With the world on the verge of panic last night after the US Treasury's shocking announcement for the first time in 25 years that China was branded a currency manipulator (after ignoring China's efforts for years to prop up its currency, just so Beijing would avoid a massive capital flight, all it took was one day of allowing the yuan to tumble for Trump to be triggered), a wave of relief swept across global markets when the PBOC fixed the yuan at 6.9683 per dollar, not only stronger than the 7.00 "line in the sand", but also marginally stronger relative to the 6.9871 forecast by analysts and traders surveyed by Bloomberg, and the 6.9736 forecast by a major Chinese publication.
The result was that while trade war between the world’s top economies remained near boiling point, some of the heat was reduced just enough by the firmer-than-expected fixing in the yuan rate, which immediately helped steady trader nerves after the biggest drop in the US stock market of 2019 which saw the Dow plunge 767 points.
Safe-haven assets, including bonds and some currencies such as the yen and Swiss franc, settled down as investors moved tentatively back into the euro, pound and some of the emerging market currencies that have been hit in recent days, while U.S. equity futures, which had tumbled as much as 1.9% after the Treasury's announcement, rose as much as 0.9%, surging 70 points from session lows...
... alongside European stocks while Asian shares fell after what the narrative quickly saw as "China moving to stabilize its currency", helping ease some of the market turmoil that kicked off the week, and resulting in a buying spree this morning.
The mood remains fragile though and a stray headline or a Trump tweet can undo everything, especially now that the S&P is trading at a level where CTAs turn short.
“I think the tipping point for a more prolonged negative trend (for risk assets) is quite close,” said SEB Investment Management’s head of asset allocation Hans Peterson, referring to the trade war escalation and other risks such as Brexit. “We have reduced both European and global equities. We still have a small overweight in EM (emerging market) stocks but just a small one.”
Meanwhile, now that the US officially declared that China was manipulating its currency, and that Washington would engage the International Monetary Fund to eliminate unfair competition from Beijing, there is confusion as to what the US will do next: "Officially labeling China a currency manipulator gives the United States a legitimate reason to take even more steps," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities. “The markets are now scrambling to factor in the possibility of the United States imposing not only an additional 10% of tariffs on Chinese imports, but the figure being raised to 25%.
Europe's Stoxx 600 index extended gain to as much as 0.6%, rebounding from the biggest 2-day drop in three years, and tracking the rebound in S&P futures. Earlier, the European index dropped as much as 0.3% earlier but all 19 sectors advanced in the morning session; LVMH Moet Hennessy Louis Vuitton jumped +2.2% after upgrade at Bernstein, Vivendi soared +7.3% on Tencent talks for UMG stake. There was some notably good economic news out of Germany, which reported that industrial orders surged 2.5% M/M, smashing the 0.5% expectation, and the highest print in two years, suggesting Germany's manufacturing recession may be coming to an end.
Earlier in the session, stocks dropped across Asia, with MSCI’s Asia-Pacific index ex-Japan ending down 0.75% after brushing its lowest since January. It has lost 3.7% so far this week. The drop was led by health care and energy firms, as traders were spooked by the escalating trade war between China and the US. Most markets in the region were down, with Australia and China leading declines. The Topix retreated 0.4%, nearly erasing its 2019 gains, as electronics and telecommunications companies dragged the Japanese gauge lower. The Shanghai Composite Index closed 1.6% lower, driven by Industrial & Commercial Bank of China and Inner Mongolia Yili Industrial Group. PetroChina’s A-shares fell 1.4% to a record low. India’s Sensex climbed 1.3%, bucking regional declines, after Credit Suisse AG upgraded the nation’s stocks to overweight amid the China-U.S. dispute. Separately, the Indian government cemented its position by revoking seven decades of autonomy in the disputed Muslim-majority state of Kashmir
In rates, although U.S. Treasury yields had edged up from October 2016 lows of 1.672%, German yields stayed down with markets now pricing in a 100% chance that the European Central Bank will cut its already deeply negative interest rates at its next meeting. European bond markets edged higher although Italian debt suffered some weakness following fresh concerns over the Italian budget; U.K. gilts were little changed; U.S. futures rose alongside European stocks while Asian shares fell. Japan’s 10-year yield fell to a three-year trough of minus 0.215%
In FX, all eyes were on the offshore yuan, which early on stretched the previous day's slide, and briefly weakened to 7.1382, the lowest since international trading in the Chinese currency began in 2010. But it pulled back to 7.0469 after Beijing's firmer-than-expected yuan fixing on Tuesday. The safe-haven Japanese yen, touched a seven-month high of 105.520 per dollar before it tumbled by more than 1%.
