Global Rally Fizzles As Bank Earnings Muzzle Low-Volume Euphoria

S&P futures pared gains, and traded unchanged as mixed Q2 earnings and disappointing hints by banks on future revenue gave traders concerns about the sustainability of the rally, while European stocks struggled for traction amid fresh trade tensions.

US equity futures gave up some of their earlier (low-volume) gains after Bank of America’s net interest income fell short of analysts’ expectations, though CEO Brian Moynihan said the economy appeared to be improving. The Stoxx Europe 600 index nudged higher amid a mixed bag of reports from companies including Swatch, Ericsson and ASML. In the US, earnings from the big banks JPMorgan, Citigroup and Wells Fargo this week have raised concerns that lower interest rates will pressure profits at a time when revenue growth is already slow.

Adding some nervousness to markets was a threat from U.S. President Donald Trump to tax another $325 billion worth of Chinese goods. And in the latest evidence that trade tensions were hurting businesses, railroad CSX reported a quarterly profit that missed estimates and lowered its full-year revenue forecast, sending its shares 7.2% lower. Also worth noting, on Tuesday more dovish comments from Federal Reserve Chairman Jerome Powell did little to stir markets, suggesting easing may be fully priced in as Bloomberg points out.

Meanwhile, in Europe, strong quarterly profit from Dutch chip equipment maker ASML helped semiconductor makers  including Advanced Micro Devices, Micron Technology, Intel and Applied Materials rise between 0.4% and 1.6%. Qualcomm jumped 5.6% after the U.S. Justice Department asked a federal appeals court to pause the enforcement of a sweeping antitrust ruling against the mobile chip supplier. 

Earlier in the session, Asian stocks slipped for a second day, with South Korean shares leading declines amid regional and global trade tensions. Technology and energy were among the weakest sectors after U.S. President Donald Trump reiterated that he could impose additional tariffs on Chinese imports if he wants. Most markets in the region dropped, while Australia bucked the trend with the S&P/ASX 200 gauge up 0.5%, supported by BHP Group after the miner forecast iron ore production will rise as much as 6% this fiscal year. China’s Shanghai Composite Index fell as large financial companies led losses. The Kospi retreated 0.9%, dragged by Samsung Electronics and SK Hynix, while the Topix closed 0.1% lower. India’s Sensex added 0.2%, with Kotak Mahindra Bank and Infosys among the biggest boosts, as investors awaited more corporate earnings.

In FX, the dollar halted a two-day rally, held down by gains in commodity currencies, with the Canadian dollar rallying ahead of inflation data. Even so, it held near its strongest level in a week as traders awaited economic data and speeches by Federal Reserve officials in coming days for clues about the size of expected interest-rate cuts this year. The pound traded near the lowest levels since April 2017 as the risk of a no-deal Brexit continued to preoccupy investors.

Elsewhere, Bitcoin extended a slide below $10,000.

 

In commodities, WTI and Brent futures are nursing some of yesterday’s losses after prices slid around 3% on comments from the US which suggested a tempering of US-Iran tensions, albeit this was later rebutted by Iran. Upside for the complex has been limited by a number of supply-side factors including the narrower-than-expected drawdown in API crude stocks (-1.4mln vs. Exp. -2.7mln).  Furthermore, refineries in the Gulf are restarting operations post-storm Barry, with only 59% of production still offline (vs. 69% on Monday).

Elsewhere, gold prices are gravitating closer to the key 1400/oz mark as the Dollar index gains more ground above 97.00. Meanwhile, Dalian iron ore futures have retreated from recent record highs as investors digested news about higher transaction fees in all iron ore futures contracts on the DCE alongside a rise in iron ore shipments to China from Australia.

Expected data include housing starts and building permits. Abbott, Bank of America, IBM, and Netflix are among companies reporting earnings.

