US Futures Drift Lower As Chinese Stocks Extend Worst Drop Of 2019

US equity futures and European bourses drifted lower, failing to carry over Asian optimism into Monday trading, while Chinese stocks extended the worst weekly loss of 2019 with another 0.8% drop to start the week despite profits at Chinese industrial firms growing for the first time in four months and a strong GDP print, if only superficially, on Friday. Most European markets were mostly in the red, with Italy sliding despite S&P reaffirming Italy's BBB rating late on Friday, while the dollar rose alongside US Treasury yields, while the yen slumped as Japan remains closed for a weeklong holiday.

The MSCI All-Country World Index was flat after the start of European trading, lifted higher by Asian markets (ex China) but pressured by poor European trading. After rising initially, the Stoxx 600 dropped to session lows while the Spain’s IBEX 35 index underperformed peers, down over half a percent after Prime Minister Pedro Sanchez overcame a challenge from nationalists in elections on Sunday. The elections had little immediate impact on the country’s bond market. Shares in Italian banks got a boost and Italian government bonds rallied after S&P Global affirmed Italy’s sovereign credit rating.

Also in Europe, the ECB reported that Eurozone credit growth decelerated markedly despite decent M3 growth, as loan growth to firms decreased to 3.5% in March from 3.8% in Feb, while loans to households stood at 3.2% in March, down from 3.3% in Feb.

Earlier in the session, a similar see-saw pattern was observed in Chinese stocks, which initially moved higher but closed near session lows, down 0.8% after losing 5.6% last week, the worst of 2019.

The latest Chinese data showed industrial profits grew in March after four months of contraction, but analysts said sentiment remained fragile. Economists polled by Reuters expect factory activity in the world’s second largest economy to grow at a steady but modest pace in April.

Australian shares were down 0.4% after hitting an 11-year closing high on Friday, while Seoul’s KOSPI was up 1.4 percent. While Japan’s cash markets are closed for a long national holiday this week, Nikkei 225 futures index in Singapore was 0.9% higher.

Emerging-market stocks headed for their biggest advance in almost two weeks and currencies traded stronger for a second day after the S&P 500 hit a record on Friday while the dollar rally cooled.

In currencies, with Japan on an extended break, currency markets were calm ahead of the FOMC meeting and U.S. jobs numbers. The dollar was 0.2 percent higher against the yen at 111.74, and the euro was up 0.1 percent at $1.1162. The dollar index, which tracks the greenback against a basket of six major rivals, slipped 0.03 percent to 97.985. South Africa’s rand led the gains, set for its best run in almost a month with elections approaching at the start of May. Turkey’s lira edged higher even as Goldman Sachs Group Inc. questioned the central bank’s credibility and predicted losses for the currency over the coming 12 months.  The pound led Group-of-10 currency gains as some strategists predicted the Bank of England to adopt a slightly more hawkish tone at this week’s meeting. The euro held up and bunds slipped amid fading fears of political instability in Spain, with Pedro Sanchez set to return as prime minister after Sunday’s election saw the Socialists emerge as winners.

Monday's directionless trading followed data showing U.S. gross domestic product grew at a 3.2% annualized rate in the first quarter, but the internals were far weaker. Nomura FX strategist Jordan Rochester noted last week’s U.S. GDP was driven by a surge in inventories, government spending, and a big contribution from net trade. “None of those are likely to be sustained, hence why market reaction was limited,” he said in a note to clients. “But overall, the past week has been dominated by higher U.S. equity prices and consequently a U.S. dollar outperformance story. In our view, this week should see a test of that new trend,” he said, referencing upcoming economic data this week.

Investors were mostly on the sidelines ahead of an event-packed week, and were looking forward to the latest Fed meeting and Chinese factory data for further clues on policy direction in the world’s biggest economies.

“For stock traders, it seems that the important catalysts are pointing higher: the U.S. sees strong domestic growth, low inflation keeps the Fed at bay and could potentially trigger a rate cut so it seems that equities have nowhere to go but higher - at least in the short term,” said Konstantinos Anthis, head of research at ADSS.

