US equity futures are flat, alongside European and Asian stocks as global markets recovered some ground on Tuesday after oil prices stabilized and as trade war fears subsided with attention still squarely focused on Trump’s Putin summit, even as global tech stocks, Nasdaq futs and FAANGs – or is that FAAGs now – felt the pressure from yesterday’s NFLX earnings bomb. The dollar rebounded from overnight lows if still down for the 4th day ahead of a bevy of earnings and before Fed Chair Jerome Powell’s much-anticipated testimony to the U.S. Congress.
The MSCI’s world equity index was broadly unchanged, with energy companies in Europe and Asia recovering ground from early losses caused by the previous day’s turbulence in commodity markets. Brent crude initially fell for a second day after a 4% slump on Monday, as Libyan ports reopened and traders eyed potential supply increases by Russia and other producers, but they recovered to trade up 0.5%.
Europe’s Stoxx 600 Index was up 0.1% with miners outperforming while telecommunications and utility shares fell. In Europe, technology stocks fell 0.4%, tracking the decline in Nasdaq futures which were hit after Netflix reported a shocking miss and sharp drop in subscriber growth.
“It’s been a fairly sluggish and unexciting start to the week for markets. Whether things get more interesting or not probably depends on what Fed Chair Jerome Powell has to say when he testifies today in front of the Senate Banking Committee,” said DB’s Craig Nichol.
Earlier in Asia, the MSCI index of Asia-Pacific ex-Japan fell 0.4%, ending two days of gains amid concern over growth in China. Japanese stocks outperformed in Asia, helped by the yen which held close to its weakest level since January. The Shanghai Composite resumed its slide, and despite a last hour rescue attempt, ostensibly by the National Team, it still closed below 2,800 for the first time since July 11.
Overnight, China’s NBS reported 70-city housing price data which showed that average commercial home price appreciation was 0.8% in June, the fastest pace of appreciation since October 2016. Out of the 70 cities NBS monitors, more cities saw housing prices increase in June compared with May.
The barometer of Chinese risk sentiment, the Yuan, initially rose despite the PBOC fixing the currency lower by 0.09% to 6.6821, the lowest in 11 months, and below the consensus estimate, however it since gave up much of the gains and tracking the late session dollar strength, slid back to 6.7. The yuan also declined against a trade-weighted basket of currencies to the lowest since Dec. 20 amid signs of a slowing economy.
The Bloomberg Dollar Spot Index fell for a fourth day, while European sovereign bonds were mixed. The DXY index index fell 0.1% against a basket of six major currencies to 94.409. The index shed 0.25 percent on Monday, nudging away from a two-week high of 95.241 on Friday. The pound advanced after the UK announced record-high employment, raising the odds of an August interest-rate hike by the Bank of England despite the escalating political crisis which threatens to sweep Theresa May from power. The New Zealand dollar jumped after the central bank’s core inflation measure accelerated at the fastest pace in seven years.
Emerging market stocks headed lower for a second day, while their currencies climbed.
Earnings and the Fed are the key remaining catalysts for market sentiment this week, a welcome respite from a background of deteriorating trade relations between the world’s biggest economic powers, at least until Trump’s next unexpected tweet. Company results have been mixed thus far, with Deutsche Bank and Bank of America beating estimates, counterbalancing misses by Netflix and Wells Fargo reading.
Today, Fed chair Jerome Powell will testify on the economy and monetary policy before the U.S. Senate Banking Committee and the House of Representatives Financial Services Committee on Wednesday. As outlined in the Fed’s monetary policy report released on Friday, he will reiterate the Fed’s stance towards gradual monetary policy tightening. Markets will focus on his views on recent trade tensions.
Some were hawkish: “In short, we expect the chairman to signal optimism on growth and inflation, consistent with continued ‘gradual’ tightening. He will undoubtedly acknowledge some downside risks associated with the administration’s trade warmongering, but he will likely try to avoid sounding critical of the administration” wrote Jim O’Sullivan, chief economist at High Frequency Economics.
