“The equity markets are getting clobbered, which is not that surprising with fears of a trade war breaking out” – Paul Fage, TD Securities
Global equities are melting as they take the full brunt of market worries of a rising trade war after China announced it plans $3BN in tariffs on US imports in retaliation to the $50BN in US sanctions, while the latest personnel turnover in the White House (Dowd, McMaster) add to fears of rising political uncertainty.
World stocks are down 3.4% since Monday, are on course for their worst week since early February, when a spike in volatility sent markets into a tailspin.
S&P futures are trading in the red, down 9 ticks as VIX make a trip back to the 25 handle.
Trade Wars
- Overnight, China announced it plans tariffs on USD 3bln of US imports, in which it plans 15% tariffs on US steel pipes, wine and fruits, while it also plans tariffs of 25% on US pork and pork products. Furthermore, there were also comments from Mofcom that China doesn’t want a trade war but is not afraid of one, while the ministry added it hopes US will be prudent in its decisions and pulls back from the ‘brink’.
- Russia’s Ministry of Trade and Industry said they are preparing restrictions on US imports as a response to US aluminium and steel tariffs.
- EU’s Tusk states that EU leaders have called for a permanent exemption from US tariffs.
- The US launched a WTO complaint over China’s “discriminatory technology licensing requirements”.
- Source reports indicate that China intervened overnight to support its stock market after tariff announcements triggered losses.
Overnight, China announced retaliation against President Donald Trump’s tariffs and there was further turnover in the U.S. administration, compounding a selloff that started in technology shares and escalated when the White House unveiled its protectionist agenda on Thursday.
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As a result, Thursday’s risk-off session continues across the board as trade conflict fully begins; the Nikkei finished -4.5% while China was close behind.
European stocks tumbled at the open, down 2% to the lowest level since February 2017, pressured by the trade and growth sensitive autos and mining sectors , with Germany’s down 1.6 percent, the French CAC 40 1.5 percent lower and Britain’s FTSE 100 0.8 percent in the red.
As Bloomberg notes, it has been a miserable week for higher-risk markets globally, as a trade war edged closer, the tech sector was roiled by Facebook Inc.’s privacy scandal and data showed European growth sputtering. Traders had already been bracing for the possibility of slowing expansion as the Federal Reserve reiterated its commitment to further interest-rate increases after Wednesday’s hike.
“The window from coming back from an all-out trade war is still open, but closing fast, and obviously leaves a lot of uncertainty over the next two to three weeks,” said Kay Van-Petersen, a Singapore-based global macro strategist with Saxo Capital Markets. It is “classic risk-off for equities today and potentially over the next few days.”
In FX, the USD/JPY slides below 105, a level not seen US election night, and has been holding in tight range, while in China the USD/CNH retraces half of yesterday’s rally; the TRY spikes considerably lower in Asian trading with officials blaming thin liquidity.
There has been some stability in core fixed income which has rallied further, although not with the same momentum as yesterday, with the 10y bund yield close to 50bps; even as peripheral EGBs continue to selloff.
Understandably, spot gold underpinned consistently, Dalian iron ore futures close -4.3% and crude futures grind lower from overnight highs.
For those who missed them, here are the key events in the tubulent overnight session, courtesy of Bloomberg:
- China is slowly hitting back after Donald Trump fired the first shots in what may be an extended trade war, with President Xi Jinping making it clear he’s going to wait before unleashing his country’s formidable arsenal in response
- China announced plans for reciprocal tariffs of $3 billion in response to Trump’s steel and aluminum tariffs, while the Commerce Ministry said it has a plan to act further on the planned levies on $50 billion worth of Chinese imports announced Thursday
- In Europe, there are signs Mario Draghi’s success in reviving the euro-area economy could, ironically, delay the European Central Bank’s exit from extraordinary stimulus
- The bloc’s broadest expansion in history is drawing workers back to the job market and spurring companies to invest to replace aging equipment, increasing the degree of slack in the economy
- Russia cut rates on Friday, as the central bank kept to its slow but steady pace of monetary easing. The one-week auction rate was lowered to 7.25 percent from 7.5 percent in a fifth consecutive cut — a move predicted by all but four of 38 economists surveyed by Bloomberg
- Japan’s key inflation gauge has finally reached half of its 2 percent goal, even as a strengthening yen and global trade battles threaten to curb that progress
US 10Y yields fell almost 8 basis points on Thursday, were set for their biggest two-week fall since September; on Friday they briefly dipped below 2.8%, before steadying above that level. In Europe, benchmark issuer Germany’s 10-year bond yield hovered close to 10-week lows struck a day earlier at around 0.52 percent and was on track for its biggest two-week drop since August, down 13 basis points.
