Futures Flat Ahead Of Fed Minutes As China Turmoil Grows

US equity futures and European stocks are little changed, having swung between gains and losses, following a broadly negative session in Asia where concerns surrounding the Chinese economy (home prices fell for the first time this year, fueling recession concerns despite increasing expectations for more stimulus) and the implosion of shadow banking giant Zhongrong (China’s Blackstone) continued to weigh on sentiment with focus remaining on earnings.

As of 7:30am, S&P 500 and Nasdaq 100 futures were unchanged, with JPM’s trading desk wondering if “there is enough momentum to stage a relief rally today” (full note available to pro subs). Commodities are rebounding across all three complexes with USD weaker. Government bonds in the US and Europe were broadly stronger, with US 10-year yields falling 3bps to 4.18%, halting a run of losses that was fueled by concern interest rates will be kept at high levels for longer than expected. The dollar rebounded from an early selloff while the pound strengthened as UK inflation topped expectations. Today’s macro focus is the Fed Minutes, housing data, Industrial Production, and Consumer-sector earnings.

In premarket trading, shares of Target jumped on a strong profit rebound at the retailer even as the company slashed its guidance, while electric-vehicle makers are lower again after Tesla cut its prices in China for the second time in three days, further fueling concerns of renewing a price war that had showed some signs of abating (Tesla -1.5%, Rivian -1.7% and Nikola -2.1%). Keep an eye on banks, which got hit on news of a potential sector-wide ratings downgrade; XLF and KRE are indicated flat pre-mkt. Here are some other notable premarket movers:

• Cava rises 12% after the fast-casual Mediterranean restaurant chain said it expects higher profits this year.
• Coherent falls 20% after the semiconductor device company forecast revenue for the first quarter that came in below analysts’ estimates.
• Dlocal shares soared 30% after the Uruguayan financial technology firm reported second-quarter net income that beat estimates and named e-commerce veteran Pedro Arnt as co-CEO. Analysts said the results were strong and applauded Arnt’s appointment.
• Occidental edges up 0.4% after the oil producer said it agreed to acquire Canadian startup Carbon Engineering Ltd. for $1.1 billion in cash.
• Target (TGT) climbs 7.7% after reporting fiscal second-quarter adjusted earnings per share and gross margin that topped the average analyst estimates. Adjusted EPS $1.80 vs. 39c y/y, estimate $1.40. Still, the retailer lowered its full-year sales and profit expectations.
• VinFast Auto falls 12% after the Vietnamese automaker’s shares surged 255% on Tuesday when it debuted on the Nasdaq Global Select Market, becoming the latest beneficiary of frenzy around SPAC deals.
• AngioDynamics (ANGO) gains 8.4% after the company said the FDA has granted breakthrough device designation for AngioVac System “for use to include the non-surgical removal of vegetation from the right heart.”.
• Coherent falls 24% after the semiconductor device company gave a forecast that was weaker than expected.
• Nubank (NU) shares advance 3.4% after the digital bank reported second-quarter net income that beat estimates. Morgan Stanley said the results were solid, while Numis noted that the company had achieved the objectives that were core to its business model.

Market sentiment was dented by a renewed concerns about China’s economic woes  despite a slew of stimulus steps by authorities, with the onshore yuan sinking toward its weakest in 16 years against the dollar and the MSCI China Index of stocks set to erase gains seen since a key policy meeting in late July.

China’s central bank moved again on Wednesday to boost fragile sentiment with a stronger-than-expected reference rate for the yuan and the largest injection of short term cash to the financial system since February. So far the steps have failed to restore optimism and market moves suggest traders are looking for more aggressive supportive measures. “Market participants are watching the developments on the real estate markets in China and the US with growing concern,” said Andreas Lipkow, a strategist at Comdirect Bank. Realizing the futility of China’s piecemeal interventions which do nothing, a PBOC central banker has now called for at least 3 trillion yuan in helicopter money to stimulate flagging consumer demand.

Meanwhile, money-market wagers for the Bank of England’s peak interest rate held steady at 6% after the UK inflation print came in hotter than expected as the cost of travel and holidays climbed. The numbers added to hot wage figures and US retail statistics that rattled markets on Tuesday, spurring bets tight central bank policy will be in place for longer.  inneapolis Fed President Neel Kashkari warned that inflation was “still too high.”

