Yesterday morning, Morgan Stanley declared that the "dead cat bounce is over. One day later, the bank's thesis was confirmed with global markets a sea of red on Tuesday, as a violent rout in Asia carried over into Europe, slamming tech and industrial stocks, and crossing the Atlantic, sending US equity futures retesting the lowest level hit during the October 10/11 two-day rout.
An ugly start to European trading pushed world shares towards their lowest level in a year on Tuesday, as negative drivers from Saudi Arabia’s diplomatic isolation to worries about Italy’s finances, trade wars and a slew of ugly earnings piled on the pressure.
Selling escalated from Wall Street into a heavy selloff in Asia before hitting Europe, which was facing a fifth day of uninterrupted declines.
One day after relentless Chinese jawboning sent the Shanghai Composite surging 4.1%, its biggest gain in two years, Chinese stocks resumed their slide as traders overpowered Beijing much to the surprise of professional traders, especially after Beijing announced fresh measures to ease the funding strains of private companies, as top officials - including president Xi - sought to restore confidence in the world’s second-largest economy. The State Council announced it would support bond financing by private firms, and said the central bank will provide funding to facilitate this. It was not enough however, and the Shanghai Composite resumed its slide, dropping 2.3% overnight and reversing more than half of Monday's gain, while China's CSI300 tumbled 2.7%.
The sudden, sharp moves in Chinese stocks in either direction have made the Shanghai Composite the most volatile world index, as vol spiked to the highest level since March 2016.
Despite the return of China's rout, the yuan was little changed and stood near Monday’s 21-month low, trading at 6.9464 per dollar in the onshore market on expectations China will pursue looser monetary policy to cope with pressure from U.S. President Donald Trump on tariffs.
"This morning weaker stocks in Asia raised some eyebrows and overall sentiment is suffering from trade tensions, Italy to Brexit; a concoction of concerns," said ING strategist Benjamin Schroeder.
Asia’s overnight tumble gave back much of the ground the region had clawed back over the last two sessions with MSCI’s index of Asian shares dropping 2.1% to a one and a half year low and on the verge of a bear market...
... with declines in many of the region’s heavyweight markets even more pronounced. South Korea’s Kospi and Hong Kong’s Hang Seng both fell 3% and Japan’s Nikkei lost 2.7%.
“We’ve got a few negative factors when market sentiment was already fragile,” said Hiroyuki Ueno, senior strategist at Sumitomo Mitsui Trust Asset Management. “And earnings from some Japanese companies were weaker than expected, with some starting to blame trade wars.” Hurting local stocks, the yen gained 0.5% amid the risk-off mood to 112.30 to the dollar.
Meanwhile, all major European indices were "drowning in a sea of red" as sentiment continued from Asia amid trade woes and growing concerns surrounding Saudi and the West. Indeed, Asia's weakness only added to Europe's ugly mood, with the European STOXX 600 index dropping to a two-year low with almost half of its stocks now in bear-market territory — down 20 percent from their peak.
The bloodbath has spared nobody: Germany’s DAX fell to late 2016 lows with Bayer one of the worst performers, dropping 8% after a U.S. court found the company liable for Monsanto weed killer Roundup’s link to cancer; London’s FTSE was down near April lows, and MSCI’s world share index was just two points of a one-year low.
Eurpope's rout was led by industrial and tech names as the tech sector index, SX8P dropped as much as 4.4%, hitting the lowest level since August 2017, led lower by AMS and Atos. Apple supplier AMS plunged as much as 32% after its margin outlook disappointed; Atos fell 24% after it also cut its outlook. The SX8P is down 18% from peak in June, getting close to bear territory; technical chart shows 50-DMA crossing below 200-DMA for first time since August 2016, triggering bearish “death cross” signal.
Other tech heavyweights also tumbled with ASML -4%, SAP -3%, Infineon -4.8% all dragged lower in sympathy. According to Bloomberg, the European tech sector now trades at 17.8x fwd earnings, down from 22.4x in June.
Also hit were European industrials with the Stoxx 600 Industrial Goods & Services index falling as much as 2.5%, touching the lowest level since Feb 2017 following a slew of warnings and disappointing results in the sector. Swedish defense company Saab (-14%) led the sector lower after posting weaker-than-expected 3Q earnings and announcing a rights issue, while Finnish power plant components manufacturer Wartsila fell 9.5% after 3Q results which disappointed on "several fronts." Swiss elevator maker Schindler dropped 8% after 3Q results which were a slight miss across the board, sparking more fears about earnings in 2019.