"China has effectively avoided a confrontation with the U.S. in the currency market, spurring short-covering in dollar-yen,” said Marito Ueda, managing director at FX Prime by GMO Corp. in Tokyo. “The Bank of Japan’s increased buying of T-bills also appears to be contributing to yen selling."
Elsewhere, the AUD/USD headed for its biggest gain in more than two weeks following the recovery in risk sentiment. Aussie held gains as the Reserve Bank of Australia kept interest rates unchanged. The Swiss franc, another currency sought in times of turmoil, has gained roughly 1% against the dollar this week. It set a six-week peak of 0.9700 franc per dollar. The euro was little changed at $1.1199 Tuesday after climbing the previous three days; the pound gained on signs opponents of a no-deal Brexit were hardening their plans.
In commodities, brent crude oil futures plumbed a seven-month low of $59.07 per barrel as the trade war raised concerns about lower demand for commodities. Brent last traded at $60.41 for a gain of 1% as bargain hunting kicked in. Spot gold advanced to a six-year peak of $1,474.80 an ounce as investors sought the safety of the precious metal. Bitcoin briefly rose above $12,000 overnight before a sudden bout of selling dragged it back down.
JOLTS is the only release today, while Allergan and Disney are among companies reporting earnings.
- S&P 500 futures up 0.9% to 2,855.00
- STOXX Europe 600 up 0.3% to 370.37
- MXAP down 0.8% to 150.77
- MXAPJ down 0.8% to 485.77
- Nikkei down 0.7% to 20,585.31
- Topix down 0.4% to 1,499.23
- Hang Seng Index down 0.7% to 25,976.24
- Shanghai Composite down 1.6% to 2,777.56
- Sensex up 1.1% to 37,088.44
- Australia S&P/ASX 200 down 2.4% to 6,478.09
- Kospi down 1.5% to 1,917.50
- German 10Y yield fell 0.7 bps to -0.523%
- Euro unchanged at $1.1203
- Italian 10Y yield rose 2.5 bps to 1.215%
- Spanish 10Y yield fell 0.7 bps to 0.239%
- Brent futures up 0.5% to $60.09/bbl
- Gold spot down 0.2% to $1,460.85
- U.S. Dollar Index little changed at 97.52
Top Overnight News
- China took steps to limit weakness in the yuan, providing some stability to global financial markets in the wake of Monday’s rout, and said it won’t depreciate the currency to be competitive. The moves from the PBOC, which came after the U.S. labeled the country a currency manipulator, helped drive the yuan up a day after it sank the most since 2015
- Trump administration formally labeled China a currency manipulator, escalating its trade war with Beijing after the Asian country’s central bank allowed the yuan to fall in retaliation for new U.S. tariffs
- Japan MOF official says will keep watching FX with sense of urgency
- Opposition Labour Party leader Jeremy Corbyn signaled he will call a vote of no confidence when Parliament returns next month while rebel MP Dominic Grieve said a growing number of his fellow Conservatives will turn against Prime Minister Boris Johnson
- Opponents of Boris Johnson’s threat to crash out of the EU without a deal on Oct. 31 are hardening their plans to stop him as the new U.K. prime minister seeks to build support with a series of targeted spending pledges
- New Zealand’s central bank is poised to cut rates on Wednesday and may hint it’s not done yet as the economy cools and global peers ease policy
- For the fourth time in the last two weeks, Kim Jong Un’s regime shot unidentified projectiles into the waters between the Korean Peninsula and Japan, South Korea’s defense ministry said
- Oil reversed a decline as China’s central bank set the yuan fixing stronger than expected, calming investors after the U.S. escalated the trade war by labeling the Asian nation a currency manipulator.
