World Markets "In World Of Pain" As Nothing Can Stop Relentless Stock Selling

After another painful week for bulls, it's again a sea of red this morning with the selling extending on Monday as U.S. equity futures slide but off their worst sessions while European stocks follow Asian shares lower as traders focused on the latest dismal trade and inflation data from China over the weekend and the sharp drop in Japan's GDP, renewing concerns for slowing global growth while the escalation of tensions between Washington and Beijing continues. The dollar was mixed while the euro advanced, and 10Y TSY yields rebounded from session lows.

The biggest surprise may be that Monday is not more in the red, with the following non-exhaustive list of potential risk-off drivers hanging over Monday's open (as succinctly summarized by Bloomberg's Garfield Reynolds):

  • China summons U.S. Ambassador over the Huawei case
  • Trump Chief of Staff Kelly to leave, amid a welter of fresh Mueller developments
  • China reports weaker trade and inflation data
  • May pushes ahead on Brexit vote despite Cabinet, DUP opposition
  • Soggy U.S. payrolls, though not soggy enough to stop a December Fed hike
  • France protests intensify, raising concern of economic damage

"Another day, another reason to sell risk. Equity markets remain in a world of pain with everyone in search of a very elusive silver lining," said Stephen Innes at brokerage OANDA

MSCI’s all-country index has spent four weeks in the red, despite intermittent rallies fueled by hopes of trade war detente, and was set to start the 5th week in the red. The pessimism has been exacerbated by data showing the world’s largest economies — the United States, China, Japan and Germany — are all headed for slower growth. That pushed the index another 0.5% lower, while Europe's Stoxx 600 fell almost one percent in early trading led by a retreat in chemical, media and auto companies, and U.S. equity futures were down 0.4%, if rebounding from losses as much as 1%, suggesting more pressure on Wall Street later in the session.

Last week’s arrest of Huawei's CFO for extradition to the United States was seen putting up another hurdle to the resolution of a trade war between the world’s two biggest economies. U.S. trade rep Robert Lighthizer said Sunday there was a “hard deadline” to the 90-day trade ceasefire and without a successful end to talks by March 1, Washington would impose new tariffs on Chinese goods.

“The trade theme will preoccupy the markets through the 90-day truce period between the United States and China, waiting for any signs of concession between the parties,” said Soichiro Monji, senior economist at Daiwa SB Investments in Tokyo.

Economic data has disappointed, too, underscoring the impact of the trade wars on the world economy. Following weak trade and inflation data on the weekend, China posted far weaker-than-expected November exports and imports...

... reinforcing expectations Beijing will roll out more stimulus to prevent the economy cooling too fast, which in turn depressed  the yuan to a one-week low after the weak data.

“(The data) would suggest China woes go well beyond U.S. tariffs, given that China trade surplus to the U.S. was at a record level. One can only imagine the impact on China terms of trade if the U.S. follows through with a 25 percent tariff,” Innes of OANDA said.

Meanwhile, China's neighbor Japan posted the worst contraction in over four years in the third quarter...

... as uncertainty over global demand and trade saw companies slashing capital spending the most since the financial crisis.

As a result, MSCI's index of Asian equities ex Japan slid 1.5% to a near three-week low, Shanghai shares retreated 0.8% and Japan's Nikkei shed 2.1 percent. EM stocks dropped 1.3 percent.

Asia’s latest weak data came after below-forecast industrial output numbers in Germany and U.S. jobs data showing employers hired fewer workers than expected in November. The U.S. jobs data weakened the dollar by convincing many that U.S. growth has peaked and the Federal Reserve will pause its rate tightening sooner than previously thought, with even Goldman now capitulating and pulling its forecast for a March rate hike. Last week, the dollar posted its worst performance since August against a basket of currencies.

