Futures Reverse Drop, Rise On Renewed “Trade Optimism”

Yesterday we predicted that looking to today’s overnight market wrap headline, it would be one of two choices:

Tomorrow market open headline cointoss:

“Futures rise as trade deal hopes buoy risk”

Or

“Futures fade as trade deal hopes dim”

— zerohedge (@zerohedge) September 26, 2019

A few hours later, that’s exactly what happened because after an initial modest dip in S&P futures during a mixed Asian session where Trump’s impeachment process sparked some concerns, risk swiftly rebounded once Europe opened for trading, with Reuters chiming in this morning right on cue: “U.S.-China trade optimism lifts stocks”…

… after China’s MOFCOM sounded constructive, saying the two sides are “closely communicating and preparing for making trade talk progress in October.” Commenting on this, Reuters said that “positive noises from China on U.S. trade talks lifted European stocks on Thursday and snuffed out a modest rally in safe-haven assets that had dominated in Asia.” Because almost a year and a half after the trade war started with no possibility of ending soon, all it takes to still fool the algos is hope, which in turn has pushed global market into a sea of green.

As a result, after some initial weakness, S&P 500 futures turned higher, pointing to more gains on Wall Street after Wednesday’s solid gains which trampled over any concerns over a Trump impeachment. The dollar was unchanged after soaring the most since March the previous day, while gold rebounded back over $1,500 after Wednesday plunge. The pound weakened amid rising acrimony among politicians as the U.K. limps toward Brexit.

Trading started off on the back foot, with Asian markets struggling for direction. MSCI’s broadest index of Asia-Pacific shares outside Japan and Japan’s Nikkei both ended fractionally higher after Japanese Prime Minister Shinzo Abe and Trump signed a limited trade deal on Wednesday, one which excluded autos. But major China tech stocks slumped more than 3% for the second day running after the PBOC drained a net 100bn in liquidity, and Australian shares fell 0.5% while gold tiptoed higher in a sign that some investors were still searching out safety.

This cautious mood reversed however once Europe opened: Europe’s main bourses initially stuttered but muscled 0.5% higher when China said it was in close communication with Washington and preparing to make progress in upcoming trade talks. President Trump had also stoked hopes when he told reporters the two sides were having “good conversations” and that an agreement “could happen sooner than you think”.

Europe’s Stoxx 600 jumped 0.7%, reversing much of yesterday’s sharp drop, with all but two industry groups in the green. Tech stocks, among the biggest losers on Wednesday, lead gains on Thursday. Industrial goods and auto shares also outperform, while banks are worst performers

As they bought stocks, investors dumped European government bond holdings, as the third German resignation from the European Central Bank’s board in recent years overnight also amplified doubts around the sustainability its stimulus measures; that said the move was not too dramatic and 10-year yields rose no more that 2 basis point across the region,, and the major currencies barely budged too, “having now got used to the constant tooing and froing of the year-long trade war” as Reuters put it.

Ironically just a day earlier, trade war odds seemed to spike after Trump sharply criticized China in a speech at the United Nations General Assembly, where he said he would not accept a “bad deal”.

“I think the trade talks will take years if it ever has a solution,” Makor Capital Markets strategist, Stéphane Barbier de la Serre, correctly concluded. “To me, what we see (today) is just market expectations, it is purely micro management of the market, nothing else. We have nearing a point where nobody cares about the discussions.”

Meanwhile, transcripts of a call showed Trump had nudged Ukraine’s president for possible information on presidential rival Joe Biden, but it was hardly the quid-pro-quo picture painted previously by Democrats who are frothing at the mouth to impeach Trump no matter the cost. Traders however remained skeptical about the likelihood of Trump being officially impeached.

In a late Wednesday report, an adviser to Ukraine’s President said President Trump’s insistence for the two leaders to discuss a possible investigation into Joe Biden was a precondition for their July 25 phone call, while it was also reported the Whistleblower’s complaint against US President Trump has been declassified and could be releases as early as Thursday morning according to sources.

In FX, the sidewinding dollar was still well within reach of a 2-year high having also shrugged off the latest controversy surrounding Trump. The Bloomberg Dollar spot index stabilized as the greenback was supported by month- and quarter-end flows, while Treasuries advanced. The yen rose amid persisting political turmoil in U.S. and the U.K. and as trade sentiment remained mixed. Sterling extended Wednesday’s drop, reversing an early gain, while the kiwi led gains among Group-of-10 currencies after RBNZ central bank Governor Adrian Orr said authorities are unlikely to need ‘unconventional’ monetary-policy tools.