- Janet Yellen, Ben Bernanke, Alan Greenspan and Paul Volcker made a joint plea for the central bank to be able to operate without political pressures or the threat of removal of its leaders
- The Fed will be leaning closer to reducing interest rates again next month after President Donald Trump ratcheted up his trade war with China and the central bank may even have to cut more steeply than it did last week
- China urged Hong Kong citizens to stand up to protesters challenging the government, after a general strike that led to a day of traffic chaos, mob violence, tear gas and flight cancellations. The Hong Kong stocks rout entered its 10th day, the worst such streak since 1984
- UBS Group AG plans to charge individual wealth clients for holding more than 500,000 euros ($560,000) in cash, extending the fee policy to more of its rich customers as negative interest rates crunch profits
Asian equity markets resumed the sell-off following Wall St’s worse performance YTD where the S&P 500 posted a 6th consecutive day of losses and the DJIA dropped over 900 points intraday due to the US-China trade tensions and CNY slump, while the US designation of China as a currency manipulator added to the jitters and initially pressured US futures after-hours. ASX 200 (-2.4%) and Nikkei 225 (-0.7%) traded with hefty losses and broad weakness across sectors although gold names remained the exception in Australia, while the Japanese benchmark staged a significant recovery as better than expected Household Spending data and a rebound in USD/JPY softened the blow, with earnings releases also a driver for price action. Elsewhere, Hang Seng (-0.7%) and Shanghai Comp. (-1.5%) were pressured by the trade tensions after the US labelled China a currency manipulator whilst China confirmed purchases of US agriculture products have been suspended, although markets found some comfort after the PBoC announced to sell CNY 30bln of bills in Hong Kong and set the reference rate within bounds of the perceived 7.00 line in the sand. Finally, 10yr JGBs were choppy with early upside seen due to the wide risk averse tone which boosted prices to a fresh record high and dragged the 10yr yields to below -0.2% which was seen to be the bottom end of BoJ’s target. However, prices have since eased back with 10yr JGBs now lower as stocks recovered from lows and after a mixed 30yr auction, while T-notes have also retreated to below the 130.00 level amid a pullback from the recent surge triggered by the trade tensions which also saw the 3m/10yr yield inversion at its most prominent since the GFC.
Top Asian News
- Currency That Gave Birth to Asian Crisis Emerges as Safest Bet
- Kirin Picks Up $1.2 Billion Stake in Japan Cosmetics Maker Fancl
- Key Gauge of Japan’s Economy Falls to Lowest Since Early 2010
Major European indices have modestly firmed after a mixed to flat open [Euro Stoxx 50 +0.6%], following on from a lacklustre Asia-Pac handover as Wall St. posted its worst performance for the year thus far. Similarly, sectors are in the green though with gains limited and the energy sector unable to breach into positive territory. In terms of individual movers this morning, Vivendi (+7.0%) are in discussions with Tencent for the sale of a 10% stake in Universal Music, with the deal valuing Vinci’s music business at EUR 30bln; since 2018 the Co. has been exploring a partial Universal Music sale with the deal to include the option for a further 10% stake to be purchased in the future. Moving to earnings this morning saw Deutsche Post (+4.3%) update where they beat on Q2 EBIT and their Germany Post & Parcels division posted positive earnings for the first time since Q4 2017. At the other end of the Stoxx spectrum are InterContinental Hotels (-2.4%) as the Co’s revenue did marginally miss on expectations; finally, with nothing fundamentally new from yesterdays pre-market update Metro AG (-6.7%) remain under pressure after further reiteration of comments that Kretinsky’s investment fund will not be increasing their offer for the Co.
Top European News
- Opponents of No-Deal Brexit Harden Plans to Block Johnson Threat
- Biggest Wealth Fund’s Bid to Dump Big Oil Is Now But a Whimper
- Domino’s Pizza Group Shares Rise After 1H Results, CEO Departure
- China, Hong Kong Tensions Weigh on InterContinental Hotels
In FX, AUD/NZD - No major surprises from the RBA overnight, but an unexpected boost from trade data revealing a wider than expected and record surplus has helped the Aussie mount a strong recovery from yesterday’s lows with additional support via a Yuan rebound (Usd/Cnh circa 7.0700 vs almost 7.1400 at one stage after a measured/capped 6.9683 Usd/Cny mid-point fix). Aud/Usd is back up near 0.6800 and Aud/Nzd has bounced even further from sub-1.0270 lows towards 1.0400, as the Kiwi also benefited from considerably better than forecast NZ jobs and wage metrics, with Nzd/Usd not far from 0.6600 compared to under 0.6500 at worst on Monday. However, the RBNZ is still seen cutting the OCR by another 25 bp tomorrow and the pair has subsequently eased drifted down to around 0.6550, while Aud/Jpy may lose momentum given mega expiry options at the 72.00 strike (4 bn).