The dollar was a touch firmer on Monday but stayed near two-week lows. The euro rose 0.3 percent at $1.1418 on upbeat German trade data, while the dollar drifted. Treasuries and European sovereign bonds were mixed. The yen was unchanged after earlier climbing toward a six-week high as concern about worsening U.S.-China relations and a slide in Asian stocks boosted demand for havens. Meanwhile, the pound tumbled to 2018 lows as Prime Minister Theresa May was said to delay the "meaningful" Brexit vote to avoid a "huge defeat ."

While that raises fears of a chaotic exit in March, those hoping for a no-Brexit outcome were encouraged by a ruling from the EU’s top court that Britain can revoke its decision to leave the bloc without the consent of other EU members.

France, meanwhile, suffered a fourth weekend of anti-government riots, which the finance minister said could curb economic growth by 0.1 percentage point. French hotel, transport and retail stocks fell amid concerns for French tourism, while the yield premium investors demand to hold French bonds over German peers rose to the highest since May. President Emmanuel Macron, already forced to row back on fuel tax increases, will make a televised address at 1900 GMT.

Elsewhere, India’s rupee fell with stocks and bonds as exit polls showed Prime Minister Narendra Modi’s party is set for tight electoral contests in key states before general elections next year.

“Concern about a bit of political and fiscal capitulation is rarely good for a bond market,” said Chris Bailey, European strategist at Raymond James.

Treasuries steadied and equities fell across the board. Italy’s debt rallied as the ruling League and Five Star Movement are considering making concessions to avoid possible sanctions as their budget wrangling continues. German bond futures snap lower, curve bear flattens along with USTs after US 10Y yields find support at ~2.82%. Gilts curve flattens, long-dated yields lower by ~4bps.

Oil erased some of Friday’s rally triggered by OPEC and its allies agreeing on production cuts. Brent (-1.0%) and WTI (-1.3%) retreated somewhat from gains seen after Friday’s agreement by OPEC+ to cut output by 1.2mln BPD from October levels for 6 months, with the deal to be reviewed in April. Russian Energy Minister Novak stated that Russia is to cut production by 228,000 BPD as part of this agreement. Separately, sources have commented that congress is increasingly likely to vote on the NOPEC bill, which will allow the DoJ to sue OPEC on anti-trust violations.

Gold has remained steady following Friday’s NFP miss which led to some speculation that the Fed may halt interest rates hikes sooner than was previously expected. Elsewhere, a Chinese government consultancy expects 2018 crude steel output to hit an annual record of 923mln tonnes.

Scheduled data include job openings, while Casey’s and Stitch Fix are set to report earnings

Market Snapshot

  • S&P 500 futures down 0.4% to 2,626.00
  • STOXX Europe 600 down 0.8% to 342.58
  • MXAP down 1.7% to 148.66
  • MXAPJ down 1.5% to 477.60
  • Nikkei down 2.1% to 21,219.50
  • Topix down 1.9% to 1,589.81
  • Hang Seng Index down 1.2% to 25,752.38
  • Shanghai Composite down 0.8% to 2,584.58
  • Sensex down 2% to 34,979.01
  • Australia S&P/ASX 200 down 2.3% to 5,552.50
  • Kospi down 1.1% to 2,053.79
  • German 10Y yield unchanged at 0.249%
  • Euro up 0.3% to $1.1416
  • Italian 10Y yield fell 6.9 bps to 2.766%
  • Spanish 10Y yield fell 0.7 bps to 1.444%
  • Brent futures down 1.3% to $60.86/bbl
  • Gold spot down 0.2% to $1,246.70
  • U.S. Dollar Index up 0.1% to 96.60