The March reading for core personal consumption expenditures (PCE), the Fed’s favored inflation measure, is due later on Monday. The central bank’s Federal Open Market Committee (FOMC) will announce its policy decision on Wednesday, with Chair Powell expected to balance the strong domestic growth data against persistent concerns over the global outlook.  Markets will also be looking to global factory activity surveys this week, particularly official and private readings on Chinese manufacturing which will both be released on Tuesday.

Alphabet is the highlight of Monday’s earnings, with Spotify and NXP Semiconductors also reporting. Data on personal income and spending is due.

In commodities, oil prices fell, extending a slump from Friday that ended weeks of rallying, after President Donald Trump demanded that producer club OPEC raise output to soften the impact of U.S. sanctions against Iran. Brent crude fell half a percent to $71.80 per barrel. Spot gold was down 0.3 percent, trading at $1,281.81 per ounce

Market Snapshot

  • S&P 500 futures down 0.1% at 2,939
  • STOXX Europe 600 up 0.1% to 391.55
  • MXAP up 0.3% to 162.56
  • MXAPJ up 0.5% to 540.49
  • Nikkei down 0.2% to 22,258.73
  • Topix down 0.2% to 1,617.93
  • Hang Seng Index up 1% to 29,892.81
  • Shanghai Composite down 0.8% to 3,062.50
  • Sensex up 0.9% to 39,067.33
  • Australia S&P/ASX 200 down 0.4% to 6,359.49
  • Kospi up 1.7% to 2,216.43
  • German 10Y yield rose 1.5 bps to -0.007%
  • Euro up 0.07% to $1.1159
  • Brent Futures down 0.7% to $71.67/bbl
  • Italian 10Y yield fell 10.3 bps to 2.213%
  • Spanish 10Y yield fell 1.9 bps to 1.005%
  • Brent Futures down 0.7% at $71.67/bbl
  • Gold spot down 0.4% at $1,281.70
  • U.S. Dollar Index down 0.02% at 97.98

Top Overnight Headlines from Bloomberg

  • Socialist Sanchez is set to return as prime minister of Spain with his left-leaning allies close to a majority, though he may still rely on Catalan separatists to govern
  • Economic confidence in the euro area dropped for a 10th month in April to the lowest in more than two years, indicating the region may struggle to pick up from its recent slump
  • The next round of China-U.S. trade talks will get under way in Beijing this week with significant issues still unresolved, according to a senior Trump administration official
  • The Bank of England got its Brexit forecasts wrong, according to lawmakers and pundits. Mark Carney would beg to differ, and has defended pre-referendum predictions that a vote to leave would lead to slower growth, a drop in the pound and faster inflation -- all of which transpired
  • China’s largest lenders posted increases in first-quarter profit and higher interest income as authorities encouraged fresh lending to support the economy. Industrial & Commercial Bank of China Ltd., Agricultural Bank of China Ltd., Bank of Communications Co. and Bank of China Ltd. reported net income rose as much as 4.9 percent in the three months ended March 31
  • Chinese industrial firms’ profits rose 13.9% in March y/y, vs a 14% decline in the first two months of this year combined
  • President Trump urged Japan to end tariffs on U.S. farm products when he met Prime Minister Shinzo Abe, who appears to have deflected the most damaging U.S. demands on trade weeks before the pair are likely to meet again

Asian equities traded mixed despite last Friday’s gains on Wall St where strong Q1 GDP and soft Core PCE Prices suggested a Goldilocks economy and propelled US stock markets to fresh record closes, as this week’s looming risk events and holiday closures restricted upside for the region. ASX 200 (-0.4%) was the laggard amid losses in its largest-weighted financials sector and with energy names also downbeat after a pullback in oil prices, while this week’s array of key releases including Chinese PMI, US NFP, BoE and FOMC announcements also added to the tentative tone. Elsewhere, Hang Seng (+0.9%) was positive after data showed Chinese Industrial Profits recovered in March and with focus on earnings including Agricultural Bank of China which kicked off the Big 4 bank earnings with an improvement in Q1 net, while Shanghai Comp. (-0.7%) was less decisive after the PBoC refrained from liquidity operations and with the mainland only open for the first 2 days of this week. As a reminder, Japan is closed until May 7th.