Others expected a dovish surprise: “It’ll be a tricky day at the office for Fed Chair Powell, but given the external challenges facing the U.S. economy, it’s hard not to see a more cautious policy being struck today,” said Viraj Patel, currency strategist at ING Groep NV. “This will come as a dovish surprise to markets. A quiet day in Europe means EUR/USD’s focus will be on Powell, we look for 1.17 to hold…. Fed’s policy outlook currently does not take into account a possible trade war – and we don’t feel that this is a valid assumption. It may be remiss for Powell not to talk about the risks.”
Also on Tuesday, the Chinese government repeated it would hit its 2018 growth target, one day after it reported slower growth in the second quarter and the weakest expansion in factory activity in June in two years. UBS economists lowered their estimates for Chinese gross domestic product to take into account trade war escalation, warning clients the country’s currency is likely to weaken.
Trading in government bonds was subdued ahead of Powell’s testimony, with the 10Y yield unchanged from Monday at 2.8582%. In the Eurozone, government bond yields inched lower by 0.5 to 2 bps, with investors unwilling to push yields any higher before Powell testifies. German Bunds yielded 0.36%, while 10Y Gilts paid 1.283%, both effectively unchanged.
Commodities climbed after Monday falling to the lowest in 11 months as WTI tumbled to $68 a barrel but has since stabilized.
Scheduled earnings include J&J, UnitedHealth, Goldman Sachs; on the economic docket we have Industrial Production, while markets will focus on today’s T-Bill sales and Powell’s testimony.
Market Snapshot
- S&P 500 futures down 0.05% to 2,795.00
- STOXX Europe 600 up 0.02% to 384.14
- MXAP up 0.04% to 165.24
- MXAPJ down 0.4% to 535.60
- Nikkei up 0.4% to 22,697.36
- Topix up 0.9% to 1,745.05
- Hang Seng Index down 1.3% to 28,181.68
- Shanghai Composite down 0.6% to 2,798.13
- Sensex up 0.3% to 36,434.45
- Australia S&P/ASX 200 down 0.6% to 6,203.64
- Kospi down 0.2% to 2,297.92
- German 10Y yield fell 0.6 bps to 0.357%
- Euro up 0.2% to $1.1728
- Brent Futures up 0.4% to $72.12/bbl
- Italian 10Y yield rose 2.6 bps to 2.312%
- Spanish 10Y yield fell 1.7 bps to 1.262%
- Gold spot up 0.3% to $1,244.03
- U.S. Dollar Index down 0.1% to 94.41
Top Overnight News
- President Donald Trump’s equivocation on U.S. intelligence agencies during a news conference with Russian leader Vladimir Putin triggered the most intense backlash from Republicans of anything he’s done since winning election in 2016
- U.K. Prime Minister Theresa May’s Brexit strategy is in disarray after she infuriated pro-European Tories by bowing to pressure from their euroskeptic colleagues to re-write her plans. May’s majority was cut to just three votes after she adopted Brexiteer amendments to a key piece of customs legislation, and the proposals narrowly passed through the House of Commons late Monday
- U.K. employment rose to a record high in the three months through May after the economy created jobs at a stronger-than-expected pace
- The International Monetary Fund echoed warnings from investors including Larry Fink that trade friction could upend the market-friendly backdrop of low volatility in equities and rates, and crimp economic growth
- Oil futures in New York fell 4.2 percent on Monday following last Wednesday’s 5 percent tumble. The latest decline comes as Saudi Arabia is offering more crude cargoes to Asian customers, according to people familiar with the matter. Trump was said to be considering tapping the U.S.’s emergency oil supply to tame rising fuel prices
- Australia’s central bank expects a strengthening economy to gradually cut unemployment and lift inflation, reiterating there’s no strong case for a near-term policy move
Asia equity markets traded mostly lower after a lacklustre lead from US where energy underperformed amid a slump in crude and Nasdaq futures took a hit after-market on disappointing earnings and subscriber numbers from Netflix. ASX 200 (-0.5%) was negative with the index dragged by losses in energy names following a decline of around 4% in oil due to concerns a supply glut could return and as miners suffered from early weakness in Shanghai metal prices. Conversely, Nikkei 225 (+0.9%) bucked the trend on return from the extended weekend amid JPY weakness, while Shanghai Comp. (-1.0%) and Hang Seng (-1.0%) led the declines despite continued liquidity efforts by the PBoC, amid overhang from trade uncertainties and with energy names pressured. Finally, 10yr JGBs were uneventful with prices subdued amid a positive tone in Tokyo stocks but with downside also restricted amid the BoJ’s presence in the market concentrated in the short end and belly of the curve.