Top Overnight News

  • President Donald Trump’s trade team sought to insulate talks with China from a growing dispute over the U.S. pursuit of a Huawei executive on Sunday, but struggled to address financial markets’ fears that a fragile truce with Beijing was at risk
  • U.K. Prime Minister May must decide Monday whether to put her Brexit deal to a vote in Parliament this week and risk a defeat that could plunge the U.K. into more political chaos.
  • The U.K. can unilaterally reverse Brexit, the European Union’s top court said in a ruling that will fuel the campaign to thwart the divorce on the eve of a make-or-break vote in the British Parliament
  • China’s Vice Foreign Minister Le Yucheng has summoned the U.S. Ambassador to China in a protest over the arrest of Huawei’s Chief Financial Officer Meng Wanzhou, and said it will take “further action” if needed
  • President Trump’s trade team sought to insulate talks with China from a growing dispute over the U.S. pursuit of a Huawei executive on Sunday, but struggled to address financial markets’ fears that a fragile truce with Beijing was at risk
  • Australian central bank Assistant Governor Christopher Kent reiterated the next interest-rate move would likely be a hike, “but not anytime soon”
  • Escalating trade tensions between the U.S. and China risk derailing the global economy by undermining business confidence and increasing the cost of living, IMF’s Managing Director Christine Lagarde said
  • Japan’s economy shrank more than initially projected, driven by the biggest drop in business spending in nine years amid a series of natural disasters
  • Italy’s government will discuss the results of a highly-awaited cost analysis of its 2019 budget proposals this week, just as the country’s populist leadership’s standoff with the European Union comes to a head with the threat of sanctions
  • French President Emmanuel Macron is due to address the nation on Monday, with everyone from Yellow Vest protesters to his dwindling band of supporters awaiting a solution to end the downward spiral of Europe’s second-largest economy

Asian equity markets began the week lower following last Friday's sell-off on Wall St and Non-Farm Payrolls miss, with
sentiment also dampened by disappointing Japanese GDP and Chinese trade data, as well as uncertainty regarding US-China
trade relations. As such, ASX 200 (-2.3%) was led lower by tech and financials to print lows last seen in around 2 years, while
Nikkei 225 (-2.1%) was pressured by a firmer JPY and larger than expected downward revision to Q3 GDP which had already
been in contraction territory. Hang Seng (-1.2%) and Shanghai Comp. (-0.8%) were also negative after Chinese Exports and
Imports data fell short of estimates and amid concerns regarding US-China trade tensions. This was after USTR Lighthizer
declared the 90-days was a 'hard deadline' for China, while there were also reports China’s Vice Foreign Minister summoned the
US and Canadian Ambassadors to China regarding the arrest of Huawei’s CFO and warned of consequences if she is not
immediately released. Finally, 10yr JGBs were underpinned by safe-haven demand and with the BoJ also present in the market for
a respectable JPY 1.2tln of JGBs with 1yr-10yr maturities.

Top Asian News

  • Investors in ‘Get-Me-Out-of-Here Mood’ as Asian Stocks Spiral
  • SoftBank Sticks to IPO Price Despite Market Drop, Network Outage
  • Ali Pictures Surges on HK$1.25b Share Sale to Alibaba
  • Alibaba Is Said to Discuss Joining Megvii Funding of Over $500M
  • China’s Bond Rally Is Turning Into a Bubble, Guotai Junan Says

Major European bourses are red across the board (Euro Stoxx 50 -0.3%) with the FTSE 100 (unch.) outperforming its peers amid currency effects (with the ongoing Brexit turmoil) and a boost by BAE Systems (+0.8%) following the Co. being shortlisted to build the next Royal Navy frigates. Over in Germany, DAX (-0.5%) is hampered by shares in heavyweight BASF (-4.9%) after the Co. significantly lowered their 2018 EBIT forecasts. Major sectors are largely in the red, with underperformance seen in materials in the wake of softer-than-expected Chinese CPI alongside further strain on US-China trade relations after the Huawei CFO is to face
prosecution in the US for fraud charges as China demands her release. Other notable movers include technology names such as Dialog Semiconductor (-2.5%) who are in the red in sympathy with poor performance in tech names overnight in Asia, while Standard Chartered (-1.5%) declined amid reports that the Co. was amongst the banks who have been misled by Huawei.

