For the third day in a row, global markets started off the session with some bullish enthusiasm - this time on hopes of a trade deal with China following Trump's delay to some key tariffs - only to see it all fade, as global stocks were flushed down the red drain thanks to dismal economic news first from China, whose key economic indicators all missed overnight and factory output tumbled to a 17 year low, then from Germany where GDP contracted for the 2nd time in 4 quarters sending the country to the verge of recession, and culminating with the inversion of both the UK and US 2s10s yield curve as the 30Y Treasury yield dropped to a record low, sliding below the effective fed funds rate for the first time ever.
US equity futures slumped to session lows, dropping alongside European stocks as weak data from two of the world’s biggest economies overshadowed an apparent de-escalation in the trade war. Treasuries and European bonds rallied, with key parts of both the U.S. and U.K. yield curves inverting.
European stocks fell on poor industrial production data and as Germany’s economy went into reverse, reviving fears of global recession and tempering a rally for equities after Washington delayed tariffs on some Chinese imports. Germany shrank 0.1% in the second quarter as the trade war and weak demand dragged on German manufacturers. The euro zone as a whole reported gross domestic product grew just 0.2% in the same quarter.
The Euro Stoxx 600 fell 0.4%, with markets in London, Frankfurt and Paris losing from 0.2% to 0.6%, tracking U.S. futures lower, as all but two of the 19 industry groups decline. Carmakers, banks and miners are the worst performers, while food-and-beverage shares temper the benchmark’s decline. Cyclical shares are retracing some of Tuesday’s gains after data from China and Germany flag a worsening economic outlook.
Earlier in the session, Asian stocks advanced, led by technology firms, as easing trade tensions between the U.S. and China spurred a relief rally around the world. Almost all markets in the region were up, with India and Japan leading gains. The Topix climbed 0.9%, supported by electronic and telecommunication firms, as Japanese traders looked beyond the worst earnings in three years and bet on a turnaround. The Shanghai Composite Index added 0.4%, with Kweichow Moutai advancing to a new record, even though China’s economy slowed more than expected in July, posting the weakest industrial output growth since 2002. The 4.8% growth was the lowest in 17 years.
The German figures, along with data showing the slowest growth for Chinese industrial output in 17 years stoking recession worries, knocked the wind out the sails for stocks.
Sure enough, this quickly manifested itself in the bond market, with the U.K. yield curve inverting for the first time since the financial crisis and the pound strengthened after inflation unexpectedly rose above the Bank of England’s 2% target in July. The US Treasury yield curve also inverted as the spread between US two-year and 10-year Treasury yields - a closely watched metric for signs of a slowdown and a famous recession predictor - finally turned negative after 12 years.
"The bond market is saying central banks are behind the curve,” said Marc Ostwald, global strategist at ADM Investor Services in London. “It’s all doom and gloom on the global economy."
Earlier in the session, investors had cheered earlier when U.S. President Donald Trump pushed back a Sept. 1 deadline for new tariffs on remaining Chinese imports. The S&P 500 which had fallen 1% on Monday, rose 1.5% on Tuesday, sending Asian stocks outside Japan up 0.6%. Benchmarks in Shanghai, Hong Kong and Tokyo all mirrored the surge in U.S. stocks. But the momentum ebbed in Europe, as optimism faded that Trump’s move meant tensions were easing and Germany’s slowdown showed the damage already done by the trade war.
“The trade war and the dispute between U.S. and China has already had an impact - especially when you look at countries most sensitive to global trade like Germany and even Italy,” said Christophe Barraud, chief economist and strategist at Market Securities in Paris.
Meanwhile, Hong Kong’s airport resumed normal operations after a chaotic night of protest in which demonstrators beat and detained two suspected infiltrators and Trump warned of Chinese troops massing on the border.
In FX, the safe haven Japanese yen gained 0.3% to 106.42 per dollar as the Chinese data signaled that any resolution to the trade war was a long way off. Mirroring that view, the offshore Chinese yuan fell 0.4% against the dollar to 7.0337, erasing gains made the day before and remaining weaker than the 7 to the dollar it reached last week. The Australian dollar fell after the China economic data, including retail sales and industrial output, missed estimates. Swedish inflation data comes in stronger than forecast yet the krona fails to sustain knee-jerk reaction gains. The pound gained after U.K. inflation unexpectedly accelerated above the Bank of England’s target.