Top Asian News
- China Hedge Fund Doubles Down as Market Selloff Deepens Losses
- India Is Said to Ready PNB Capital Injection to Aid Bond Payment
- India’s Supreme Court Recommends Parliament Act on Mob Lynchings
- Philippine Vehicle Sales On Five-Month Losing Streak in June
European equities have pared back their modest opening losses to trade with little in the way of firm direction (Eurostoxx 50 -0.2%, DAX +0.1%) in what has been a relatively light session thus far in terms of newsflow. European markets have opted to shrug off the broadly softer Asia-Pac lead which saw sentiment hampered by yesterday’s declines in energy prices and slump in Nasdaq futures after Netflix subscriber growth figures fell short of street estimates. In terms of sectors, telecom names lag their peers after Orange (-1.4%) were cut to neutral from buy at Citi and Telenor (-1.8%) earnings fell short of market expectations. Material names are seen higher despite ongoing trade concerns as gains in Thyssenkrupp (+7.0%) lift the sector amid news that their Chairman is to leave the Co., following the recent resignation of their CEO.
Top European News
- Thyssenkrupp Inches Toward Breakup as Top Leadership Departs
- Italy’s Mediaset and F2i Offer to Buy Rest of Ei Towers
- Getinge Leaps; Increased Guidance Likely Conservative: Pareto
- TomTom Shares Catch Break After Apple Turmoil With Guidance Hike
In FX, the NZD Kiwi is now head and shoulders above the G10 pack on elevated NZ inflation data, but not the headline measures that were actually a tad softer than expected. Instead, it was the RBNZ’s preferred core or factor model measure that hit a 1.7% y/y 7 year peak that boosted the Nzd to 0.6840 vs the Usd and not far from 1.0860 vs the Aud, which lagged in wake of neutral RBA minutes flagging heightened global trade risks due to hyped up import tariff threats between the US and China amongst others. Aud/Usd remains above 0.7400 on a broadly soft Greenback, but is still wary about option expiries at the strike through this week, with 800 mn falling today. GBP – Resilient in wake of another Government semi U-turn on post-Brexit proposals, with Cable rotating around 1.3250 and Eur/Gbp circling 0.8850 following UK labour data showing underlying strength in the jobs market, albeit with wages still not reflecting high levels of employment perhaps. JPY – USDJPY meanders between 112.25-55 with heavy offers layered above 112.50 and markets looking towards US ip data for some further direction.
In commodities, WTI and Brent (+0.1% and +0.3% respectively) crude futures trade in close proximity to recent lows as market forces continue to act against the commodity. Prices have been unable to make any meaningful recovery from recent losses which have stemmed from ongoing concerns that a supply glut could return amid reports the US is open to considering waivers on Iran sanctions, Libyan refineries coming back online, as well as recent chatter that the US was mulling dipping into the strategic petroleum reserve. In terms of energy newsflow from today’s session, Libyan sources report that domestic oil output has risen to 650-700k bpd as ports continue to re-open. With this in mind, Goldman Sachs state that they still expect Brent crude to retest USD 80/bbl although it may occur in late 2018 rather than previous forecast of summer, citing US stance on oil. In metals markets, spot gold (+0.36%) has seen some modest support from the broadly softer USD. Elsewhere, copper is seen higher by around 1% in London trade as LME inventories remain tight, whilst steel prices were seen lower overnight as recent Chinese data poses some concern for the market. Finally, Indian government sources suggest that the nation is still in talks with the US regarding the rolling back of steel tariffs with India ready to impose safeguards if necessary.