Elsewhere in the region the Philippines joined the army of global central banks which have cut interest rates this month, with a 25 basis point trim to 4% Mexico could slice its 8% rates but a similar amount later too.

In other central bank news, Fed’s Kaplan (non-voter, dove) said he feels current policy setting is on the margin of being a little accommodative, while he is agnostic on whether or not more cuts are required and is keeping an open mind. Furthermore, Kaplan said the odds of a recession within next 12 months are relatively low and that repo problems last week show a need for more liquidity but are not sign of broader stress.

In commodities, oil prices swung in and out of the red meanwhile with Brent fetching $62.52 per barrel and U.S. crude at $56.50 a barrel.

Expected data include GDP and wholesale inventories. Carnival and Micron are among companies reporting earnings.

Market Snapshot

• S&P 500 futures up 0.2% to 2,991.75
• STOXX Europe 600 up 0.6% to 389.78
• MXAP up 0.1% to 158.34
• MXAPJ up 0.07% to 504.30
• Nikkei up 0.1% to 22,048.24
• Topix up 0.2% to 1,623.27
• Hang Seng Index up 0.4% to 26,041.93
• Shanghai Composite down 0.9% to 2,929.09
• Sensex up 0.8% to 38,911.86
• Australia S&P/ASX 200 down 0.5% to 6,677.58
• Kospi up 0.05% to 2,074.52
• Brent futures up 0.2% to $62.51/bbl
• German 10Y yield fell 0.6 bps to -0.581%
• Euro down 0.05% to $1.0937
• Italian 10Y yield rose 1.0 bps to 0.504%
• Spanish 10Y yield fell 1.5 bps to 0.118%
• Gold spot up 0.3% to $1,507.92
• U.S. Dollar Index up 0.1% to 99.10

Top Overnight News from Bloomberg

• Boris Johnson sparked uproar during angry exchanges in the House of Commons after he was dragged back to Parliament to explain why he broke the law and tried to suspend the legislature in the run-up to Brexit
• ABN Amro Bank NV fell the most in more than three years in Amsterdam trading after Dutch authorities opened a criminal investigation into the bank under anti-money laundering laws
• Trump tried to squelch the latest threat to his presidency with the release of a transcript of his call with Ukraine’s president. Democrats say transcript bolsters move for impeachment inquiry
• The Federal Reserve should consider increasing its balance sheet by $250 billion over the next two quarters through outright purchases of Treasury securities to help diminish the risk of future money market turmoil, two former U.S. central bank officials said
• A record pace of defaults hit China’s domestic bonds this year. In 2020, it could be the offshore market’s turn. That’s because of a looming wall of dollar debt, issued by now-stressed borrowers, that comes to maturity. There’s $8.6 billion of offshore bonds coming due next year that currently have at least 15% yields — classifying them as stressed, according to data compiled by Bloomberg
• London’s dominance of the derivatives market is under threat, with European firms at risk of being blocked from using clearinghouses in the British capital within six months

Asian equity markets traded somewhat mixed as the region struggled to maintain the momentum from the US where President Trump ignited trade hopes after he suggested a deal with China could happen ‘sooner than you think’, while the US and Japan also reached a first stage trade agreement. ASX 200 (-0.5%) and Nikkei 225 (+0.1%) were higher at the open although the optimism in Australia later faded amid losses in commodity related sectors especially gold miners after the precious metal slumped to test the USD 1500/oz level, while the Japanese benchmark was positive but with gains capped as participants reflected on the limited US-Japan trade pact which didn’t involve autos although the US was said to have agreed to not impose Section 232 tariffs on Japan while talks are underway. Hang Seng (+0.4%) and Shanghai Comp. (-0.9%) were both underpinned at the open following the encouraging trade rhetoric from US President Trump who also stated that China is making large agricultural purchases and that there is a good chance we’ll make a trade deal with China which is getting closer and closer. However, the advances in the region later waned considering Trump’s tendency to flip flop on trade discussions and as US impeachment concerns lingered, while the PBoC’s open market operations also resulted to a considerable CNY 100bln net drain in liquidity. Finally, 10yr JGBs were lower following the bear steepening in the US and after the BoJ reduced its purchase amounts of 5yr-10yr JGBs for today’s Rinban operations.

