US futures and European stocks edged higher albeit in a low-volume session, with bond markets trading sideways ahead of G-20 kickoff in Osaka, as markets took early comments from Xi and Trump broadly in stride even as growing uncertainty ahead of the critical meeting between the two world leaders deterred traders from making bold directional bets.
After Asian stock markets slipped, European shares were marginally higher, with the pan-European STOXX 600 index up 0.08%. Germany’s DAX index was the biggest gainer, up 0.36% percent on the day. Europe’s Stoxx 50 rose +0.3%, while the e-mini S&P future tracked Europe, and was up +0.2%.
In the day’s main event, Trump and Xi will meet on the sidelines of the G20 summit this weekend in Osaka, Japan, for talks that could help resolve a year-long trade war between China and the United States, as signs proliferate of rising risks to global growth. Of course, it is just as likely that nothing happens.
“Market participants are taking a cautious approach ahead of this high-level meeting as hopes for a material breakthrough are low,” said ADSS head of research, Konstantinos Anthis. “This is a stellar opportunity for the two leaders to find some common ground and unless they do so, equities will likely push lower as a prolonged period of tariffs on each other’s exports will take a heavier toll on both economies and global growth.”
Due to the uncertainty, the MSCI All Country World Index was up just 0.04% on the day; the index was set to break a three-week streak of gains but also on course for its best month since January, gaining nearly 6% in June as equities rallied globally on the back of a pivot towards easier monetary policy from major central banks. That shift came after a breakdown in trade negotiations between the United States and China earlier this year, and has markets betting on an interest rate cut from the U.S. Federal Reserve as early as the next policy meeting in July.
On Thursday, China’s central bank also joined the party when it pledged to support a slowing economy, ahead of the release of data that is expected to show China’s factory activity shrank for a second consecutive month in June.
That, however, was not enough to boost Asian markets as the MSCI Asia-Pacific index ex-Japan fell 0.1% with energy and material firms leading Asian shares lower. Japan’s Topix gauge slipped 0.1%, driven by Daikin Industries and Central Japan Railway, even as Japanese factory output beat estimates; the Nikkei stock index ended down 0.29%, while Chinese blue chips fell 0.24% on Friday and Hong Kong’s Hang Seng lost 0.32%. Australian shares shed 0.71%.
The Shanghai Composite Index retreated 0.6%, with PetroChina Co. and Kweichow Moutai among the biggest drags. The People’s Bank of China softened its tone on financial risk management, indicating an effort to allay fears for a possible funding squeeze. The S&P BSE Sensex Index dropped 0.3%, as traders gauged the scope of possible stimulus in a federal budget next week. Reliance Industries, Tata Consultancy Services and HDFC Bank dragged the Indian benchmark lower.
In Europe, stocks traded in proximity to unchanged, while euro zone government bond yields hovered near record lows in many cases ahead of the release of inflation data for the bloc. With the euro zone reporting inflation of 1.2% for the month of June — well short of the European Central Bank’s target of just below 2% — investors held on to government bonds in early trade. Core European yields steady to 1bp higher, with 10-yr BTP/bund spread 6bps tighter at 240bps. UST yields steady to 1bp higher in the 2-yr through 10-yr maturities.
Heading into the G-20, on Thursday White House economic adviser Larry Kudlow said that Trump had agreed to no preconditions for the meeting with Xi and is maintaining his threat to impose new tariffs on Chinese goods. Kudlow also dismissed a Wall Street Journal report that China was insisting on lifting sanctions on Chinese telecom equipment giant Huawei Technologies Co Ltd as part of a trade deal and that the Trump administration had tentatively agreed to delay new tariffs on Chinese goods.
“I’m not sure the Americans can deliver what the Chinese want and the Chinese don’t want to deliver what the Americans want,” said Greg McKenna, strategist at McKenna Macro, adding that he sees an “extend and pretend” outcome, in which Chinese and U.S. officials agree to continue talks, as the most likely outcome of the weekend meeting. Regardless of the outcome, McKenna said, “we will not be in a holding pattern on Monday morning.”