“Global financial markets continue to struggle to rally as various geopolitical concerns weigh on investor confidence,” Nick Twidale, chief operating officer at Rakuten Securities Australia, said in a note. “With the rest of the world looking much more pessimistic in the current environment,” markets were poised for “a firm correction,” he added.
And with both Asia and Europe crumbling, not even US equity futures, usually resilient to offshore turbulence, were able to stage a rebound, and tumbled 37 points, or 1.3%, retesting the lows from the October 10/11 two-day rout.
In FX, the euro also fell towards a two-month low and Italian bonds struggled before a European Commission meeting that could see Brussels take the unprecedented step of demanding changes to Italy’s recently laid out budget plans. That has bred some doubt about the European Central Bank raising interest rates next summer, leaving the euro at $1.1470.
“The prospect of a normalization of (ECB) monetary policy was the main reason why the euro was able to appreciate over the past year. However, there is a rising risk that this support is now going to crumble,” Commerzbank analyst Thu Lan Nguyen said.
The Bloomberg dollar index trimmed the overnight haven bid, which capped just shy of 2018 highs. The pound rose above $1.30, rebounding from an almost three-week low, as the threat of an imminent leadership challenge to U.K. Prime Minister Theresa May faded. Former Brexit minister Steve Baker dropped a parliamentary attempt to sabotage the withdrawal talks, and Conservative Party challengers judged they don’t have the numbers to overthrow May.
All that contributed to the risk-averse mood, with the safe-haven Japanese yen and Swiss franc strengthening while higher-yielding currencies like the Australian and New Zealand dollars fell. The worst performing Emerging Market currency was the Turkish lira which dropped more than 3%, leading declines among emerging-market currencies, after the leader of the nationalist MHP said he’d end a voting alliance with President Recep Tayyip Erdogan’s ruling AK Party at local elections scheduled for March 31.
In global rates markets, BTPs reversed early losses, bolstered by a press report that Italy hopes ECB will buy country’s debt if spreads get out of control. Bund/BTP spread broadly steady around 300bp.
U.S. growth data later in the week as well as earnings from companies including Amazon, Alphabet, Microsoft and Intel could be key to how far much further the drop will go. In the meantime, uncertainty over the death of a Saudi journalist, Italy’s budget and Brexit are among the factors weighing on sentiment.
Meanwhile, fears about diplomatic escalation with Saudi Arabia over the Khashoggi murder festered after Turkish President Erdogan said the information and evidence shows journalist Khashoggi was murdered savagely and was part of a planned operation, he added the Saudi King acknowledged the murder in a phone call. Riyadh faces international pressure to provide all the facts about an incident that has raised a global storm and added the threat of sanctions against the kingdom to a list of market concerns. U.S. President Donald Trump said on Monday he was not satisfied with what he had heard from Saudi Arabia about the killing, but expressed reluctance to punish the kingdom economically.
Investors worry that may lead to Saudi retaliation through crude oil, although a pledge by the Saudi energy minister to play a “responsible role” and keep markets supplied while not ruling out that Saudi output should be 1-2m b/d higher held down crude prices on Tuesday; as a result, WTI and Brent are both in the red with prices currently hovering under USD 68.50/bbl and USD 78.50/bbl respectively. Saudi Energy Minister Al Falih said the oil market is in a good place now and will continue to monitor the oil market, but supply and demand have their uncertainties. Al-Falih sees a lot of output decline in many regions and does not rule out that Saudi output is going to be 1-2mln BPD higher. He said that the nation will be able to produce 12mln bpd of oil in less than three months.
Gold is trading with gains in excess of 1% amid safe haven flows. Elsewhere, China’s alumina exports for September have increased by over 5 times to 165.8k tonnes compared to August. Separately, world refined copper market showed a 47k tonnes deficit in July vs. June’s deficit of 38k tonnes.
Verizon, McDonald’s, 3M and Texas Instruments are among companies reporting earnings. Richmond manufacturing survey is due.
