US equity futures and global markets are lower this morning with bond yields and the USD flat as collapsing German eco data and elevated oil prices reignited stagflation concerns across the euro area. As of 7:45am, emini S&P and Nasdaq 100 futures were down 0.2%. The Bloomberg Dollar Spot Index edged higher along with the Japanese yen, while oil-linked currencies retreated as Brent crude dipped from 2023 highs; commodities are weaker with a sell-off in energy and metals complexes. Treasury yields were little changed in a lackluster day for bond markets. Gold fell for a second day, while Bitcoin climbed for the first time in three days.
In premarket trading, tech is underperforming; sentiment was dented by headlines that China’s government workers were told not to use iPhones. As a result, the world's biggest company, AAPL, is trading -0.7% pre-mkt with MegaCap names all in the red; meanwhile keep an eye on the Huawei chip story. Yesterday’s Fedspeak was dovish, but we have three speakers today and four speakers tomorrow, so let’s see if the tone sharpens. Corporate mentions of ‘recession’ have fallen ~75% from their 22 Q2 peak and are now below their 5-yr average (62 vs. 82). Today’s macro data focus includes ISM Services, Beige Book, and Mortgage Applications (they dropped -2.9% after rising 2.3% last week).
The Stoxx 600 index retreated 0.7%, falling for the sixth straight session (see below) after German factory orders plummeted in July, showing that the woes of Europe’s biggest economy are continuing into the third quarter.
It also bears asking: with China and Europe imploding, just how much longer can the lie of US "economic growth" continue? Fears of stumbling growth and sticky inflation were also fanned by Brent crude prices holding just below $90 per barrel after the largest OPEC+ oil producers extended their supply cuts to year-end.
The collapsing economy in Europe and the ongoing economic collapse in China put pressure on equity futures in the US, if only for the moment, where signs are mounting that the Federal Reserve won’t cut interest rates any time soon. Because, you see, under the economic miracle of Bidenomics, the US can decouple from the rest of the world.
“The euro zone and UK are dabbling with recession, which markets had forgotten about three months ago,” said Rupert Thompson, chief economist at Kingswood Holdings. “It’s clear growth will head in the wrong direction in the coming months, which means equity markets will remain under downward pressure.”
Meanwhile, the soaring dollar forced Japan, whose yen may as well be renamed to lira, issued its strongest warning in weeks against rapid declines in the yen on Wednesday, with its top currency official saying the nation is ready to take action amid speculative moves in the market. The yen plumbed a 10-month low against the greenback. Shortly after, China’s central bank offered the most forceful guidance on record with its daily reference rate for the yuan, as the managed currency weakened toward a level unseen since 2007.
Going back to equity markets, European bourses are lower in a rather muted session, with the Stoxx 50 down 0.6% as stocks react to recent cross-asset moves. Banks are the main underperformers while other cyclical sectors such as miners and energy give up early strength. Real estate continues to trade well as the peak rate narrative in Europe continues to get traction (despite a slew of European Central Bank officials' warning: don't assume no action at next week's meeting). The retrace higher in yields continues to get attention given the implications for equity valuations along with USD strength while the gap higher in oil risks fuelling a resurgence in global inflation. The UBS desk has been 60:40 better to buy on hedge fund demand in energy and semis while it has been a better seller of staples and telcos. It has also been active two-way in software with long-only buying and hedge-fund selling. Telcos are in focus following news of a stake build in Spain Telefonica. Here are the notable European movers:
Earlier in the session, Asian stocks were mixed as losses in Chinese equities amid caution on the impact of government stimulus countered gains in Japan on a forex boost. The MSCI Asia Pacific Index fluctuated in a narrow range, with Tencent and Samsung among the biggest drags while Toyota and Sony provided support. Hong Kong and mainland China indexes were among the region’s worst performers as investors continued to monitor Beijing’s measures to stem the economic slide. That said, Chinese property developers notched dramatic gains on speculation that further stimulus is forthcoming.
In FX, the US economy’s perplexing resilience has boosted the dollar, with conviction growing that the European Central Bank will hold off raising interest rates at its meeting next week. The Bloomberg Dollar Spot Index rises 0.1%, adding to Wednesday’s gain, and near a 5-1/2-month high against a basket of developed-market currencies after a run of seven weekly gains. The yen is off its best levels, having earlier benefited from some modest jawboning by the Japanese government. The euro got a brief boost from comments by ECB rate-setter Klaas Knot, who said markets may be underestimating the chances of a September interest-rate hike. “Our long-term view is that the dollar is overvalued, but for now cyclical pressures are in the other direction, so the pressure is for the dollar to strengthen,” said Thompson, who expects the ECB to hold rates steady next week.
