Month: September 2019

Authored by Lance Roberts via RealInvestmentAdvice.com,

Earnings results for the third quarter is fast approaching, and investors are getting excited for the “beat the estimate” game where Wall Street continually lowers estimates so companies can beat them. As I noted previously:

One of the reasons given for the push to new highs was the ‘better than expected’ earnings reports coming in. As noted by FactSet: 

“78% have reported actual EPS above the mean EPS estimate…The percentage of companies reporting EPS above the mean EPS estimate is above the 1-year (76%) average and above the 5-year (72%) average.”

The problem is the “beat rate” was simply due to the consistent ‘lowering of the bar’ as shown in the chart below:

Beginning in mid-October last year, estimates for both 2019 and 2020 crashed. 

This is why I call it ‘Millennial Soccer.’ 

Earnings season is now a ‘game’ where scores aren’t kept, the media cheers, and everyone gets a ‘participation trophy’ just for showing up.

You also can’t turn on financial television, or read a financial website, without the continual droning from a Wall Street analyst about why the markets are destined to go higher, or why you should be buying XYZ stock.

The mainstream press, most financial advisers, and the average investor, unfortunately take this information as “fact,” and use it as a basis for portfolio investment decisions.

But why wouldn’t you?

After all, Carl Gugasian of Dewey, Cheatham & Howe just rated Bianchi Corp. a “Strong Buy.” That rating is surely something that you can “take to the bank,”right?

Maybe not.

For many years, I have counseled individuals to disregard mainstream analysts, Wall Street recommendations, and even MorningStar ratings, due to the inherent conflict of interest between the firms and their particular clientèle. Here is the point:

• YOU, are NOT Wall Street’s client.

• YOU are the CONSUMER of the products sold FOR Wall Street’s clients.

Major brokerage firms are big business. I mean REALLY big business. As in $1.8 Trillion a year in revenue big. The table below shows the annual revenue of 40 of the largest financial firms in the S&P 500.

(The revenue of the 40 largest firms was in excess of $1.65 Trillion, or 88% of the total revenue generated by all 98 financial firms comprising the S&P 500 financial sector.)

Like all businesses, these companies are driven by the needs of increasing corporate profitability, on an annual basis, regardless of market conditions.

The Conflict Arises

When it comes to Wall Street profitability, the most lucrative transactions are not coming from servicing “Mom and Pop” retail clients trying to save their way into retirement.

Wall Street is not “invested” along with you, but “uses you” to generate income.

This is why “buy and hold” investment strategies are so widely promoted. As long as your dollars are invested the mutual funds, stocks, ETF’s, etc, brokerage firms collect fees regardless of what happens in the market. These strategies are certainly in their best interest – just not necessarily yours.

However, those retail management fees are a “rounding error” compared to the really big money.

Wall Street’s real clients are multi-million, and billion, dollar investment banking transactions, such as public offerings, mergers, acquisitions and bond offerings which generate hundreds of millions to billions of dollars in fees for Wall Street each year.

You know, companies like Uber, Lyft, Snapchat, Tesla and WeWork.

For Wall Street firms to “win” that very lucrative business, they must cater to their prospective clients. Not surprisingly, it is difficult for a firm to gain investment banking business from a company they have a “sell” rating on. This is why “buy” ratings are so prevalent versus “hold” or “sell,” as it keeps the client happy. I have compiled a chart of 4642 rated stocks ranked by the number of “Buy”, “Hold” or “Sell.”

There are just 2.8% of all stocks with a “sell” rating.

Do you believe that out of 4642 rated companies, only 129 should be “sold?”

You shouldn’t.

But for Wall Street, a “sell” rating is not good for business.

The conflict doesn’t end just at Wall Street’s pocketbook. Companies depend on their stock prices rising as it is a huge part of executive compensation packages.

Corporations apply pressure on Wall Street firms, and their analysts, to ensure positive research reports on their companies with the threat that they will take their business to another “friendlier” firm. This is also why up to 40% of corporate earnings reports are “fudged” to produce better outcomes.

As the Associated Press exposed in “Experts Worry That Phony Numbers Are Misleading Investors:”

“Those record profits that companies are reporting may not be all they’re cracked up to be.

As the stock market climbs ever higher, professional investors are warning that companies are presenting misleading versions of their results that ignore a wide variety of normal costs of running a business to make it seem like they’re doing better than they really are.

What’s worse, the financial analysts who are supposed to fight corporate spin are often playing along. Instead of challenging the companies, they’re largely passing along the rosy numbers in reports recommending stocks to investors.“

Where Do You Rank

Still think Wall Street might be looking out for you?

