US Futures, Global Markets Slide Amid Emerging Market Bloodbath

It is a sea of red on trader screens this morning with U.S. equity futures modestly lower on the last trading day of the month, after European and Asian shares fell following Trump’s latest comments on trade. Emerging Markets were hit again while Treasury yields drifted lower and the dollar rebounded from an early dip.

The deepening rout in the Turkish lira and Argentinian peso spread to other emerging markets, with the Indonesian rupiah dropping to the weakest level since the 1998 Asian financial crisis...

... and the Indian rupee sliding to a record low.

Caution has returned to markets as global stocks end a month that saw a solid rally from mid-August. While the Fed remains on its tightening path and Chinese authorities stepped in to stem declines in the country’s currency, the threat of global growth taking a hit from souring U.S.-China relations remains front and center, and continues to slam emerging markets the hardest.

After emerging markets initially ignored the slide in the Argentine Peso (and Turkish Lira), the correlation between the currency and the broader EM FX index has jumped, as the Argentine contagion has spread to the rest of the world following the latest shock plunge sent the currency to a record low.

More trade uncertainty was in the air as President Donald Trump was said to move ahead with a plan to impose $200 billion in new tariffs on China, pushing the MSCI Asia Pacific down 0.3%. One bright spot, China’s official manufacturing PMI unexpectedly strengthened, signaling some resilience to escalating trade wars and that China's stimulus may be trickling into the economy:

  • Chinese Manufacturing PMI (Jul) 51.3 vs. Exp. 51.0 (Prev. 51.2)
  • Chinese Non-Manufacturing PMI (Jul) 54.2 vs. Exp. 53.7 (Prev. 54.0)
  • Chinese Composite PMI (Aug) 53.8 (Prev. 53.6)

It has been a busy session so far, with several product-specific moves: the Yuan rallied in Asian trading after stronger-than-expected PBOC fix coupled with domestic PMI beats, however that did not help the Shanghai Composite which closed lower for a 4th day.

The EUR was bid early in European session on hawkish Nowotny comments, however it reversed its gain and slid to session lows below 1.1660 as US traders starting coming in; At the same time, USDJPY made a firm break below 111.00, while the Turkish Lira for once lead EMFX higher after latest de facto tightening measures sought to incentivize local currency savings.

Turkey hiked a tax on up to 6-month FX deposit accounts to 20% from 18%, and raised the tax on FX accounts with maturities of up to 1 year to 16% from 15%, according to decree published in official gazette. At the same time, Turkey cut tax on lira deposit accounts to 5% from 15% for up to 6-month accounts. The result was another squeeze, but also confirmation that the central bank refuses to intervene conventionally by hiking rates. As a result while the lira initially jumped 3%, it has since seen the gain fade to 1.2%

U.S. equity futures trade close to bottom of yesterday’s range. JGB futures spike lower as BOJ purchase schedule for September shows a reduction on a net basis.

European shares fell for a second day on Friday on reports that U.S. President Donald Trump is planning more tariffs on China, while Whitbread surged after clinching a $5.1 billion deal with Coca-Cola. The STOXX 600 dropped 0.5%, on track for its biggest decline in two weeks, led by Germany's DAX which was dragged lower by trade-sensitive industrial stocks, and fell 1%. Sparring over trade between Trump and the EU hit European car stocks, which were down 1% and the worst-performing sector after Trump told Bloomberg he rejected an EU offer to eliminate car tariffs, saying its trade policies are “almost as bad as China”. In response, European Commission President Jean-Claude Juncker said the EU would respond in kind. Daimler, Volkswagen, BMW, and Continental were the biggest weights on the DAX, falling 1 to 1.3 percent after rebounding in the previous session.