In rates, treasuries held small gains as the US trading day begins, trimming yields from the highest levels in a week reached amid Tuesday’s corporate new-issue explosion and crude oil price jumping to YTD highs. Yields are lower across the curve by 1bp-2bp, 10-year around 4.25%, down from session high near 4.27%. Yields climbed 8bp-9bp Tuesday as 20 corporate borrowers raised a combined $36.2b, the most in a day since April 2020, reinforcing the reputation of the first trading day after US Labor Day as magnet for IG issuers; Nippon Life Insurance Co. has announced a benchmark-sized offering for Wednesday’s session. Focal points of US session include ISM services gauge at 10am New York time and comments by Boston Fed’s Collins at 8:30am.
In commodities, crude futures decline, with WTI falling 0.7% to trade near $86.10. Spot gold falls 0.1%. Goldman Sachs warned of upside risks to its end-year Brent target of $86 per barrel and UBS Global Wealth Management forecast Brent and US WTI benchmark to end the year at $95 and $91 per barrel, respectively.
Looking to the day ahead now, and data releases include German factory orders for July, Euro Area retail sales for July, and the August construction PMIs from Germany and the UK. Over in the US, we’ll also get the ISM services index for August, the final services and composite PMIs for August, and the July trade balance. From central banks, the Bank of Canada will announce their latest policy decision, the Federal Reserve will release their Beige Book, and we’ll hear remarks from BoE Governor Bailey and the Fed’s Collins and Logan.
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A more detailed look at global markets courtesy of Newsquawk
APAC stocks traded mostly in the red following the subdued handover from Wall Street where sentiment was clouded by the higher yield environment, a stronger dollar and rising oil prices. ASX 200 was dragged lower by tech and with most sectors pressured aside from energy which benefitted from the higher oil prices, while better-than-expected GDP data for Australia failed to inspire a turnaround. Nikkei 225 bucked the trend after it reclaimed the 33,000 status and with tailwinds from a weaker currency. Hang Seng and Shanghai Comp suffered from tech weakness but losses stemmed as developers surged on hopes of further support measures and with Sunac up by over 60% after its return to the Stock Connect; additionally, further support came via China's Premier Li and reports of a Hong Kong Financial task force meeting.
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European bourses are in the red, Euro Stoxx 50 -0.5%, in a similar fashion to the subdued APAC handover though performance for both regions lifted off lows towards the China close. Pressure in Europe also emanated from soft German data, though this comes with mitigating factors, and hawkish commentary from ECB's Knot. Sectors are similarly lower aside from Telecom, where support stems from reports that Saudi's STC has amassed a near-10% stake in Telefonica. Stateside, futures are also under pressure, ES -0.3%, but to a slightly lesser extent than the above action as the region is more tentative ahead of key US data and Central Bank speak. Apple (AAPL) iPhone and other foreign-branded devices have been banned in China for use by government officials at work, according to WSJ sources.
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DB's Jim Reid concludes the overnight wrap
There has been little back-to-school optimism in markets over the last 24 hours, with a decent selloff for equities and bonds as the US returned from holiday. There were several factors driving the moves, but a highlight was another rise in oil prices that saw Brent crude (+1.17%) surpass the $90/bbl mark for the first time since November. That followed an announcement from Saudi Arabia that they’d be extending their unilateral production cut of 1 million barrels per day until December, as well as one from Russia that they’d be extending their own cutback of 300k barrels per day over the same period. Russia’s move was in line with earlier comments, and actually a partial reversal of the 500k cut seen in August, but the length of the extension by Saudi Arabia was a surprise, as during the summer it had extended its production cut for one month at a time. So this added to the tight oil supply outlook (though oil prices did reverse by 1% from their intra-day peak as Europe closed).
This run-up in oil prices continues a trend that’s been going since the end of June, back when Brent was still only at $72/bbl. At the lows in June, Oil was c.-45% YoY. Now it’s nearly flat, down about -3% YoY as I type. The move has already had a clear impact on gasoline/petrol prices, and is expected to lead to some hot CPI reports in August, so the risk is that this further run-up will only add to those pressures in the September/October numbers. This could pose a tricky dilemma at a time when several growth indicators are already turning lower, particularly in Europe, since central bankers will have to decide whether to focus on above-target inflation, or whether they should ease up on rate hikes given the downturn in growth. It’s true that this won’t directly show up in core inflation since it's energy, but the risk is you ultimately get second-round effects in other categories. In addition, since central banks’ targets are still measured in headline terms, it’s going to be harder for them to pivot in a dovish direction the longer inflation stays above target.