- S&P 500 futures down 1.3% to 2,720.50
- STOXX Europe 600 down 1.3% to 355.20
- MXAP down 2.1% to 150.51
- MXAPJ down 2.1% to 475.27
- Nikkei down 2.7% to 22,010.78
- Topix down 2.6% to 1,650.72
- Hang Seng Index down 3.1% to 25,346.55
- Shanghai Composite down 2.3% to 2,594.82
- Sensex down 0.9% to 33,826.52
- Australia S&P/ASX 200 down 1.1% to 5,843.09
- Kospi down 2.6% to 2,106.10
- German 10Y yield fell 0.7 bps to 0.441%
- Euro up 0.04% to $1.1469
- Brent Futures down 1.2% to $78.89/bbl
- Italian 10Y yield rose 0.7 bps to 3.118%
- Spanish 10Y yield fell 2.2 bps to 1.674%
- Brent Futures down 1.2% to $78.89/bbl
- Gold spot up 1.2% to $1,236.25
- U.S. Dollar Index down 0.1% to 95.92
Top Overnight News from Bloomberg
- Erdogan said the murder of Saudi journalist Jamal Khashoggi in Istanbul was part of a planned operation as he tries to turn the death into a catalyst for changing the balance of power in Saudi Arabia and regaining influence across the Middle East
- Equities failed to get any reprieve after China announced fresh measures to ease the funding strains of private companies, as top officials seek to restore confidence in the world’s second- largest economy. The State Council announced it would support bond financing by private firms, and said the central bank will provide funding to facilitate this
- French Finance Minister Bruno Le Maire said euro-area limits on budget deficits must be respected and the Italian government has an interest in upholding the restrictions. The European Commission will likely decide Tuesday on whether to formally demand a member state to take back, revise and resubmit its budget, a step it has never taken before
- The Italian government hopes that the European Central Bank would purchase the country’s securities if the bond yield spread with German bunds gets out of control in the coming months, newspaper La Stampa reported, without saying where it obtained the information
- U.S. President Donald Trump’s surprise call to cut middle-income families’ taxes by 10% could mean top earners get a break, too. It’s still unclear how Trump will propose to reduce the tax burden on middle-class Americans, but one of the most straightforward ways would be to lower rates by 10% for single filers making up to $82,500
- A small group of British currency traders didn’t have the power to fix prices in a $5.1 trillion-a-day market where hundreds of competitors were battling to get the best price, a foreign-exchange expert told a U.S. jury considering criminal antitrust charges against the lot known as “The Cartel”
Asian equity markets were lower across the board following the uninspiring performance on Wall St where most major indices finished in the red amid underperformance in financials and in which the S&P 500 posted a 4th consecutive loss. ASX 200 (-1.05%) was dragged lower by weakness across the large industries including financials, energy and resources, while Nikkei 225 (-2.67%) slumped as Japanese exporters suffered the ill-effects of a firmer currency. Hang Seng (-3.08%) and Shanghai Comp. (-2.26%) conformed to the downbeat tone as buying in the mainland eased following the prior day’s over 4% rally, while US equity futures declined alongside their Asian peers with pressure exacerbated as the E-mini S&P broke below US session lows around the 2750.00 level. Finally, 10yr JGBs were quiet and only marginally benefitted from the downbeat risk tone, while the enhanced-liquidity auction for 10yr, 20yr and 30yr JGBs failed to spur any meaningful demand with the b/c unchanged from the prior.
Top Asian News
- Indonesia Holds Key Rate as Run of Hikes Helps Stabilize Rupiah
- China’s Central Bank to Offer More Funds for Private Companies
- Agarwal Says Trying to Combine Anglo, Hindustan Zinc Ops: CNBC
- J&J to Buy Rest of Japan Skin-Care Company Ci:z for $2 Billion
All major European indices are drowning in a sea of red as sentiment continues from Asia amid trade woes and growing concerns surrounding Saudi and the West; Germany's DAX (-2.1%) is lagging its peers, largely due to downside in Bayer (-8.0%) after a US judge affirmed a verdict in regards the weed-killer which was linked to cancer. Key sectors are broadly in the red, with IT (-3.8%) the lagging index, significantly weighed on by Atos (-22.4%) following a cut to their financial year growth guidance. Meanwhile, AMS (-27.0%) slumped amid earnings, with the likes of STMicroelectronics (-4.8%), Infeneon (-5.0%) and Wirecard (-5.8%) dragged lower in sympathy.