In a study by Lawrence Brown, Andrew Call, Michael Clement, and Nathan Sharp it is clear that Wall Street analysts are not that interested in you. The study surveyed analysts from the major Wall Street firms to try and understand what went on behind closed doors when research reports were being put together. In an interview with the researchers John Reeves and Llan Moscovitz wrote:

“Countless studies have shown that the forecasts and stock recommendations of sell-side analysts are of questionable value to investors. As it turns out, Wall Street sell-side analysts aren’t primarily interested in making accurate stock picks and earnings forecasts. Despite the attention lavished on their forecasts and recommendations, predictive accuracy just isn’t their main job.”

The chart below is from the survey conducted by the researchers which shows the main factors that play into analysts compensation.  It is quite clear that what analysts are “paid” to do is quite different than what retail investors “think” they do.

“Sharp and Call told us that ordinary investors, who may be relying on analysts’ stock recommendations to make decisions, need to know that accuracy in these areas is ‘not a priority.’ One analyst told the researchers:

‘The part to me that’s shocking about the industry is that I came into the industry thinking [success] would be based on how well my stock picks do. But a lot of it ends up being “What are your broker votes?”‘

A ‘broker vote’ is an internal process whereby clients of the sell-side analysts’ firms assess the value of their research and decide which firms’ services they wish to buy. This process is crucial to analysts because good broker votes result in revenue for their firm. One analyst noted that broker votes ‘directly impact my compensation and directly impact the compensation of my firm.’”

The question really becomes then “If the retail client is not the focus of the firm then who is?”  The survey table below clearly answers that question.

Yep, there you are.

At the bottom of the list.

The incestuous relationship between companies, institutional clients, and Wall Street is the root cause of the ongoing problems within the financial system.  It is a closed loop that is portrayed to be a fair and functional system; however, in reality, it has become a “money grab” that has corrupted not only the system but the regulatory agencies that are supposed to oversee it.

Why You Need Independence

So, where can you go to get “real investment advice” and a true consideration of the value of YOUR money?

Thankfully, starting at the turn of the century, the rise of independent, fee-only, financial advisers, private investment analysts, research, and rating firms began to infiltrate the system. 

Here is an example of the difference.

As an independent money manager, I use valuation analysis to determine what equities should be bought, sold or held in client’s portfolios. While there are many measures of valuation, two of my favorites are Price to Sales and the Piotroski f-score among others. I then sorted the entire Zacks Research equity universe of 4867 issues and ranked them by these two measures.

See the difference. Not surprisingly, there are far fewer “buy” rated, and far more “sell” rated, companies than what is suggested by Wall Street analysts.

Here is something even more alarming.

Just after the “dot.com” bust, I wrote a valuation article quoting Scott McNeely, who was the CEO of Sun Microsystems at the time. At its peak the stock was trading at 10x its sales. (Price-to-Sales ratio) In a Bloomberg interview Scott made the following point.

“At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company.

That assumes zero expenses, which is really hard with 39,000 employees.That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate.

Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes.

What were you thinking?

How many of the following “Buy” rated companies do you own that are carrying price-to-sales valuations in excess of 10x?

So, what are you thinking?

As more and more “baby boomers” head into retirement the need for firms that can do organic research, analysis, and make investment decisions free from “conflict,” which are also in the client’s best interest, will continue to be in high demand in the years to come.

This is particularly the case when the next downturn occurs and the dangers of passive ETF indexing and robo-advisors are readily exposed.

Independent advice can help remove those emotional biases from the investing process that lead to poor investment outcomes over time. There are a raft of advisers with the right team, tools, and data, who can spend the time necessary to manage portfolios, monitor trends, adjust allocations, and protect capital through risk management.

The next time someone tells you that you can’t “risk manage” your portfolio and just have to “ride things out,” just remember, you don’t.

This week’s data docket is packed with important economic releases that according to DB’s Brett Ryan will shape investors’ views ahead of the October 30 FOMC meeting—particularly, Friday’s employment report, Tuesday’s manufacturing and Thursday’s Non-mfg ISMs. Adding to the noise will be almost a dozen Fed speakers, as well as continued political posturing over the US-China trade war, not to mention Trump’s impeachment process.