Top Asian News

  • CIC Said to Estimate 3-4% Overseas Investment Loss for 2018
  • China Firm’s Plunge Is Said to Cost Interactive Brokers Millions
  • Thai Finance Ministry Cuts 2019 GDP Growth, Export Forecasts
  • Goldman Says These Australia Stocks at Risk of Profit Warnings

Major European indices are choppy but overall marginally lower [Euro Stoxx 50 -0.5%], following on from their Asian counterparts ahead of a week with multiple market closures and several key risk events. Sectors are similarly mixed, with some mild underperformance seen in energy names in-line with the complex in general. The IBEX 35 (-0.4%) is lagging its peers this morning following on from the Spanish elections where the incumbent Socialist party emerged as the only one with the potential to form a coalition; within the index utility names are underperforming, which is dragging the utility sector in general down, with some speculation that this may be due to the success of the far right Vox party which secured 24 seats. Downside in utilities likely stemming from pledges by Vox to keep nuclear plants open, which contradicts the incumbent socialist party’s policies of closing nuclear plants and supporting renewable energy, which has been beneficial to Spanish utility names. Notable movers this morning include, Altice (+5.1%) who have reportedly attracted 3 potential bidders for their fibre optic network. Following the dissolution of merger discussions, Commerzbank (+1.6%) have rebutted speculation that the Co. may be sold, stating that they are strong enough alone and their customer relationships remain intact. Elsewhere, Bayer (-2.5%) are down after a spokesman stated that the majority of the Co’s investors voted against ratifying the executive boards 2018 business conduct, for reference the Co. are trading ex-div today.

Top European News

  • Czech Bank Stocks Slump as Babis Mulls Turnaround on Extra Tax
  • Caius Capital Hires Credit Analysts in Distressed-Debt Expansion
  • Opus Jumps to Highest Since January on China-Linked Rail Deal
  • UBS Banker Cleared After Seeing Tip on Eurostar Neighbor’s Phone

In FX, the Greenback has regained some composure after last Friday’s post-data downturn, but remains on a mixed footing vs G10 peers and EM currencies at the start of what looks like a busy/pivotal week on paper at least. First up, more inflation data and the Fed’s preferred price measure in the form of core y/y PCE following softer than expected Q1 reads within the advance GDP release, and then it’s month end on Tuesday with FX rebalancing models suggesting a Usd sell signal that could be countered to an extent by supportive SOMA flows. On to May 1, and the FOMC follows the first NFP proxies for Friday via the ADP survey plus employment readings in the manufacturing PMI and ISM. In the run up, the index is straddling 98.000 in a relatively narrow 98.066-97.917 range, with last week’s new 98.330 ytd peak providing resistance vs support at 97.693 that held on Friday.

  • GBP/EUR/AUD/NZD - Cable continues to display resilience ahead of the 1.2900 handle even though Brexit remains up in the air and talks between the Tory and Labour Party are still grid-locked, but the Pound is still looking toppy around 1.2950 amidst offers at 1.2945 (last month’s low) and with DMAs in close proximity (100 and 200 from 1.2962-65). Similarly, the single currency is finding support off 1.1100 and 2019 lows, as mostly weaker than forecast Eurozone sentiment indicators are countered by a degree of relief post-Spanish election and S&P reaffirming Italy’s BBB rating. Meanwhile, an improvement in Chinese industrial profits and latest US-China trade reports suggesting negotiations are reaching the last stretch are propping up the Aussie and Kiwi circa 0.7050 and 0.6670 respectively.
  • CHF/CAD/JPY - All on a more even keel vs the Usd and in relatively thin confines as the Franc meanders between 1.0200-1.0185 and Loonie roams from 1.3472-51 amidst a further pull-back in crude and ahead of tomorrow’s Canadian monthly GDP and PPI data. Meanwhile, Usd/Jpy has extended its trading parameters, but only to 111.54-77 in the absence of Japanese markets at the start of Golden Week and with strong chart support sub-111.50 as the 30 DMA, 38.2% Fib retracement of April peak to March trough (112.40-109.70) and last week’s low all fall at 111.37.
  • EM - At last some respite for the beleaguered Lira as an improvement in Turkish industrial confidence nudges Usd/Try off near 5.9600 peaks awaiting Tuesday’s CBRT inflation report for more independent impetus. As we reported last night, Goldman Sachs sees EUR/USD declining to 1.10 in the next 3 months and DXY rising to 99.00, while it suggested global growth is unlikely to be strong enough to weigh on the greenback. Furthermore, Goldman Sachs forecasts USD/TRY at 6.25 in 3 months, 6.50 in 6 months and 7.00 in 12 months.

