Trade fears have returned with a twist, as global market weakness has spread to European banks while safe havens including the yen and sovereign bonds are broadly higher amid a broad risk-off sentiment.
Once again, it started in China where the Shanghai Composite slumped for another session, dropping 1.1%, and falling deeper into a bear market.
The weakness was prompted by a renewed decline in the “weaponized” Yuan, which fell for a 10th consecutive day, matching a record losing stretch.
As we noted last night, last time the yuan devalued this fast, it unleashed hell on the world’s financial markets
The continued slump in the yuan has stoked concerns that Chinese policy makers are less willing to temper its decline, which may remove an anchor of stability for emerging-market currencies. Still, it may not be all Beijing’s doing as policymakers set the fixing at a level that was stronger than analysts expected on Wednesday, while the decline could have been far worse when at least one major Chinese bank sold the dollar in the onshore market to keep the yuan stronger than 6.6, according to two traders, prompting speculation of intervention.
A foreign-exchange trader in Asia told Bloomberg the offshore yuan ran into a large dollar-seller – possibly an agent bank working for Chinese authorities – after weakening beyond 6.61 per dollar. Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd., said he wouldn’t be surprised if the People’s Bank of China intervened if speculative bets against the yuan grew. “The PBOC may think that fundamentally the yuan should weaken, but the move is too fast in the past week and that could ignite capital outflows,” Ong said. “Any intervention should aim only to smooth out such market moves
Whatever Beijing’s intentions, the Chinese drop pressured the MSCI Asia Pacific index lower for third day, while the yuan led to a decline in Asian currencies, as developing-market stocks also tumbled, with the MSCI Emerging Markets Index hitting the lowest in 10 months.
In Europe, the Stoxx 600 reversed initial gains and fell with beaten-down autos sector index resuming its sell-off, down 0.8% and hitting its lowest level since September 2017 amid worries over trade tensions.
The banking sector did not help, as Deutsche Bank suffered a sharp selloff shortly after the start of trading, sending the stock to new all time lows, and dragging the European banking sector to the lowest level since 2016, and down 14% YTD.
U.S. equity-index futures also slid amid a rush for safety, which sent the dollar higher and the yield on 10Y Treasurys as low as 2.84%, briefly sending the 2s10s below 33 bps.
In FX, the dollar was headed for a second day of gains in early trading, only surpassed by the yen, which was boosted by demand for haven assets. The pound slipped while Brexit tensions kept demand for pound puts strong across tenors, though BOE policy maker Ian McCafferty’s stance that officials shouldn’t wait any longer to increase interest rates eases pressure on the medium term. The kiwi led declines among Group- of-10 peers, dropping to its lowest since November and also dragging down the Aussie, before the RBNZ’s interest-rate decision on Thursday,
Continued mixed signals on global trade have complicated the investment picture, after President Donald Trump signaled he may take a less confrontational path toward curbing Chinese investments, only for his trade representative Robert Lighthizer to once again pour fuel on the showdown with countries including the EU, blasting the various retaliatory tariffs the U.S.’ trading partners have advanced in reaction to the Trump administration’s trade policies, calling the tariffs proof of the “complete hypocrisy” of the global trade system.
“[T]he European Union has concocted a groundless legal theory to justify immediate tariffs on U.S. exports. Other WTO Members, including China, have adopted a similar approach. These retaliatory tariffs underscore the complete hypocrisy that governs so much of the global trading system,” Lighthizer said in a statement Tuesday evening.
Also overnight, the US House voted 400 vs. 2 in favour of passing bill to tighten oversight of US foreign investment due to concern over China. In related news, US President Trump suggested he would back down from his demand for new tight restrictions on Chinese investments into technology and instead rely on other channels already in place such as CFIUS.