Currency markets also reflected caution, with the Japanese yen reversing a three-day losing streak against the dollar. Bloomberg dollar index traded lower again by 0.1%, set to turn in its worst monthly performance since the start of 2018. Bets on interest rate cuts from the Fed have pushed the dollar index down 1.7% this month. All G-10 currencies ex-NOK gaining versus the greenback. In commodities, gold trades +0.3% at $1414, with both Brent ($66.24) and WTI ($59.20) lower.
In commodity markets, trade worries continued to weigh on oil, with U.S. crude losing 0.3% to $59.26 a barrel and global benchmark Brent crude down 0.36% to $66.31 per barrel. The weak dollar and uncertainty over global trade saw gold rebound after dipping below $1,400 per ounce on Thursday. Spot gold was last traded at $1,414.15 per ounce, up 0.35%, but down from earlier highs.
Expected data include personal income and spending, as well as University of Michigan Sentiment. Constellation Brands is reporting earnings.
Market Snapshot
- S&P 500 futures up 0.3% to 2,938.50
- STOXX Europe 600 up 0.3% to 383.23
- MXAP down 0.09% to 160.21
- MXAPJ down 0.1% to 528.48
- Nikkei down 0.3% to 21,275.92
- Topix down 0.1% to 1,551.14
- Hang Seng Index down 0.3% to 28,542.62
- Shanghai Composite down 0.6% to 2,978.88
- Sensex down 0.2% to 39,499.81
- Australia S&P/ASX 200 down 0.7% to 6,618.77
- Kospi down 0.2% to 2,130.62
- German 10Y yield rose 0.7 bps to -0.313%
- Euro up 0.2% to $1.1390
- Italian 10Y yield fell 0.7 bps to 1.772%
- Spanish 10Y yield fell 0.7 bps to 0.389%
- Brent futures down 0.4% to $66.32/bbl
- Gold spot up 0.3% to $1,413.71
- U.S. Dollar Index down 0.1% to 96.07
Top Overnight News from Bloomberg
- President Trump wants a weaker dollar to help boost exports, and is counting on the Federal Reserve to help make that happen. But Fed Chair Jerome Powell has made clear it’s not his job
- Euro-area inflation was unchanged well below the European Central Bank’s goal in June, despite a faster-than-expected pickup in underlying prices. The rate of growth was 1.2%, in line with economists’ estimates
- Trump lightheartedly asked Russian President Vladimir Putin not to interfere in the upcoming U.S. election during a meeting at the G-20 summit, their first since Special Counsel Robert Mueller documented alleged Kremlin efforts to manipulate the 2016 vote
- With speculation still bubbling that the Bank of Japan’s next move will be further stimulus, a BOJ board member tried to rule out a lowering of Japanese interest rates, saying they were already close to an unfavorable tipping point
- Hedge funds have turned bullish on the yen for the first time in a year amid rising global tensions, even as Japanese retail investors have boosted shorts on the currency to the most in 15 months betting sinking bond yields will spur outflows
- Policy makers in Beijing are trying to funnel cash into the economy while warding off a re-inflation of the property market bubble, a task made doubly hard by the uncertainty generated by the intensifying trade war
Asian equity markets were subdued amid book squaring heading into the end of H1 and ahead of the upcoming Trump-Xi meeting at the G20. ASX 200 (-0.7%) was led lower by mining names with BHP pressured as it is expected to pay AUD 250mln as settlement in the royalty dispute with Western Australia, although downside for the broader market was limited by outperformance in tech and financials, while Nikkei 225 (-0.3%) also suffered losses in the commodity-related sectors and with exporters weighed by detrimental flows into the currency. Hang Seng (-0.3%) and Shanghai Comp. (-0.6%) weakened amid continued PBoC inaction and as trade uncertainty remained rife heading into the US-China showdown at the G20. Finally, 10yr JGBs tracked the upside in their US counterparts with prices lifted by safe-haven flows and amid the BoJ presence in the market for JPY 720bln of government bonds in the belly to super-long end.
