US Futures Storm Higher, Erasing All Post-Tariff Losses As Dollar Soars

After futures tumbled sharply lower when they re-opened for trading on Sunday night, following a weekend in which the US and China did in fact activate a fresh round of reciprocal tariffs contrary to the market's whisper expectations for a delay, stocks have staged another remarkable comeback with futures now virtually unchanged from their Friday close...

... as Europe's Stoxx 600 Index rose 0.7% to session highs as of noon London time, climbing to the highest level in a month and extending its winning streak to a third session, as health care and utility stocks are the best sector performers, each rising 1.2%, closely followed by telecoms and financial services.

Earlier in the session, Asian stocks were mixed, with Singapore and the Philippines leading declines. The Topix slipped 0.4%, dragged down by Daiichi Sankyo and SoftBank Group. The Bank of Japan cut bond purchases for a second time in two days in a bid to stop benchmark yields from falling to record lows. Meanwhile, despite the escalation in trade war, the Shanghai Composite Index advanced 1.3%, with Ping An Insurance Group and China Shenhua Energy among the biggest boosts. The catalyst for the Chinese rebound: the Chinese government said it will maintain “reasonably ample” liquidity and “reasonable growth” in aggregate financing, while the latest monthly Caixin PMI gave investors hope that China's manufacturing sector may finally be bottoming after it printed at 50.4, its first expansion in two months, and beating expectations of a 49.8 print, even as the official NBS Mfg PMI dropped again, earlier in the weekend, sliding to 49.5, and just barely missing expectations. Needless to say, the algos focused on the good news, and ignored the bad.

As Goldman wrote, "in contrast to the fall in NBS manufacturing PMI in August, the Caixin manufcturing PMI implied stronger growth momentum in the manufacturing sector" even though according to its analysis, the "NBS manufacturing PMI in general has a higher correlation with industrial production growth, compared with the Caixin manufacturing PMI (although both PMIs' correlation with industrial production appeared to have weakened in recent months). The Caixin manufacturing PMI appeared to be more closely correlated with concurrent export growth." As a result, "the better August reading could also reflect support from trade front-loading ahead of higher tariffs on exports to the US", according to Goldman. Not only that, but the production shutdown ahead of October 1st National day might have also front-loaded production activities to August. If so, don't tell that to the algos, who used the Caixin print as the basis for what has now turned into a worldwide rally, even though for yet another day the yuan refused to rebound and the jaws between the Chinese currency and equity futures have continued to grow.

Naturally, with US markets closed for labor day holiday, volumes are dismal, and US equity markets and cash Treasuries won’t trade even though treasury futures edged lower while the Bloomberg dollar rose for the sixth consecutive day, hitting a fresh two year high (as a reminder, the broad trade-weighted dollar remains at all time highs).

“Broad market activity and trading volume are likely to be somewhat muted today,” Simon Ballard, a macro strategist at First Abu Dhabi Bank, wrote in a note. While it should mean a quiet start to the week, “the net cautious tone seems set to dominate investor sentiment,” he said.

In the U.K., the pound fell and gilts rose a day before Parliament re-convenes in a potential showdown over a possible no-deal Brexit, while a barometer of the country’s manufacturing dipped to its lowest level in seven years.

As we enter the historically most volatile month of the year, investors are still reeling from the August rollercoaster that saw a collapse in Treasury yields and declines for equities globally which however were largely recovered on hope that a trade deal will emerge (narrator: it won't).

Meanwhile, in commodities, crude oil struggled for traction after its first monthly drop since May amid fears that the fading global economic growth will hurt fuel demand. Also keeping a lid on sentiment are demonstrations in Hong Kong, where a senior official said he won’t rule out imposing an emergency law in a bid to wrestle back control after protesters caused major disruptions to the city’s international airport over the weekend.

Elsewhere, America’s southeastern coast braced for Hurricane Dorian, tied as the most powerful storm to hit land anywhere in the Atlantic, after it inflicted colossal damage to the Bahamas. Also notably over the weekend, Argentina’s troubled government imposed currency controls to halt the flight of dollars out of the country as it teeters on the brink of default. Turkey’s lira rose after data showed the economy shrank less than expected in the second quarter.