Top Asian News

• Chinese Economy Weakens Across the Board, Early Indicators Show
• ‘Massive Snowball’ Effect to Spur China Bond Defaults Overseas
• India’s Combined Fiscal Deficit Seen Rising to 7.5% by Fitch
• Hong Kong Protests Threaten Billionaires’ Ties With Beijing

Major European Indices (Euro Stoxx 50 +0.5%) are higher, following a more mixed AsiaPac lead, as the market digests the latest trade developments; China’s MOFCOM sounded constructive, saying the two sides are “closely communicating and preparing for making trade talk progress in October” (reminder; US President Trump yesterday hinted that a deal could come sooner than we think). Moreover, a stumbling block for the potential US/Japan trade deal seems to have been averted; USTR Lighthizer said it is not the intention of the US to put tariffs on Japanese auto exports. However, on the EU/US front, the WTO look set to rule that the US can sanction up to USD 8bln worth of EU goods over Airbus (AIR FP) aid, sources said. It is also worth noting that Eurozone broad money supply increased more than forecast. ING note that it considered one of the best leading indicators for the eurozone economy, and as such, could be lending some support to sentiment (though EURUSD is just off YTD lows). Sectors are mostly higher, lead by Tech (+1.3%), and Energy (+1.3%), with Telecoms and Financials (+0.2) the laggards for now. In terms of stock specific movers; ABN Amro (-10.0%) shares took a tumble, as the company joined the ranks of other notable European banks in that it is now being investigated by public prosecutors over potential money laundering violations. Imperial Brands (-10.6%) issued negative outlook, expressing concerns over its next generation of products. British American Tobacco (-1.3%) moved lower in sympathy, and US tobacco names may not escape the session unscathed, not least given Imperial Brands specifically names US action on vaping products as resulting in a notable slowdown of vapour product growth. Pearson (-18.1%) sunk after the co. provided disappointing guidance. Wirecard (+2.3%) was bid premarket, after SocGen initiated the company at a Buy premarket. Ericsson (-0.7%) managed to reverse the majority of what was initially substantial losses as the broader market advanced, on the co. provided guidance for Q3 provisions in relation to investigations State-side, and sees costs at SEK 12bln. Finally, airlines were under pressure after IAG (-3.5%) issued a profit warning.

Top European News

• IMF to Leave Ukraine Without Accord Amid Privatbank Uncertainty
• Ericsson Expects to Pay $1 Billion in U.S. Corruption Probes
• British Airways Owner Warns Industry Woes Spill Over Into 2020
• Barclays Names El-Erian and Fitzpatrick as New Board Members

In FX, the DXY is marginally firmer on the day thus far with the index topping yesterday’s high (99.06) in a continuation of recent strength, whilst an optimistic tone from China’s MOFCOM regarding October trade talks in Washington did little to stem the Buck’s rise. DXY has breached its 12 Sept high at 99.10 with its YTD high at 99.37. Next up on the docket State-side, the final metrics US GDP and PCE prices, weekly initial jobless claims and a slew of Fed speaks including Kaplan (non-voter), Bullard (voter, dissenter), Calrida (voter), Daly (non-voter), Kashkari (non-voter) and Barkin (non-voter). In terms of US politics, participants will also be eyeing the potential release of the whistleblower’s complaint against US President Trump in regard to the controversial phone call between Trump and his Ukrainian counterpart, which some members of congress described as “troubling”.

• NZD, AUD – All firmer, with outperformance in the Kiwi following comments from RBNZ Governor Orr who struck an optimistic tone on the domestic economy whilst highlighting that unconventional policy tools are not currently necessary. NZD/USD reached a 0.63+ status overnight, albeit remains off highs (0.6310) at around 0.6290 after kicking the session off at 0.6270. Meanwhile, its Aussie counterpart remains buoyed by the optimistic US/China trade tone after the US President said a deal with China could happen “sooner than you think”, whilst rhetoric from China was remained constructive ahead of trade talks in Washington next month. AUD/USD trades north of 0.6750 with little by way of immediate technical levels in play.
• GBP, EUR – Both softer on the day with Cable the underperformer amid a firmer Buck coupled with Brexit angst as the UK PM remains resilient to a Brexit extension, whilst rhetoric from the EU is also less optimistic as most diplomats believe another delay will only increase the chances of No Deal down the line, according to Sun’s Nick Gutteridge. GBP/USD has tested 1.2300 to the downside after breaching a barrage of support levels between 1.2346-50 with the next level to the downside touted at 1.2233 (9th Sept low). The Euro is marginally softer, down from highs of 1.0965 due to a firmer Dollar as the pair moves closer to its YTD low of 1.0924. In terms of levels to the downside, below the psychological 1.0900 mark, the pair sees a strong Fib level at 1.0864 ahead of support at 1.0850. Note: EUR/USD sees large option expiries at today’s NY cut with 2bln between 1.0925-50 and 6bln at 1.1000. On the docket, ECB’s de Guindos, and Villeroy are set to speak later in the session.
• JPY, CHF – Discrepancies seen in the safe-haven currencies, albeit marginal with USD/JPY within a narrow intraday parameter of 107.60-80 ahead of a slew of Fed speakers. CHF meanwhile remains modestly softer with USD/CHF at session highs of around 0.9940 ahead of its 50 WMA and 200 DMA both at 0.9948.