- GBP/NOK/SEK - The Pound has also regained composure amidst a broad stabilisation in risk sentiment, with Cable just surpassing yesterday’s best before stalling into the 1.2200 level and Eur/Gbp reversing from 0.9250 to a few pips below 0.9200 even though no deal Brexit risk is arguably rising. Similar story for the Scandi Crowns that are paring losses vs a steady Euro and with the Nok encouraged by a partial revival in oil as well.
- JPY/CHF - Conversely, the tentative and formative Tuesday turnaround in financial markets/mood has taken its toll on the Yen especially as Usd/Jpy spikes from near 105.50 lows to just over 107.00 before topping out, while the Franc has retreated against the Dollar and Euro to 0.9750+ and 1.0930 respectively compared to almost 0.9700 and 1.0900.
- EUR - In contrast to the Aussie and Kiwi, German factory orders and the construction PMI hardly impacted the single currency even though the former was significantly better than anticipated and the latter lost grip of the 50.0 handle. Instead, Eur/Usd is anchored around 1.1200 and trading more in lock-step with wider Greenback moves as the DXY returns to its 97.500 axis within 97.698-203 parameters, plus the aforementioned Yuan fluctuations on the premise that the Euro may become the default alternative for China if trade wars escalate and US Treasuries are offloaded in response to tariffs and the official declaration that Beijing is a currency manipulator. However, expiries may also be impacting ahead of the NY cut when 1.5 bn roll off between 1.1190-1.1200.
- EM - The RBI completes this week’s global Central Bank policy meeting rota, and like the RBNZ is expected to reduce key rates by ¼ point and if confirmed it will be 4 such moves in a row. However, the BoK could make an unscheduled appearance in some shape or form before that as an emergency gathering has been convened in South Korea for 23GMT tonight to ‘discuss’ financial conditions. Usd/Inr currently hovering above 70.7300 and Usd/Krw close to 1215.50.
- RBA kept the Cash Rate Target unchanged at 1.00% as expected and stated it is to adjust policy if needed to support the economy and will monitor developments in labour markets closely. Furthermore, the RBA said outlook for the global economy remains reasonable and that there are signs house prices are stabilizing in Sydney and Melbourne, but also noted it will take longer than expected to reach 2% inflation and that wage growth remains subdued with little upward pressure at the moment.
In commodities, WTI and Brent are firmer thus far, though have tested the USD 55.0/bbl and USD 60.0/bbl marks to the downside on several occasions thus far. Newsflow for the complex has been very light thus far with the only notable update from Goldman Sachs who maintain their US oil growth outlook at 1.3mln BPD for 2019, but lowers 2020’s to 1.1mln BPD vs. 1.2mln BPD. Looking ahead, we do have the API weekly report where expectations are for a headline draw of 3mln, we also have the EIA’s Short Term Energy Outlook on the day’s schedule. In terms of metals, gold has dipped this morning as risk sentiment has arguably strengthened but perhaps more appropriately not deteriorated further, while the yellow metal is weaker it is still significantly above the USD 1450/oz handle. As such, copper prices are firmer deriving support from the aforementioned market sentiment.