Top Overnight Headlines from Bloomberg

  • Trump administration slapped tariffs on $110 billion of Chinese imports Sunday, marking the latest escalation in a trade war. China’s retaliated with higher tariffs being rolled out in stages on a total of about $75 billion of U.S. goods
  • Argentina’s government imposed capital controls to halt a slump in FX reserves and the peso that has pushed the country to the brink of default
  • Boris Johnson’s summer is over. The week that could determine how long he remains prime minister -- and how or whether Britain leaves the European Union -- is about to begin
  • Bank of Japan cut bond purchases for a second time in two days as the benchmark yield hovers near record lows. The central bank offered to buy 140 billion yen of 10-to-25y securities, down from 160 billion yen at its prior operation
  • Italy’s premier-designate Giuseppe Conte said he plans to present a list of key ministers and a new government program to President Sergio Mattarella between Tuesday and Wednesday as he seeks to hold together a ruling coalition
  • Angela Merkel’s ruling coalition stemmed a surge by Germany’s far-right populists in two elections in the former communist east. The anti-immigration Alternative for Germany trailed the incumbent Social Democrats by 2 to 3 percentage points in the state of Brandenburg, according to TV projections
  • Riot police patrolled key subway stations on Monday morning ahead of a planned strike that threatens to disrupt transportation in Hong Kong after another weekend of chaos left travelers stranded at the airport

Asian equity markets traded mostly negatively after the latest round of tariffs in the US-China trade war took effect and as the region digested mixed Chinese PMI data. ASX 200 (-0.5%) and Nikkei 225 (-0.4%) were lower with early underperformance seen in Australia’s energy sector following the recent pullback for oil prices and with Telecoms weighed after Telstra reduced its FY EBITDA guidance, while the Japanese benchmark was also downbeat but off its lows as price action was determined by a choppy currency. Elsewhere, Hang Seng (-0.6%) and Shanghai Comp. (+1.1%) diverged with outperformance in the mainland despite the latest round of tariffs taking effect, as China’s state council pledged more support for the economy and Caixin Manufacturing PMI topped estimates with its first expansion in 3 months, to provide some much-needed reprieve after the miss on China’s Official Manufacturing PMI data over the weekend. Conversely, the Hang Seng lagged following further clashes between protesters and police over the weekend and as participants reacted to a slump in Retail Sales. Finally, 10yr JGBs declined despite the risk averse tone in Japan, with prices weakened after the BoJ lowered its purchase amounts of 10yr-25yr JGBs for today’s Rinban operation, while it also recently announced a reduction in its buying intentions in 5yr-10yr JGBs for the month.

Major European indices are firmer [Euro Stoxx 50 +0.4%], as markets initially struggled for clear direction, after the downbeat Asia-Pac session as the additional US levy on Chinese goods and China’s retaliatory tariffs came into effect alongside today’s US market holiday; before taking a positive line. Notably, the FTSE 100 (+1.5%) is outperforming its peers, as exporters benefit from the subdued Sterling due to the ongoing Brexit narrative over PM Johnson’s prorogation and the increasing likelihood of a no-deal outcome, whilst downbeat UK manufacturing PMI further weighed on the currency. Sectors opened the session all in the green but have since deteriorated somewhat to a mixed performance. In terms of individual movers, AstraZeneca (+3.3%) are topping the FTSE 100 after positive Phase III trial results; just below the Co. on the Stoxx 600 this morning is Adecco (+2.2%) after being upgraded to outperform from neutral at Credit Suisse. At the other end of the spectrum, Thyssenkrupp (-0.8%) shares are lower ahead of Wednesday’s DAX 30 reshuffle, during which the Co. are expected to be demoted from the index and German listed MTU Aero Engines (+2.1%) is seen as a strong contender for the empty spot.

In FX, sterling was already looking shaky in the run up to the UK manufacturing PMI amidst reports of RHS demand in Eur/Gbp for the 9.00 am fix (perhaps residual or belated month end orders), with Cable slipping towards and just through 1.2100 amidst heightened jitters ahead of tomorrow’s new and potentially truncated Parliament term. However, the Pound briefly regrouped even though the headline print was worse than forecast and sub-components were bleak before succumbing to more selling pressure as Tory rebels continued their condemnation of PM Johnson’s move to suspend the upcoming session in an attempt to head off a no deal Brexit motion. On that note, latest reports suggest that a cross-party group will launch a bill aimed at blocking no deal within hours, and Cable is hovering just above 1.2075 awaiting further developments/news, while Eur/Gbp is holding near the top of a circa 0.9025-85 range. From a chart perspective, 1.2065 is next on the downside for Cable (August 20 low) ahead of 1.2015 (2019 base) and hefty option/barrier interest at the 1.2000 strike

