfort, prior 58.6
  • 10am: Wholesale Inventories MoM, est. 0.0%, prior 0.0%; Wholesale Trade Sales MoM, est. 0.2%, prior 2.5%

DB's Jim Reid concludes the overnight wrap

A look at the S&P 500 (-0.03%) last night suggests a pretty quiet day. Indeed the intraday range of 0.33% was the 3rd smallest this year. However there were actually some interesting stories floating around as trade continued to be a hot topic, WTI Oil falling -3.22%, Italy seeing a bullish morning but a bearish afternoon on the budget debate, Sterling down -0.44% to a fresh 12 month low against the dollar, Turkey reversing Tuesday’s gains and Russia after a bad day then seeing fresh US sanctions imposed after the close.

Starting with trade, following yesterday’s confirmation by the US that it will impose 25% tariffs on an additional $16bn worth of Chinese goods from August 23rd, China quickly responded with confirmation that it will impose 25% tariff on $16bn worth of US imports from the same date. The list of impacted US goods includes fuel products, autos and medical equipment but excludes bigger ticket items like crude oil and large aircraft. Nonetheless, trade tension concerns coupled with a smaller than expected decline in US crude inventories from the latest EIA data saw WTI oil down to the lowest in c7 weeks (-3.22%).

Moving onto equities, the S&P fluctuated before a late decline to close broadly flat as stronger tech and financial stocks were offset by energy and consumer staples. Notably the Nasdaq edged up for the seventh consecutive day (+0.06%), matching its streak in early March. Back in Europe, bourses were broadly weaker, impacted by trade tensions and weaker health care stocks (-0.78%) as Danish drugmakers Novo Nordisk and H. Lundbeck fell -6.1% and -14.3%, respectively following disappointing trading updates. Across the region the Stoxx 600 (-0.20%) and DAX (-0.12%) nudged lower while the FTSE rose +0.75%, partly aided by the lower Sterling.

This morning in Asia, markets are trading mixed with China’s CSI300 leading the gains (+2.42%) along with the Hang Seng (+0.88%), in part boosted by news that regulators (CSRC) plans to further open the domestic market to  foreigners. The Nikkei (-0.28%) and Kospi (-0.26%) are down modestly as we type. Datawise China's July CPI rose 0.2ppt mom to an above market print of 2.1% (vs. 2.0% expected) while the decline in PPI growth was less than expected at 4.6% yoy (vs. 4.5%). Meanwhile the Yen is c0.2% stronger ahead of trade talks between Japan and the US today at Washington while the New Zealand kiwi dollar is down to a 2yr low (-1.1%) after the central bank pushed back its forecast for an interestrate hike to late 2020.

In government bonds yesterday core 10y yields were down c1bp (Bunds -1bp; Gilts -1.3bp; Treasuries -1.3bp) while treasuries also firmed despite absorbing a record $26bn auction yesterday, matching its previous record set in 2009. Notably yields on 10y BTPs swung within a 10bp range as it initially rallied following Italian Finance Minister Tria’s reassuring comments where he noted that the introduction of a “flat tax” would be done in stages while PM Conte also confirmed he wants to see the measures introduced “progressively”. However gains were later reversed as the leader of the 5SM Party Di Maio noted the plans to cut taxes and introduce citizen’s income should be brought in “immediately” in the 2019 budget and if the EU changed the way the deficit was calculated, then his plans can be accommodated. By the end of day, yields on 10y BTPs ended +4.3bp higher.

Moving onto currencies, the US dollar index dipped -0.10% while Sterling weakened to the lowest since August 2017 (-0.44%). DB’s Oliver Harvey believes part of the recent weakness could be due to corporates preparing for a hard Brexit or markets giving more importance to the current account deficit in the absence of any major news. Meanwhile the Russian ruble tumbled -3.24% yesterday to the lowest since November 2016. The pressure on the ruble started after Russia’s Kommersant newspaper published the full text of a US bill seeking “crushing sanctions” on Russia for election meddling. Losses then accelerated as the US announced new sanctions on Russia for the March 4 nerve agent attack in the UK. Bloomberg noted the latter sanctions will begin from Aug. 22 and will limit exports to Russia of US goods and sensitive technology. Elsewhere the Turkish Lira resumed its decline (-0.96%) yesterday.

As for the limited data releases from yesterday, in the US, the MBA’s new purchase mortgage applications index fell 2.0% last week but the four-week average was still up a modest 0.6% yoy. In France, the July Bank of France industry sentiment index was steady mom and in line with expectations at 101. Meanwhile Spain’s June industrial output fell more than expected to -0.6% mom (vs. -0.2%), leaving annual growth at a modest 0.5% yoy.

Looking at the day ahead, in Europe the ECB will publish the latest economic bulletin. In the US, we get the July core PPI report (0.2% mom and 2.8% yoy expected) along with final June wholesale inventories data and the latest weekly initial jobless claims data. Merck and Adidas will also report earnings.


lisa.roy39 giovanni_f Thu, 08/09/2018 - 08:27 Permalink

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In reply to by giovanni_f

Davidduke2000 Thu, 08/09/2018 - 07:02 Permalink

ZeroHedge has a great sense of dramatics, just checked the lira and the ruble and I do not see any collapsing,  crashing and tumbling, sometimes I wonder if the writer is too negative or taking directive from let's say the CIA????

Last of the Mi… CheapBastard Thu, 08/09/2018 - 07:28 Permalink

These are fill-in-the-blank generic articles where the names are changed daily based upon the smallest of wavelets within the world economic market and meant to signify absolutely nothing. Real economic reports here, these days are almost non-existent. And it's a shame, because at one time they were pretty good and insightful. Add in the SJW articles and unfortunately the medium is long in the tooth. 

But I do still enjoy exploding snowflake heads with facts. 

In reply to by CheapBastard

roddy6667 Thu, 08/09/2018 - 07:10 Permalink

Every day the author fires up his computer and generates a metric shitload of Chart Porn. He writes a VERY detailed article about the importance and ramifications of the charts. Tomorrow he does the same. If the market moves 1%, it's a "collapse" or a "plunge". 

This gets tiresome.

BANKERS-WE ARE… Thu, 08/09/2018 - 07:13 Permalink

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653 DAYS.
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Just a friendly reminder for the NEWBS.
When you sell your bitcoin, you are selling it to a whale, or even worse, A BANKSTER.
 Never before in the world of finance has a predetermined event of this magnitude happened. It could be the GREATEST FINANCIAL EVENT EVER TO TAKE PLACE. A Known/Known event.
 The WHALES know this and are getting coin cheap right now. Organized theft from weak hands.
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Grandad Grumps Thu, 08/09/2018 - 07:24 Permalink

Looks like they are trying everything they can to spook the market. Maybe the issue is that there are no human players left in the market to spook. Computers can’t be spooked... maybe AI can be trained to act like human traders and be “spooked”.

seryanhoj Thu, 08/09/2018 - 08:35 Permalink

That's it then. Best thing to do today is to give up and do whatever the US tells you, otherwise they'll beggar you without even firing a rocket.

Could be that is the plan.