In commodities, Brent (-0.9%) and WTI (-0.5%) prices are subdued in reaction to US President Trump’s comments on Friday that he contacted OPEC and told them to lower oil prices; although, there were subsequent reports that OPEC or Saudi officials have not spoken to President Trump regarding oil prices. However, some of the downside was mitigated by the Baker Hughes total rig count which fell by 21, with oil rigs falling by 20 to 805 in the steepest decline since January. Regarding the Iranian waivers a Trump Official says there is no wind down period or short-term waiver being considered for China’s oil purchases from Iran, and that it should be easy for China to comply as business with the US is more important for them than Iran. Elsewhere, sources report that exports of Nigeria’s Amenam crude oil is currently under a force majeure; these exports are operated by Total and typically equal 100k BPD. Gold (-0.3%) is marginally weaker, although the yellow metal is trading within a relatively narrow USD 5/oz range. After the metal printed its biggest daily gain in over a month on Friday, following US data which was disappointing in-spite of the larger than expected headline GDP print of 3.2%. Elsewhere, China’s Iron and Steel association stated that the industry is at risk from excess capacity which could impact profits in the industry.

US Event Calendar

  • 8:30am: Personal Income, est. 0.4%, prior 0.2%
  • 8:30am: Personal Spending, est. 0.7%; Real Personal Spending, est. 0.3%
  • 8:30am: PCE Deflator MoM, est. 0.3%; PCE Deflator YoY, est. 1.6%
  • 8:30am: PCE Core Deflator MoM, est. 0.1%; PCE Core Deflator YoY, est. 1.7%
  • 10:30am: Dallas Fed Manf. Activity, est. 10, prior 8.3

DB's Craig Nicol concludes the overnight wrap

If markets had the excuse of having too few catalysts to trade off in the last couple of weeks then the same excuse need not apply this week as we’ve got a star-studded line of up events to look forward to. We’ll touch on them in more detail further down but to whet the appetite they include Fed and BoE policy meetings, the latest US employment report, the final PMIs around the world, Q1 GDP in the Euro Area, various inflation readings in the US and Europe, more US and China trade talks and another bumper week of earnings. Last week it felt like the market was having a bit of a tug of war on the global growth narrative particularly with the US versus Europe story and then separately DM versus EM. So, this week could be a very important test and could very well go a long way to answering some of the lingering questions out there at the moment.

All that to look forward to then but in the meantime, it’s straight to the weekend news where the highlight was the election in Spain. With all votes counted, the centre-left PSOE was the clear winner with 123 seats and 28.7% of the vote, up from 85 seats in 2016, with 176 needed for a majority. DB’s Marc De-Muizon notes that this was broadly in line with polls. The centre-right PP gained the second most seats but suffered a huge drop, going from 137 seats to 66 seats. Citizens Party gained 57 seats compared to 32 seats previously while Podemos dropped to 42 seats from 71 previously.

Marc highlights in his report this morning (see here ) that there appears to be only two options to form a government that in Sanchez’s words will be a “pro-EU government, to fortify and not weaken Europe”. One is a PSOE-Podemos alliance supported by regionalist and Catalan independent parties. The other is a PSOE-Citizens alliance. The latter does, however, appear fairly unlikely at this point. In any case parties are unlikely to reach an agreement before June given upcoming regional and European elections, so it’s likely to drag on for some time.

