US equity futures drifted lower, tracking European and Asian stocks in the red as uncertainty over the outlook for interest rate cuts following the release of the FOMC minutes kept investors on edge, while few traders were willing to trade in size with the Jackson Hole meeting set to begin. The yen and dollar jumped as the euro dropped and the yuan tumbled, while Treasuries edged higher with oil, while gold dipped.
The euro and German yields initially nudged initially higher after better-than-expected PMI readings in the euro area helped offset some fears of an imminent European recession. The moves were modest, however, and gains quickly faded as the manufacturing readings remain challenging (especially in Germany).
Some details on the latest PMI report from Goldman:
- The Euro area Flash composite PMI was up three-tenths in August, against expectations of a decline. The gain only partially offset the decline in July. The breakdown of the Euro area PMI showed a small increase in the services PMI (+0.2pt to 53.4) and a larger one in the manufacturing PMI (+0.5pt to 47.0). Within the manufacturing PMI, employment, new orders and output were higher than their July levels, but remain in contractionary territory.
- At the country level, the French PMIs recorded gains across all subcomponents, helping to push the composite PMI up 0.8pt to 52.7. New orders increased in both the service and manufacturing sectors. In Germany, the composite PMI rose 0.5pt to 51.4, led by modest gains in the manufacturing output subcomponent. The German services PMI showed a marginal decline; however, the underlying indices were more subdued, with new orders and employment falling more. The press release also noted a sharp fall in business expectations in the services sector.
As a result, after the glow faded from euro-area PMIs, investors again sought safer assets, pushing Treasuries higher while the yen hit a fresh daily high amid a flight to safe havens. The moves came after South Korea said it would withdraw from an intelligence-sharing agreement with Japan and a senior EU official says discussions with U.K. Prime Minister Boris Johnson suggest a no-deal Brexit is likely. Italy’s FTSE MIB (+0.4%) was kept afloat as Italian President Mattarella holds a barrage of talks with party leaders in search of a coalition to fill the country’s political void in order to pass the 2020 budget later this year. Meanwhile, UK’s FTSE 100 (-0.5%) marginally lags its peers as heavyweight tobacco stocks (Imperial Brands -1.0%, British American Tobacco -1.4%) weigh on the index amid news that the US House Energy and Commerce Committee launched a probe into four e-cigarette companies, British American Tobacco, Atria Group (MO), Japan Tobacco (2914 JT) and Reynolds American; seeking information on Cos’ research into public heath impacts, marketing practices and promotion of e-cigarette use by adolescents.
As a result, Europe's STOXX 600 index fell 0.1% in choppy trade, following a 0.5% drop in MSCI’s broadest index of Asia-Pacific shares outside Japan. The MSCI world equity index was down 0.1%.
Earlier in the session, Asian stocks dropped for a second day, led by energy and utility firms, as traders awaited a Friday address by Federal Reserve Chairman Jerome Powell. Markets in the region were mixed, with India retreating and Malaysia climbing. The Topix closed little changed, as chemical producers advanced and electronic companies slipped. The Shanghai Composite Index edged up 0.1%, supported by Kweichow Moutai Co. and China International Travel Service Corp. The Hang Seng Index fell 0.8%, with Hong Kong-listed stocks facing their worst earnings decline since 2008. India’s Sensex fell for a third day, dragged down by Reliance Industries Ltd. and HDFC Bank Ltd. The country needs a “significant” fiscal package, a gradual decline in the rupee and more liquidity for the shadow-banking system to ease tight financial conditions, according to Bank of America Merrill Lynch.
While it didn't impact markets on Wednesday, when US equities posted notable gains, minutes of the Fed’s July meeting showed deep splits among policymakers over whether to cut interest rates last month, though there was some unity in wanting to signal it was not on a preset path to looser policy. The Fed cut rates by 0.25% in July. While a “couple” of Fed members supported a deeper cut of half a percentage point, “several” favored no change at all. That reluctance to loosen policy seems at odds with the expectations for a cut of over 100 basis points by the end of 2020 that are already priced into markets.
Strategists said that the minutes reflected a dissonance between expectations for cuts - fueled by geopolitical concerns such as U.S.-China trade tensions and economic weakness in major economies such as Germany - and the apparently solid fundamentals of the U.S. economy.
“The update last night was a bit of a reality check - maybe don’t get ahead of yourself on what the Fed is going to do,” said David Madden, market analyst at CMC Markets. “If you forget about the geopolitical headlines, forget about what the bond markets are doing, and look at the underlying indicators of the U.S. ... people are in jobs, earning decent money, and more importantly spending money.”
