US index futures rose higher into record territory rising above 2,900, as European stocks pared muted gains after the EURUSD rose above 1.17, pressuring exporters, while Asian shares were broadly higher with the exception of China; but the key theme of the session was another day of USD weakness.
World stocks rose to a six-month high on Tuesday, lifted by optimism that the U.S.-Mexico deal to replace the North American Free Trade Agreement will help with averting a global trade war. Investors expect Canada will agree to join the three-nation pact, while Trump and Merkel spoke by telephone and the two leaders “strongly supported ongoing discussions” on trade, according to the White House.
European and Asian shares followed Wall Street’s Monday lead, inching to multi-month highs after the S&P 500 and Nasdaq indexes surged to fresh records on Monday led by gains in technology stocks.
The Bloomberg Dollar index extended its recent slump, sliding to the lowest level in 4 weeks and implied volatility across currencies and equity markets also eased amid bullish risk sentiment and stabilization in the Chinese Yuan.
The ongoing slump in the dollar ever since China re-introduced the countercyclical factor has helped boost emerging market currencies, although the clear outlier overnight was the Turkish lira which slumped 1.4% and was back down to 6.21 vs the USD.
Optimism around the U.S.-Mexico deal has been key in helping shift market sentiment and the news agenda in the wake of Trump’s legal woes last week, while the Federal Reserve’s "gradualist" outlook has also boosted sentiment. Gains for risk assets remain fragile, however, as hopes for a similar trade breakthrough between American and China fade and a host of threats remain, from U.S. relations with Russia and North Korea, to Chinese growth prospects.
For now, the US remains immune to global trade woes, with the daily record highs in US stocks persisting even as the US economy appears to have hit a downward inflection point, with US economic surprises underperforming the world over the past three months.
The Euro Stoxx 50 was unchanged with gains in mining shares offset by a drop in banks and telecoms, while E-mini futures looked to extend on the 0.8% Monday gain, with the S&P500 set to open above 2,900 in cash trading after the U.S. and Mexico moved closer to a deal on trade. Italian stocks and bonds fell, while Treasuries and German bunds were steady.
Stocks in Japan extended a recent increase as the yen round-tripped an early decline, while China A-shares underperformed amid concerns that a Mexico trade deal made a similar deal with China less likely. JPMorgan and other analysts said the trade deal was not necessarily positive for the outcome of talks with China, though they said risks of a generalized global trade war had abated somewhat. "Despite this, Asia-Pacific equities including HK/China should benefit from the weaker U.S. dollar and risk-on moves."
The Chinese yuan edged higher Chinese central bank strengthened the daily fixing against the greenback by the most in more than 14 months, even as President Donald Trump said it’s not the right time for trade negotiations with China.
Speaking to reporters during his announcement Monday of the new Mexico accord, Trump said he is rejecting overtures from China to negotiate as he tries to achieve a less "one-sided" trade policy. "They want to talk but it’s just not the right time to talk right now, to be honest" Trump said. As Bloomberg notes, Trump’s remarks are his latest in recent weeks to suggest he doesn’t see a quick end to trade tensions with China, stoking concerns in Beijing that his actions are part of a wider plan to contain the nation’s rise. Fears are growing that the spat between the world’s biggest economies may spill over into geopolitical flash points, from North Korea to Taiwan.
The Mexico breakthrough will embolden Trump’s trade hawks to double down on demands for concessions from China, according Rob Carnell and Prakash Sakpal, economists at ING Bank NV in Singapore.
"So as far as China and Asia are concerned, this new Mexico deal solves nothing," they wrote in a note. "It strengthens the U.S. position to play hard-ball with China. This doesn’t look good for the region."
Elsewhere, the Mexican peso fell after initially rallying on the deal news as investors clamored for details and clarity on where it leaves Canada. "It could be because a dose of reality is sinking in after the initial euphoria," said TD Securities EM strategist Mitul Kotecha. "There is still some way to go before the deal is concluded, including political hurdles in both the the U.S. and Mexico and the question of how Canada will be added to a broader deal."
U.K. stocks rose in sympathy, catching-up rally as traders returned from a holiday, while the pound steadied as Prime Minister Theresa May said a no-deal break with Europe wouldn’t be the end of the world.
"On a broad sense, if markets were worried about trade tensions and trade talks escalating into full-blown wars at least this is one sign that there is a cooling off period and that some parts of the global trade space will still be connected and as free markets would hope,” said JPM global market strategist Nandini Ramakrishnan. "Another good example: European discussions this summer came down to a very conciliatory, almost non-issue."