European equities moved between modest gains and losses as growing pessimism around China’s economic outlook prompted caution among investors. Higher-than-expected UK inflation data also weighed on sentiment. The Stoxx Europe 600 was little changed after falling to the lowest level in a month on Tuesday. Retailers led gains while energy and travel and leisure stocks were the biggest laggards. Among individual stocks, Admiral Group Plc rallied after reporting results that Jefferies said showed that its UK car business had recovered well. Elsewhere, nutrition firm Glanbia Plc advanced after boosting its full-year adjusted earnings guidance. Here are the biggest European movers:

• Aviva rises as much as 3% after the UK insurer and asset manager said 2023 earnings should exceed medium-term targets. Morgan Stanley notes improving property and casual insurance
• Sectra gains as much as 9.9%, the most since June, after the medical imaging firm announced it has won an enterprise imaging contract with “one of the larger multi-region healthcare systems in the US”
• Demant gains as much as 5.3% after the Danish hearing-aid maker raised its sales and earnings outlook for the year. Still, the guidance upgrade was “widely anticipated,” according to Citi analysts
• B&M European Value Retail rises as much as 3.2% in a third day of gains amid speculation that the company could bid for collapsed British discounter Wilko
• Glanbia shares climb as much as 5.7% to the highest since September 2021 after the Irish food and nutrition company increased its outlook for the year and named Hugh McGuire as its new CEO
• Balfour Beatty falls as much as 4.8%, the most intraday since February, after the UK construction and infrastructure group’s 1H EPS came below expectations and its net cash position fell, Liberum writes
• Prosus shares drop as much as 3.9% in Amsterdam trading after Tencent’s second-quarter revenue missed expectations, held back by lower-than-expected sales from games both at home and abroad
• Antofagasta falls as much as 2.4% after RBC Capital downgrades to underperform, citing growing capital expenditure and a risk to the premium valuation the miner has built year-to-date
• Storskogen falls as much as 26% after the Swedish acquisition group’s second-quarter Ebit dropped 11% y/y and fell 19% short of consensus expectations, also guiding for continued challenges

Asian equities retreat for fourth day as risk appetite remained low in the wake of growing economic concerns in China and prospects of the Federal Reserve keeping rates higher for longer. The MSCI Asia Pacific Index fell as much as 1.4%, set for its lowest close since May 31. Chinese equities weighed on the regional benchmark as disappointing economic data worsened the recent selloff, while South Korean gauges were the worst performers regionally as foreign investors sold shares amid a stronger dollar. Hang Seng falls 1.2% and mainland indexes lose ground. Japanese, South Korean and Australian stock indexes all decline.

“A recent set of disappointing economic data out of China has not been encouraging for the region,” Jun Rong Yeap, Market Analyst at IG Asia Pte. said in a note. The aggressive 15 bps cut by Chinese central bank to its one-year policy interest reflects the severity of the economic weakness that authorities foresee to drag on for longer, Yeap said.

• The Hang Seng and Shanghai Comp remained pressured amid China growth concerns as recent poor data releases have prompted several banks to cut their growth forecasts for the world’s second-largest economy including JPMorgan which now anticipates 4.8% GDP growth for China this year, while the latest House Price data also showed a contraction Y/Y to add to the ongoing developer woes. The MSCI China Index is on course to erase all its gains made since last month’s Politburo meeting, reflecting growing anxiety among investors that Asia’s largest economy needs major economic stimulus to boost its consumption and property sector.
• Japanese stocks fell on Wednesday amid concerns that interest rates will stay higher for longer in the US and as the outlook for the Chinese economy remained downbeat. The Topix Index fell 1.3% to 2,260.84 while the Nikkei declined 1.5% to 31,766.82. Materials-related stocks such as steel and non-ferrous metals declined, as did trading company stocks.
• In Australia, the ASX 200 was led lower by the large industries, while participants also digested earnings and a softer leading index.
• Stocks in India erased initial losses to end higher as utilities and automakers gained. Local shares were among major gainers in Asia as most regional peers fell amid concerns over slowing growth in China. The S&P BSE Sensex rose 0.2% to 65,539.42 in Mumbai. The NSE Nifty 50 Index advanced by a similar measure before recovering from a drop of as much as 0.6%. Trading in India was closed on Tuesday for a local holiday.