Oil prices climbed amid worries that Bolton would pursue a hard-line stance against Iran. Safe-haven spot gold rose 1 percent to $1,341 an ounce, highest since Feb. 20. Copper and iron prices both fell, as investors bet demand for the metals would suffer in a trade war.
Economic data on Friday include durable goods orders and new home sales data
Market Snapshot
- S&P 500 futures down 0.2% to 2,637.00
- STOXX Europe 600 down 1.1% to 365.04
- German 10Y yield fell 1.0 bps to 0.519%
- MXAP down 2.6% to 172.06
- MXAPJ down 2.2% to 565.65
- Nikkei down 4.5% to 20,617.86
- Topix down 3.6% to 1,664.94
- Hang Seng Index down 2.5% to 30,309.29
- Shanghai Composite down 3.4% to 3,152.76
- Sensex down 1.2% to 32,627.04
- Australia S&P/ASX 200 down 2% to 5,820.73
- Kospi down 3.2% to 2,416.76
- Euro up 0.3% to $1.2334
- Brent Futures up 0.7% to $69.39/bbl
- Italian 10Y yield fell 4.6 bps to 1.63%
- Spanish 10Y yield fell 0.8 bps to 1.284%
- Brent Futures up 0.7% to $69.39/bbl
- Gold spot up 0.9% to $1,340.34
- U.S. Dollar Index down 0.2% to 89.65
Top Overnight News
- China said it doesn’t fear a trade war and announced plans for reciprocal tariffs on $3 billion of imports from the U.S. in the first response to President Donald Trump’s ordering of levies on Chinese metal exports
- Trump signs order to exclude the EU, Argentina, Australia, Brazil, Canada, Mexico and South Korea from steel and aluminum tariffs through May 1
- The U.S. president is replacing White House National Security Adviser H.R. McMaster with John Bolton, a former U.S. Ambassador to the United Nations famed for his hawkish views, in the latest shakeup of his administration.
- Senate passes $1.3t spending bill to fund govt for rest of fiscal year and avert a partial govt shutdown, sending the measure to Trump for his signature.
- Investors withdrew $19.9b from equity funds this week following last week’s record inflow, analysts at Bank of America Merrill Lynch write in research note citing EPFR Global data for week ending March 21
- Japan won’t retaliate on U.S. tariffs as it could lead to the collapse of the free-trade system, Japanese Trade Minister Hiroshige Seko said
- EU leaders will discuss trade on Friday after they were left in limbo on Thursday awaiting confirmation from President Trump that the bloc was indeed exempt from the new levies
- ECB interest-rate hike expectations have been retreating after a series of dovishly perceived central bank speakers and softening data, though interest to fade the move via put ladders has emerged via Euribor options
Asian stocks saw hefty losses on trade war fears after the US announced USD 50bln of tariffs on China and with the latter planning tariffs of USD 3bln in retaliation, while it was also reported that National Security Advisor McMasters was replaced by policy hawk John Bolton. The intensified trade tensions triggered a bloodbath across stock markets with ASX 200 (-2.0%) led lower by miners as Chinese metals prices slumped on steel demand and tariff concerns, while Nikkei 225 (-4.5%) was the worst performer and briefly fell over 1000 points as selling pressure was magnified by a firmer JPY. Elsewhere, Hang Seng (-2.5%) and Shanghai Comp. (-3.4%) conformed to the sell-off as Chinese stocks felt the pinch from the US trade offensive, while the PBoC refrained from open market operations for a net weekly drain of CNY 320bln. Finally, 10yr JGBs traded higher to track the gains in T-notes amid a safe-haven bid and with the BoJ present in the market under its massive bond buying program. This helped 10yr JGB prices back above 151.00 and saw the 10yr yield slip to below 0.025% which was its lowest since November.