Earlier, Asian markets also traded lower across the board, with sentiment hit by reports Trump will back tariffs on an additional $200BN of Chinese goods as early as next week, although losses in the Asia-Pac region were stemmed as participants also digested a trifecta of encouraging China PMI data. Nonetheless, ASX 200 (-0.5%) was lower as weakness in miners and profit taking in telecoms led the downside in Australia, while the Nikkei 225 (-0.1%) was initially pressured by a firmer currency but then showed resilience and gradually rebounded throughout the session. Shanghai Comp. (-0.5%) was also weighed by the fresh tariff fears although data helped plug losses including Chinese Official Manufacturing and Non-Manufacturing PMI which topped estimates and with Composite PMI higher than previous. The

Hang Seng (-1.0%) was the worst performer as its largest weighted stock Tencent slumped over 5% at the open after China’s regulators said they plan to limit the number of new online games to restrict minors’ playing time. Other game developers join the slump, with Kingsoft falling 2.8% and Youzu Interactive dropping 7.5%.

“It’s very hard to see a decisive resuscitation of risk appetite until these tensions are resolved,” said Janus Henderson strategist Paul O’Connor. “We have learned to under-react to some of the individual headlines because if you try to extrapolate from any of them you could find yourself in big trouble.”

While trade disputes have caused uncertainty and volatility, investors drew comfort from strong earnings strong earnings.

"Concerns around trade are not significantly affecting macro and market fundamentals at this stage. There’s still a fairly strong global recovery, earnings forecasts remain resilient across the board,” said Janus Henderson’s O’Connor.  “It limits the upside but isn’t something that is changing our perception of broader market fundamentals.”

For those who missed it, there was a barrage of Trump-related news overnight following an extensive Bloomberg interview, with the highlights below:

  • Trump rejected the EU’s proposal to remove car tariffs, stating that the offer is not good enough, while he added
  • the EU is almost as bad as China, just smaller.
  • Trump said he has no regrets appointing Powell as Fed chair and stated he is not being accommodated by the Fed in trade disputes but he is not sure the currency should be controlled by a politician. In addition, Trump stated that AG Sessions job is safe until at least the November elections and declared there will be no pay rises for public sector workers in 2019, while Trump also threatened to withdraw from WTO if it does not "shape up".
  • Trump has once again threatened to withdraw from the WTO unless the organisation treats the US better.
  • Trump stated that a trade agreement with Canada may come by Friday or within a period of time but it will occur, while Canada’s Foreign Minister Freeland was said to be optimistic about NAFTA talks and commented that the both sides are showing constructive attitudes and have a lot of work to do in a short time. However, reports later noted that US &  Canada have not made progress yet on Chapter 9 issue in trade discussions and that Canadian Foreign Minister Freeland left talks with USTR after only minutes which will reconvene on Friday morning.

In overnight central bank news, the BoK kept the 7-day repo rate unchanged at 1.50% as expected, with the decision not unanimous as board member Lee dissented. BoK stated the economy is to maintain growth momentum and rebound in consumption will continue but also commented that pace of investment will slow. Elsewhere, the RBA said high debt levels could make future policy decisions difficult and could also make the economy less resilient to shocks.

In rates, USTs remain supported through Asia and Europe with curve unchanged; bunds traded in a tight range while BTPs rallied after reports of a more pragmatic deficit ratio within the new Italian budget.

Expected data include University of Michigan Consumer Sentiment. Big Lots and Rubius Therapeutics are among companies reporting earnings.

Market Snapshot

  • S&P 500 futures little changed at 2,901.75
  • STOXX Europe 600 down 0.5% to 383.51
  • German 10Y yield rose 0.5 bps to 0.351%
  • Euro up 0.06% to $1.1678
  • Italian 10Y yield rose 8.8 bps to 2.941%
  • Spanish 10Y yield fell 0.5 bps to 1.465%
  • MXAP down 0.3% to 165.61
  • MXAPJ down 0.6% to 534.51
  • Nikkei down 0.02% to 22,865.15
  • Topix down 0.2% to 1,735.35
  • Hang Seng Index down 1% to 27,888.55
  • Shanghai Composite down 0.5% to 2,725.25
  • Sensex down 0.2% to 38,599.94
  • Australia S&P/ASX 200 down 0.5% to 6,319.50
  • Kospi up 0.7% to 2,322.88
  • Brent futures down 0.5% to $77.39/bbl
  • Gold spot up 0.6% to $1,207.04
  • U.S. Dollar Index little changed at 94.68