In commodities, crude is trading flat, albeit seeing some upside in recent trade alongside European equities, amid a lack of notable fresh supply side/geopolitical developments. OPEC Secretary General Barkindo said that Saudi Arabia has almost restored the bulk of its oil supply, in line with recent commentary from the Saudis. Barkindo added that OPEC will continue to do whatever it takes to insulate oil market from politics but took an extraordinary OPEC+ meeting off the table. Elsewhere, the Kazaks said that had no plans to up crude production in wake of the recent Saudi attacks. ING note the fall in crude prices that occurred yesterday, on reports that Saudi Aramco is ahead of schedule by about a week in bringing capacity back. However, “it still seems that the market is being complacent,” the bank says, “with less than a US$3/bbl risk premium priced into the market, despite the heightened geopolitical risk in the region”. WTI Nov’ 19 and Brent Nov’ 19 futures currently sit near the USD 56.50/bbl and USD 62.50/bbl levels respectively. Elsewhere, Gold prices are slightly higher, but have been coming off somewhat during the European session, as the precious metal consolidates following yesterday’s declines in which it lost the USD 1520/oz handle again. Elsewhere in the metal complex, Copper prices are similarly lacklustre.

US Event Calendar

• 8:30am: GDP Annualized QoQ, est. 2.0%, prior 2.0%; GDP Price Index, est. 2.4%, prior 2.4%
• 8:30am: Core PCE QoQ, est. 1.7%, prior 1.7%
• 8:30am: Advance Goods Trade Balance, est. $73.4b deficit, prior $72.3b deficit
• 8:30am: Personal Consumption, est. 4.7%, prior 4.7%
• 8:30am: Wholesale Inventories MoM, est. 0.1%, prior 0.2%
• 8:30am: Retail Inventories MoM, est. 0.1%, prior 0.8%, revised 0.8%
• 8:30am: Initial Jobless Claims, est. 211,500, prior 208,000; Continuing Claims, est. 1.67m, prior 1.66m
• 9:45am: Bloomberg Consumer Comfort, prior 62.7
• 10am: Pending Home Sales MoM, est. 1.0%, prior -2.5%; Pending Home Sales NSA YoY, est. 1.3%, prior 1.7%
• 11am: Kansas City Fed Manf. Activity, est. -4, prior -6

DB’s Jim Reid concludes the overnight wrap

The political drama surrounding President Trump and a possible impeachment inquiry was the main talking point again even if positive trade momentum won out in the end. Other than a slight dip, markets appeared fairly non-fussed over the impeachment risks which probably goes to show how complicated, long-winded, and uncertain this investigation is in reality, especially since the Republicans control the Senate. Yesterday’s late afternoon headlines (European time) instead from the President suggesting that a trade deal with China “could happen sooner than you think” in the end saw markets recover after the post impeachment inquiry losses from the previous day and the morning session.

Indeed the S&P 500 (+0.62%) finished on a firmer footing despite trading down nearly half a percent at the lows after a rough transcript was released of the call between Trump and Ukraine President Zelenskiy yesterday. It showed that Trump asked Zelenkskiy to look into political rival Joe Biden, with the specific reference in the statement saying that “there’s a lot of talk about Biden’s son, that Biden stopped the prosecution and a lot of people want to find out about that…so whatever you can do with the attorney general would be great” but fell short of an explicit link to his days-earlier decision to freeze more than $391 million in military aid to Ukraine. As mentioned above, equities took a leg up on the positive trade comment, and then rallied further in the afternoon when USTR Lighthizer said that it’s “not our intention” to impose tariffs on Japanese cars. Ultimately, the more trade-sensitive tech sector outperformed, with the NASDAQ and Philly semiconductors indices up +1.05% and +1.78% respectively.

As for treasuries, 10y yields rose +8.5bps while the 2s10s curve finished +3.7bps steeper at 5.3bps. That marked the third consecutive session with the 10y trading in an intra-day range of around 10bps, which hasn’t happened in six weeks. Yields kicked higher after the Fed’s Evans said that his rate forecast does not include another cut which was somewhat surprising, as our economists had previously believed he leaned somewhat dovishly on the committee. Since he is a voting member of the FOMC this year, his rate expectation is particularly important. On the other hand, there was some attention paid to new research from the Fed staff which introduced a new measure of the labour market, which shows the recent job growth trend to be at its weakest level since 2010, which would argue for more accommodative rate policy. Finally, St. Louis Fed President Bullard reiterated his stated view that he would’ve preferred to cut rates by 50bps last week. Overnight we also heard from Kaplan (non-voter) and he said that the message from debt markets around the world is that monetary policy isn’t going to be sufficient on its own to lift growth. He added, “The marginal return in lowering the fed funds here has got diminishing returns. QE in the future may well have diminishing returns.” These comments from him signals that there is need for the fiscal spending alongside monetary policy support.

