With the US taking the day off for Independent Day holiday, US futures and European bourses have posted modest gains amid muted volumes even as Chinese stocks resumed selling, dragging most Asian markets lower even as the Yuan staged a remarkable comeback rising 1,200 pips in 48 hours after the PBOC issued a “red line” on further devaluation.
Tech names were the biggest losers in Europe’s Stoxx 600 Index, amid spillover fears following yesterday’s news that a Chinese court temporarily banned sales by chip giant Micron Technology. This weakness, however, was offset by gains in telecom shares which has led to choppy and mixed performance in Europe, amid volumes over a third below the 30DMA.
Still, tech shares are off the lows, perhaps eyeing the latest development in the trade war spat which came after the Micron news, when the US allowed ZTE to resume some business activities temporarily, which traders eyes as a potential catalyst to easing of tensions, and has helped Nasdaq 100 futures rise 21 points on Wednesday morning.
With the US closed today, all eyes were on China and how traders would respond to the PBOC’s Tuesday intervention to halt the rout in the Yuan. Here, despite a weaker fixing by the PBOC, the Yuan surged, with the offshore CNH spiking as high as 6.6135 against the dollar, after sliding to just shy of 6.74 the day before, a stunning 1,200+ pip reversal. Nonetheless, the USDCNH was trading some 200 pips off the lows as doubt snuck in that despite the PBOC’s insistence, the devaluation of the Yuan – whether with or without the PBOC’s intervention – is far from over.
This was also evident in the action of the Shanghai Composite, which after staging a sharp rebound on Tuesday during the violent yuan reversal, resumed its selloff deeper into bear market territory, and ignoring a better than expected print in the China Caixin services PMI (53.9 vs 52.7 est), it closed lower by 1% with Chinese stocks dropping to their lowest since March 2016 as trade tension with the U.S. continued to weigh while the PBOC’s latest reverse repo net drain of 80bn Yuan did not help. The Shenzhen Composite slumped 2% as traders took profits after yesterday’s brief rebound.
As Bloomberg notes, “while the People’s Bank of China yesterday gave assurances that the yuan won’t be weaponized, governmental trade restrictions and market intervention remain key themes.” Case in point is Tuesday’s announcement that chipmaker Micron has been temporarily barred from selling in China, a move many say is in response to Trump’s decision to bar China Mobile from accessing the US market. Meanwhile, the broader trade war comes into play on Friday when tariffs on goods flowing the other way come into effect.
Elsewhere in Asia, spooked by growing trade war rumbling, markets slumped toward a 9 month low, with the Nikkei down 0.3%, Sydney’s ASX 200 index losing 0.43%; the Hang Seng down -1.06%, and the Kospi lower by 0.3%.
In FX, the USD retraced an early overnight Asian weakness against its G-10 peers, led by bounce off session lows in USDCNH and spiking higher around the time of the European open. The yen nudged higher and the euro slipped, while the pound fluctuated. The rebound in the yuan set emerging market currencies on course for the first back-to-back gains in a month, even as the MSCI Emerging Market Index of stocks headed for a third consecutive decline.
Treasury futures marginally weaker as U.S. cash markets remain closed for holiday. WTI crude climbs near $74.60; Dalian iron ore 0.3% firmer.
Commodities were mixed with WTI (-0.4%) losing the USD 74/bbl handle in recent trade. Brent initially edged higher amid looming threats of supply disruptions (with Iranian and Venezuelan sanctions as well as Libya’s 850K stunt in production) on traders’ minds, as well as last night’s APIs print which showed a larger than expected inventory drop of 4.5mln barrels. There has been reports that US sour crude sellers have cut offers for Asian buyers as over concerns of a potential fall in demand after China threatened to impose tariffs on US oil.
On the flip side, gold rebounds to one-week highs of USD 1261.10/oz, accelerated by the recovery in the Chinese yuan from 11-month lows. Elsewhere London copper climbed almost 1% as the red metal recovered from 9-month lows amid the second largest Chilean copper mine potentially facing a 24-hour stoppage within two weeks due to a strike.
With U.S. markets shuttered for Independence Day, the focus is shifting to a busy end to the week, when minutes from the last Federal Reserve meeting and jobs numbers are due.
