One day after a solid start to the new quarter, and after the US took a day off for Independence Day, sentiment has reversed for the worse and US equity futures and European stocks followed Asian shares lower, while bonds declined after the latest China services PMI print from China came well below expectations (53.9 VS 56.2 expected) and raised fresh concerns about the outlook for the global economy. At 7:45am ET, S&P 500 and Nasdaq 100 futures both fell more than 0.5%, indicating US stocks will open lower when trading resumes after the Independence Day holiday. The yield on 2Y Treasuries drifted about five basis points lower to 4.89%. The China-driven weakness was broad based with Japan's NKY down -40bps, China's Shcomp sliding -60bps and the HSI -1.5%. The Stoxx Europe 600 Index slid about 0.6% after soft euro-zone May PPI data, with miners leading the retreat on concern about waning minerals demand from China. Most commodities were lower with copper -70bps, oil -50bps and iron ore -40bps. The Bloomberg dollar index is higher, gold is climbing, and oil is also edging higher.
In premarket trading, United Parcel Service fell as employees moved closer to a strike over pay. Monster Beverage gained more than 2% ahead of its earnings report on Thursday. Here are some other notable premarket movers:
Risk sentiment was on the back foot from the outset in Europe after Chinese service PMI missed expectations...
... and stocks extended declines after the euro area print for June was revised lower, and the Composite PMI print dipped back into contraction (we already knew the Eurozone is in technical recession, but this is just another confirmation that the ECB keeps hiking into a recession).
The latest indication of slowing economic growth around the globe - in fact, everywhere except Biden's seasonally-adjusted US - is sapping demand for equities after a stellar rally in the first half, driven mostly by mega-cap tech stocks. Major central banks including the Federal Reserve and European Central Bank are still in tightening mode, clamping the brakes on economic growth.
“It’s too early to say how deep the recession that is to come will be, but clearly a slowdown is coming,” Fabiana Fedeli, chief investment officer for equities and multi assets at M&G Plc, said on Bloomberg TV. “It’s too early to throw in the towel on risk assets whether in equities or credit. But at the same time you have to stay pretty high on the quality pole.”
With more interest-rate hikes anticipated from the Fed and the ECB in July, an aggregate gauge of borrowing costs calculated by Bloomberg Economics now shows a peak of 6.25% this quarter, up from 6% foreseen three months ago.
Later Wednesday, traders will monitoring the minutes of the Fed’s last policy meeting, which left Wall Street perplexed as officials paused their rate-hike cycle after 10 consecutive moves, but forecast two additional increases this year.
European stocks were also in the red as investors fret over the prospects for global growth. The Stoxx Europe 600 Index slid about 0.6%, on course for its largest decline in two weeks with miners leading the retreat on concern about waning minerals demand from China. The gauge extended its decline after the Eurozone composite purchasing managers’ index was revised lower, offset by continued declines in Europe's PPI print. European bonds gained, with Germany’s 10-year yield dipping four basis points to 2.41%. Casino Guichard-Perrachon SA plunged as much as 42% as investors size up competing offers to rescue the troubled French grocer. Bunds rose to new highs on the aforementioned PMI data while falling consumer inflation expectations also played their part. German 10-year yields are down 5bps. Here are some of the most notable European movers this morning:
Earlier in the session Asian stocks were briadly lower following the US holiday and as participants digested the latest huge miss in the Chinese Caixin Services PMI data, while geopolitical concerns also lingered after Ukraine and Russia accused each other of planning an overnight attack on the Zaporizhzhia nuclear plant.
The Hang Seng and Shanghai Comp were subdued by ongoing trade-related frictions with warnings of more retaliatory measures against Western tech export controls, while initial losses in Chinese equities deepened and the offshore yuan reversed an advance after the Caixin China services purchasing managers’ index was weaker than expected and printed its slowest pace of increase since January. The yuan’s drop was also notable because it came despite the central bank earlier maintaining its support for the currency in its daily fix. “This brings focus back on slowing growth momentum and the recent step-up in geopolitical angst,” Charu Chanana, market strategist at Saxo Capital Markets, said of the China services data.