Looking at the day ahead, as noted at the top the main highlight is likely to be Fed Chair Powell delivering his semi-annual testimony to the Senate Panel in the afternoon. We’ve got June industrial and manufacturing production prints along with the July NAHB housing market index release all scheduled. Q2 earnings for Goldman Sachs and Johnson & Johnson are also due. Meanwhile the BoE’s Carney, Bailey and Stheeman will speak on the Financial Stability Report while the Italian Finance Minister Tria will testify before Parliament.
US Event Calendar
- 9:15am: Industrial Production MoM, est. 0.5%, prior -0.1%; Manufacturing Production, est. 0.7%, prior -0.7%
- 10am: NAHB Housing Market Index, est. 68, prior 68
- 10am: Powell to Deliver Semi-Annual Testimony Before Senate Panel
- 4pm: Total Net TIC Flows, prior $138.7b; Net Long-term TIC Flows, prior $93.9b
DB’s Craig Nicol concludes the overnight wrap
Blame it on the World Cup hangover or more likely the dog days of summer, but it’s been a fairly sluggish and unexciting start to the week for markets. Whether things get more interesting or not probably depends on what Fed Chair Jerome Powell has to say when he testifies at 3pm BST today in front of the Senate Banking Committee. As a reminder our US economists expect Powell’s testimony to largely reflect the minutes of the June 13th FOMC meeting. Those minutes presented a generally upbeat economic outlook and broad-based support amongst participants for continuing along the path of “gradual” policy firming. That said there was an acknowledgement of the rising risks to the economic outlook associated with trade policy and since that meeting we obviously know that the Trump administration has announced a review of tariffs on $200bn of additional goods from China. So expect this to be a talking point. The relentless flattening of the yield curve is another possible point for discussion although our colleagues would be surprised if Powell raised alarm bells about this.
Yesterday was actually a rare day where the Treasury curve steepened with 2s10s closing 1.4bps steeper at 26.0bps – a week since we last saw the curve steepen. Benchmark 10y yields rose 3.1bps to 2.859% making it 34 trading days in a row that yields remain entrenched in this 2.80-3.00% range. At the short end 2y yields ended 1.8bps higher while 30y yields were up 3.0bps by the closing bell. A weaker bond market in Europe was also about as exciting as it got with 10y Bunds +2.3bps higher to 0.359%.
A solid US retail sales report combined with some positioning ahead of Powell’s testimony and a stream of bank issuance in the US all appeared to play a role in one way or another in contributing to the bond moves. Equities appeared to be a lot less interested however. Last night the S&P 500 finished -0.10% despite banks rallying over 3% for the sector’s strongest day since late March. Bank of America surged +4.31% following a stronger than expected earnings report and as a reminder we’ve still got Goldman Sachs today and Morgan Stanley tomorrow to cap the large US banks reporting for Q2. Coming back to the broader index, we couldn’t help but notice that the S&P 500 is now yielding less than 3-month T-bills which is an incredible statistic. It’s the first time that has happened since 2008. In fairness T-bills are also yielding more than 30y bonds in 12 European countries so the S&P is hardly on its own. Elsewhere, in Europe yesterday the Stoxx 600 also limped to a -0.25% fall with a -4.15% decline for WTI Oil on the back of potentially higher Saudi Arabia supply not helping sentiment across equities generally. EM currencies were fairly well behaved however while Gold (-0.27%) and the US dollar index (-0.18%) edged a bit lower.
This morning in Asia, markets are broadly extending on losses with the Hang Seng (-1.11%), Shanghai Comp (-1.13%) and ASX (-0.50%) all down while the Nikkei (+0.95%) is bucking the trend as trading resumed post holidays. Futures on the S&P 500 and Nasdaq are broadly flat despite, after the closing bell in the US, Netflix’s share price dropping as much as -15% after reporting slower than expected growth in subscriber numbers in Q2 (+5.2m, c.1m less than consensus) and an outlook which suggested a decline in numbers for the current quarter. Elsewhere this morning Reuters noted the average new home prices in China’s 70 major cities rose the fastest in around 2 years, up 1% in the month of June versus 0.7% in May.