But beyond the United States, worries about the fragility of the global economy were evident in data from Europe on Thursday. Germany’s private sector continued to struggle in August, suggesting further that Europe’s largest economy is heading for a recession after its economy shrunk between April-June. Euro zone business growth expectations also fell to their weakest in more than six years on trade war fears, even as the expansion picked up a touch in August.
In FX, the slump in the yuan dragged it to an 11-year low, which also sapped appetite for risk, with dealers saying state-owned banks were seen selling dollars to support the yuan.
The Fed minutes also raised the stakes for Chairman Jerome Powell’s speech on Friday at the Fed’s annual policy retreat in Jackson Hole, Wyoming - an event that investors are waiting for with bated breath hoping for some clarity on the Fed's intentions. U.S. President Donald Trump has been urging larger rate reductions, with proponents of looser policy pointing to the need to lift inflation toward the Fed’s target and thwart fallout from global trade tensions. And those trade worries played out again in currency markets, where the fall in onshore China’s yuan to 7.0752 per dollar, its lowest since March 2008, promoted a rush to perceived safe-haven assets such as the Japanese yen. The yen advanced by 0.2% to 106.41 yen, nearing last week’s eight-month low of 105.05 yen. The euro slipped to a daily lows as commodity and Scandinavian currencies deepened losses.
Currency traders said that while the Chinese economy’s slowing growth meant pressure had been building on the renminbi from long before, the new fall suggested Beijing was prepared to use the currency as leverage as trade tensions simmer.
“This indicates that this is an instrument of the Chinese government in the trade war. It is allowing for renminbi weaknesses,” said Thu Lan Nguyen, FX strategist with Commerzbank in Frankfurt. “It is an indication that they are expecting the trade war to continue, to last longer than they anticipated last year.”
In geopolitics, North Korea carried out live fire drills by bombing replicas of South Korea's F-15K fighter jets, surface to air missiles and a radar. Across the border, South Korea stated they will not be renewing their intelligence accord with Japan, according to the Blue House. Iran displayed a new locally built mobile missile defence system, reported via Iranian news agencies. Iranian Foreign Minister Zarif says he is prepared to work on France's proposals regarding a nuclear deal.
In commodities, oil prices dipped on worries about the global economy and bigger-than-expected buildups in oil product inventories in the United States, the world’s biggest oil consumer. Brent crude futures rose 0.3%, or 18 cents, to $60.48, while U.S. crude gained 23 cents to $55.91 a barrel.
Expected data include jobless claims and PMIs. Gap, Intuit, Salesforce, and VMware are among companies reporting earnings.
- S&P 500 futures unchanged at 2,929
- STOXX Europe 600 down 0.4% to 374.24
- MXAP down 0.3% to 152.02
- MXAPJ down 0.5% to 492.13
- Nikkei up 0.05% to 20,628.01
- Topix up 0.04% to 1,498.06
- Hang Seng Index down 0.8% to 26,048.72
- Shanghai Composite up 0.1% to 2,883.44
- Sensex down 1.1% to 36,660.18
- Australia S&P/ASX 200 up 0.3% to 6,501.81
- Kospi down 0.7% to 1,951.01
- German 10Y yield rose 1.3 bps to -0.657%
- Euro up 0.2% to $1.1102
- Italian 10Y yield fell 3.9 bps to 0.985%
- Spanish 10Y yield rose 1.2 bps to 0.109%
- Brent futures up 0.2% to $60.44/bbl
- Gold spot down 0.2% to $1,499.52
- U.S. Dollar Index little changed at 98.24
Top Overnight News
- German manufacturers are reinforcing concern that Europe’s largest economy is headed into a recession. A nationwide gauge showed orders at factories and services companies dropping at the fastest pace in six years, and more companies now expect output to fall than rise over the next 12 months. That’s the first time that’s happened since 2014, according to the Purchasing Managers’ Index from IHS Markit
- Federal Reserve officials viewed their interest-rate cut last month as insurance against too-low inflation and the risk of a deeper slump in business investment stemming from uncertainty over President Donald Trump’s trade war.
- Angela Merkel’s challenge to Boris Johnson to find a Brexit solution in the next 30 days sounds impossible. But while both sides are talking tough, officials in private say there’s still time to salvage a deal
- The prospects for forming a new coalition in Italy improved after the first day of consultations as most of the smaller parties and independent lawmakers told Mattarella they’re against a snap election and would eventually favor a new government.