The yuan rose after China’s central bank set the daily fixing at a level stronger than the market expected for a fifth straight day. The People’s Bank of China strengthened the fix to 7.0312 per dollar Wednesday, snapping a nine-day streak of weakening, after Donald Trump decided to delay the imposition of new tariffs on a wide variety of Chinese goods until December. The 10% tariff postponement on largely consumer products including toys and laptops came after U.S. and China senior trade officials spoke by phone. Trump said the conversation was "productive" and that the delay was made "so it won’t be relevant to the Christmas shopping season".
In kneejerk response, the offshore yuan rose as much as 1.6%, most on record, on the news. "The fixing came in much stronger than expected probably because China needs to stabilize the yuan and prevent sustained depreciation as the trade talks resume,” said Scotiabank currency strategist Gao Qi, adding that the onshore currency will likely trade between 6.9 and 7.1 per dollar if no further major news emerges on the negotiations. If trade tensions escalate, there is a 20% probability that the PBOC could push the yuan in the direction of 7.5 per greenback, BNP Paribas analyst Chi Lo wrote in a note.
In commodity markets, oil prices fell after the Chinese data from China and a rise in U.S. crude inventories, erasing some of the gains made after Trump’s tariff delay. Brent crude was down 54 cents, or 0.9%, at $60.76 a barrel after rising 4.7% on Tuesday, its biggest percentage gain since December.
Expected data include mortgage applications. Canada Goose, Macy’s, Agilent, Canopy Growth and Cisco are among companies reporting earnings.
- S&P 500 futures down 0.5% to 2,918.00
- STOXX Europe 600 down 0.2% to 371.86
- MXAP up 0.8% to 151.02
- MXAPJ up 0.6% to 486.93
- Nikkei up 1% to 20,655.13
- Topix up 0.9% to 1,499.50
- Hang Seng Index up 0.08% to 25,302.28
- Shanghai Composite up 0.4% to 2,808.92
- Sensex up 1.2% to 37,403.73
- Australia S&P/ASX 200 up 0.4% to 6,595.90
- Kospi up 0.7% to 1,938.37
- German 10Y yield fell 1.4 bps to -0.623%
- Euro up 0.1% to $1.1184
- Italian 10Y yield fell 8.3 bps to 1.265%
- Spanish 10Y yield fell 2.0 bps to 0.19%
- Brent futures down 0.9% to $60.76/bbl
- Gold spot down 0.1% to $1,500.29
- U.S. Dollar Index little changed at 97.75
Top Overnight News
- President Donald Trump bowed to pressure from U.S. businesses and concerns over the economic fallout of his trade war with China, delaying the imposition of new tariffs on a wide variety of consumer products including toys and laptops until December
- The U.K. is gearing up for a Brexit-driven election that its Prime Minister can’t call. Under 2011 legislation, a national ballot can be called only if two-thirds of lawmakers opt for one -- or if the government loses a confidence vote
- Germany’s economy shrank in the second quarter, piling pressure on Chancellor Angela Merkel to unleash fiscal stimulus as manufacturers reel from a U.S.-China trade war
- China’s economy slowed more than expected in July, worsening growth prospects as trade tensions escalate and additional U.S. tariffs loom.
- President Donald Trump said reports from U.S. intelligence agencies show the Chinese government is moving troops to its border with Hong Kong. “Everyone should be calm and safe!” Trump said in a tweet on Tuesday, without providing details about when he received the information
- Italian lawmakers summoned Prime Minister Giuseppe Conte to appear before the senate on Aug. 20 as parliament responds to the political chaos that has gripped the euro-area’s third largest economy
- Prime Minister Boris Johnson’s staff talk about an imminent general election as though it were a fact, and on Tuesday, a Conservative politician accidentally published a draft email about his “GE2019 team”
- Norway’s central bank Governor Oystein Olsen faces a tough call on whether to stick to a plan to raise again and go against a global wave of easing that was kicked off by the U.S. Federal Reserve in July. Three of the six biggest Nordic banks expect Norges Bank to signal a September tightening at a rate decision on Thursday
- Chinese officials are sticking to their plan to visit Washington in September for face-to-face trade meetings, people familiar with the matter said, signaling that talks remain on track for now despite an abrupt escalation in tariff threats this month
Asian equity markets traded higher across the board with global risk appetite spurred by a de-escalation in the US-China trade war after the US announced to delay the 10% tariffs on some items from China until December 15th, although stocks are off the day’s best levels on disappointing Chinese data in which Industrial Production grew at the slowest pace in 17 years. ASX 200 (+0.4%) and Nikkei 225 (+1.0%) gained from the open but with upside in Australia capped by weakness in financials after NAB reported tepid profit growth for Q3 and as gold miners suffered from a pullback in the precious metal, while Tokyo sentiment was boosted by encouraging data after Machinery Orders showed the largest M/M increase on record. Hang Seng (+0.1%) and Shanghai Comp. (+0.4%) were buoyed at the open after the tariff delay announcement which President Trump noted was for the Christmas season in case it had an impact on shopping and suggested that he had a very productive call with China, while a continued PBoC liquidity effort and firmer CNY fix added to the optimism before weaker than expected Industrial Production and Retail Sales data from China saw stocks give back some of the gains. 10yr JGBs are lower after the US tariff delay triggered safe haven outflows and amid a continued lack of BoJ buying with the central bank only in the market today for Treasury Bills.