Top European News
- Car Stocks Fall as Renault Sales Miss Offsets Confirmed Guidance
- French Are Target of Widespread Spying by Chinese, Figaro Says
- BTPs Rise on Report That Italy Hopes ECB Will Buy Nation’s Debt
In FX, the Yen was the standout G10 outperformer on safe-haven grounds, with Usd/Jpy retreating further from Monday’s near 112.90 highs towards 112.25 where stops are anticipated down to 112.20 and Jpy crosses also trending lower again as big figure levels give way (like 129.00 vs the Eur and 80.00 vs the Aud). GBP - A sterling effort to avoid another leg-down and loss of a round number, as Cable rebounds firmly from sub-1.2950 lows to retest 1.3000 with the aid of reported model buying around 1.2985. However, the Pound remains precarious and prone to further Brexit-related pressure, as Eur/Gbp hovers above 0.8800 having broken above a couple of Mas yesterday. NZD - The Kiwi is also relatively resilient to broad risk aversion and hovering around 0.6650 vs its US counterpart, albeit partly on favourable cross-flows again as AUD/Nzd remains capped around 1.0800 and the Aud loses 0.7100 support alongside ongoing weakness in the Yuan. EM - The Lira has lost more of its recent recovery momentum on a mixture of factors including a move from the CBRT ahead of Thursday’s rate meeting to raise the RRR on Usd, renewed political uncertainty following the national party announcing that it will not continue its AK party allowance and a further deterioration in consumer confidence. Usd/Try just off near 5.8700 highs, but still significantly above lows circa 5.6670.
In commodities, WTI and Brent are both in the red with prices currently hovering under USD 68.50/bbl and USD 78.50/bbl respectively, this price dip comes as Saudi Arabia pledges to be responsible in energy markets removing some of the market’s risk sentiment ahead of the step-up in Iranian sanctions. Saudi Energy Minister Al Falih said the oil market is in a good place now and will continue to monitor the oil market, but supply and demand have their uncertainties. Al-Falih sees a lot of output decline in many regions and does not rule out that Saudi output is going to be 1-2mln BPD higher. He said that the nation will be able to produce 12mln bpd of oil in less than three months. Iran said they are not concerned about maintaining oil production. Iranian Oil Minister said the country's oil exports cannot be stopped and sanctions on Iran will keep the market volatile. Gold is trading with gains in excess of 1% amid safe haven flows due to political tensions between Saudi Arabia and Western countries. Elsewhere, China’s alumina exports for September have increased by over 5 times to 165.8k tonnes compared to August. Separately, world refined copper market showed a 47k tonnes deficit in July vs. June’s deficit of 38k tonnes.
Today, we get the October Richmond Fed manufacturing index. Away from data, BOE Governor Carney and Chief Economist Haldane, and the Fed's Kashkari and Evans will be speaking at different times. In addition, Caterpillar, Verizon, Texas Instruments, Lockheed Martin, United Technologies, and Harley Davidson will release their earnings.
US Event Calendar
- 9:30am: Fed’s Kashkari Speaks at Early Childhood Development Event
- 10:00am: Richmond Fed Manufact. Index, est. 24, prior 29
- 1:30pm: Fed’s Bostic Speaks on Economy and Monetary Policy
- 2:15pm: Fed’s Kaplan Speaks at Economic Development Event in Texas
- 8pm: Fed’s George Takes Part in Payment System Conference in Sydney
DB's Jim Reid concludes the overnight wrap
It was another disappointing day for markets after a bright start with China and Italy rallying hard. Italy as we’ll see later reversed these gains with China equity markets also selling off around 1.5% overnight (more also later). The S&P 500 closed -0.42% yesterday, its fourth consecutive daily loss and remarkably the 17th day of losses over the last 22 trading session (a month). This is the worst such stretch of losses since October 2000. I have to hat tip my colleague Quinn for this stat. Hopefully he’ll return the favour by sharing me in on his winning lottery ticket.
The DOW also fell in sympathy, dropping -0.50%, though tech had a positive session, with the NASDAQ and FANGs gaining +0.48% and +1.44%, respectively. An impressive out-performance. Banks underperformed sharply, dropping -2.55%. US HY credit sold-off, with the generic US HY CDS index rising +4bps to the highest level since December 2016. Note that the US cash HY index is only marginally wider YTD now but has risen over 40bps from recent tights. In Europe, the STOXX 600 fell -0.42%, with banks underperforming as well (-1.17%). Italian assets gave up strong initial gains with 10yr BTPs climbing 1bps after rallying nearly 20bps near the open as relief over Moody’s stable outlook from Friday night kicked in. That completed a 50bps rally (3.80% to 3.30%) in less than one full trading day from early Friday morning before the yesterday’s reversal. We eventually closed just below 3.50% last night.