- The French government expects the U.K. to leave the European Union without a withdrawal agreement, an official in President Emmanuel Macron’s office said, meaning the immediate imposition of border controls after Brexit at the end of October
- The IMF executive board recommended removing the age- limit for the fund’s managing director, paving the way for Kristalina Georgieva the European Union-backed candidate to replace Christine Lagarde
- Oil climbed as attention turned from expanding American fuel stockpiles to the prospects for monetary easing as the world’s top central bankers gather in Jackson Hole, Wyoming
- South Korea said it would withdraw from an intelligence-sharing agreement with Japan, extending their feud over trade measures and historical grievances into security cooperation.
- Italy’s President Sergio Mattarella will meet with the country’s main political leaders on Thursday in an effort to carve out a viable governing coalition after Rome’s government - - an alliance between the hard-right League and the anti- establishment Five Star Movement -- collapsed earlier this week
Asian equity markets traded mixed as the region failed to sustain the early momentum from Wall St where sentiment was underpinned by strong retailer earnings and after the FOMC minutes did little to alter the landscape as they showed a divide among officials on rate cuts. ASX 200 (+0.3%) and Nikkei 225 (U/C) were both higher at the open with tech and energy the outperformers on the busiest day of the earnings season in Australia, while Tokyo trade was less decisive as price action eventually reflected a choppy currency and after a lack of progress in talks between Japanese and South Korean Foreign Ministers to resolve the ongoing spat. Hang Seng (-0.8%) and Shanghai Comp. (+0.1%) were subdued amid CNY weakness and as Hong Kong’s property sector suffered the brunt of the Hong Kong protests with developers said to be reducing prices to support sales, although losses in the mainland have been cushioned by the PBoC’s liquidity efforts. Finally, 10yr JGBs were initially unchanged amid similar uneventful trade in T-notes, but later saw mild support after firmer demand at the enhanced liquidity auction for long end JGBs and as risk tone began to deteriorate.
Top Asian News
- Hong Kong Faces Worst Earnings Recession Since 2008 Crisis
- Indonesia Surprises With Second Rate Cut to Support Growth
- Hedge Fund Outflows of $55.9 Billion Make Dismal 2018 Look Good
European stocks have given up the earlier PMI-induced gains [Eurostoxx 50 -0.1%] as the sentiment seen from firmer EZ metrics across the board failed to persist, and amid little follow-through from FOMC Minutes. Italy’s FTSE MIB (+0.4%) is kept afloat as Italian President Mattarella holds a barrage of talks with party leaders in search of a coalition to fill the country’s political void in order to pass the 2020 budget later this year. Meanwhile, UK’s FTSE 100 (-0.5%) marginally lags its peers as heavyweight tobacco stocks (Imperial Brands -1.0%, British American Tobacco -1.4%) weigh on the index amid news that the US House Energy and Commerce Committee launched a probe into four e-cigarette companies, British American Tobacco, Atria Group (MO), Japan Tobacco (2914 JT) and Reynolds American; seeking information on Cos’ research into public heath impacts, marketing practices and promotion of e-cigarette use by adolescents. Moreover, broker downgrades for BHP (-1.7%), Anglo American (-2.0%) and Rio Tinto (-0.4%) adds further pressure on the index. Sectors are almost all in the red with cyclical stocks faring worse than defensives, in-fitting with the current risk tone. In terms of individual movers, Thyssenkrupp (+5.4%) shares jumped to the top of the Stoxx 600 amid reports that parties interested in Co's elevator unit include Advent, Apollo, CVC, Carlyle, KKR and possibly EQT, according to Manager Magazin. Meanwhile, BBVA (+1.3%) and Caixabank (+1.7%) benefit from broker upgrades at HSBC
Top European News
- Italy’s President Enters High-Stakes Talks in Bid to End Crisis
- Osram Board Agrees AMS Can Make Offer to Rival Bain- Carlyle
- Distressed-Debt Hedge Fund Mudrick Starts Expanding Into Europe
In FX, the euro was Not the strongest G10 currency, but the Euro perked up in wake of the flash Eurozone PMI surveys that were firmer than forecast across the board. Eur/Usd started to climb after the French preliminary prints and then crossed 1.1100 and beyond when German and pan headlines maintained the recovery trend, but faded again before testing offers reportedly waiting at 1.1120. Note also, hefty option expiries between 1.1095 and the big figure may be exerting a gravitational pull given 1.65 bn rolling off at the NY cut.