Market Snapshot

  • S&P 500 futures up 0.1% to 3,011.00
  • STOXX Europe 600 down 0.01% to 389.06
  • MXAP down 0.2% to 160.30
  • MXAPJ down 0.3% to 527.76
  • Nikkei down 0.3% to 21,469.18
  • Topix down 0.08% to 1,567.41
  • Hang Seng Index down 0.09% to 28,593.17
  • Shanghai Composite down 0.2% to 2,931.69
  • Sensex up 0.2% to 39,201.86
  • Australia S&P/ASX 200 up 0.5% to 6,673.26
  • Kospi down 0.9% to 2,072.92
  • German 10Y yield fell 2.7 bps to -0.271%
  • Euro up 0.02% to $1.1213
  • Italian 10Y yield fell 3.5 bps to 1.259%
  • Spanish 10Y yield fell 3.2 bps to 0.459%
  • Brent futures up 0.7% to $64.81/bbl
  • Gold spot down 0.3% to $1,402.29
  • U.S. Dollar Index little changed at 97.35

Top Overnight News from Bloomberg

  • President Donald Trump reiterated that he could impose additional tariffs on Chinese imports if he wants, after promising to hold off on more duties in a trade-war truce he reached with China’s Xi Jinping last month
  • European car registrations fell sharply in June, resuming a downward spiral this year that has seen profit warnings at German manufacturer Daimler AG and a quarterly automotive division loss at rival BMW AG.
  • Hong Kong is beginning to reckon with the economic cost of ongoing protests against the government’s extradition bill, as the disruption risks driving away local shoppers and deterring tourists from mainland China.
  • President Donald Trump reiterated that he could impose additional tariffs on Chinese imports if he wants, after promising to hold off on more duties in a trade-war truce he reached with China’s Xi Jinping last month.
  • Fed Chairman Jerome Powell said the central bank is “carefully monitoring” downside risks to U.S. growth and “will act as appropriate to sustain the expansion,” reiterating concerns last week that cemented expectations for an interest-rate cut later this month
  • The next leader of the European Commission, Ursula von der Leyen, said she hopes to dissuade President Trump from imposing tariffs on EU cars by reminding him of all the areas where European and American interests coincide
  • A lawyer who won a landmark ruling that allows the U.K. to reverse Brexit is considering what could be one of several lawsuits seeking to block any attempt to suspend Parliament to force through a no-deal departure from the bloc
  • The U.S. and Japan are working on a small trade deal that would involve agriculture and autos, Reuters reported citing three unidentified industry sources familiar with the talks
  • China’s holdings of U.S. Treasuries dipped in May to the lowest in two years amid an escalation of the trade war between the world’s two largest economies. The Asian nation’s pile of notes, bills and bonds fell by $2.8b to $1.11t, according to Treasury Department data released Tuesday in Washington
  • House Speaker Nancy Pelosi said she sees “forward motion” after yet more talks with Treasury Secretary Steven Mnuchin to negotiate higher spending levels in a budget deal that congressional leaders want to attach to a bill raising the debt limit before Congress’s August recess
  • Japan’s long-term foreign currency debt rating was affirmed by Fitch at A because of the nation’s advanced and wealthy economy, high governance standards and strong public institutions
  • Oil held its biggest loss in two weeks as President Trump’s threat of new tariffs on Chinese imports rekindled fears about global demand, while the U.S. signaled a possible easing of tensions with Iran

Asian equity markets traded mostly lower as the region followed suit from the lacklustre performance on Wall St where all major indices pulled back from record levels as participants digested the first bout of blue-chip earnings and with risk sentiment also pressured after comments from US President Trump added to the doubts for a near-term breakthrough with China. This weighed on the regional indices from the open although the ASX 200 (+0.5%) quickly bucked the trend with upside in defensive sectors and miners leading the turnaround including BHP which gained after it topped production estimates despite output declining Y/Y, although the energy sector underperformed after crude prices slipped around 3%. Nikkei 225 (-0.3%) and KOSPI (-0.9%) weakened as the soured Japan-South Korea relations and ongoing trade dispute continued to take its toll, while Hang Seng (-0.1%) and Shanghai Comp. (-0.2%) conformed to the glum after US President Trump suggested there is a long way to go regarding trade with China and that the US can put tariffs on another USD 325bln of goods if it wants. Furthermore, China made a hawkish addition to its trade team indicating that it is in no hurry to wrap up trade discussions, although pressure in the mainland was limited after the PBoC conducted a consecutive substantial liquidity injection. Finally, 10yr JGBs were subdued as prices initially ignored the upside in T-notes and weakness in stocks ahead of a 20yr JGB auction, which proved to be mixed but still showed a higher b/c to provide marginal support in late trade.