The Italian government officially replied to the European Commission’s letter asking for clarification on several budget points. Finance Minister Tria said that he knows that Italy’s spending plans do not comply with EU rules, but that he wants "constructive" talks on the issue and that the government will stand ready to ensure its 2019 budget deficit doesn’t exceed its 2.4% target. Contrary to speculation in press on Friday, there were no indications that Italy might lower its headline deficit to a more fiscally-sustainable target of 2.1% of GDP. The EU may implement the never-before-used step of demanding revisions to the budget as soon as today. Contrary to last week, there were limited signs of contagion today, with Spanish spreads tightening -2.8bps, though the euro depreciated 0.43% versus the dollar. The greenback rallied to its strongest level in 2 months, gaining +0.33%, with gains coming against both developed and emerging market currencies.
This morning in Asia, the risk off sentiment from Wall Street has continued with the Nikkei (-2.26%), Hang Seng (-2.03%), Shanghai Comp (-1.37%) and Kospi (-2.40%) all lower along with most Asian markets. Elsewhere, futures on the S&P 500 (-0.89%) are pointing to a weak start. In the meantime, China’s state council yesterday announced that it would support bond financing by private firms and added that the PBOC will provide funding to facilitate this. The PBOC also announced a plan shortly after to support such issuance, without providing any details on how it would work, the size of the plan, or when it would begin.
So a lot of intervention in China at the moment.
Back to yesterday and the British Pound had its worst day in a month, dropping around -0.85% versus the dollar as Brexit negotiations continued and Prime Minister May faced down the conflicting flanks of her governing coalition. First, Steve Baker of the Eurosceptic European Research Group proposed an amendment that would have required the Northern Ireland Assembly to approve anything that would treat NI separate from the rest of the UK, making it more difficult for Prime Minister May to negotiate a backstop deal with the EU. Baker ultimately withdrew his amendment, avoiding a more direct confrontation within the Conservative party. Second, media outlets (Including Bloomberg) reported that a “centrist” MP is supporting a no-confidence vote in PM May, which might signal that a political crisis is more imminent than most people realize. Our strategists have held this view for weeks, and continue to think that the fundamental tension within the governing coalition is more significant than discounted in the market. Exemplifying this yesterday Ireland’s Foreign Minister Coveney said that any attempt by the UK to move away from the backstop arrangement "is not going to fly with Ireland or the EU as a whole." So the NI issue does not appear to be any closer to a solution.
Today’s most important event could be Turkey’s President Erdogan promise to unveil details of the Turkish investigation over the killing of Saudi Arabia’s journalist Khashoggi. So, one to keep an eye out on amidst rising geopolitical risks. Turkey has found itself as a huge power broker over this story so today’s announcement will be fascinating and has numerous sub plots and implications just as the ill fated Saudi investor conference starts. Separately, Saudi Energy Minister al-Falih downplayed the spillovers from geopolitical tensions into the oil markets, asserting that Saudi Arabia would increase production as planned and would not try to use oil prices as a weapon.
In other news, the German Bundesbank said in its monthly report that Germany’s growth may have stalled in the third quarter as carmakers struggled with a switch to new emissions testing. However, the report added, the “upswing in Germany is still fundamentally intact” and the “growth break shouldn’t be long-lasting.” This is consistent with our economists’ view, which sees the recent softness in hard data as transitory, though they note downside risks to the third quarter GDP print in a few weeks.
On the earnings front, US companies mostly missed expectations yesterday. Toy-maker Hasbro reported that sales fell in North America and that it was struggling to meet demand for its products. Halliburton, the energy services giant, reported slow activity growth in US fracking and lowered its fourth quarter guidance. Management cited bottlenecks in the Permian Basin and increasing pressure on firms to generate a profit rather than maximize production volumes. Finally, the household products manufacturer Kimberly-Clark (maker of Kleenex and other consumer products) cited high commodity prices and currency volatility for its disappointing earnings guidance. All three stocks traded lower and weighed on sentiment. On the economic data front, the only major release in the US was the Chicago National Activity Index, which printed at 0.17 versus expectations for 0.21. A positive value indicates an above-average rate of economic expansion.
Today, we get the Euro Area's October consumer confidence, Germany's September PPI, Spain's August trade balance and in the UK, October CBI Trends total orders, selling prices and business optimism. In the US, we get the October Richmond Fed manufacturing index. Away from data, BOE Governor Carney and Chief Economist Haldane, and the Fed's Kashkari and Evans will be speaking at different times. In addition, Caterpillar, Verizon, Texas Instruments, Lockheed Martin, United Technologies, and Harley Davidson will release their earnings.