- GBP/JPY - The other major outperformers as the Dollar continues to drift post-FOMC minutes that failed to provide any further or clearer insight on guidance for the September policy meeting. Indeed, the DXY remains tightly bound just above the 98.000 handle and inside relatively narrow confines for the week so far (between 98.451-115), awaiting Fed chair Powell for clearer pointers (hopefully) at Jackson Hole on Friday. Meanwhile, Sterling is still seemingly taking the positive view that there is time left (albeit limited and decaying) to resolve the Irish backstop stalemate and reach some sort of Brexit deal before October 31, with Cable keeping its head above 1.2100, but capped by the 21 DMA circa 1.2154 and Eur/Gbp pivoting 0.9150 even though the single currency is underpinned as noted above. Elsewhere, the safe-haven Yen retains an underlying bid around 106.50 amidst ongoing global trade and geopolitical tensions after tough talks between the US and Japan failed to produce a breakthrough and SK not renewing its intelligence sharing agreement with Japan.
- NZD/AUD/CAD - All on the backfoot vs their US counterpart as the Kiwi loses more ground after failing to sustain recovery momentum above 0.6400 and the Aussie likewise following fleeting bounces over 0.6800, but also undermined by CBA PMIs overnight showing sub-50 manufacturing and composite readings. The Loonie is holding up a bit better after Wednesday’s frothy Canadian CPI, but unable to rally too far beyond 1.3300 ahead of wholesale trade data later today.
- SEK/NOK - Also weaker, partly on fundamentals and technically as Swedish unemployed jumped in SA terms and Norway trimmed its Q3 oil investment estimate, with Eur/Sek back up above 10.7000 and Eur/Nok hovering nearer the top of 9.9550-9145 trading parameters against the backdrop of faltering risk appetite.
- EM - Widespread losses against the Greenback, but Cnh and Try depreciation looks particularly eye-catching as the offshore Yuan teeters around 7.1000 amidst more warnings from China that retaliation is in the pipeline if the US presses ahead with extra tariffs on September 1st. Meanwhile, the Lira continues to list and tested 100 DMA support circa 5.7922 even though Turkish consumer sentiment picked up in August.
In commodities, WTI and Brent futures are modestly firmer on the day with the former around the 56/bbl mark, whilst the latter remains near the 60.50/bbl level having found a base at 60/bbl. News flow has been light thus far for the complex with price action likely to be dictated by macro developments/sentiment heading into Fed Chair Powell’s speech tomorrow. Meanwhile, the WTI/Brent Arb widened to around USD 4.60/bbl vs. USD 3.60 earlier in the week. ING notes that “it does appear that the relative strength in WTI is starting to raise concerns over how it may impact demand for US oil from overseas buyers”. Elsewhere, gold is marginally softer and pivots on either side of 1500/oz ahead of ECB Minutes and as the Jackson Hole Symposium goes on underway, with Fed Chair Powell due to speak tomorrow. Copper prices declined further below the 2.6/lb mark as risk appetite somewhat waned.
US Event Calendar
- 8:30am: Initial Jobless Claims, est. 216,000, prior 220,000; Continuing Claims, est. 1.71m, prior 1.73m
- 9:45am: Bloomberg Consumer Comfort, prior 61.2; Bloomberg Economic Expectations, prior 55
- 9:45am: Markit US Manufacturing PMI, est. 50.5, prior 50.4; Markit US Services PMI, est. 52.8, prior 53
- 10am: Leading Index, est. 0.3%, prior -0.3%
- 11am: Kansas City Fed Manf. Activity, est. 1.2, prior -1
DB's Craig Nicol concludes the overnight wrap
So there we have it, another one of those ‘where were you when…’ moments in the era of crazy low bond yields with the world’s first-ever zero coupon 30-year bond issued yesterday. Indeed, the 30y Bund ended up pricing at -0.11%; however, the big talking point was the anaemic demand at the auction with less than half of the offering being taken up by investors, meaning the Bundesbank had to retain the balance. The real subscription rate as a result was just 0.43x, which compares with 0.86x at the July auction. A lot was made of this being a very weak auction although it’s still hard to ignore the fact that €824m of the negative yielding ultra-long bonds were taken up by investors.
That auction came on a day when bond markets were a bit weaker. The whole Bund curve is still negative; however, yields were up a couple of basis points while Treasury yields also closed higher after the release of the FOMC minutes. Two-year yields rose +6.3bps, while 10-year yields rose +3.4bps.That sent the curve back down to just 1.0bp - a level it’s holding this morning – and dangerously close to inversion again.