On a similar vein the resignation of Sabine Lautenschläger, the German Executive Board member was a bit of a surprise last night and she becomes the third German ECB resignation in the QE era. Lautenschläger is a hawk and was clearly opposed to the restarting of QE. Given this and the relatively high dissent rate at the last meeting, it hints at very difficult meetings to come in order to rally around a consensus. Policy tensions are building across countries in the Euro-area.

Back to markets and the VIX ‘spiked’ to as high as 18.45 after the Trump transcript was released but settled down to close at 15.88, back lower than where it ended Tuesday and now just 2 points above the September lows, and well below the closing high of 25.45 back in August. Meanwhile in commodities the main mover yesterday was oil where WTI fell -1.40% after inventories data showed a 2.4 million barrel increase in stockpiles, compared to expectations for a slight drawdown. We are now only +2.99% above the levels before the Saudi attack and an impressive -10.78% below the intra-day highs immediately after.

Meanwhile, Mr Trump and Japanese PM Abe signed the “first stage” of an initial pact after meeting at the UNGA yesterday, with Trump saying that he expects “in the fairly near future” that the US will have “final comprehensive deals signed with Japan.” In terms of specifics, the trade deal will help US farmers by opening up Japan’s agricultural market as it will eliminate or reduce tariffs on $7.2bn of US food and agricultural products, helping US beef, corn, pork and other farmers. Trump also said that the deal, which also covers a $ 40bn digital trade agreement, would help reduce a “chronic” US trade deficit and both the countries’ goal is for the accord to go into force on January 1, 2020. The limited deal will also not require a vote from Congress according to Trump while Japanese PM Abe said that he received direct confirmation from President Trump that the US won’t slap tariffs on Japan’s auto exports. Markets will hope this eventually extends to European autos.

This morning in Asia markets are trading mixed with the Nikkei (+0.24%), Hang Seng (+0.16%) and Kospi (+0.12%) all up while the Shanghai Comp (-0.73%) is down. Meanwhile, the BoJ reduced purchases in the key 5-10yr segment by JPY 30bn at today’s regular operation thereby bringing the purchases to JPY 350bn (vs. JPY 380bn at previous operation). This marks the fourth reduction in this segment in six weeks and the move come after the yield on 5yr JGBs reached record lows yesterday. They are up +1.9bps to -0.379% with 10yrs +1.6bps at -0.252%. Elsewhere, futures on the S&P 500 are down -0.15% while yields on 10yr USTs are down -3.8bps this morning.

Back to yesterday, where the political drama playing out in the House of Commons saw MPs back in their seats following the return of parliament. PM Johnson spoke late in the day after a fraught session with the highlight being his fresh challenge to the opposition to join him in supporting an election. The Labour party declined to take the bait, and looks set to maintain their position that they will not support a fresh vote until after Article 50 is extended successfully or until the Benn bill can be made watertight.

In other news, the data didn’t add much to proceedings yesterday. In the US, August new home sales rose a better than expected +7.1% mom reading (vs. +3.8% expected) which continues the trend of some outperformance in the housing sector, even if this data tends be volatile and prone to revisions. Meanwhile in the UK CBI retail sales volume survey for September wasn’t quite as bad as feared, printing at -16 (vs. -25 expected).

To the day ahead now, which for data this morning includes August M3 money supply data for the Euro Area and October consumer confidence in Germany. In the US the focus will likely be on the third revision to Q2 GDP where no change from the +2.0% qoq estimate is expected. Along with that, we’ll also get the August advance goods trade balance, August wholesale inventories, latest weekly jobless claims print, August pending home sales and September Kansas Fed manufacturing survey. Away from that data it’s a busy day for central bank speak. Indeed over at the Fed we’re due to hear from Kaplan at 2.30pm BST, Bullard at 3pm BST, Clarida and Daly at 4.45pm BST, Kashkari at 7pm BST and Barkin at 9.30pm BST. Along with that, ECB President Draghi speaks at 2.30pm BST at a conference in Frankfurt. Finally the BoE’s Cunliffe is also due to speak. The Mexico policy meeting is also due today.