Top European News

  • Bruised Euro-Zone Economy Stumbles On After Its 2018 Beating
  • Will Merkel Leave Germany Fit for the Future? Probably Not
  • Yellow Vests Protests Put a Dent in French Economic Growth
  • Italy Banks Face $273 Billion Headache Replacing Cheap ECB Funds
  • Italy, EU Stage Sideshow Fight As Recession Risk Looms

In FX, the DXY is still on the backfoot, albeit off worst levels, in a continuation of the move following Friday’s NFP miss with the index and broad dollar closer to the top of a 96.684-358 range and awaiting more impetus data in the form of JOLTS and employment trends.

  • AUD, NZD – Antipodeans deriving support from their softer US counterpart having initially wobbled on weaker Chinese trade data overnight. Kiwi hovers just below 0.6900 as the AUD/NZD remains capped ahead of 1.0500 and AUD/USD struggles to hold above 0.7200.
  • GBP,EUR – More volatile trade for the Pound amidst ongoing Brexit uncertainty with all eyes on the 11.30GMT Cabinet conference call where Minister are now assuming PM May will delay the meaningful vote due to wide anticipation that the deal will be rejected in Parliament. GBP/USD currently languishing below 1.2700 ahead of the recently-made YTD low of 1.2657 having seen some reprieve following the ECJ ruling that the UK can unilaterally reverse Brexit without consulting the EU27 members. However, the upside was short-lived ahead of UK data which was weaker overall, with industrial productions considerably weaker than forecasts. Meanwhile, EUR benefits from the softer buck and pound with EUR/GBP near the top of a 0.8988-57 range.
  • NOK, SEK – Stronger than expected Norwegian inflation data just ahead of Thursday’s Norges Bank interest rate decision, weighed on EUR/NOK with the pair making a substantial move sub-9.7000 post-data with a low print of around 9.6500, before paring back a fraction of the move to stabilise around 9.6700. Conversely, further political angst in Sweden after the Centre party leader Loof noted that talks with Social Democrats have failed, adding they will not support their leader Leader Lofven as PM. This subsequently (alongside the NOK/SEK spillover) pushed EUR/SEK to session highs north of 10.3350 vs. a low print of 10.2973.
  • JPY – Moving in tandem with swings in risk sentiment more so than the wider-than-expected contraction in Japanese Q3 GDP, with USD/JPY currently nearer the highs of a 112.75-25 range with the downside contained by big options (1.13bln at 112.40-50) and a fib at 112.46.
  • EMs – USD/CNY rose to just shy of 6.9150 in the wake of lower-than-expected inflation data alongside continuous US pressure after US Trade Representative Lightizer solidified the 90-day negotiating period as “a hard deadline” with new tariffs imposed by March 1st should the parties not reach an agreement. Meanwhile, TRY has largely recovered from the miss in Turkish GDP with USD/TRY clipping 5.3000 post-data before edging lower to around 5.2800. Elsewhere, ZAR is on the backfoot on a more technical note as traders cite the USD/ZAR breach above 14.2000 as the catalyst

In commodities, Brent (-1.0%) and WTI (-1.3%) have retreated somewhat from gains seen after Friday’s agreement by OPEC+ to cut output by 1.2mln BPD from October levels for 6 months, with the deal to be reviewed in April. Russian Energy Minister Novak stated that Russia is to cut production by 228,000 BPD as part of this agreement. Separately, sources have commented that congress is increasingly likely to vote on the NOPEC bill, which will allow the DoJ to sue OPEC on anti-trust violations. Elsewhere, Libya’s NOC has declared a force majeure following a production suspension at the Sharara oil field due to safety concerns because of protestors at the oil field; which will result in a 315k BPD production cut, while Zawiya refinery is also at risk due to its dependence on the Sharara field. Gold (Unch) has remained steady following Friday’s NFP miss which led to some speculation that the Fed may halt interest rates hikes sooner than was previously expected. Elsewhere, a Chinese government consultancy expects 2018 crude steel output to hit an annual record of 923mln tonnes Iraq oil Minister Ghadhban says that the county's oil exports have improved after November's drop in exports due to bad weather.