The most immediately-relevant takeaway from the minutes was that there is minimal support for a 50bps cut in September, and markets moved to price in only a 12% chance of the bigger cut. That’s down from 20% before the minutes and from as high as 50% last week, though a 25bps cut remains fully priced. The minutes also suggested that policymakers were attentive to the trade war risks and were not caught off guard by the recent escalation, saying that “participants were mindful that trade tensions were far from settled.” As for the Fed’s longer-term policy review, there were several indications that the discussions are accelerating, as policymakers reportedly discussed using QE “more aggressively” and also analyzed “makeup strategies.” The latter “could be designed to promote a 2 percent inflation rate, on average, over some period,” which would have dovish implications for rates. While we’re on the Fed, President Trump continued his relentless attack on twitter, calling Powell “a golfer who can’t putt, has no touch”. To be fair, the same could be said for 99% of amateur golfers.
The moves in bond markets reflected a generally more upbeat tone across markets more broadly. That was certainly the case in equities where last night the S&P 500 closed +0.82%. The NASDAQ and DOW also finished +0.90% and +0.93%, respectively, with cyclical sectors generally leading gains. Favourably-viewed corporate earnings results in the retail sector from Target (+20.55%) and Lowe’s (+10.35%) helped. Nevertheless, the reality is that equities have just chopped around in a range since the plunge early in August and sit roughly where they were two weeks ago. HY credit spreads also had a strong day, with cash spreads trading -11bps and -10bps tighter in the US and Europe, respectively.
Overnight, Asian markets are quickly losing momentum although it’s not entirely obvious what’s driving the reversal from the highs. The Nikkei (-0.04%), Hang Seng (-0.87%), Shanghai Comp (-0.18%) and Kospi (-0.38%) are all lower having opened with decent gains. Futures on the S&P 500 (-0.03%) are also back to flat as we go to print.
Moving on. While markets have had very little to feed on the way of economic data this week, the good news is that we’ve got the global flash August PMIs today, which will give us a fresh opportunity to test the global growth pulse. We’ve already had the data out in Japan this morning where the composite rose half a point to 51.7, helped by a 1.6pt increase in the services reading to 53.4 while the manufacturing reading remained in contractionary territory at 49.5, albeit up 0.1pt from July. We’ll get the data for France, Germany and the Euro Area shortly and the consensus expects the composite reading for the Euro Area to have deteriorated slightly from 51.5 to 51.2, with the manufacturing and services readings expected to print at 46.2 and 53.0, respectively. A reminder that the July numbers confirmed a reversal of the improvement seen in June with the composite reading roughly consistent with a low +0.2% qoq rate of growth. This data of course will be the single biggest growth data point ahead of the ECB meeting in 3 weeks’ time. We should note that we’ll also get the data in the US where expectations are for a 50.5 manufacturing and 52.8 services print.
In other news, Italian assets continue to perform well despite persistent political uncertainty. Prime Minister Conte is scheduled to meet with leaders from the League and Five Star today, to see if he can find a prospective government and avoid fresh elections. Italian assets outperformed their European counterparts yesterday with the FTSE MIB finishing +1.77% versus +1.21% for the STOXX 600 while BTPs rallied -4.0bps and now sit at the lowest since October 2016.
Elsewhere, the CBO updated their US economic and budget forecasts. They now expect the fiscal deficit to widen to $960bn this year, up from their prior estimate of $896bn from May. That will be worth around 4.5% of GDP, worse than their prior forecast for 3.9%. The worse outlook will also result in trillion-dollar deficits beginning in 2020, two years earlier than before. On the bright side, the CBO raised their 2020 GDP growth forecast by 0.4pp to 2.1%, though they left 2019 at 2.3%.
Finally, the economic data didn’t add much but for completeness, US existing home sales rose to 5.42mn for July, marginally beating expectations for 5.40mn. That took the trend to 2.5% mom, and the prior month was revised upward slightly. Mortgage applications, a more forward-looking metric, fell -0.9%.
Looking at the day ahead now, outside of the PMIs the other data scheduled for release is August CBI survey data in the UK and August consumer confidence data for Euro Area, before jobless claims, July leading index and August Kansas Fed manufacturing survey is released in the US. We’ll also get the ECB minutes and of course the Fed’s Jackson Hole symposium kicks off tonight but with Powell not due to speak until tomorrow.