Top Asia News
- Australia Pension Managers in Talks to Create A$22 Billion Fund
Major European indices are just into positive territory after a tentative and mixed/flat open [Euro Stoxx 50 +0.3%] as the G20 summit gets underway and markets move into month, quarter and half end. Within the bourses the SMI (-0.2%) is the modest underperformer as we approach the Sunday expiry of temporary measures introduced by the EU which allow Swiss Co’s to be traded on EU exchanges; most recently the Swiss Government stated they will block trading of Swiss shares in the EU following the Commission stating they do not see reason to extend the measures beyond June. In terms of this morning notable movers, significantly outperforming at the top of the Stoxx 600 are Merlin Entertainment (+14.0%) after reports that the Co. had received a GBP 6bln offer from the Lego Family, Blackstone & a Canadian fund. On the back of yesterday’s Fed stress tests where all banks capital plans were approved Deutsche Bank (+3.7%) are the outperforming financial name; however, Credit Suisse (-1.0%) are lagging their peers after receiving only conditional approval and being the Co. must now address the relevant weaknesses.
Top European News
- Rutte Says the EU Must Intervene Over Italy’s Public Finances
- Italy May Nominate ECB Chief Draghi for Top EU Job, Stampa Says
- Volkswagen’s Truck Unit Opens Flat in Frankfurt Trading Debut
- Berlin Scares Off Banks Targeting the Rich as Fintechs Boom
In FX, the broad Dollar and Index remain in a relatively confined 96.05-25 range as markets gear up for tomorrow’s US-Sino showdown. US President Trump said that he believes the meeting with his Chinese counterpart (at 0330BST tomorrow) will be “productive at minimum”. The comments somewhat reaffirmed market expectations for a restart in talks, but no breakthrough. The index currently hovers closer to the bottom of the intraday range ahead of the psychological 96.00 and its 200 WMA at 95.97, while to the upside, technicians will be eyeing resistance at 96.37 (50 WMA). Meanwhile, US Core PCE and comments from Fed’s Daly are unlikely to sway the Buck ahead of the weekend’s risk event. In a similar vein, CNH is caged within a tight 6.86-88 range vs Greenback but is ultimately flat, having briefly dipped below its 50 DMA at 6.8675.
- EUR, GBP, NZD, AUD, JPY, CHF – All largely benefitting from a marginally softer USD, albeit the EUR also feels tailwind from touted month-end EUR/GBP buying, which aided the pair climb to levels last seen in January. EUR was little moved by the release of overall encouraging inflation data in which the core and super-core figures topped estimates while the headline matched expectations. EUR/USD remains near the top of a 1.1360-90 intraday band with around 1bln in options scattered around strikes 1.1375-85. Meanwhile, the GBP is benefiting slightly less from a softer USD amid the aforementioned EUR/GBP buying as Cable remains within a tight band under 1.2700. Elsewhere the AUD and NZD have similarly jumped on the back of a softer Buck and over close to HODs of 0.7017 and 0.6710 respectively, albeit off best levels. Finally, the safe heaven FX follow suit from the tentative tone in the FX market, although positioning before the end of the trading day may sway the currencies. USD/JPY hovers just above the near the bottom of a 107.57-83 range with 2.1bln in options expiring at 107.50 at today’s NY cut.
- NOK, SEK – The Swedish Crown has pared back recent losses vs. the EUR after dismal retail sales extended the pair’s intraday upper bound to 10.5850, albeit the SEK has since pared back those losses and trades flat on the day thus far. Meanwhile, the NOK was little fazed by the regional unemployment figures and fares slightly worse but ultimately on the back of softer energy prices.
In commodities, WTI and Brent futures are cautious ahead talks between US President Trump and his Chinese counterpart. The benchmarks found supports USD 59/bbl and USD 66/bbl respectively but remain subdued on the day. Post-G20, the energy market will be looking forward to the delayed OPEC+ meeting in which the oil producers are expected to roll over the output curbs but still seem split on potential revisions to the pact. Russia still remains the unknown, despite Energy Minister Novak stating that consensus will be found in July, however “the potential downside risk in the market in the event of a no deal will likely be enough to persuade Russia to continue” ING says. Back to G20, analysts remind us that talks between Russian President Putin and Saudi Crown Prince Mohammed Bin Salman will also be monitored as it may influence the cartel’s decision. Elsewhere, gold is marginally firmer on the day as a function of a weaker Dollar. In light of the recent gold rally, UBS has raised its 3-month gold forecast to USD 1430/oz from USD 1380/oz. Meanwhile, Copper remains above the USD 2.7/lb as the softer USD outweighs the supply resumptions from the end of strikes at the Coldeco Chuquicamata mine. The workers, after 14 days, have accepted the latest offer and miners returned to work today.