Elsewhere, South Africa’s rand has pulled off two-year lows hit earlier this month while the Australian dollar, often used as a liquid hedge for global growth, is well above recent 1-1/2 year troughs. Reversing the EM trend this morning was the Turkish lira which fell another 1.5% against the dollar, adding to Monday’s 2% fall as concerns have not abated about Turkey’s rift with Washington and its monetary policies.
The yield on 10-year Treasuries was unchanged at 2.85%, the highest in more than a week. Germany 10-year yield dropped 1 bp to 0.37%.
WTI oil hovered around $69 a barrel. Bitcoin climbed for the fourth successive weekday, breaking above its 50-day moving average.
Italian BTPs initially underperformed as supply concession is priced in, later futures spike higher as block trade crosses. Earlier, Italian interest rates rose to three-month highs after Deputy Prime Minister Luigi Di Maio said the country’s public deficit could exceed the European Union’s ceiling of 3% of gross domestic product next year.
In commodities, gold increased 0.1 percent to $1,213.19 an ounce, the highest in almost three weeks. Brent crude advanced 0.6 percent to $76.66 a barrel, the highest in seven weeks. LME copper gained 0.5 percent to $6,136.00 per metric ton, the highest in more than two weeks.
U.S. economic data - with consumer confidence figures due later in the day and the latest estimate for second-quarter gross domestic product expected on Wednesday - could determine the dollar’s further moves. Best Buy and Tiffany are among companies reporting earnings.
- S&P 500 futures little changed at 2,899.50
- STOXX Europe 600 up 0.2% to 386.28
- MXAP up 0.4% to 166.45
- MXAPJ up 0.5% to 540.13
- Nikkei up 0.06% to 22,813.47
- Topix up 0.2% to 1,731.63
- Hang Seng Index up 0.3% to 28,351.62
- Shanghai Composite down 0.1% to 2,777.98
- Sensex up 0.5% to 38,878.05
- Australia S&P/ASX 200 up 0.6% to 6,304.65
- Kospi up 0.2% to 2,303.12
- German 10Y yield fell 0.9 bps to 0.367%
- Euro up 0.1% to $1.1690
- Italian 10Y yield rose 0.4 bps to 2.882%
- Spanish 10Y yield rose 0.7 bps to 1.417%
- Brent futures up 0.6% to $76.70/bbl
- Gold spot up 0.1% to $1,213.07
- U.S. Dollar Index down 0.1% to 94.70
Top Overnight News from Bloomberg
- President Donald Trump said it’s not the right time for trade negotiations with China, denting expectations for a near term deal after a breakthrough agreement between the U.S. and Mexico
- President Donald Trump said the U.S. is pursuing a new trade accord with Mexico to replace the North American Free Trade Agreement and called on Canada to join the deal soon or risk being left out. Trump, Trudeau agree to continue ‘productive’ trade talks
- The earliest indicators for China’s economy show that the pace of expansion slowed for a fourth month in August, highlighting the pressure for the government to push through pro-growth policies
- The French government will prepare contingency plans in case the European Union and the U.K. fail to agree on terms of their divorce
- The Federal Reserve Bank of San Francisco has bad news for those declaring an inverted yield curve is no longer a recession predictor. Adjusting for the compensation investors demand to hold longer-dated bonds doesn’t invalidate the curve’s prognosis powers, according to a new research post published Monday
Asian equity markets traded mostly higher as the region got a tailwind from US where the S&P 500 and Nasdaq extended on record highs with sentiment supported after US and Mexico reached a trade agreement. This lifted the ASX 200 (+0.7%) back above the 6300 level with gains led by outperformance in financials, while Nikkei 225 (+0.4%) was underpinned by a weaker currency but with upside capped by resistance around 23000. Shanghai Comp. (Unch) and Hang Seng (+0.3%) both initially conformed to the positive tone although the mainland then failed to sustain gains amid ongoing US-China trade uncertainty and as focus shifts to earnings with 3 of China’s big 4 banks to announce results today. Finally, 10yr JGBs traded subdued with demand sapped as focus centred on riskier assets and following weaker demand at the enhanced liquidity auction for longer dated JGBs.