Another factor that has likely added to the recent bond sell off has been the anticipation of unusually high corporate bond issuance, with over $36bn of debt coming to market in the US as it returned from the Labor Day weekend. The $120bn of dollar IG issuance expected this month is just a shade over the median September issuance in recent years, but we've gotten off to a flyer with perhaps some strong front-loading given corporate blackouts and the FOMC meeting later in the month. The pressure on US Treasury yields then comes as investors hedge the interest rate risk.
Coupled with the negative news on inflation, this drove a sell off across the curve. 10yr Treasury yields were up +8.3bps by the close to 4.26%, which builds on their +7.1bps move on Friday after the jobs report. This is the largest 2-session increase since early July. In the meantime, real yields were back near their highs for this cycle, with the 10yr real yield up +3.9bps to 1.96%, which is just shy of its post-GFC closing high of 1.98% on August 21. And with real yields climbing further, that helped the US Dollar Index (+0.55%) to close at its highest level since March, at the time of SVB’s collapse. As we'll see in the Asia section below we are seeing the FX intervention noise increase again.
Over in Europe it was much the same story, with yields on 10yr bunds (+3.3bps), OATs (+3.8bps) and BTPs (+5.1bps) all rising on the day. As well as the oil news, in Europe we also had the ECB’s latest Consumer Expectations Survey for July. That showed 3yr median inflation expectations ticking up a tenth to 2.4%, whilst 1yr expectations remained at 3.4%. So still above the ECB’s 2% target, and a change from the declining expectations that we saw in June.
In several respects though, the bigger story in Europe came from the final PMIs yesterday, which showed an even weaker picture than the flash readings. For instance, the final composite PMI for the entire Euro Area came in at 46.7 (vs. flash 47.0), and the services PMI came in at 47.9 (vs. flash 48.3). So that’s more evidence for increasingly weak growth in Europe ahead of the ECB’s decision next week, and will only add to the fears of stagflation.
For equities, it was difficult to advance against this backdrop, and the S&P 500 (-0.42%) saw a moderate decline. This was a broad-based reversal, with 83% of the index down on the day. The S&P 500 equal weight index was -1.2%. The only real exceptions were energy stocks (+0.49%) and technology (+0.39%). Indeed, tech mega caps had a good day, with the FANG+ index up +1.10%. By contrast, small-cap stocks suffered, with the Russell 2000 (-2.10%) experiencing its worst daily performance in 4 months. Notably, the S&P 1500 homebuilding index, which had been up nearly 50% year-to-date, saw its worst day since October 2022 (-5.49%), partially on sensitivity to higher real rates. Meanwhile in Europe, the STOXX 600 (-0.23%) lost ground for a 5th day running, continuing its series of small losses.
Asian equity markets are broadly trading lower this morning but with no incremental sell-off versus the US close. As I glance through my screens, Chinese equities are the biggest underperformers with the Hang Seng (-0.82%) leading losses followed by the CSI (-0.71%) and the Shanghai Composite (-0.42%). Elsewhere, the KOSPI (-0.64%) is also slipping while the Nikkei (+0.68%) is vastly outperforming its regional peers, rising for the eighth consecutive day. S&P 500 (-0.12%) and NASDAQ 100 (-0.20%) futures are moving a little bit lower.
Early morning data showed that Australia’s economic growth slowed at an annual pace in the June quarter (+2.1%) compared to an upwardly revised +2.4% annual rate in the previous quarter (v/s +1.8% expected) as the impact of rising interest rates and a disappointing post-Covid recovery in China is taking its toll. On a quarterly basis, the Q2 GDP expanded +0.4%, matching market expectations and against a revised +0.4% in the previous three months.
In FX, the Japanese yen (+0.12%) slightly strengthened against the dollar to trade at 147.55 albeit still trading near a fresh 10-month low even after Japan issued its strongest warning over sharp currency moves. Top currency diplomat Masato Kanda stated that the government will monitor foreign exchange moves and will consider timely action if speculative moves persist. The Yuan fell to 10-month lows even with a strong fix by the authorities. Local bank selling of dollars after the lows has moved it back to -0.1% on the day.
There wasn’t much in the way of other data yesterday. We did get the Euro Area PPI reading for July, which showed producer prices were down -7.6% over the year to July as expected. That’s the biggest annual decline since July 2009 after the GFC. Otherwise, US factory orders fell by -2.1% in July (vs. -2.5% expected).
To the day ahead now, and data releases include German factory orders for July, Euro Area retail sales for July, and the August construction PMIs from Germany and the UK. Over in the US, we’ll also get the ISM services index for August, the final services and composite PMIs for August, and the July trade balance. From central banks, the Bank of Canada will announce their latest policy decision, the Federal Reserve will release their Beige Book, and we’ll hear remarks from BoE Governor Bailey and the Fed’s Collins and Logan.