US Event Calendar
- 8:30am: Personal Income, est. 0.3%, prior 0.5%; Personal Spending, est. 0.5%, prior 0.3%
- 8:30am: PCE Deflator MoM, est. 0.2%, prior 0.3%; PCE Deflator YoY, est. 1.5%, prior 1.5%
- 9:45am: MNI Chicago PMI, est. 53.5, prior 54.2
- 10am: U. of Mich. Sentiment, est. 97.9, prior 97.9; Current Conditions, prior 112.5; Expectations, prior 88.6
DB’s Jim Reid concludes the overnight wrap
I’m at a big 2-day macro DB hosted conference at the moment with investors representing over 25 trillion of investable capital attending. There were a few shows of hands through day one to gauge the mood and a couple of the interesting takeaways from me was that about 90% expected 10yr US yields to go to 1.70% next versus 2.30%, and around a similar percentage expected the Euro construct to look similar in 10 years time than it does today (in terms of countries in it) – so relatively sanguine about Italy. On the second question I was one of the 10%! The conference was held in beautiful 30 degree London sunshine but that seems to have been near Arctic like conditions compared to what was the hottest June day on record in mainland Europe. My wife has gone away on her own for a long weekend to Scotland to cool down and is away from the children overnight for the first time since they started to come along like buses nearly four years ago. The problem with that is I’m petrified as I now take sole charge of them all for the longest period of time so far in my brief (and sometimes chaotic) parenting career. Given the weather, immediately after I type this I’m going to search for blow up paddling pools on Amazon Prime! What could possibly go wrong?
The same might be said about the G-20 that starts today. A resolution might be highly unlikely, but will markets have any greater clarity as to which path trade talks travel down next in a little under 24 hours’ time? Presidents Trump and Xi are scheduled to meet at 11.30am local time tomorrow morning. That is 3.30am in London and 10.30pm tonight in New York for those who want to base their whole weekend around it. Hopefully it won’t interfere with my solo parenting. Unsurprisingly, the headlines second-guessing what may or may not happen have picked up in recent days with the latest being the WSJ story yesterday suggesting that Xi will insist on any trade truce including the US lifting the Huawei ban, though he will also reportedly offer new support for the US vis-à-vis Iran and North Korea. Given the rhetoric that surrounded the Huawei ban when it was announced, plus the fact that law enforcement is theoretically separate from trade policy, the bar for progress on that front feels high. That said, Larry Kudlow did say that “we may change our views” if “China is willing to offer us a good deal,” so maybe there is scope for some movement.
We should note that by the time we hit send on this Trump is due to meet with Russia’s Putin so that could be one to watch for markets. The early headlines out of the summit are unsurprisingly about trade with Trump saying that he expects to announce “very big” trade deals with both Japan and India while Xi in a meeting with African leaders ahead of the summit condemned protectionism and “bullying practices,” saying, “any attempt to put one’s own interests first and undermine others’ will not win any popularity”. At the BRICS nations gathering, Xi said that protectionism is “destroying the global trade order… This also impacts common interests of our countries, overshadows the peace and stability world wide.” On Iran, Trump said that there was “absolutely no time pressure” to deal with the country. Meanwhile on the WTO, Indian PM Modi called for its reform while Russian President Putin said that “We consider counter-productive any attempts to destroy WTO or to lower its role”. Separately, a White House official said Trump wanted to promote to Abe and Modi “a resilient quality secure infrastructure” – a reference to the US push with allies to keep Huawei out of next generation telecoms networks.
Asian markets are heading lower ahead of the anticipated meeting between Trump and Xi tomorrow amidst lower than average volumes. The Nikkei (-0.39%), Hang Seng (-0.56%), Shanghai Comp (-0.88%) and Kospi (-0.16%) are all down thereby partly erasing yesterday’s gains. Elsewhere, futures on the S&P 500 are up +0.10%. In terms of overnight data releases, Japan’s preliminary May industrial production came in at +2.3% mom (vs. +0.7% expected).