  • USD - The Dollar is firmer almost across the board, as the DXY inches a bit further above the 99.000 handle to a marginal new ytd peak (99.109) and closer to the next line of chart resistance (99.262) in wake of additional/higher US tariffs on around 1/3 of the remaining Usd300 bn Chinese goods and Usd75 bn US exports to China in return. However, the Greenback is also gaining at the expense of rival currencies that continue to weaken of their own accord, as noted above.
  • EUR/CHF/CAD/AUD/NZD/JPY - The single currency derived some indirect support via the aforementioned Sterling cross activity through the run of Eurozone manufacturing PMIs, but Eur/Usd has subsequently retreated from a circa 1.1000 recovery high to print a fresh, albeit slender, yearly low at 1.0958, not far from supposed expiries at 1.0950, but away from a hefty 1.8 bn rolling off at the big figure. Meanwhile, the Franc is closer to the base of a 0.9918-0.9890 band, but outperforming vs the Euro within 1.0866-99 parameters and the Loonie has lost impetus between 1.3310-1.3340 vs its US counterpart. Elsewhere, the Aussie is meandering from 0.6715 to 0.6735 on the back of mixed Chinese PMIs overnight and a shock drop in Q2 Australian business inventories vs the Kiwi that is just keeping its head above 0.6300 following improved NZ Q2 terms of trade that has nudged Anz/Nzd down towards 1.0650 from 1.0685. The Yen has drifted towards 106.40 from just over 106.00 at one stage with Japanese PM Abe due to announce a cabinet reshuffle next week and Q2 Capex a bit better than expected.
  • SEK/NOK - The Scandi Crowns have both been boosted by encouraging manufacturing PMIs, and especially from Norway where the headline rebounded above 50.0 again, with Eur/Sek eyeing 10.7500 and Eur/Nok sub-10.0000.
  • EM - The Turkish Lira has also rebounded from worst levels with the aid of a better manufacturing PMI, but also as Q2 GDP data revealed less contraction. Usd/Try has tested 5.8000 bids/support vs a high just a few pips shy of 5.8400, but Usd/Ars may see more upside if capital controls fail to stop the rot.

In commodities, WTI and Brent futures are slightly softer, with prices just above the 55/bbl and 59/bbl levels with little by way of specific catalysts thus far, although gains in the complex are somewhat capped by the latest imposition of US and China tariffs in which China slapped a 5% levy on US crude oil exports. Despite demand woes outweighing supply concerns, it is worth keeping an eye on Hurricane Dorian which, according to the NHC’s latest update, is drifting westward with life-threatening storm surges and dangerous hurricane-force winds expected along the Florida east coast through mid-week. As it stands, production in the Gulf of Mexico has not been affected. On the geopolitical front, UK is said to be considering sending drones to near the Gulf of Oman amid its crisis with Iran, which follows comments from the UK’s Royal Navy Captain who stated that its warship has faced 115 confrontations with the IRGC since the start of July. Elsewhere, gold prices are marginally firmer, in-spite of the weaker Buck, albeit the yellow metal remains above the USD 1500/oz handle. Copper prices are lacklustre today as trade woes weighed on the red metal with little impetus derived from mixed China PMIs. Meanwhile, China’s iron ore futures rose around 6% at a point to a two-week high with desks citing robust short-term demand with Beijing rolling out more support measures to the Chinese economy. Finally, nickel prices gained in excess of 8% after the Indonesian Finance Ministry said nickel ore export ban will take effect as of January 1st 2020 (as touted), and new mineral ore export ban is only to be implemented for all Nickel Ore grades.

US Event Calendar

  • Everything closed for Labor Day holiday.

DB's Jim Reid concludes the overnight wrap

Welcome to September, colder darker mornings and the start of the countdown towards Xmas. I hope such similar thoughts didn’t ruin your weekend. We got two sofas delivered for our new house on Saturday and I spent the weekend making last ditch sliding tackles to stop yogurt, milk, dirt, sweets and various other fluids/solids being smeared on it by the family. I’m not sure I’ll be able to keep up that sort of work rate over the life of the sofa.

If you’ve been long bonds over August you’ll be sitting pretty as we start September. As Craig has just showed in his monthly performance review, including a few more fixed income returns have been fairly spectacular with Bunds and Treasuries seeing their best month since June 2016 and November 2008, respectively. Most European 10yr yields hit record lows in the month as did 30yr Treasuries. Gold and Silver were the standouts though with equities down almost everywhere but with most markets actually recovering well after a very tough first 5 days of the month. See the full review (including YTD) from Craig here.