Top US News
- Indonesian Bond Sale Draws Fewer Bids as Global Risks Weigh
- Modi Has Limited Options to Boost Economy in Locked Down Kashmir
- China July Industrial Output Growth Weakens to 17-Year Low
European equities are lower across the board [Eurostoxx 50 -1.3%] as the global risk appetite seen yesterday and overnight waned in earlier European trade. Major bourses are posting broad-based losses although Italy’s FTSE MIB (-1.9%) is underperforming, as the ongoing political angst sees almost all Italian stocks in the red. Meanwhile, DAX 30 (-1.4%) breached the key 11,600 support level on which the index turned-around during the May rout. Sectors are all in negative territory, although defensive sectors are somewhat more resilient, i.e. utilities, consumer staples and healthcare. In terms of individual movers, Commerzbank (-4.0%) fell to a new record low of EUR 5/shr as the German banking rout deepens following a Germany GDP Q/Q contraction and as the bank tracks German yields. Meanwhile, Balfour Beatty (+9.0%) and RWE (+1.9%) rose to the top of the Stoxx 600 after earnings, with the latter raising its interim dividend.
Top European News
- Police Arrest 22-Year-Old Suspect in Danish Tax Agency Bombing
- Italy Bonds Fire Warning to Salvini Over Cost of Leadership Bid
- Sports Direct Plunges as Auditor Leaves Without a Successor
- Mining Stocks Lag in Europe as Data Cast Doubt on Global Growth
In FX, the traditional safe-haven currencies and their commodity compatriot Gold have regained some composure after yesterday’s sharp/abrupt fall from grace on the resumption of US-China trade talks and decision to defer/waiver certain items from the list of Chinese imports that were due for 10% tariffs on September 1. Subsequent comments from President Trump indicate that the concessions are not in response to any progress in negotiations or reciprocity from Beijing, but an effort to avoid US consumers feeling the pinch over the festive period. Meanwhile, latest Chinese data has also dampened spirits with ip and retail sales both falling short of expectations, though the PBoC has stalled the measured Yuan depreciation and Usd/Cny ended on-shore trade below the official fix. Usd/Jpy back down around 106.00 and Usd/Chf is pivoting 0.9730 as Xau/Usd returns to justy above 1500/oz mark amidst faltering risk sentiment.
- EUR/GBP/SEK/NOK - The single currency and Sterling are both firmer vs the Dollar even though the DXY is holding the bulk of its post-US CPI gains within a 97.847-660 range, and data has helped to an extent given Eurozone Q2 GDP matching or slightly surpassing forecasts, while headline UK inflation was firmer than consensus along with the core. However, Eur/Usd and Cable remain top-heavy ahead of 1.1200 and 1.2100, with the former still unable to breach Fib resistance at 1.1220 convincingly or on a closing basis, and also faced with decent option expiry interest today at 1.1215 (1.3 bn). Similarly, the Swedish Krona only got a fleeting boost from CPIF beats vs market medians and the Riksbank’s own projection, as inflated food prices were partly if not largely to blame, while another retreat in crude prices is weighing on its Norwegian peer, as Eur/Sek and Eur/Nok hover closer to the tops of 10.7145-6455 and 9.9715-9085 bands respectively.