Coming back to the retail sales data yesterday, headline sales were confirmed as rising +0.5% mom in the US in June as expected however this was on top of a five-tenths of a percent upward revision to the May print to +1.3% mom. Excluding autos and gas, sales printed at a slightly below consensus +0.3% mom (vs. +0.4% expected) however again there was a big upward revision to May to +1.3% mom (from +0.8%). The control group component (0.0% mom vs. +0.4% expected) was more of a wash with June’s miss offset also by May’s upward revision (+0.8% from +0.5%). Elsewhere the July Empire manufacturing reading came in at a slightly better than expected 22.6 (vs. 21.0 expected) albeit with the prices paid component falling a full 10pts while business inventories printed at +0.4% mom as expected. It’s worth noting that the Atlanta Fed revised up their Q2 GDP forecast post that retail sales data to 4.5% (from 3.9%) – the highest since last month.
Elsewhere there was plenty of focus on the press conference between President Trump and his Russian counterpart President Putin yesterday following their first summit together. Perhaps unsurprisingly the Mueller investigation into potential interference by Russia in the US election was front and centre for those watching with Trump’s refusal to side with US intelligence agencies and instead contradict his own security aides, subsequently criticised by Republican lawmakers including Senator John McCain and House Speaker Paul Ryan.
Meanwhile here in the UK it was another busy day for Brexit headlines. After accepting four earlier amendments and then enduring a night of tight votes as well as a resignation of a junior defence minister (Guto Bebb), PM May’s Brexit customs legislation has now passed its third reading with a vote of 318 to 285 in the lower House. Notably voting on two earlier amendments were fairly close calls with the government winning with 305 vs. 302 votes (14 Tories rebelling) and 303 vs. 300 votes (11 Tories rebelling) respectively. The Taxation bill will allow the government to levy duties on goods after leaving the EU. Looking ahead, the entire draft bill will go to the House of Lords for voting and approval before becoming law. For markets, Sterling traded as high as c0.5% up before paring back gains to close +0.10% stronger versus the Greenback.
Elsewhere, over at the Fed, Neel Kashkari reiterated his dovish view on rates as he noted “there is little reason to raise rates much further, invert the yield curve, put the brakes on the economy and risk that it does, in fact, trigger a recession”. In part as he pointed to “…if inflation expectations or real growth prospects pick up, the Fed can always raise rates then”. He also went on to say that “this time is different” (with respect to the yield curve) are the four most dangerous words in economics, in his view.
Before we look at today’s calendar, yesterday also saw the release of the IMF’s latest Global Economic Outlook. While the Fund made no change to either its 2018 or 2019 global growth forecast of 3.9%, the accompanying statement did highlight that “the expansion is becoming less even, and risks to the outlook are mounting”. They went as far as to say that “the rate of expansion appears to have peaked in some major economies and growth has become less synchronised”. Indeed the country-by-country forecasts highlight the widening divergence between the US and other developed nations. The 2.9% and 2.7% growth forecast for the US in 2018 and 2019 respectively was the same as the April forecast, however the Euro Area was revised down to 2.2% in 2018 and 1.9% in 2019, a downward revision of two-tenths and one-tenth. Japan and the UK were also revised down two-tenths this year to 1.0% and 1.4% respectively although forecasts for next year were left unchanged. There were also no surprises for China (6.6% in 2018 and 6.4% in 2019). Unsurprisingly the looming trade war concerns were cited as the greatest risk with the IMF saying that “the risk that current trade tensions escalate further – with adverse effects on confidence, asset prices, and investment – is the greatest near-term threat to global growth”.
Looking at the day ahead then, as noted at the top the main highlight is likely to be Fed Chair Powell delivering his semi-annual testimony to the Senate Panel in the afternoon. Datawise, May and June employment data in the UK will be a focus (4.2% unemployment rate expected), while June EU27 new car registrations and the final June CPI release in Italy are also due in Europe. In the US we’ve got June industrial and manufacturing production prints along with the July NAHB housing market index release all scheduled. Q2 earnings for Goldman Sachs and Johnson & Johnson are also due. Meanwhile the BoE’s Carney, Bailey and Stheeman will speak on the Financial Stability Report while the Italian Finance Minister Tria will testify before Parliament.
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