In FX, the Bloomberg Dollar Spot Index edged lower, falling as much as 0.2% after four-straight days of increases. The dollar was lower against all G10 peers.

• The pound rose as much as 0.5% to $1.2766, set for a second day of gains versus the dollar after inflation data came in slightly stronger than expected. It’s the best performer among the G-10’s with the kiwi, which rose after the RBNZ left the door open to further rate hikes.
• EUR/USD snapped three days of declines against the US dollar, rising about 0.3% to 1.0934
• The New Zealand dollar reversed an intraday decline after the Reserve Bank left its key rate unchanged at 5.5% but signaled a small chance of another rate hike. Yields on 2-year swaps also reversed its 2.5-basis point slidethanks  earlier in the day
• A selloff in Chinese assets deepened on Wednesday, with a key equity gauge set to erase all gains seen since last month’s Politburo meeting and the yuan falling toward a 16-year low.

In rates, treasuries are in the green with US 10-year yields falling 3bps to 4.18% on speculation the jump in yields is overdone; treasuries were richer across the curve by up to 4.5bps in a bull steepening move with front-end leading gains; 2s10s, 5s30s spreads are steeper by 1.7bp and 4.5bp on the day ahead of key US data and FOMC meeting minutes release later in the US session. 10-year yields around 4.18% after breaching 4.20% Tuesday, richer by 3bp on the day and outperforming bunds and gilts by 0.5bp and 6bp. The current TSY yield provides a good entry point for investors, according to Steven Major, global head of fixed-income research at HSBC Holdings. “Going up the US curve to 10 year-plus is now looking more and more interesting,” he said on Bloomberg Television. Bunds also rise but gilts are nursing small declines after UK inflation rose slightly faster than expected in July.  The dollar IG issuance slate empty so far; three deals priced Tuesday for a combined $1.85b — at least three issuers elected against announcing transactions.

In commodities, crude futures are little changed with WTI trading near $81. Benchmark European natural gas futures rose as much as 10% — after gaining 13% on Tuesday — as traders weighed the prospect of disruptions against weak demand and high storage levels in the region. Gold prices edged 0.2% higher.

Looking to the day ahead now, and one of the main highlights will be the FOMC minutes from their July meeting. US data releases include July’s industrial production, capacity utilisation, housing starts and building permits. Elsewhere, there’s UK CPI for July and Euro Area industrial production for June. Lastly, earnings releases include Target and Cisco.

Market Snapshot

• S&P 500 futures up 0.3% to 4,465.25
• MXAP down 1.2% to 159.53
• MXAPJ down 1.0% to 502.94
• Nikkei down 1.5% to 31,766.82
• Topix down 1.3% to 2,260.84
• Hang Seng Index down 1.4% to 18,329.30
• Shanghai Composite down 0.8% to 3,150.13
• Sensex little changed at 65,403.63
• Australia S&P/ASX 200 down 1.5% to 7,195.17
• Kospi down 1.8% to 2,525.64
• STOXX Europe 600 up 0.2% to 456.34
• German 10Y yield little changed at 2.67%
• Euro up 0.3% to $1.0934
• Brent Futures up 0.1% to $85.01/bbl
• Gold spot up 0.2% to $1,905.41
• U.S. Dollar Index down 0.25% to 102.95