Top Overnight News
- PBOC is comfortable with a weakening yuan and would only intervene to prevent a rapid or destabilizing selloff; some yuan depreciation is okay but would not like 6.90 level breached against USD, according to people familiar: Reuters
- ECB Chief Economist Peter Praet sees interest rates making a comeback in the institution’s toolkit after more recent monetary policy activism leaned on bond purchases
- Nomura is cutting at least 50 positions in London, including some of its most senior traders, people familiar with the Japanese bank’s plans said
- U.K. Serious Fraud Office has dropped a criminal investigation into Lloyds Banking Group and its former traders over Libor rigging, according to a newspaper report
- Rising money-market rates have forced the Fed to take steps to maintain control over its key policy benchmark. With the bill issuance rising and the Fed unwinding its balance sheet, the front-end is poised to take center stage
- European Jun. Service PMIs: Spain 55.4 vs 56.2 est; Italy 54.3 vs 53.3 est; France 55.9 vs 56.4 est; Germany 54.5 vs 53.9 est; U.K. 55.1 vs 54.0 est.
- Trade: Chinese reciprocal tariffs on $34b worth of U.S. goods will take effect from the beginning of the day on July 6 Beijing time, according to people familiar
- FT: EU considering talks on a tariff-cutting deal between world’s largest car exporters amid worries of an all-out trade war, according to people familiar
- China Caixin services PMI 53.9 vs 52.7 est, composite PMI 53.0 vs 52.3
- Villeroy says ECB still sees robust economic growth; Praet sees interest rates making a comeback as policy tool
- Reserve- ratio cut and MLF rollovers not policy loosening: PBOC official
- Harada says more easing may be needed if inflation loses momentum
Asia stocks traded lower following a subdued lead from the holiday-shortened US session, where all majors finished in the red and tech underperformed as Micron shares tumbled almost 7% after losing a patent suit in China, which in turn weighed on other chipmakers. As such, ASX 200 (-0.5%) and Nikkei 225 (-0.4%) were negative with Industrials and Financials the laggards in Australia, while a firmer currency weighed on Japanese exporter names including index heavyweight Fast Retailing which had also reported a decline in same-store sales. Elsewhere, Hang Seng (-1.1%) and Shanghai Comp. (-0.7%) conformed to the downbeat tone following another consecutive net liquidity drain and although Chinese Caixin Services and Composite PMIs were more encouraging than the recent misses in the factory gauges, the support from the data was only brief.
European stocks trade mixed (Eurostoxx 50 +0.1%) with IT names taking a hit after Micron shares tumbled almost 7% after losing a patent suit in China, which in turn weighed on other Asian and European chipmakers. Microfocus (-1.9%), Infineon (-1.5%) and STMicroelectronics (-2.6%) are seen at the foot of their respective bourses. European auto names are in the green after reports the EU in considering talks with the leading global auto exporters in efforts to avoid a full-blown trade war. In stocks specifics, Altice (-6.1%) is the worst performer in the Stoxx 600 amid reports the company does not intend to sell their French telecom component SFR.
In FX, there was Another broad downturn in the Dollar after reports of further sales in China to prop up the yuan, although the PBoC will be less aggressive in terms of intervention than it was in 2015, according to sources, and with leverage names said to be net sellers of the Greenback over July 4. However, the index has bounced off overnight lows below 94.500 in holiday-thinned trading conditions that are exacerbating price moves. NZD/JPY – Early outperformers, with the Kiwi holding the bulk of its recovery gains vs the Usd and 0.6750+ status, while the Jpy has bounced off 111.00+ lows again as the headline pair seems to be forming multi-peak resistance alongside the EUR cross at 129.50. Moreover, Eur/Usd remains pivotal around its 30 DMA (1.1666) and faces mega option-related offers on top of psychological sellers at the 1.1700 level where a total of 4 bn expiries run off tomorrow and Friday. SEK/TRY – Starkly contrasting fortunes for the Krona and Lira, with the former getting another lift from hawkish Riksbank rhetoric and a Swedish services PMI beat to extend gains vs the Eur (sub-10.2500), but the latter weakening further vs the Usd (4.7000+) on political jitters over high inflation/CBRT tightening prospects.
Commodities traded mixed with WTI (-0.4%) losing the USD 74/bbl handle in recent trade. Brent (Unch) initially edged higher as the global benchmark continues to be buoyed by looming threats of supply disruptions (with Iranian and Venezuelan sanctions as well as Libya’s 850K stunt in production) on traders’ minds. Last night’s APIs printed a larger than expected inventory drop of 4.5mln barrels. Some traders mentioned the decline in inventories was largely due to the outage at Syncrude Canada’s 360K BPD oil facility. There has been reports that US sour crude sellers have cut offers for Asian buyers as over concerns of a potential fall in demand after China threatened to impose tariffs on US oil.
On the flip side, gold rebounds to one-week highs of USD 1261.10/oz, accelerated by the recovery in the Chinese yuan from 11-month lows. Elsewhere London copper climbed almost 1% as the red metal recovered from 9-month lows amid the second largest Chilean copper mine potentially facing a 24-hour stoppage within two weeks due to a strike.
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