Top Asian News

  • Hong Kong Protests Have City’s Residents Plotting Their Exit
  • Morgan Stanley Revises Call on Turkey Rate, Sees Bigger July Cut
  • Shining Star of Mideast Stock Markets Seen Losing Sparkle
  • India Shadow Bank Said to Discuss Rescue Plan With Bondholder

A muted session thus far for European equities [Eurostoxx 50 Unch] as the region has derived little inspiration from a mixed Asia-Pac handover. Sectors are mixed with clear underperformance seen in the Energy sector following yesterday’s decline in oil prices, whilst defensive sectors are kept afloat by the somewhat cautious tone. Individual movers this morning have largely been driven by earnings. Swatch (+5.0%) rose to the top if the SMI as operating profits topped estimates and amid expectations of positive overall growth in FY 19. Likewise, ASML (+4.2%) rests near the top of the Stoxx 600 as the Co. beat on revenue forecasts and expects Q4 “to be very strong”. On the flip side, Ericsson (-4.9%) shares are pressured as the Co. expects negative impacts to increase in H2 this year. Finally, Swedbank (-5.8%) declined to the foot of the pan-European index as its firm earnings were overshadowed by shortcomings in regard to its money laundering investigation.

Top European News

  • Deutsche Bank’s Prime-Broker Deal Could Elevate BNP in Asia
  • Ericsson Ends Run of Earnings Beats With Asia Warning
  • Chip Gear Maker ASML Gets Boost From 5G Push Amid Memory Slump
  • Swedbank Slashes Dividend as Baltic Dirty-Money Probes Drag On
  • Swatch Climbs as Watchmaker Takes Aim Against Gray Market

In FX, Nzd/Usd has rebounded relatively firmly back above 0.6700 and is retesting the 200 DMA circa 0.6718 mainly due to the Greenback losing a bit of its retail sales momentum and the DXY fading just shy of 97.500, though the Kiwi may have gleaned some belated traction from yesterday’s rebound in GDT auction prices after the in line and firmer NZ CPI data for Q2 overnight. Similarly, Usd/Cad has retreated towards 1.3050 from close to 1.3100 as the Loonie eyes Canadian inflation data for independent impetus and draws some underlying support from firm crude prices in the run up.

  • CHF - Somewhat surprisingly perhaps, or at least unexpectedly, Usd/Chf and Eur/Chf are both firmer and nudging big figures at 0.9900 and 1.1100 respectively without any apparent rationale for Franc underperformance. However, following recent strength it would not be out of the realms of reality to point the finger at official intervention/rate checking or front-running the SNB.
  • EUR/JPY/AUD/GBP - All narrowly mixed vs the Usd, as the single currency clings on to the 1.1200 handle after a more concerted attempt to fill evidently substantial bids at the round number, albeit in no small part due to contagion from another bout of Sterling weakness as Cable tumbled further below 1.2400 and Eur/Gbp touched 0.9050. Note, however, Eur/Usd appears capped ahead of decent option expiries between 1.1250-55 (1.1 bn), just like Usd/Jpy within 108.12-32 given similar size expiry interest running off at 108.00 (1.5 bn) and 108.30 (1.1 bn) at the NY cut. Elsewhere, Aud/Usd has drifted back towards 0.7000 after topping out a few pips short of 0.7050 on Tuesday amidst less positive vibes on US-China trade prospects following President Trump’s latest tweets and tariff threats plus the appointment of a so called hawk to Beijing’s negotiating team. Back to the beleaguered Pound, no real reaction to largely in line UK inflation data, with the exception of PPI input prices that were considerably weaker than forecast.
  • EM - The Rand is a notable regional laggard, with Usd/Zar hovering near the top of a 14.0000-13.9500 range ahead of SA retail sales data at midday and the SARB meeting on Thursday when a rate cut is widely anticipated (-25 bp), while ongoing doubts about Eskom are also weighing on sentiment.