Top Overnight News from Bloomberg

  • President Donald Trump wants to move ahead with a plan to impose tariffs on $200 billion in Chinese imports as soon as a public- comment period concludes next week, according to six people familiar with the matter
  • President Donald Trump said in a Bloomberg interview that he would pull the U.S. out of the WTO if it doesn’t “shape up.” He also rejected the EU’s offer to eliminate trans-Atlantic car tariffs, and said a report that he wants to move ahead with a plan to impose tariffs on $200 billion in Chinese imports as soon as next week was “not totally wrong”
  • Trump declared Thursday that China won’t outlast the U.S. in their trade dispute, and said his administration is re-examining how to determine whether countries are manipulating their currencies
  • President Donald Trump said he doesn’t regret appointing Jerome Powell as Federal Reserve chairman, even after criticizing interest rate increases by the central bank
  • The U.S. president said his country is making progress with Canada to revamp Nafta as negotiators stepped up the pace of discussions to meet a Friday deadline to reach an agreement
  • ECB policy maker Olli Rehn hit back against Trump’s accusation that Europe is manipulating its currency and is “almost as bad as China” on trade, saying it was “very regrettable that from the U.S. side there is a tendency to escalate the trade war”
  • The Bank of Korea left its key interest rate unchanged on Friday as it weighed escalating trade battles and signs that Asia’s fourth-largest economy may be losing steam
  • ECB policy maker Ewald Nowotny suggested that Italy’s laggard economy shouldn’t slow plans to end euro-area monetary stimulus and start raising interest rates
  • Emerging-market assets are headed for a monthly loss as declines in Argentina and Turkey sparked fears of global contagion and amid a renewed intensification of U.S.-China trade tensions
  • U.K. house prices fell by the most in six years in August as the Bank of England lifted interest rates, according to Nationwide Building Society
  • Trump rejected a European Union offer to scrap tariffs on cars, likening the bloc’s trade policies to those of China. He also said he would pull out of the World Trade Organization if it doesn’t treat the U.S. better, targeting a cornerstone of the international trading system

Asian equity markets traded mostly lower with sentiment weighed as trade war fears were reignited by reports US President Trump is said to back tariffs on an additional USD 200bln of Chinese goods as early as next week. This subsequently saw all US majors close in the red and both the S&P 500 and Nasdaq Comp. snap their streak of record highs, although losses in most the Asia-Pac region have been stemmed as participants also digested a trifecta of encouraging China PMI data. Nonetheless, ASX 200 (-0.5%) was lower as weakness in miners and profit taking in telecoms led the downside in Australia, while the Nikkei 225 (-0.1%) was initially pressured by a firmer currency but then showed resilience and gradually rebounded throughout the session. Shanghai Comp. (-0.5%) was also weighed by the fresh tariff fears although data helped plug losses including Chinese Official Manufacturing and Non-Manufacturing PMI which topped estimates and with Composite PMI higher than previous, while Hang Seng (-1.0%) was the worst performer as its largest weighted stock Tencent slumped over 5% at the open on government plans to control the amount of new online game releases. Finally, 10yr JGBs were marginally higher with demand supported by early safe-haven flows and with the BoJ also present in the market for nearly JPY 1tln of JGBs ranging from 1yr-10yr maturities.

  • Chinese Manufacturing PMI (Jul) 51.3 vs. Exp. 51.0 (Prev. 51.2). (Newswires)
  • Chinese Non-Manufacturing PMI (Jul) 54.2 vs. Exp. 53.7 (Prev. 54.0)
  • Chinese Composite PMI (Aug) 53.8 (Prev. 53.6)

PBoC skipped open market operations for a net weekly drain of CNY 170bln vs. last week's CNY 40bln net injection.