- AUD/NZD/CAD - The aforementioned tempered exuberance surrounding US-China relations and disappointing data have taken their toll of the Aussie in particular, with Aud/Usd recoiling from 0.6800+ recovery peaks towards 0.6750 again, Nzd/Usd back under 0.6450 and Usd/Cad rebounding from sub-1.3200 to just shy of 1.3250. Ahead, Australian jobs data will be crucial for the RBA, and at the current juncture it appears that a hefty 0.6790 expiry in 1.2 bn won’t have a bearing on direction.
In commodities, WTI and Brent prices have held onto the bulk of their trade-driven gains in which the benchmarks soared around USD 3/bbl after the USTR decided to delay tariffs on some Chinese goods until December 15th. Sentiment drove yesterday’s gains, although ultimately, the demand outlook remains unchanged unless material progress can be made in dialogue, i.e. if the nations overcome sticking points which broke down talks last time. The relief rally had begun to peter out in Asia-Pac and European trade, with some aid from a surprise build in API stockpiles (+3.7mln vs. Exp. -2.8mln). WTI residing around its 50 DMAs at 56.08/bbl whilst its Brent counterpart remains around 60.50/bbl. PVM notes that if Brent fails to hold its 13 DMA (60.55/bbl), then it’ll likely cause a 5-day gap narrowing dip to around the 5 DMA at 59.29/bbl. Traders will now be looking ahead to the weekly DoE data for confirmation of the API numbers. ING notes that last week’s release saw a surprise build driven mainly by a fall in crude oil exports. “The relative strength in WTI vs. Brent, means we could see another week of poor exports”, analysts say. Elsewhere, gold has made some gains above the 1500/oz mark after finding a base at 1480/oz yesterday from the trade-driven unwind of safe-haven positions. Meanwhile, copper prices are on the backfoot as yesterday’s optimism wanes in EU trade and disappointing Chinese IP prints exacerbated the downside, with some additional pressure after exports of the red metal from Peruvian port of Matarani have now resumed following a three-week suspension due to protests.
US Event Calendar
- 7am: MBA Mortgage Applications, prior 5.3%
- 8:30am: Import Price Index MoM, est. -0.1%, prior -0.9%;
- 8:30am: Export Price Index MoM, est. -0.05%, prior -0.7%
DB's Craig Nicol concludes the overnight wrap
Just when you thought we were getting away with a rare period of calm from trade headlines, yesterday afternoon’s announcement that the Trump administration was to delay 10% tariffs on some Chinese products until mid-December quickly put an end to any hope of that. Risk-on was back in force, however the inherent problem for markets with these trade headlines is the predictability of how unpredictable they are, both with regards to timing and substance so it makes it incredibly difficult to take short term views while things remain so fluid.
That didn’t bother risk assets though, with the S&P 500 gaining +1.50% to more than retrace Monday’s decline. The benchmark index has now traded +/-1% in five of the last seven sessions, the longest such streak since December. Tech shares outperformed, with the NASDAQ, FANG, and Philly semiconductor indexes rallying +1.95%, +2.53%, and +2.95%, respectively, as several broad categories of high-tech imports from China were in the basket of goods which will not be tariffed on 1 September. Apple (+4.23%), Qualcomm (+3.41%), and Micron (+4.84%) paced gains. In Europe, the STOXX 600 reversed losses of as much as -0.87% to ultimately close +0.54% higher.
The moves in rates were sharp as well, with two-year treasuries retracing yesterday’s rally to end +8.3bps higher. The rise in 10-year yields was more muted, up only +5.9bps. Both were affected by the risk-on sentiment and flows out of safe havens, but the front-end also had to deal with the strong CPI inflation print (more below). As a result, the market is now pricing 57bps of Fed cuts this year, from 66bps as of Monday. Those reduced fed odds contributed to a flatter yield curve, with the 2y10y spread down -2.5bps to just 3.3bps, having touched a low of 0.8bps in the New York afternoon. As we’ve highlighted many time the 2y10y is our favourite recession indicator and as it flirts with inversion we’ve become more concerned about the downside risks.
In other markets, oil was boosted by the trade de-escalation, with WTI advancing +3.95% to $57.10/bbl. The US cash HY energy index rallied -16bps, helping the overall HY index to tighten -13bps, The VIX index fell -3.6pts to 17.5, which is actually relatively elevated from its 6-month average of 15.0. Meanwhile, EM currencies gained +0.48%, despite another bloodbath for the Argentine peso, which weakened a further -5.00% versus the dollar. The biggest EM mover was the offshore yuan, which gained +1.29% during US trading on trade optimism.