Top Overnight News from Bloomberg

• A record of the Federal Reserve’s July policy meeting due Wednesday is set to show only a minority of officials favored holding interest rates steady over the remainder of the year, according to Bloomberg Economics.
• UK inflation remained higher than expected last month as the cost of travel and holidays climbed, adding to the case for the Bank of England to raise interest rates again.
• The yen may have slumped to within a whisker of levels that saw Japan intervene in the currency market last year, but options traders see little need to prepare for a jolt from authorities in Tokyo.
• New Zealand’s central bank kept interest rates unchanged for a second straight meeting but signaled a risk that it may need to hike them further to tame inflation.
• China home prices dropped for a second month in July, a further sign of the deepening property downturn that’s weighing on the world’s second-largest economy.
• Fitch Ratings Ltd. said it may reconsider China’s A+ sovereign credit score, adding to the growing pessimism toward the nation’s financial markets.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were pressured following the declines on Wall St amid the broad risk-off mood, which was triggered by global macro headwinds, in particular, the recent slew of weak data from China. ASX 200 was led lower by the large industries, while participants also digested earnings and a softer leading index. Nikkei 225 dipped beneath the 32,000 level as all major bourses suffered from the falling tide across stocks. Hang Seng and Shanghai Comp remained pressured amid China growth concerns as recent poor data releases have prompted several banks to cut their growth forecasts for the world’s second-largest economy including JPMorgan which now anticipates 4.8% GDP growth for China this year, while the latest House Price data also showed a contraction Y/Y to add to the ongoing developer woes.

Top Asian News

• China reportedly asked some funds to avoid net equity sales as the market sinks, according to Bloomberg sources.
• RBNZ kept the OCR unchanged at 5.50% as expected, while it noted that the Committee agreed that the OCR will need to remain at a restrictive level for the foreseeable future and the current level of interest rates is constraining spending and hence inflation pressure, as anticipated and required. RBNZ also stated that headline inflation and inflation expectations have declined but measures of core inflation remain too high, as well as noted there is a risk in the near-term that activity and inflation measures do not slow as much as expected. Furthermore, it slightly raised OCR projections which is seen at 5.57% in September 2024 (prev. 5.43%) and at 5.50% in December 2024 (prev. 5.30%).
• RBNZ Governor Orr said during the press conference that the rise in the OCR track is not forward guidance and is not a strong signal of their next move, while they are wary about doing too much on rates. Orr noted that risks in the next few months are that activity could be stronger than projected, while he responded that there will always be the risk of another rate hike as there is always the risk of a rate cut when asked if there are risks of another hike, and stated that they are very comfortable where the OCR is.

European bourses trade mixed after opening after shrugging off mild broad-based opening losses with no obvious catalyst behind the move at the time. Sectors are mixed with Retail, Utilities, Consumer Produce & Services at the top of the bunch while Travel & Leisure, Media, Energy and Telecoms reside as the laggards. Stateside, equity futures are trading slightly firmer as some positive sentiment attempts to return following yesterday’s closes, with traders looking ahead to FOMC minutes.

Top European News

• Norwegian Sovereign Wealth Fund CEO expects that inflation will be difficult to lower; cites climate change, driving up food prices and lowering worker productivity.

FX

• DXY faded again on a combination of factors; the index narrowly failed to match the prior session high before retreating from 103.270 to 102.940 and back down through the 200 DMA in the process.
• GBP received a boost from slightly above consensus core UK inflation hot on the heels of the even stronger average earnings relative to expectations.
• NZD is the top G10 performer after the RBNZ held rates but tweaked its OCR path upwards to omit a rate cut by Dec 2024.
• PBoC set USD/CNY mid-point at 7.1986 vs exp. 7.2878 (prev. 7.1768)
• Chinese state banks were seen selling dollars vs yuan at the 7.2800 level.
• Russian Authorities may bring back the compulsory sale of FX revenues “at any moment” even though part of export revenues are now in Roubles and Rupees, according to Reuters citing a high-level source who said the move could be imminent.
• South Korean Finance Minister said tax breaks on oil products are to be extended until the end of October, adding they are closely watching the FX market, according to Reuters.

Fixed Income

• Debt futures remain broadly firmer after recouping more losses from fresh cycle lows, with the exception of Gilts that have been hampered by core UK CPI bucking the disinflationary dynamic.
• Bunds are hovering just over 131.00 within a 131.14-130.65 range, while Gilts sits sub-parity between 93.05-92.53 parameters and the T-note holds nearer 110.04+ overnight peak than 109-24 trough
• Germany sold EUR 0.787bln vs. Exp. EUR 1bln 0.00% 2050 Bund and EUR 1.266bln vs. Exp. EUR 1.5bln 0.00% 2052 Bund