Also overnight and after the US market close, all 18 banks passed the qualitative US Fed stress test which was a positive surprise. The results for the US banks gave them the green light to proceed with their capital plans. The major firms all announced enhanced buyback and dividend programs and their share prices gained further in after-hours trading. Bank of America (+1.77% after hours) will buy back $30.9bn in stock, JP Morgan (+1.63%) will buy $29.4bn, and Wells Fargo (+1.21%) will buy $23.1bn. Goldman Sachs (+2.46%) and Morgan Stanley (+1.61%) announced buybacks of $7bn and $6bn, respectively. All the major firms boosted their dividends as well.
This followed a healthier day in US equities yesterday which culminated in the S&P 500 (+0.38%) halting a four-day slide. The NASDAQ (+0.73%) also closed higher while banks (+0.78%) led at a sector level even before the stress test results. The DOW (-0.04%) underperformed as Boeing slid -2.93% after US regulators found new safety risks in the troubled 737 Max aircraft after fresh tests. In Europe, the STOXX 600 ebbed and flowed in another fairly tight range before ultimately ending flat. Bond markets weren’t a lot more interesting, though treasuries resumed their recent rally, with 10y yields down -3.3bps and 2-year yields a more modest -2.6bps. Bunds traded down -1.8bps while peripheral bonds were near flat on the day. Oil (-0.15%) and Gold (flat) also had quiet sessions, but Bitcoin’s selloff went into overdrive (-16.09%) making it -22.85% lower from the peak just before the close the previous night. However, this morning in Asia the crypto currency is back up +3.64 taking month-to-date gains to +30.11%, which is still quite impressive but feels somewhat flat after reaching gain of +62.90% on the month late on Wednesday. In other currency markets, the dollar traded flat yesterday and EM currencies advanced +0.13%.
The data didn’t add a huge amount to the session. Of note was the unexpected upward revision to Q1 core PCE in the US of two-tenths to +1.2% qoq saar. Whether or not that will change the inflation views of any of the Fed officials remains to be seen, however San Francisco Fed President Daly gave modestly dovish comments yesterday. She said that while “it’s too early to know whether we should” ease policy, she is also unsure about the “magnitude of the tool we should apply.” This seemed to open the door to the possibility of a 50bps rate cut, though equally it would be consistent with no change in rate policy next month. Short-end Treasuries still closed lower on the day in yield while Fed Funds contracts are still pricing in 33bps of cuts for the next FOMC meeting. It’s worth noting that today we get the May PCE inflation report in the US where the consensus expects a +0.2% mom reading and a one-tenth move lower in the annual rate to +1.5% yoy. Yesterday’s data does however help lessen the risk of a rounding lower in the annual rate however.
The other data out in the US yesterday included the third revision to Q1 GDP which was unchanged at +3.1% qoq – a modest disappointment compared to the expectation for a one-tenth rise. Meanwhile jobless claims were reported as rising 10k to 227k, while pending home sales rose +1.1% mom in May and broadly as expected, while the Kansas City Fed manufacturing index dipped 4pts to 0, which mirrors other recent soft survey data.
In Germany the preliminary June CPI reading came in at +0.1% mom and +1.3% yoy, both higher than expected, while June confidence indicators for the Euro Area were a bit softer across the board, including economic confidence which dropped -2pts to 103.3 and the lowest since August 2016.
Looking at the day ahead, the May PCE inflation report in the US this afternoon is the highlight of the data calendar while the G-20 meeting will be the other obvious big focus, albeit with the main meeting still to come tomorrow. The other data releases due out today in Europe includes the May import price index in Germany, preliminary June CPI reports for France, Italy and the Euro Area, and final Q1 GDP revisions. In the US we’ll also get the May personal income and spending prints, June MNI Chicago PMI and the final University of Michigan consumer sentiment survey revisions. The Fed’s Daly will also speak this evening.
via ZeroHedge News https://ift.tt/2J710Pu Tyler Durden