In time August might be remembered for the point where the 2s10s curve became inverted for the first time since May 2007. Regular readers will know our thoughts on this but it was interesting to see a report from our US economists last week that added to the debate. Last week saw the Conference Board consumer confidence survey and the University of Michigan consumer sentiment survey diverge to their widest point since 1969 with the former staying near its highest levels in decades, while the latter dropped to its lowest point since 2016. Our US economists’ report (available here) shows how this divergence is not atypical, is due to the exact survey specifications, and in fact it is a great recession indicator. The current spread between the two surveys is flashing a warning sign that recessionary odds are currently elevated, with around 30-40% risk of recession over the next 12 months. That’s pretty similar to the current signal from the yield curve, according to them. Given the 2s10s success in the past I would put the odds notably higher by H1 2021.

Current conditions are relatively decent in the US for now though and the highlight this week is probably payrolls on Friday. As for the global highlight, the final August manufacturing PMI revisions in Europe are due this morning with the services and composite readings on Wednesday. We’ve had the Asia numbers already, which we’ll come to shortly. We'll also get important survey data in the US with August ISM manufacturing and non-manufacturing prints due on Tuesday (delayed from today due to a US holiday) and Thursday, respectively. Look out for Fedspeak though ahead of their blackout period starting on Saturday with Powell speaking at an SNB event on Friday in Zurich just before the radio silence. Brexit will be squarely in the spotlight over the next few days as the UK Parliament briefly reconvenes tomorrow for only around a week after the summer break before being suspended early for conference season and only reconvening later than usual on October 14th. It’s likely that Parliament will try to pass anti no-deal legislation this week, the results of which will massively shape the next few months of political drama in the UK. It seems this is the immediate priority tactic for the anti Brexit forces at the moment over the alternative of a vote of no confidence. Finally on politics, Italy’s chances of a having new coalition Government will likely be known early this week as talks between S5M and the PD party reach their conclusions. On that, Italian press Corriere reported over the weekend that Italy’s premier designate Conte plans to present a list of key ministers and a new government program by tomorrow and Wednesday.

The new month saw the new US import tariffs on certain Chinese goods go into effect yesterday with the China retaliation also taking force. China’s Global Times called the new tariffs “a turning point in the trade war”; however, there isn’t much news beyond that, which brings us to the PMIs where in China over the weekend the official manufacturing reading dipped another 0.2pts to 49.5 (vs. 49.6 expected). However, there was better news with the Caixin manufacturing reading this morning, which improved 0.5pts to 50.4 (vs. 49.8 expected). Meanwhile, the official non-manufacturing reading rose 0.1pts to 53.8 (vs. 53.7 expected). So a mixed bag, the same of which can be said for most of the PMIs across Asia this morning although one bright spot for improvement was South Korea, which rose 1.7pts to 49.0, albeit still in negative territory. In fact, of the 9 released this morning in the manufacturing sector four remain in contractionary territory.

In terms of markets this morning the Shanghai Comp (+1.07%) and CSI 300 (+1.11%) have both made steady gains; however, other markets are more mixed including the Nikkei (-0.34%) and Kospi (+0.20%). US equity futures are also slightly lower – a reminder that US markets will be shut today though for the Labour Day holiday. Meanwhile in bonds, JGB yields are up around 1bp across the curve after the BoJ announced a further cut in purchases of bonds maturing in 10-25 years.

It will also be worth keeping an eye on Argentina this week after capital controls were put in place over the weekend to help them stem the large losses of reserves towards the end of last week after a more than 25% decline in the peso over the last month after primary elections showed that the relatively market friendly government has little chance of retaining power in full elections next month.

As for last week’s market action now, equities ended up rallying on perceived positive trade news despite further flattening in the yield curve and continued uncertainties over global growth. The S&P 500 ended +2.79% higher (+0.06% on Friday), with the DOW and NASDAQ gaining similar amounts, up +3.02% and +2.72% (+0.16% and -0.13% Friday), respectively. In Europe, the STOXX 600 advanced +2.19% (+0.73% Friday), with the FTSE MIB (+4.15%) the biggest outperformer (-0.35% Friday) as the PD and Five Star moved toward making a new coalition government without requiring new elections. The UK’s FTSE 100 underperformed a bit, gaining +1.58% (+0.32% Friday), despite the pound’s -0.90% depreciation (-0.21% Friday), as the Johnson government moved to prorogue parliament and potentially force through a hard Brexit.

In fixed income, the US 2y10y yield curve flattened further, falling as low as -6.6bps during trading on Wednesday before ultimately ending at -1.4bps (-1.4bps lower on the week and +1.6bps on Friday). The 10-year yield rallied -3.9bps (+0.2bps Friday), its fourth consecutive weekly decline. BTP yields fell to reach a new all-time low before ending at 0.998%, down -31.8bps (+1.4bps Friday) on the week. HY cash credit spreads narrowed -8bps and -18bps in the US and Europe (+1bps and -3bps Friday).