In commodities, oil was up ~0.8% on the day and around the month-long high levels seen post Tuesday afternoon’s rally after reports the US was pressing its allies to halt all oil imports from the nation by November. Further, API inventory report showed the largest drawdown to crude stockpiles since September 2016, although the impact was relatively contained on slight fatigue considering WTI had already rallied over 3% prior to the release. In the metals scope, gold is uneventful at its lowest levels since December 2017 as the overnight weakening has abated slightly. Copper has hit 12 week lows as trade concerns have hit the building material at USD 6,679/tonne, alongside ongoing supply concerns from Chile.
Expected data include MBA mortgage applications, wholesale inventories, and durable-goods orders. Canopy Growth, General Mills, Paychex, Bed Bath & Beyond and Rite Aid are among companies reporting earnings
Market Snapshot
- S&P 500 futures down 0.6% to 2,713.00
- STOXX Europe 600 down 0.8% to 374.43
- German 10Y yield fell 2.9 bps to 0.311%
- Euro down 0.2% to $1.1631
- Italian 10Y yield rose 6.2 bps to 2.619%
- Spanish 10Y yield fell 2.9 bps to 1.364%
- Brent futures up 0.1% to $76.41/bbl
- Gold spot down 0.2% to $1,256.19
- U.S. Dollar Index up 0.1% to 94.78
- MXAP down 0.7% to 165.81
- MXAPJ down 1.1% to 535.03
- Nikkei down 0.3% to 22,271.77
- Topix up 0.02% to 1,731.45
- Hang Seng Index down 1.8% to 28,356.26
- Shanghai Composite down 1.1% to 2,813.18
- Sensex down 0.7% to 35,244.36
- Australia S&P/ASX 200 down 0.03% to 6,195.86
- Kospi down 0.4% to 2,342.03
Top Overnight News from Bloomberg
- U.S. President Donald Trump signaled he may take a less confrontational path toward curbing Chinese investments in sensitive American technologies, potentially relying on a U.S. committee that scrutinizes foreign acquisitions for national security risks
- An accelerating slump in China’s yuan is stoking fear that policy makers are less willing to temper the currency’s decline as the economy slows and a trade battle with the U.S. worsens
- The Canadian government is preparing new measures to prevent a potential flood of steel imports from global producers seeking to avoid U.S. tariffs, according to people familiar with the plans
- S&P Global Ratings affirmed the U.S.’s sovereign credit score at AA+, the assessor’s second- highest grade, citing the country’s “diversified and resilient economy” while noting the impact of ongoing political wrangling on public finances
- Oil held gains above $70 a barrel as the U.S. pressed allies to end Iranian imports by a November deadline and after industry data showed American inventories declined
- U.K. house-price growth slowed in June, dropping to its weakest pace in five years, according to Nationwide Building Society.
- Europe’s junk-debt investors are gaining ground after years of borrowers chipping away at the safeguards enshrined in the small print of bond documents
- Bank of Japan’s Deputy Governor Masayoshi Amamiya sees the central bank as “very far off from the exit”, underpinning monetary policy divergence that could keep the pair in bullish trajectory as long as trade concerns ease
Asian equity markets were negative with the region cautious as trade concerns lingered, albeit with a slight moderation after US President Trump suggested he would ease off on demands for new tight restrictions regarding Chinese investments and instead go through channels already in place such as the Committee on Foreign Investment in the United States. ASX 200 (flat) was choppy as the initial gains led by the energy sector were briefly eclipsed by weakness in telecoms and financials, while Nikkei 225 (-0.3%) exporter names were dampened by currency strength. Elsewhere, Hang Seng (-1.8%) and Shanghai Comp. (-1.1%) were also subdued amid the current backdrop of trade concerns and after a net liquidity drain by the PBoC which saw the mainland index extend on its descent through bear market territory. Finally, 10yr JGBs were relatively flat with only minimal support seen from the risk-averse tone in Japan and the BoJ’s presence for JPY 810bln of JGBs across the curve. Chinese President Xi is said to have warned leaders to be prepared in the event of a full-scale trade war with US during a 2-day meeting, according to a note from SGH Macro Advisors that also suggested the PBoC will refrain from buying US Treasuries and seek to lower them.