US Event Calendar
- 10am: JOLTS Job Openings, est. 7,326, prior 7,323
- 12pm: Fed’s Bullard Speaks on U.S. Economy in Washington
DB's Jim Reid concludes the overnight wrap
Thanks for all your well wishes after news of my bike accident filtered through yesterday. Nice to know that so many people are pleased that I’m still alive. Having said that you’d be a pretty strange lot if you felt the opposite. The clip of the incident recorded from a nearby van’s dashcam has gone viral. Maybe not in a Lady Gaga type way but maybe enough to fill a non-league second division football promotion decider. See my Bloomberg header for the link or ask me and I’ll send. What I didn’t say yesterday was what happened next. I was sprawled across the side of the road with my bike by my side in agony and in shock. The driver then moved to go round me and looked like he was driving off. Like a premier league footballer who has theatrically fallen to the ground, and then realises that there’s actually a goal to score, I got up quickly (in agony mind) and blocked him from moving off and shouted at him. He then shouted back at me that he was moving to one side to park the car. He got out and profusely apologised while I went back to being a premier league footballer on the ground. As for my wife, this all happened before she was even awake and after being driven back home I woke her up with a cup of tea with blood all over me and bits of ripped cloth hanging off my clothing. To say I’ve never seen her wake up quicker would be an understatement.
Will August be as much as a write-off as my bike is? It does continue to feel like it’s going to be one of “those” Augusts where markets are unstable and illiquid, and the tranquility of holidays are ruined. As we discussed last week the stakes for this month were already being raised by markets getting ahead of themselves on both central bank action and risk levels versus the current data. Adding on a fresh US tariff announcement from Mr. Trump on Thursday, the Chinese using the yuan as a retaliatory weapon yesterday, and the US Treasury’s official designation of China as a currency manipulator overnight, and we have a combustible situation.
The Treasury’s statement on China being cited as an FX manipulator alleges that there have been “concrete steps to devalue its currency” in recent days. It goes on to say that “the purpose of China’s currency devaluation is to gain an unfair competitive advantage in international trade.” The fact that the designation came under the 1988 act, rather than the 2015 act, actually makes it a bit less disruptive, as the more recent act is the one that automatically starts a new, specific sanction process. Nevertheless, there may be scope for the Commerce Department to treat the designation as a subsidy, which could clear the way for more and higher tariff rates on Chinese goods.
The signal from the move is unambiguously escalatory, and markets are taking the news negatively. However we have rebounded off the Asian lows as markets took heart from the PBoC fixing the daily reference rate for the onshore yuan at 6.9683 (vs. 6.9871 expected).The onshore yuan is actually trading up +0.15% this morning at 7.0399 while the offshore yuan is trading flattish at 7.0649. Asian equity markets pared some of their deep early losses after the PBOC move but are still trading down with Chinese markets leading declines. The CSI (-2.01%), Shanghai Comp (-2.43%) and Shenzhen Comp (-3.03%) are all down over 2%. The Nikkei (-0.64%), Hang Seng (-0.71%) and Kospi (-0.55%) are also making relatively modest declines. The MSCI HK is on course for the 10th successive decline which would be the worst run since 1984 if we close in the red. Amongst G10 currencies, the Japanese yen is down -0.80% while others are trading mixed. Elsewhere, the S&P 500 futures are trading up +0.2% lower overnight, recouping early losses of c. -1.8%. Yields on 10y USTs are +3.5bps this morning. To be honest markets are a bit all over the place this morning so best to check where we are when you’re reading this.
In other news, North Korea has said overnight that it will take “new road” in negotiations with the U.S., saying that Washington and Seoul would “pay a heavy price” if they continued to disregard the regime’s warnings against holding joint military exercises. The statement came less than an hour after North Korea fired a new volley of short-range ballistic missiles into the sea -- its fourth such weapons test in two weeks. Elsewhere, President Trump imposed further sanctions on Venezuela, freezing the government’s assets in the US and adding immigration restrictions in a move aimed at stepping up pressure on the regime of Nicolas Maduro.
Back to yesterday now and these overnight moves come after risk assets took a heavy hit. All three US bourses posted their worst days of the year, with declines approaching or above -3% for each index. The biggest move was reserved for the NASDAQ, which fell -3.47%, while the S&P 500 and DOW finished -2.98% and -2.90% respectively. The S&P 500 is now down for 6 straight sessions, which is the longest such run since October last year. It’s also down -5.99% in that time (-6.73% at yesterday’s lows) which is equivalent to a market cap loss of $1.76 trillion; that’s roughly the same as the annual GDP of Canada. The overall US public markets shed -$906.2bn of value just yesterday, which made yesterday’s session the sixth worst day in market history in terms of absolute losses. The NYSE FANG index also tumbled -4.59%, with China-exposed Apple trading down -5.23%, for the index’s worst day since last October. While tech bore the brunt of the pain, the reality was that all sectors closed lower yesterday, with even relative havens like utilities and consumer staples down -1.51% and -2.69%. Credit wasn’t immune either, with US HY cash spreads +36bps wider and +10bps in Europe.