WTI and Brent futures are nursing some of yesterday’s losses after prices slid around 3% on comments from the US which suggested a tempering of US-Iran tensions, albeit this was later rebutted by Iran. Upside for the complex has been limited by a number of supply-side factors including the narrower-than-expected drawdown in API crude stocks (-1.4mln vs. Exp. -2.7mln).  Furthermore, refineries in the Gulf are restarting operations post-storm Barry, with only 59% of production still offline (vs. 69% on Monday). Elsewhere, gold prices are gravitating closer to the key 1400/oz mark as the Dollar index gains more ground above 97.00. Meanwhile, Dalian iron ore futures have retreated from recent record highs as investors digested news about higher transaction fees in all iron ore futures contracts on the DCE alongside a rise in iron ore shipments to China from Australia.

US Event Calendar

  • 7am: MBA Mortgage Applications, prior -2.4%
  • 8:30am: Housing Starts, est. 1.26m, prior 1.27m; MoM, est. -0.71%, prior -0.9%
  • 8:30am: Building Permits, est. 1.3m, prior 1.29m; MoM, est. 0.08%, prior 0.3%
  • 2pm: U.S. Federal Reserve Releases Beige Book

DB's Jim Reid concludes the overnight wrap

It might have been the 50th anniversary of Apollo 11 lifting off yesterday in what five days later followed with the first man landing on the Moon, however US equities failed to shoot for the moon as they retreated off their record highs. Indeed yesterday’s closing moves of -0.34% for the S&P 500, -0.09% for the DOW and -0.43% for the NASDAQ coincided with another fairly benign intraday range and also with summer-like trading volumes. There was actually a large volume of newsflow to digest, but it seemed like ultimately comments from President Trump outweighed everything else, with the market declining after he said that there’s “a long way to go as far as tariffs where China is concerned, if we want. We have another $325 billion we can put a tariff on.” Away from that, there was a bumper US retail sales report, a soft German ZEW survey, a selloff in oil prices, a mixed bag of US bank earnings reports, and a slew of Fedspeak.

Bond markets were a bit more exciting. Indeed, 10y Treasuries sold off as much as +5.2bps, boosted by the bumper US retail sales numbers with the 2s10s curve flattish following a similar move at the front end. However they ended only +1.4bps higher, off their highs, at 2.103% following dovish comments from Fed officials and a swoon in oil prices. WTI crude fell -3.29% in New York after US Secretary of State Pompeo suggested that Iran was willing to negotiate on its missile program. Positive progress could open the door to higher exports, and although Iranian sources subsequently denied the story, oil held its losses. The selloff in Treasuries also helped Bunds to finish flat on the day after rallying post the soft German ZEW survey number while the STOXX 600 ended +0.35% higher.

This morning Asia has followed Wall Street’s lead with little new newsflow to report, with the Nikkei (-0.40%), Hang Seng (-0.32%), Shanghai Comp (-0.05%) and the KOSPI (-0.92%) all trading lower. S&P futures have made a marginal gain however, up +0.06%.

Coming back to the US bank earnings yesterday, the highlights were strong results from Goldman Sachs (+1.86%) and JPMorgan (+1.04%). Both banks beat consensus profit estimates, with Goldman performing especially well in equity trading and investment banking. Wells Fargo (-3.02%) underperformed sharply though after reporting disappointing progress on costs. Somewhat worryingly for the sector as a whole, the three banks saw pressure on their net interest margins, which follows naturally from the recent fall in rates. The S&P 500 banks index retreated -0.52%.

As for the Fedspeak yesterday, the highlight on the calendar was undoubtedly a speech by Chair Powell in the early evening. However, his remarks were largely unchanged from his recent rhetoric, saying the Fed will “act as appropriate.” His only truly interesting comment was regarding the Fed’s ongoing policy review, providing the first calendar guidance for the results and saying the FOMC will devote time at regular FOMC meetings soon to discuss it, with a final result due in H1 next year.