The fading optimism over the outlook for China has also driven investors to lower their expectations for gains in Asian equities this year. A survey of 17 strategists and fund managers by Bloomberg News indicates MSCI Inc.’s Asia-Pacific Index may only rise about 5% by year end from Tuesday’s closing level.
Japan's Nikkei 225 slumped at the open but recouped some of the losses after it held above the 33,000 level. Australia's ASX 200 was marginally lower amid underperformance in the largest-weighted financials sector and after mostly softer data releases from Australia.
In FX, the Bloomberg Dollar Spot Index is up 0.1%. The Canadian dollar is the weakest of the G10 currencies, falling 0.3% versus the greenback. The USD/JPY consolidates near mid 144-145 while EUR/USD is steady to hold under 1.09. GBP/USD drifts lower and nears 1.27 as AUD/USD weakens to remain under 0.67.
In rates, cash treasuries reopened after the July 4 holiday richer across the front-end of the curve as 2-year yields gap lower, lessening inversion of 2s10s spread back to around 106bp from as much as 110.8bp Monday, a new cycle wide. Front-end yields are richer by ~3bp, steepening 2s10s spread by 2.5bp; 10-year little changed ~3.85% with bunds richer by 2bp in the sector. European bonds gained, with Germany’s 10-year yield dipping four basis points to 2.41 after an ECB survey shows consumer inflation expectations continued to decline in May. US economic data slate includes May factory orders (10am) and FOMC June 13-14 meeting minutes (2pm)
In commodities, Brent oil was steady after rallying on Tuesday on Saudi Arabian and Russian output cuts. Traders are waiting for potentially critical commentary from Saudi energy minister. Gold was little changed.
Looking at the day ahead, data releases include the global services and composite PMIs for June, Euro Area PPI for May, and the final reading of US factory orders for May. From central banks, we’ll get the Fed’s minutes from the June meeting and the ECB’s Consumer Expectations Survey. Speakers include the Fed’s Williams, as well as the ECB’s Nagel, Visco, Villeroy and De Cos.
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A more detailed look at global markets courtesy of Newsquawk
APAC stocks were mostly lower following the holiday lull stateside and as participants digested the latest Chinese Caixin Services PMI data, while geopolitical concerns also lingered after Ukraine and Russia accused each other of planning an overnight attack on the Zaporizhzhia nuclear plant. ASX 200 was marginally lower amid underperformance in the largest-weighted financials sector and after mostly softer data releases from Australia. Nikkei 225 slumped at the open but recouped some of the losses after it held above the 33,000 level. Hang Seng and Shanghai Comp were subdued by ongoing trade-related frictions with warnings of more retaliatory measures against Western tech export controls, while the latest Chinese Caixin Services PMI missed forecasts and printed its slowest pace of increase since January.
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European bourses are in the red, following a subdued APAC handover given soft data and the region thereafter impaired by its own bleak Final PMIs; Euro Stoxx 50 -0.7%. Sectors are mainly in the red and continue to exhibit the defensive bias from the morning's cash open, though with Auto names outperforming after strong Volvo Cars numbers. Stateside, futures are similarly softer and have been moving in tandem with European trade ahead of their return from the market holiday and looking ahead to key FOMC minutes and data releases before hand; ES -0.5%.
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DB's Jim Reid concludes the overnight wrap
Don't tell my boss but I'm going to sneak out today for an hour or so to watch sports day at school. Maisie has missed the last 2 because of 14 months in a wheelchair and crutches for several months before that. She missed the previous one to that because of covid shutting it down. So I'm there to mop up my wife’s tears as Maisie does the sprint race.
To stop me from crying, please consider voting for myself, my team or anyone in the wider DB Research group in the Institutional Investor (II) Annual Fixed Income Survey that starts later today. We are very keen to do well, and a good showing will ensure we can continue to maintain and expand the products. People who have voted before will likely get an email later today saying that the survey is live. I will be blatantly asking for votes every day for the next 3 weeks of the survey so apologies in advance but to get a head start the categories you can vote for me are in this link here. If you value the research, this is the one way you can express that. Many thanks for your help.