Top Asian News
- BreadTalk Soars to Record High as It Presents at Citi Roadshow
- Bank Rakyat Is Said to Revive Sale of Stake in Life Insurer
- China H Shares, Once World’s Hottest, Tumble Into Bear Market
- Yuan’s Rapid Selloff Puts China’s Market-Anchor Role in Danger
European equity bourses were initially negative across the board as trade concerns hit European markets following US congressional approval of increased US-Chinese investment scrutinization. There was a turnaround, however, into positive territory with the DAX currently the outperforming bourse, after hitting 2 month lows, on the back of US Defence Secretary Mattis striking a positive tone after talks with Chinese President Xi. Most bourses are still below their 100DMA, however, and have not been able to eliminate the losses seen throughout the week, with the DAX at 12,210 vs. its 50DMA of 12,761, the FTSE 100 at 7,534 vs its 50DMA of 7,616 and the CAC at 5,268 vs. its 50DMA of 5,473. The financial sector (-0.4%) is currently underperforming as falling treasury yields are weighing on the sector.
Top European News
- European Banks Decline as Deutsche Bank Hits Fresh Low
- Banks in Denmark Are Facing a Capital Hit as Early as This Year
- Norway Sells Out of SAS in Move That May Ease Consolidation
- Bulgaria Blames ‘Constantly Changing’ Demands for Euro Delay
In FX, it was a cagey start to European trade in FX markets with most majors sticking to their recent ranges. Subsequently, the USD trades relatively unchanged thus far with the DXY sitting just above 94.50 as markets pause for breath after US President Trump took a slightly more conciliatory tone yesterday by suggesting he would ease off on demands for new tight restrictions regarding Chinese investments. That said, despite these comments from Trump, they are unlikely to signal a U-turn in US trade policy and the threat of an escalation in trade tensions remains at the forefront of investor sentiment. From a Chinese perspective, preparations are said to be made by leaders of the communist regime to help protect the nation’s economy in the event of a trade war with the US. It’s worth noting that the PBoC set the CNY mid-point fix at its softest level since 25th December last year with USD/CNY back below 6.6000 as the recent move to the downside continues to gather momentum; scepticism remains as to whether this is actually a targeted policy measure by China and how fair they would be willing to tolerate the move given the risk of capital outflows. Elsewhere, not too much to report for EUR as focus on the most recent ECB policy announcements and communications somewhat abates Subsequently, in the absence of any major USD traction at this stage of the session, option activity could dictate performance for the pair with 1.6bln in expiries at 1.1650, 3.3bln at 1.1625 and 2.4bln at 1.1600.
In commodities, oil is up ~0.8% on the day and around the month-long high levels seen post Tuesday afternoon’s rally after reports the US was pressing its allies to halt all oil imports from the nation by November. Further, API inventory report showed the largest drawdown to crude stockpiles since September 2016, although the impact was relatively contained on slight fatigue considering WTI had already rallied over 3% prior to the release. In the metals scope, gold is uneventful at its lowest levels since December 2017 as the overnight weakening has abated slightly. Copper has hit 12 week lows as trade concerns have hit the building material at USD 6,679/tonne, alongside ongoing supply concerns from Chile.
US Event Calendar
- 7am: MBA Mortgage Applications, prior 5.1%
- 8:30am: Advance Goods Trade Balance, est. $69.0b deficit, prior $68.2b deficit, revised $67.3b deficit
- 8:30am: Wholesale Inventories MoM, est. 0.2%, prior 0.1%; Retail Inventories MoM, prior 0.6%, revised 0.5%
- 8:30am: Durable Goods Orders, est. -1.0%, prior -1.6%; Durables Ex Transportation, est. 0.5%, prior 0.9%
- 8:30am: Cap Goods Orders Nondef Ex Air, est. 0.45%, prior 1.0%; Cap Goods Ship Nondef Ex Air, est. 0.3%, prior 0.9%
- 10am: Pending Home Sales MoM, est. 0.5%, prior -1.3%; Pending Home Sales NSA YoY, prior 0.4%
via RSS https://ift.tt/2MomDL9 Tyler Durden