Top Asian News
- The $4.4 Billion Hong Kong Residential Enclave That Cost $41,000
- Early Indicators Show China’s Economy Weakening Again in August
- Ex-Temasek Executive Warns Debt Deal Won’t Fix Noble Group
- Lira Extends Slide as Investors See Policy Concerns Unaddressed
- Aramco’s IPO Delay Brings Silver Lining for Saudi Stocks
European equities trade mixed (Eurostoxx 50 +0.02%) with underperformance in Italy’s FTSE MIB with Italian banks plumbing the depths while UK’s FTSE 100 outperforms as it plays catch-up following a public holiday on Monday. In terms of sectors, material names outperform on the back of firmer base metal prices while telecom names underperform. For stock specifics, Faurecia (+4.4%) climbed to the top if the Stoxx 600 following an upgrade at Kepler Cheuvreux while Sybank (-9.8%) and Baloise (-3.4%) share fell amid disappointing earnings
Top European News
- Italy May Breach Deficit Limit for Income Support Tool: Fatto
- Italian Bonds Fall as Budget Concerns Continue to Hit Investors
- French Energy Minister Hulot Resigns in Clash With Macron
- Swedish Retail Sales Plunge Raises Doubts on Economic Momentum
- Altice Is Said to Mandate Lazard on SFR Network Finance: Figaro
In FX, the Dollar has lost more ground vs most G10/major rivals, but remains mixed vs EMs, as the Try continues to weaken in contrast to the Cny (and Cnh in response) that saw the strongest fixing in more than a year overnight. Hence, the index has been drifting down further below 95.000 within a new 94.920-665 range, with nearest supports seen at early August lows (circa 94.610 and 94.491). CHF - The Franc is benefiting most from the weaker Greenback and trading above 0.9800, though not really outperforming in cross terms as Eur/Chf holds firmly above 1.1400. GBP - Mixed fortunes for the Pound as Cable revisits 1.2900 by virtue of the aforementioned broad Usd downturn, but Eur/Gbp climbs towards 0.9075 on heightened prospects of a no deal Brexit. AUD/JPY - Narrowly mixed vs the Usd around 0.7350 and 111.00 respectively, with the Aud undermined by the ongoing US-China import tariff stand-off, but Jpy gleaning some support due to its safe-haven status, the Dollar’s demise and key chart levels/supply (unlike Eur/Jpy that touched 130.00 earlier amidst macro, leverage and fast money buying).
Commodities are benefitting from the pullback of the dollar with Brent futures marginally higher while WTI futures test the USD 69/bbl level to the upside. Saudi Energy Adviser stated the current US sanctions are unlikely to completely stop Iranian exports, ahead of oil-related sanctions are to come into effect in November. News flow has be relatively light, traders will be keeping an eye on the API crude inventories released after-market today; the Street expects crude stocks to draw by 500k bbls in the week, distillates are seen building by 1.4mln, and gasoline is expected to build by 400k bbls; according to a Reuters poll. Traders are also citing reports on Monday that showed OPEC+ compliance fell, though output still remains below target. Elsewhere, gold has gained a firmer footing above USD 1200/oz, attributed to the ongoing dollar weaker.
Looking ahead to today’s calendar, we'll get the July advance goods trade balance, preliminary July wholesale inventories report, the August Richmond Fed manufacturing index print and the August Conference Board consumer confidence survey. Away from the data we'll also hear from ECB board member Peter Praet when he speaks around lunchtime in Germany. European Commissioner Gunther Oettinger will also discuss the EU budget at a conference in Brussels. Finally the UK’s Secretary of State for international trade Mr Fox will address the British Chamber of Commerce in Singapore.
US Event Calendar
- 8:30am: Advance Goods Trade Balance, est. $69.0b deficit, prior $68.3b deficit, revised $67.9b deficit
- 8:30am: Wholesale Inventories MoM, est. 0.2%, prior 0.1%; Retail Inventories MoM, prior 0.0%, revised 0.1%
- 9am: Case Shiller 20-City MoM SA, est. 0.2%, prior 0.2%; CS 20-City YoY NSA, est. 6.4%, prior 6.51%
- 10am: Richmond Fed Manufact. Index, est. 17, prior 20
- 10am: Conf. Board Consumer Confidence, est. 126.6, prior 127.4; Present Situation, prior 165.9; Expectations, prior 101.7
DB's Jim Reid concludes the overnight wrap
The sun was well and truly shining out on global equities yesterday albeit in thin trading volumes with London on holiday. The Shanghai Composite (+1.89%) started the gains early on, while the Euro Stoxx 600 advanced +0.52%. In the US, the S&P 500 (+0.77%), NASDAQ (+0.91%), and Russell 2000 (+0.16%) all reached new all-time highs while the Dow gained +1.01% but still remains just below its January peak. Cyclical sectors led gains on both sides of the Atlantic, with materials, car makers, financials, and IT outperforming. The dollar index shed -0.39%, supporting commodity prices, with Brent crude oil up +0.22%. The risk on tone weighed on bonds with treasury yields higher across the curve. 10-year yields were up +3.6bps while Bunds also weakened (+3.2bp), in part as a firmer than expected IFO reading added to the upbeat mood (more below).