Commodities

• WTI and Brent futures are flat in tight ranges with little in the way of fresh newsflow for the complex, with the downside from the overnight risk aversion somewhat cushioned by the constructive Private Inventory report yesterday
• Spot gold moves in tandem with the Buck after finding overnight support at the USD 1,900/oz mark and gradually inching higher back towards its 200 DMA (1,905/oz).
• Base metals have tilted firmer since the lacklustre European opened with sentiment in the complex potentially supported (alongside the soft dollar) by Chinese battery maker CATL unveiling its new “superfast charging” long-range battery.
• US Energy Inventory Data (bbls): Crude -6.2mln (exp. -2.3mln), Gasoline +0.7mln (exp. -1.3mln), Distillate -0.8mln (exp. -0.5mln), Cushing -1.0mln.
• Woodside Energy (WDS AT) workers at the North West Shelf LNG plant will likely hold more talks next week after failing to reach an agreement yesterday. The talks are reportedly slated for next Wednesday, according to Bloomberg sources. Chevron (CVX) will reportedly delay plans to sell some spot market cargoes from its Gorgon operation amid the risk of strikes, according to Bloomberg sources.
• Warehouses and grain silos were damaged in Russia’s overnight attack at one of the Danube river ports in Ukraine, according to the Odesa governor cited by Reuters.

Geopolitics

• Ukraine said Russian drones were over the Danube and headed towards river port Izmail. It was also reported that Russia’s Defence Ministry said it destroyed three Ukrainian drones over Russia’s Kaluga region, according to Reuters.
• North Korea said US soldier Travis King confessed he decided to come over to North Korea as he harboured ill feelings against the US Army and expressed a willingness to seek refuge in North Korea or a third country, according to KCNA.

US Event Calendar

• 07:00: Aug. MBA Mortgage Applications -0.8%, prior -3.1%
• 08:30: July Housing Starts, est. 1.45m, prior 1.43m
  • July Housing Starts MoM, est. 1.1%, prior -8.0%
  • July Building Permits, est. 1.46m, prior 1.44m, revised 1.44m
  • July Building Permits MoM, est. 1.5%, prior -3.7%
• 09:15: July Industrial Production MoM, est. 0.3%, prior -0.5%
  • July Manufacturing (SIC) Production, est. 0%, prior -0.3%
  • July Capacity Utilization, est. 79.1%, prior 78.9%
• 14:00: July FOMC Meeting Minutes

DB’s Henry Allen concludes the overnight wrap

Markets have continued to struggle over the last 24 hours, with both the S&P 500 (-1.16%) and Europe’s STOXX 600 (-0.93%) hitting a one-month low. Several factors were behind the declines, including ongoing concern about China’s economy. But yesterday also brought a fresh round of concerns about inflation, not least after UK wage growth and Canadian CPI both surprised on the upside, whilst European natural gas prices (+12.89%) saw a fresh spike amidst a potential strike at Australian LNG facilities. All that put a dent in risk assets, but the inflation fears contributed to a decent bond sell-off as well, with yields reaching their highest level in months across several countries.

Markets had already started the day on the back foot after the weak China data we discussed yesterday and the mood didn’t improve much from there, starting with the latest UK labour market data. That showed regular annual pay growth (excluding bonuses) was running at +7.8% over the three months to June, which was the highest since comparable records begin in 2001, and some way above the +7.4% consensus. That added to fears about entrenched inflation, whilst there was also bad news on the unemployment side, which rose to 4.2% over the same period (vs. 4.0% expected). See our economists’ reaction note here for more details.

The UK print led investors to ratchet up the chance of further rate hikes from the Bank of England over the months ahead. Indeed, the size of the hike priced in for the next meeting in September went up by +8.3bps yesterday from 23.7bps to 32.0bps, and this morning markets are now fully pricing in a terminal rate of 6% by the time of the March 2024 meeting. So all eyes will be on today’s UK CPI print to see how that changes things, and our UK economist is looking for a +6.8% reading.

That wage data served as the catalyst for a substantial sovereign bond sell-off that only came off slightly towards the day’s end. In fact, yields on 10yr bunds (+3.6bps) hit a post-SVB high of 2.67%, as did those on 10yr OATs (+4.0bps) which closed at 3.21%. 10yr gilts saw a more moderate rise (+2.3bps to 4.59%) but with a larger sell-off in the 2yr after the stronger pay data (+5.6bps). There were also sizeable moves at the long end of the curve, with the nominal and real 30yr gilt yield both rising to their highest level since the mini-budget turmoil last year, at 4.77% and 1.34%, respectively.