Top Asian News

  • BOJ Tweaks Bond-Purchase Ranges, Buying Frequency for September
  • China’s Factories Show Resilience Amid Trump Tariff Danger
  • Transurban Group Buys Sydney Tollroad Stake for $6.7 Billion
  • Lira Gets a Helping Hand as Turkey Raises Tax on Dollar Deposits

European equities are largely on the backfoot (Eurostoxx 50 -1.1%) after extending opening losses. In terms of sectors, IT, materials and consumer discretionary names underperform. Material names are lower on base metal price action while consumer discretionary names are weighed on by autos following comments from EU’s Juncker stating the EU will increase auto tariffs if the US does, hence denting sentiment in the sector. In terms of individual movers, Whitbread (+15.1%) opened higher by over 18% on reports the company proposed the sale of Costa to Coca Cola for GBP 3.9bln, while Whitbread’s CEO added the deal offers a significant premium to anything that could be achieved from spinning off Costa alone.

Top European News

  • ECB’s Nowotny Signals Italian Woes Shouldn’t Delay Rate Hikes
  • Euro-Area Inflation Unexpectedly Slows as Trade Risks Escalate
  • BP, Shell Upgraded by Santander While It Remains Cautious
  • No One Loves Irrelevant, Tiring, Dull European Stocks These Days

In FX, JPY benefited from month end-related demand and risk aversion amidst heightened US-EU/China import tariff tensions, with Usd/Jpy reversing further from near 112.00 highs to circa 110.70 and Jpy crosses strong bar Chf/Jpy for the aforementioned reasons. EUR/GBP - Both slightly firmer vs the Greenback and on a par with each other as the single currency meanders between 1.1690- 60 and Cable circles 1.3000 ahead of more Brexit talks and less positive EU vibes about the 2 sides still being a long way from resolving the NI backstop. The cross has been volatile, albeit rangy around the 21 DMA at 0.8972, with stops and/or RHS orders for month end from 0.8975-80 pushing the pair up towards 0.8990 at one stage. Back to Eur/Usd, option expiries abound from 1.1675 (1.1 bn), through 1.1700-05 (1.7 bn) to 1.1720-25 (1.85 bn). AUD/NZD - No real sign of any lasting comfort from better than expected Chinese PMIs overnight, as the Aussie and Kiwi remain on track to end a torrid week with extended losses vs their US counterpart due to increased US-China and global trade threats. Aud/Usd has tumbled through 0.7250 and Nzd/Usd is struggling to hold 0.6650 as the cross rotates around 1.0900, but hefty option expiry interest may exert influence in Aud/Usd into the NY cut (almost 1.2 bn at 0.7250). EM - Interestingly, Turkey got a bit more purchase from latest measures to halt Lira losses via prolonging tax exemptions on wealth repatriation by 6 months, increasing withholding tax on up to 1 year foreign currency deposits and setting taxes on Try deposits of up to 1 year at 0% than Argentina with its eye-catching (watering) 1500 bp rate hike on Thursday. Indeed, Usd/Try reversed sharply from just over 6.7900 to sub-6.3800 before settling around 6.5000 amidst more verbal intervention.

In commodities, WTI and Brent futures are softer on the day while the former is still holding onto the USD 70/bbl handle heading into the end of the month. Next month will be interesting as the OPEC and non-OPEC technical committee meet on 11th to potentially discuss a production strategy, while the JMMC are to meet in Algeria on the 23rd. Elsewhere, gold is benefitting from the softer dollar while copper lags on reports the US may impose tariffs on USD 200bln worth of Chinese goods as soon as next week. Separately, the Shanghai Futures Exchange are to launch copper options on September 21st.

US Event Calendar

  • 9:45am: Chicago Purchasing Manager, est. 63, prior 65.5
  • 10am: U. of Mich. Sentiment, est. 95.5, prior 95.3; Current Conditi9ons, prior 107.8; Expectations, prior 87.3