The hasn’t been much of a reaction in the Euro post that result, making a modest +0.08% advance this morning. Risk assets more broadly in Asia are lacking direction meanwhile, with the Hang Seng (+0.78%) and Kospi (+1.07%) making decent gains, but the Shanghai Comp (-0.11%) and ASX (-0.51%) both down. Markets in Japan are closed for an extended holiday-week. Meanwhile bond markets are quiet, and US equity futures are slightly up.

Back to this week where for the Fed on Wednesday, while no policy change is expected, all eyes will be on how Powell and the Committee balance the dichotomy of improved growth prospects and easy financial conditions on the one hand and easy softening inflation pressures on the other – as Friday’s Q1 GDP report details showed (more on that below). Our economists ultimately believe that the Committee is likely to continue to emphasize that the current policy remains appropriate and that patience remains the proper prescription. You can see their full preview here .

As for the data, we’ll warm up with the March PCE report in the US today before China’s official April PMIs become the next focal point early tomorrow morning. The Q1 GDP print for the Euro Area in just over 24 hours’ time follows that where the market is looking for a +0.3% qoq reading. There’s little slowdown as Wednesday follows with the April ISM manufacturing reading in the US before we get the final April manufacturing PMIs in Europe on Thursday. A reminder that the Euro Area reading ‘improved’ to 47.8 when we got the flash albeit with <50 readings for Germany and France, with Italy also expected to post a similar reading. If that wasn’t enough then Friday ends with a bang with the April employment report where our economists expect a slight slowdown for nonfarm payrolls growth to 160k, albeit enough to hold the unemployment rate at 3.8%. They also expect earnings to rise +0.2% mom, which would be enough to hold the year-on-year rate at +3.2%.

There’s also the not-so-insignificant obstacle of 164 S&P 500 earnings reports to get through this week including the likes of Google today and Apple tomorrow. And last but by no means least, Lighthizer and Mnuchin travel to Beijing tomorrow for yet another round of trade talks. However, given that both sides have signalled hope of getting to a draft agreement by the end of next month, these talks may go some way to deciding the fate of that pledge. Interestingly, a Bloomberg story this morning suggests that Trump may walk away from talks with China should he not be satisfied with how talks progress this week.

Plenty to keep us all busy then. Turning now to a recap of Friday’s action, where US equities advanced strongly and treasury yields fell. The S&P 500 ended the week +1.20% higher (+0.47% on Friday) as economic data came in stronger-than expected and earnings reports continued to surprise to the upside. With 230 of S&P 500 companies having reported first quarter results, 78% have beaten earnings expectations for an aggregate beat of 5.36%. The surprises have been concentrated in the tech sector (where 24 of 25 companies have beaten profit expectations for a beat of 7.40%) and the consumer discretionary (aggregate beat of 27.02% thanks to Amazon’s 51.60% earnings beat). Earnings also helped the NASDAQ to a +1.85% gain (+0.34% Friday), though the DOW fell -0.06% (+0.31%) as a few large-cap firms like 3M, Intel, and Caterpillar disappointed.

Away from earnings, focus was on the first quarter US GDP report, which surprised to the upside, showing growth 3.2% on an annualized basis. That substantially beat expectations for a print of 2.3%, but the details were less encouraging. Core PCE inflation was 0.1pp lower than expected at 1.3% qoq, which raises the risk that a monthly print will fall to 1.5% mom, possibly worrying the Fed. Inventories and net exports (due to weak import growth) both contributed extra to the headline print, leaving underlying domestic demand running a bit soft at 1.3%. Still, seasonality effects and the government shutdown both weighed a bit on the headline figure.

The print’s softer details helped Treasury yields fall -6.2bps on the week (-3.4bps Friday). Bund yields were down -4.6bps (-1.3bps Friday), while BTPs experienced volatility, rising as much as 10bps earlier in the week only to retrace and end -1.8bps lower (-10.5bps Friday). After markets closed on Friday, ratings agency S&P affirmed Italy’s credit rating at BBB with a negative outlook. WTI oil prices also took a roundtrip on the week, rising as much as +4.06% early in the week after the Trump administration declined to renew waivers on Iran sanctions. They then retraced after US data showed another build in inventories and President Trump tweeted about asking OPEC to increase production, ultimately ending the week -1.20% lower (-2.93% Friday).