We kick the week off with Germany's October trade balance and current account balance, France's November Bank of France industry sentiment index, the UK's October trade balance, industrial production, manufacturing production, construction output and October monthly GDP print, and the Euro Area's December Sentix investor confidence reading. In the US, only the October JOLTS job openings reading is due. Away from that, BoE Deputy Governor Cunliffe, ECB's Angeloni and Italian Deputy Premier Salvini are due to speak.

US Event Calendar

  • 10am: JOLTS Job Openings, est. 7,100, prior 7,009

DB's Jim Reid concludes the overnight wrap

The biggest events of this very week will be the ECB meeting on Thursday and the Brexit Parliamentary vote tomorrow. On the ECB, our economists expect a “dovish tightening,” i.e. an announcement that QE will end at the end of the calendar year. To soften this blow, Draghi will also probably argue that policy remains accommodative due to the stock effect of a large balance sheet and the commitment to keep rates low for as long as needed to meet the inflation target. Draghi is likely to tacitly endorse current market pricing, which does not include a hike until into 2020. Any acknowledgement of TLTRO2 being in the offing next year will also be looked out for.

On Brexit there has continued to be speculation over the weekend that tomorrow’s vote could be delayed to avoid a sizeable defeat for the government. This has generally been denied by those close to the top though. Assuming the vote goes ahead, assuming the government lose, what happens next and at what pace, is where all the drama will be. To add to the intrigue the ECJ will this morning (8am) formally rule on whether Britain can unilaterally revoke Article 50. This follows last week’s advice from the EU advocate general that suggested the U.K. should be able to. A myriad of scenarios remain on the table after tomorrow’s vote.

Elsewhere there will also be a slew of important economic data this week, including US CPI for November on Wednesday, which will be key for pricing the Fed. The market is rapidly removing US hikes from the 2019 outlook (less than one now priced in) and even for next week’s expected hike some doubts are creeping in.

In terms of other data, although it was only last week that we saw the final PMIs for November, this Friday sees the flash numbers for most major economies, plus additional hard data in the US and China in the form of industrial production and retail sales.

Asian markets have started the week where last week left off. That is pretty weak with the Nikkei (-2.13%), Hang Seng (-1.44%), Shanghai Comp (-0.84%) and the Kospi (-1.35%) all down. Not helping sentiment has been the summoning over the weekend of the US Ambassador to China, Terry Branstad, by China’s Vice Foreign Minister Le Yucheng to register its protest over the arrest of the Huawei CFO. Le Yucheng said that the US actions have violated the “legitimate rights and interests of Chinese citizens and are extremely bad in nature,” while adding that, “China will take further action based on the US actions.” Canada’s ambassador to China was also summoned to the ministry on Saturday. Elsewhere, futures on the S&P 500 are down -0.66%. Also over the weekend, Italian daily La Stampa reported that the Italian cabinet will meet today to discuss the cost assessment results of its 2019 budget pledges. So we should have more headlines after this. As we go to print Italian daily Messaggero has reported that Italian PM Conte is seeking an accord on a 2% budget deficit target while Italian Finance Minister Tria is seeking 1.9%. So if you believe these headlines there is a small gap ahead of today’s cabinet discussion but a debate that has seemingly moved a long way from the 2.4% is non-negotiable.

In terms of overnight and weekend data releases, Japan’s final Q3 (annualised) GDP shrank -2.5% qoq vs. (-2.0% qoq expected and -1.2% qoq in first read), the largest contraction since Q2 2014, mainly on account of the sharpest decline in business spending (-2.8% qoq vs. -1.8% qoq expected), largest since Q3 2009. China’s November trade balance stood at $44.74bn (vs. $34.40bn expected) mainly as the slowdown in import growth (3.0% yoy vs. 14.0% yoy expected) outpaced the slowdown in export growth (5.4% yoy vs. 9.4% yoy). Meanwhile, China’s November PPI came in line with consensus at +2.7% yoy and November CPI stood at +2.2% yoy (vs. +2.4% yoy expected).