Inflation news elsewhere added further fuel to the sell-off. For instance, Canada’s CPI in July moved back up to +3.3% (vs. +3.0% expected), which similarly led investors to price in a growing chance of another Bank of Canada rate hike by year-end. And back in Europe, natural gas futures (+12.89%) closed at their highest level in over two months. That came as the potential strike among Australian LNG workers remained unresolved. If there is a strike, that could interrupt as much as 10% of global LNG exports, so it has significant importance to the global market.

The backdrop of weaker China activity data and higher inflation risks meant that risk assets put in a weak performance across the board, with the S&P 500 down -1.16%. Banks (-2.75%) saw their weakest day since early May, whilst energy stocks (-2.44%) also underperformed as oil prices retreated (WTI crude -1.84% to $80.99/bl). That said, the decline was broad-based, with all 24 industry groups of the S&P 500 down on the day. This came in spite of upbeat retail sales numbers out of the US, with headline sales up +0.7% in July (vs. +0.4% expected) and retail control up +1.0% (vs +0.5% exp.). Other indices saw a similar pattern, with the NASDAQ (-1.14%) and the Dow Jones (-1.02%) both losing ground. And back in Europe it was much the same story, with losses for the STOXX 600 (-0.93%), the DAX (-0.86%) and the CAC 40 (-1.10%).

Another asset that saw significant moves yesterday were US Treasuries, and the 10yr real yield (+5.0bps) closed at a post-2009 high of 1.88%. Nominal yields had an eventful day too, with the 10yr yield (+2.0bps) up for a 4th consecutive day to 4.211%, which was actually a slight pullback from the intraday peak of 4.268%. That went alongside a steepening in the yield curve, with the 2yr yield down -1.5bps to 4.952% as investors priced in a slightly more dovish path for the fed funds rate. For instance, futures for the December 2023 and 2024 meetings were down -1.2bps and -2.7bps, respectively. That also followed comments from Minneapolis fed President Kashkari, who commented that he wasn’t “ready to say that we’re done”, and that the Fed is “a long way from cutting rates”.

Overnight in Asia, that pattern of losses has continued, with sharp losses across the major indices. That includes the KOSPI (-1.52%) as it returns after a public holiday, as well as the Hang Seng (-1.39%), the Nikkei (-1.09%), the Shanghai Comp (-0.25%) and the CSI 300 (-0.18%). The moves come amidst further signs of property market weakness in China, with new home prices down by a monthly -0.23% in July. In the meantime, the People’s Bank of China injected a net 297bn yuan of cash through its 7-day reverse repurchase contracts overnight, which is the most since February. Looking forward, equity futures are pointing to further losses, with those on the STOXX 50 (-0.33%) and the DAX (-0.37%) falling back, whilst S&P 500 futures (-0.01%) have seen a modest decline.

Elsewhere overnight, the Reserve Bank of New Zealand held its benchmark policy rate at 5.5% as expected, whilst indicating that interest rates would need to stay high for some time yet to tame inflation. Their latest forecasts show the average official cash rate with a higher path than before, with a peak of 5.59% in mid-2024. However, Governor Orr played down the higher rate track, saying that they were in “watch, worry and wait” mode. This morning the New Zealand dollar is the best-performing G10 currency, and is up +0.17% against the US Dollar.

When it came to yesterday’s other data, the US Empire State manufacturing survey fell back to -19.0 (vs. -1.0 expected). Separately, the NAHB’s housing market index fell back to 50 in August (vs. 56 expected), which marked an end to a run of 7 consecutive monthly gains. Over in Europe, the German ZEW survey saw the current situation fall to its weakest since October at -71.3 (vs. -63.0 expected). However, the expectations component moved up slightly to -12.3 (vs. -14.9 expected).

To the day ahead now, and one of the main highlights will be the FOMC minutes from their July meeting. US data releases include July’s industrial production, capacity utilisation, housing starts and building permits. Elsewhere, there’s UK CPI for July and Euro Area industrial production for June. Lastly, earnings releases include Target and Cisco.