Instead, remarks from Dallas President Kaplan and Chicago President Evans proved more impactful. The former said that he could support an “adjustment in the policy rate in light of market-determined rates,” which was a big shift from his recent stance against any cuts. That caused rates to ease off their highs, and the move was further supported by dovish comments from Evans who said that “we are little bit more restrictive than we need to be, and we need to be more accommodative.” He also weighed the arguments for and against an immediate 50bps cut, saying “if I think it takes 50bps before the end of the year to get inflation up then something right away would make that happen sooner.” So at least for him, a voting member this year, the door remains open for a 50bps cut. Right now the market prices around a one-in-four chance of a 50bps cut happening this month, with a 25bps cut fully priced.

Meanwhile in Europe, the European Parliament supported Ursula von der Leyen as the next President of the European Commission, with a majority of 383 MEPs voting in favour, narrowly above the absolute majority of 374 required. The appointment process isn’t yet finished however, as the other members of the Commission will need to be chosen, and the full college of Commissioners including the Commission President needs to win a parliamentary vote of approval, which will take place after the summer. Notable comments in von der Leyen’s remarks yesterday included her goal that she was seeking “the first climate-neutral continent in the world by 2050”, and on Brexit, she said that “I stand ready for a further extension of the withdrawal date should more time be required for a good reason.”

Elsewhere, just on the details of the June retail sales report in the US which as mentioned at the top revealed that ex-auto and gas sales rose +0.7% mom and therefore far exceeded expectations for a +0.3% mom rise. The control group component also rose +0.7% mom which helped push some of the oft-watched GDP trackers higher, including a 0.3pp uptick for the Atlanta Fed’s tracker to 1.6%. That includes an estimated 4.2% expansion in consumer spending, with the headline GDP figure predicted to be softer as a result of headwinds from inventories and trade. In fact, the annualized retail control reading for Q2 was 7.52% which was the highest quarterly print since Q4 2005, and the 6-month annualized rate was the highest-ever at 11.05%. The May control group reading was also revised up by one-tenth so a much rosier picture for the consumer compared to investment and supply data of late.

Indeed, in contrast the June industrial production reading was flat in June which compared to expectations for a +0.1% mom reading. However, in what is likely to please the Fed following comments by Powell about weakness in manufacturing output being a concern, the June manufacturing production print bettered expectations at +0.4% mom (vs. +0.3% expected).

As for the rest of the US data which was a bit more mixed, the import price index ex-petrol in June slid more than expected (-0.4% mom vs. -0.2% expected) while the NAHB housing market index rose 1pt in July to 65. Finally the May business inventories reading of +0.3% mom was in line.

Prior to this in Germany that July ZEW expectations survey reading of -24.5 was a 3.4pt decline from June and was also weaker than expected. It’s also back to testing the -24.7 low mark made in July and October last year. The good news is that the monthly drop was a lot more modest in comparison to the 19pt decline in June. What was interesting was the reference to the Iran conflict in the text as an additional concern alongside the now-standard mentions of Brexit and trade war risks.

There was better news for the data here in the UK where unemployment held steady in May and earnings crept higher. Indeed the unemployment rate held at 3.8% although employment growth did slow slightly, however the bigger takeaway was the 3.6% print for regular wage growth (vs. +3.5% expected). This somewhat affirms a robust underlying trend following sizeable rises in private sector regular pay in April too.

Despite that Sterling fell -0.87% and even broke below $1.240 at one stage intraday. Clearly the market isn’t putting much emphasis on the UK data at the moment and instead throwing more weight behind the incremental pricing of a hard Brexit. On that, Sky News ran a story yesterday suggesting that Boris Johnson, should he win the PM job, could send lawmakers home in October to stop them hindering a possible no deal Brexit. However, the report also said that a decision hasn’t been made yet. It was also reported by the Times last night that Johnson wanted to have an early election while the current Labour Party leader Jeremy Corbyn is “still around”.

Finally, looking at the day ahead this morning we’ve got more data out of the UK with the June CPI/RPI/PPI data docket before the final June CPI revisions for the Euro Area are released. In the US we’re due to get June housing starts and building permits data. This evening we’ll also get the Fed’s Beige Book while the Fed’s George is due to speak at 6.30pm BST on the economic outlook. As for earnings, Bank of America is the latest US bank to report while the tech sector will also be in focus with eBay, Netflix and IBM also releasing earnings.