Markets have unsurprisingly voted to do nothing much over the last 24 hours, with much lower volumes than usual thanks to the US Independence Day holiday. Indeed, even where markets were open, it was hard to generate much of a story, since Europe’s STOXX 600 (+0.07%) and yields on 10yr bunds (+1.8bps) barely moved in either direction. Overall, it’s fair to say it was one of the quietest days we’ve covered for some time, with most of the major asset classes moving sideways.
Activity is picking up a bit in Asia though with Chinese markets under pressure as another round of economic data indicated that the world’s second biggest economy continued to struggle in June (more on this below). As I check my screens, the Hang Seng (-1.22%) is the biggest underperformer across the region followed by the CSI (-0.52%), the Shanghai Composite (-0.47%), the Nikkei (-0.36%) and the KOSPI (-0.35%). US stock futures tied to the S&P 500 (-0.08%) and NASDAQ 100 (-0.15%) are slightly lower after being closed yesterday. Yields on 10yr USTs (-1.18bps) have moved lower, trading at 3.84% with the 2yr yield declining by -3.56bps to 4.90%, a slight steepening after the relentless flattening of late.
Coming back to China, the Caixin services PMI declined more than expected to 53.9 (consensus 56.2), the weakest since January, versus the prior month’s reading of 57.1. This will add to the pressure of more stimulus. The composite PMI declined from 55.6 to 52.5. Elsewhere, the final estimate of the Japan Jibun Bank services PMI came in at 54.0 in June, easing from the previous month’s record level of 55.9.
Data releases will now dominate over the next couple of days, with the jobs report on Friday, as well as tomorrow’s ISM services index and the weekly jobless claims. The remainder of the services (and composite) PMIs around the world today will also be important
Back to a sophorific European session yesterday and Real Estate (+2.66%) was one of the few bright spots in the STOXX 600, but some of the more cyclical sectors struggled, including industrials (-0.45%) and financials (-0.40%). Elsewhere, many of the individual country indices lost ground as well, including the FTSE 100 (-0.10%), the CAC 40 (-0.23%) and the DAX (-0.26%).
For bonds there was a slightly more interesting story, with yields rising before pulling back a bit in the European afternoon. By the end of the session, that meant yields on 10yr bunds (+1.8bps) and OATs (+2.3bps) had both risen, whilst BTPs (+6.1bps) saw a larger gain in yields that was in line with the broader risk-off tone. The main exception to this pattern came from the UK, where gilts rallied across the curve, with yields on 10yr gilts closing -2.4bps lower at 4.41%. That said, even as gilts rallied a bit, the recent selloff has continued to transmit to the real economy. For instance, data from Moneyfacts yesterday showed that the average 5yr fixed mortgage rate had now surpassed 6%, which is the first time that’s happened since very briefly in the aftermath of the mini-budget last year. Before that we’d have to go back to pre-GFC days.
When it came to commodities, a bit more was going on yesterday relative to the other asset classes. One example was oil, which posted decent gains after the previous day’s news that Saudi Arabia would extend its supply cut and Russia would also be reducing output. That meant Brent Crude oil prices (+2.14%) hit a 2-week high of $76.25/bbl by the close. Natural gas prices in Europe (+4.36%) were another that increased in light of ongoing supply issues. And for the first time since the SVB turmoil, we also saw gold (+0.20%) advance for a 4th day running.
There was very little data to speak of yesterday, although the German trade surplus for May came in at €14.4bn (vs. €17.3bn expected). That was driven by a rise in imports of +1.7% (vs. unch expected), whereas exports saw a modest fall of -0.1% (vs. +0.4% expected).
To the day ahead now, and data releases include the global services and composite PMIs for June, Euro Area PPI for May, and the final reading of US factory orders for May. From central banks, we’ll get the Fed’s minutes from the June meeting and the ECB’s Consumer Expectations Survey. Speakers include the Fed’s Williams, as well as the ECB’s Nagel, Visco, Villeroy and De Cos.