The real outperformers yesterday, however, were in Latin America and Asia. In LatAm, sentiment was boosted by the announcement that the US had reached a new NAFTA agreement with Mexico. Any deal would need Congressional approval in the US but it was encouraging to the market that some of these trade disputes can be resolved. Bloomberg reported that the Canadian Foreign Minister and chief negotiator Chrystia Freeland will travel to the US today to join the discussions, while the Mexican President Nieto was “quite hopeful” that Canada would soon join in the revised agreement. The Mexican Peso gained 0.77% versus the dollar and Mexico’s benchmark index, the S&P/BMV index, rallied +1.58% to reach its highest level since February. Elsewhere the MSCI EM index jumped +1.81% while most EM currencies also advanced, although the Turkish Lira fell -1.96% as trading resumed post last week’s holidays. This morning in Asia, markets are consolidating on Monday’s gains with the Nikkei (+0.41%), Kospi (+0.19%) and Hang Seng (+0.24%) all modestly up while Chinese bourses are broadly flat following stronger gains yesterday. Elsewhere the Yuan is little changed while futures on the S&P are also pointing to a firmer start.
Back to yesterday, given the U.K. holiday its worth expanding on the Asia equity advance. The Nikkei, Hang Seng, and CSI 300 gaining +0.88%, +2.17%, and +2.44%, respectively. It was the first trading day since last Friday’s news that the PBoC would reintroduce the “counter-cyclical buffer” in its daily formulation of the Yuan’s exchange rate fixing. The buffer allows the central bank to use more discretion when setting currency policy, potentially leaning against prevailing trends to moderate FX swings. The offshore Yuan had gained 1.30% versus the dollar on Friday, its biggest gain since January 2017 and its third best day since offshore trading began in 2010. The apparent effort by policymakers to arrest the currency’s decline may signal a potential concession to US policymakers amid the ongoing trade dispute between the two countries, which, if realised, would also prove to be positive for risk assets.
Staying with the trade theme, DB’s Quinn Brody and Torsten Slok have looked at the five popular myths around US trade, including: i) that China's large imbalances take advantage of the system, ii) trade imbalances are driven by tariffs, iii) the US has broadly lower tariffs on goods imports than its partners, iv) US services trade is more open than the rest of the world, and v) the US has fewer non-tariff barriers than competitors. Amongst other findings, they conclude that the US is generally as open to trade as other DM countries and that tariffs or nontariffs barriers, are actually not the main source of the US trade deficit. Refer to their note for details.
Meanwhile in Europe yesterday, yields on 10y Italian BTPs slightly outperformed (+0.5bp), though they remain within 1bp off their year-to-date highs. Italian politicians seems to have continued to escalate their rhetoric regarding potential budget conflict with the European Union. Deputy Prime Minister Di Maio, leader of the Five Star Movement, said that Italy has no intention of withdrawing from the union or the currency zone, but that “we will look at all measures in discussions regarding the European budget and will block what doesn’t work for us.” The other Deputy Prime Minister, from the Northern League, Matteo Salvini, echoed Di Maio’s sentiments, saying “it’s time to cut financing to a useless entity.” The principle point of contention is immigration policy, with Italian leaders arguing that the rest of Europe needs to do more to assist Italy with their influx of migrants. This issue is likely to remain a big topic for markets as we go into autumn/fall although judging from the weather we’ve gone straight to winter in the U.K.
Elsewhere for those interested in empirical research on the yield curve. The latest research from the San Francisco Fed concluded the yield curve has been a reliable predictor of recessions and that the best summary measure is the spread between the 10y and 3m yields. That said, the authors Mr Bauer and Mr Mertens added that “the flattening yield curve provides no sign of an impending recession”, in part as long term rates, while falling remains above short term rates (3m-10y spread of c75bp).
Yesterday’s economic calendar was light, but the data was mostly positive. Germany’s August IFO business survey printed at 103.8, its first monthly increase since last November and its highest level since February. Improvements were concentrated in the forward-looking expectations subsection, boding well for H2 growth. The strong reading may have been driven by the weaker euro or by stronger domestic demand. In the US, the July Chicago Fed National Activity Index printed at 0.13 (a positive value signals above average growth) while the August Dallas Fed manufacturing activity survey came in at 30.9. Both of the US indexes were lower than last month, but they remain near the cyclical highs.
Looking ahead to today’s calendar, we'll get August consumer confidence data for France and July M3 money supply data for the Euro area. Data in the US will include the July advance goods trade balance, preliminary July wholesale inventories report, the August Richmond Fed manufacturing index print and the August Conference Board consumer confidence survey. Away from the data we'll also hear from ECB board member Peter Praet when he speaks around lunchtime in Germany. European Commissioner Gunther Oettinger will also discuss the EU budget at a conference in Brussels. Finally the UK’s Secretary of State for international trade Mr Fox will address the British Chamber of Commerce in Singapore.