The moves in US equities unsurprisingly coincided with a decent leg up in volatility with the VIX yesterday closing at 23.47 which is the highest level since January. Month to date the VIX is already up +5.6pts which is the biggest move to start a month over the first three days since February 2018 when inverse vol ETFs were blowing up. Meanwhile, Europe also suffered with the moves matching those in the US at the time of the close with the STOXX 600 down -2.31%. Banks (-1.41%) actually held in relatively well considering despite Bunds hitting a new low of -0.516% (-2.0bps). 30 year bunds closed (-1.6bps at -0.012%) below zero for the first time ever. In the UK, gilts reached 0.512% (-3.8bps).
However the big moves in rates were reserved for Treasuries where 2y and 10y yields fell -12.7bps and -11.9bps respectively. The 10-year note has now rallied -33.5bps over the last 4 sessions, the biggest such rally since 2011. That rally at the short end actually meant the 2y10y curve steepened +0.8bps to 13.7bps. However, the other two prominent yield curve metrics, the 3m10y and the Fed’s forward spread, both flattened, by -6.3bps and -14.7bps. That takes the 3m10y to a fresh cyclical low, its lowest since April 2007. It’s also worth noting that breakevens shot lower with 10y breakevens falling -5.6bps and to its lowest level since September 2016. Other safe havens, e.g. the Swiss Franc (+0.88%), Japanese Yen (+0.45%), and gold (+1.51%) also all performed well. Gold is now up +14.04% this year, passing the S&P 500 in terms of YTD gains (+13.48%). The last time that gold beat the S&P on a full-year basis was 2011.
As for Fed expectations we’ve now shifted all the way back to 67bps of cuts being priced in through year-end. Keep in mind that the day after Powell spoke – just 6 days ago – there were only 34bps of cuts priced in. Yesterday, the Fed’s Brainard spoke about the payments system, and when asked about markets she said “I am certainly monitoring developments very closely.” That was corroborated by Kansas City’s George (who dissented against last week’s cut) who said that “markets move quickly. It takes some time to see how that evolves and so the best I think that you can do right now is just to monitor.”
President Trump took to Twitter throughout yesterday’s session to rachet up his confrontational rhetoric. He accused China of having “dropped the price of their currency to an almost a historic low” and said that their “currency manipulation (…) is a major violation.” He also said that “China is intent on continuing to receive the hundreds of Billions of Dollars they have been taking from the U.S. with unfair trade practices and currency manipulation. So one-sided, it should have been stopped many years ago!” There were also unconfirmed reports of Chinese retaliation, with Bloomberg reporting that Chinese agriculture firms have been told to stop buying US soybeans. Hu Xijin, editor of the English-language Chinese paper the Global Times, tweeted that “Chinese enterprises have halted buying US farm products. The Chinese side won’t submit to the US.”
In other news, data played second fiddle however it didn’t go unnoticed that the US non-manufacturing ISM weakened to the lowest level since August 2018, down -1.4pts at 53.7. The sub-indexes weren’t particularly encouraging either, as new orders fell to 54.1, the lowest since August 2016. On the other hand, employment rose to 56.2, right in the middle of the range since 2017. Earlier in the session, the Markit services PMI was revised +0.8pts higher to 52.2. Obviously, these surveys were conducted before the most recent trade escalation, limiting their immediate relevance.
Over in Europe, the final July PMIs were similarly mixed. The euro area aggregate services PMI came in at 53.2, -0.1pt lower from the flash reading, as expected. Italy’s reading was notably better than expected, up +1.2pts to 51.7 versus expectations for a +0.1 increase. Meanwhile, France was also stronger at 52.6 (from 52.2 flash), while Germany was down at 54.5 (-0.9pts from flash).
To the day ahead now, which is a quiet one for data with only June factory orders data due in Germany this morning and then the June JOLTS report scheduled for the US. Away from that we’re due to hear from the Fed’s Bullard at 5pm BST when he speaks on the US economy in Washington. Earnings releases are also due from Walt Disney and Duke Energy.