European equities are suffering heavy losses across the board with the Eurostoxx (-1.4%) hitting its lowest point since August 2017, continuing to remain hampered by the risk-off sentiment seen in US and Asia, after US announced USD 50bln tariffs on China triggering a retaliation of USD 3.1bln on US imports. Taking a closer look at sectors, materials (-1.8%) and industrials (-1.6%) are lagging behind due to their vast exposure to the Chinese market and are immediately followed by IT (-1.9%), financials (-1.6%) and consumer discretionary (-1.3%). On the flip side, Next (+7.5%) is leading the FTSE100 after maintaining its profit guidance this morning and against the recent backdrop of the retail sector whilst GSK (+3.6%) is the outperformer in the index after it officially announced its withdrawal for its takeover of Pfizer’s health unit, following its rival Reckitt Benckiser who ended talks over the acquisition of the unit yesterday. Elsewhere, Indivior sank more than 20% at the open after the US court turned against the co. and is said to favour its competitor Alvogen. In the DAX, Deutsche Bank is down 12.7% for the week, extending losses over the widening LIBOR – OIS spread which is believed to provide a headwind for the bank.
FX markets continue to be swayed by the prospect of ongoing ‘trade wars’ which have adopted more of a bilateral dynamic over the past 24 hours with exemptions for Argentina, Australia, Brazil, Canada, Mexico, South Korea and EU. In terms of the follow through for FX markets, the DXY is softer and back below 90.00 but largely a by-product of the safe-haven bid into JPY which knocked USD/JPY (temporarily) below 105.00 after the pair breached the YTD low at 105.23 during yesterday’s trade. From a technical perspective, some analysts are pointing towards 103.64 as a key level which marks the 76.4% Fib from the 99.00-118.66 recovery seen in 2016; a view held by IFR. Elsewhere, the USD softness has provided a modest lift to EUR/USD holding onto 1.2300, however GBP/USD gave up the 1.4100 handle. For EUR/USD, barring any major macro developments and amid a light data docket for the EZ, 2.3bln in expiries between 1.2250 and 1.2300 could act as a guiding force for prices. Back to GBP and amid the fallout of yesterday’s BoE release, focus for the UK will likely be on developments in Brussels at the EU council meeting (albeit seen as somewhat of a rubber stamp process). N.b. BoE Vlieghe to speak at 1230GMT. Elsewhere, AUD has also benefited from the softer USD despite the risk environment, albeit the pair may struggle to make any meaningful progress above 0.7730-40. Interestingly, despite concerns over potential faltering demand from China (Australia’s major trading partner), some suggest AUD could benefit if China opts to use Australian goods as a substitute for US ones. Moving forward, CAD will likely come into focus later today amid domestic CPI and retail sales releases. Traders will be looking to see if today’s releases conform to the recent slew of soft data whilst NAFTA concerns linger in the background. If this materialises, USD/CAD could make a firmer reclaiming of the 1.3000 level to the upside but would still have some way to go to hit the 2018 high around 1.3125.
In commodities , WTI (+0.1%) and Brent Crude (+0.3%) are underpinned by the latest comment from Saudi Energy Minister Al-Falih stating that there is still time to go before OPEC+ supply cut oil inventories to “normal levels” adding that OPEC/Non-OPEC will still require coordination in 2019. Additionally, the latest White House replacement of National Security Adviser HR McMaster with hardliner John Bolton, ahead of a key decision on May 12th regarding whether to maintain the Iran nuclear deal, raises the prospect of sanctions against Iran’s oil sales. Something to be aware of, with driving season edging closer, refineries are stocking up on crude oil to meet the seasonal demand for the summer driving season commencing in a few weeks. Moving onto metals, Gold (+1.0%) prices hit highs last seen in early February, boosted as investors flock into the traditional safe haven following the eruption of a trade war between US and China. Furthermore, a softer dollar this week has been supporting the yellow metal. Base metals on the other hand have fallen amid escalating trade concerns. Chinese steel futures fell more than 6%, hitting their lowest level in more than eight months while Dalian iron ore also shed over 6% hitting lows last seen in June 2017
US Event Calendar
- 8:30am: Durable Goods Orders, est. 1.6%, prior -3.6%;
- Durables Ex Transportation, est. 0.5%, prior -0.3%
- Cap Goods Orders Nondef Ex Air, est. 0.85%, prior -0.3%
- Cap Goods Ship Nondef Ex Air, est. 0.47%, prior -0.1%
- 10am: New Home Sales, est. 620,000, prior 593,000; MoM, est. 4.55%, prior -7.8%
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