As for the actual details of the tariff announcement, the most substantive news was the decision to delay tariffs on around $150bn of imports until at least 15 December. Around $100bn of imports will face the 10% tariff effective on 1 September. That leaves several tens of billions of goods unaccounted for, though they could just be the result of rounding, other exemptions, or errors. The USTR’s press release said that some items would be removed for “health, safety, national security and other factors.” As for the goods which will see delayed tariffs, the list includes cell phones, laptops, video games, toys, and computer monitors, which explains the tech outperformance mentioned above. President Trump later confirmed that he decided to delay the tariffs to avoid impacting the Christmas shopping season, which may be taken as a tacit admission that tariffs result in higher prices for US consumers, as our economists have argued. Fittingly, “art for nativity scenes” was also among the items be delayed beyond the Christmas season.
The trade headlines came not long after a much more risk unfriendly CPI report in the US. Indeed the July core CPI reading of +0.3% mom was ahead of consensus for +0.2% and in doing so it pushed up the annual reading to +2.2% yoy and thus matching the highs from January. Amazingly, that is the first time since 2001 that we’ve had two rounded readings of at least +0.3% mom for the core. The 3m annualized rate is also now at +2.83% which is the second highest during the current cycle. On top of that, there were no obvious outliers in the details which is another indication of the broadness in strength in the data. So, however you cut and slice it this was a strong reading. That being said the moves in rates were quickly overtaken by the tariff story headlines.
Overnight, Asian markets are following Wall Street’s lead with the Nikkei (+0.63%), Hang Seng (+0.55%), Shanghai Comp (+0.75%) and Kospi (+0.75%) all up. That being said, most markets are off their intraday highs following weak Chinese data overnight (more on that below). As for FX, the CNY is trading at 7.0234 (+0.28%) while other Asian currencies are also trading up with the South Korean won (+0.79%), Indian rupee (+0.75%) and Indonesian rupiah (+0.70%) all making gains. Elsewhere, S&P 500 futures are flat.
Just on the China data, industrial production in July was confirmed at 4.8% yoy which was well below expectations for 6.0% yoy and also the weakest reading since 2002 while retail sales also came in at +7.6% yoy (vs. +8.6% expected). There was a smaller miss for fixed asset investment which came in one tenth lower than expectations at 5.7% yoy while the surveyed jobless rate rose two tenths versus last month to 5.3% and thus matching the recent highs from February. So, a weak slew of data and one which begs the question how long is China willing to tolerate weaker growth and higher joblessness. Needless to say that the downside risks to growth are now on the rise.
In other news, the Telegraph is reporting that House of Commons Speaker John Bercow said that he will refuse to allow PM Johnson to suspend U.K. Parliament to secure Brexit. He said, “We cannot have a situation in which Parliament is shut down – we are a democratic society. And Parliament will be heard and nobody is going to get away as far as I am concerned with stopping that happening." Meanwhile, in Italy lawmakers have summoned PM Conte to appear before the Senate on August 20, with Bloomberg suggesting that this could lead to a confidence vote in the upper house, or possibly even his resignation of further delays.
The other highlight of the data yesterday and which ultimately got overshadowed was a shocking August ZEW survey in Germany. The -44.1 expectations reading was not only well below consensus for -28.0 but marked a monthly decline of -19.6pts which was the most since July 2016 and second most since 2012. Staying with Germany, the final July CPI revisions threw up no surprises with the +0.4% mom reading unrevised versus the flash. The data in the UK was also broadly in line with earnings printing at +3.9% 3m/yoy while the unemployment nudged up one-tenth to 3.9%. The other data release worth flagging was the July NFIB small business optimism reading in the US which rose 1.4pts to 104.7 (vs. 104.0 expected).
To the day ahead now, where the main focus of the data this morning will be Germany’s Q2 GDP release where expectations are for a -0.1% qoq print. We’ll also get Q2 employment data in France, and July CPI readings in France and the UK. We’ll then round off the data in Europe with the preliminary Q2 GDP print for the Euro Area. In the US this afternoon it’s a bit quieter for data with the July import price index reading the only data of note.