Overnight our European equity strategist Sebastian Raedler has argued that European equities are priced for a further sharp deterioration in global growth momentum from its current two-year low. The Stoxx 600, at 345, is 7% below fair value on his model and a drop in the Euro area PMI from the current 52 to 49 would be required to justify the current pricing. European cyclicals have underperformed defensives by 16% over the past six months, leaving them around 13% below the level implied by global PMIs, the largest undershoot since October 2014. However, our strategist expects global PMI momentum to turn positive again over the coming months and notes that a number of macro risks (trade war, Italy, Brexit, EM) have started to abate. His macro projections are consistent with 12% upside for European equities near-term (to 385 on the Stoxx 600 by February) as well as 15% upside for European cyclicals versus defensives, 16% outperformance for banks and 10%+ underperformance for pharma, telecoms and Swiss equities.

In terms of reviewing last week, it seems almost a lifetime away now that cautious optimism last Monday greeted the G20 US/China trade truce! This quickly faded and risk markets traded much weaker to end the week on a distinctly negative note. Most major bourses erased their gains from the prior week. In the US, the S&P 500 and DOW fell -4.60% and -4.50% (-2.33% and -2.24% on Friday), respectively, and are now back in negative territory yet again for 2018. The tech-heavy NASDAQ and NYFANG indexes are still positive for the year, but they also had rough weeks, retreating -4.83% and -3.13% (-3.30% and -2.67% Friday), respectively. Cyclical sectors led declines, with the S&P 500 banks index down -8.20% (-2.17% Friday) for its worst week since January 2016. That compares favourably with the macro bellwether DOW transports index though, which had its worst week since September 2011, falling -8.03% (-3.93% Friday).

In Europe, the STOXX 600 fell -3.37% (+0.62% Friday) and the DAX fell into a bear market, down -20.44% from its peak after dropping -4.17% on the week (-0.21% Friday). Brent crude oil rallied +4.63% (+2.28% Friday) as OPEC, in coordination with other partners – namely Russia – delivered an output cut of 1.2 million barrels per day. This is enough to stabilise prices at current levels but not to change the underlying supply-demand dynamic.

Ten-year treasury yields fell -14.3bps on the week (-5.1bps Friday), their strongest performance since April 2017. The 3s5s curve inverted for the first time this cycle, raising some fears that the yield curve is beginning to signal a potential recession over the next several quarters, though it steepened into the end of the week as the market priced out fed rate hikes in 2019, and the two-year treasury yield fell -7.6bps (-4.9bps Friday) as the market now prices in less than one hike next year after the near-certain hike next week. Bund yields fell -6.4bps (+1.3bps Friday) and reached their lowest closing levels since June 2017 before partially retracing on Friday. The euro gained +0.55% versus the dollar (+0.04% Friday) while EM currencies shed -0.42% (-0.13% Friday).

Economic data was mixed, as nonfarm payrolls disappointed slightly but other measures of activity surprised to the upside. The US economy added 155,000 jobs last month, a tad below the expected 198,000, while unemployment stayed at 3.7%. Average hourly earnings rose 0.2% mom, below the expected 0.3%, but the yoy figure was 3.1% as expected. In a bad week the positive highlights were the US ISM indices, as the manufacturing and non-manufacturing readings rose to 59.3 and 60.7, signaling robust growth. If these are a correct signal, markets have massively overreacted of late.

What to expect today? We kick the week off on Monday in Europe with Germany's October trade balance and current account balance, France's November Bank of France industry sentiment index, the UK's October trade balance, industrial production, manufacturing production, construction output and October monthly GDP print, and the Euro Area's December Sentix investor confidence reading. In the US, only the October JOLTS job openings reading is due. Away from that, BoE Deputy Governor Cunliffe, ECB's Angeloni and Italian Deputy Premier Salvini are due to speak.