The flash PMI/ISM numbers showed a worrying deterioration in services in Europe after months of holding up well in the face of big declines in manufacturing so the final reading will help show more about this trend. Tomorrow sees China celebrate the 70th anniversary of the People’s Republic of China, which will see financial markets closed until October 7. The start of the event will also see a major speech from President Xi Jinping. It’ll be interesting to hear the tone and the substance. In the UK, the Conservative Party Conference is currently taking place until Wednesday, with PM Johnson giving his first conference speech as party leader on the final day unless it’s brought forward by events overtaking them in Parliament. On Friday the government suggested they would outline firm legal proposals for a Brexit deal in days after the conference. So we could know more about that by the end of the week. The PM may also face a vote of no confidence this week if press stories are to be believed. So a busy week in U.K. politics awaits.

Back to US economics, where according to Deutsche Bank, the headline nonfarm payrolls (+125k forecast vs. 130k previously) could again be boosted by Census workers, which is why it will be critical for market participants to focus on private payrolls (+100k vs. +96k). A payroll print in line with the bank’s forecast should have the effect of raising the unemployment rate a tenth to 3.8%. Note that similar to August, the consensus forecast for private payrolls has missed the initial print in four out of the last five Septembers by an average of 44k. The median miss during this period has been an even larger 64k. Indeed, if payrolls miss again, the Fed’s characterization of the labor market as “strong” could be questioned.

There are several important data releases ahead of the September employment report that will also impact the Fed’s  near-term outlook for the manufacturing sector—a key area of concern Chair Powell highlighted in his post-meeting press conference. Monday’s Chicago PMI (49.0 vs. 50.4) is expected to remain depressed amidst ongoing trade uncertainty. Recall that the regional surveys this month have generally softened—the Philadelphia Fed survey slipped 4.8 points to 12, the New York Fed Empire survey fell 2.8 points to 2.0, and the Richmond Fed survey plunged 10 points to -9. All three of these surveys were notably below their 3-month averages.

While Tuesday’s manufacturing ISM (50.8 vs. 49.1) to edge up slightly, the decidedly disappointing PMI figures out of Europe last week provide Fed officials little reason to be optimistic with respect to the global manufacturing outlook. Ongoing weakness in business sentiment and expenditures will continue to spill over into consumer sentiment and spending, the engine of the economy. Given the weakness in August personal consumption expenditures, pay close attention to Tuesday’s September unit motor vehicle sales (16.8 million vs. 17.0 million). A more pronounced drop off in auto sales may presage a more concerning pull back in consumer activity.

Tuesday’s August construction (+1.3% vs. +0.1%) figures should point to a rebound in residential investment. According to DB, residential investment should be a relative bright spot in the near term. A positive contribution to growth from housing will be an important reversal of the recent drag on output over the last several quarters and should help put a floor under growth momentum during a period when capex is lagging.

Wednesday’s ADP employment survey (+100k vs. +195k) and Thursday’s nonmanufacturing ISM (54.1 vs. 56.4) will anchor expectations going into Friday’s employment report. Regarding the former, it is worth noting that the initial September ADP survey has overestimated the initial BLS private payrolls print in each of the past two years, and by a wide margin—109k last year and 175k in 2017. With respect to the non-manufacturing ISM, traders will focus closely on the employment component, which last month fell to 53.1, the lowest level since March 2017 (52.1). While this series does not tell us much about the monthly changes in employment, it has historically been a leading indicator of the overall trend in service-sector job growth. Further deterioration would send a more concerning signal to monetary policymakers about the labor market outlook.

While there are no scheduled Fed events today, the same cannot be said for the rest of the week where all but three of the seventeen principals will be speaking, including all five Governors and nine of twelve regional Fed Presidents. Given that Chair Powell will only be making introductory remarks at Friday’s Fed Listens event, focus will be on Vice Chair Clarida’s (neutral) Thursday discussion of the economy and monetary policy. Clarida is likely one of the seven participants that forecasted further cuts in the Fed’s September dot plot given his previous focus on low neutral rates both domestically and internationally. His appearance will also feature an audience Q&A, providing an opportunity for the Vice Chair to weigh in on the latest data developments.

With respect to the remaining deluge of Fedspeak, pundits will look for clues as to what particular data policymakers are focused on and where they may lean with respect to further easing. From this perspective, New York Fed President Williams’ (neutral) moderated discussion on Wednesday, Cleveland Fed President Mester’s (hawk/ nonvoter) panel discussion on inflation with former Chair Bernanke on Thursday, and Atlanta Fed President Bostic’s (dove/nonvoter) moderated discussion at a business forum on Friday are the most likely to be informative in this regard.

Several other officials speaking this week have already identified their near-term position on rates in previous comments, namely Chicago’s Evans (dove/voter) appearing at central banking conferences on Tuesday and Thursday, Philadelphia’s Harker (neutral/nonvoter) appearing at a community banking conference on Wednesday, and Dallas’s Kaplan (dove/nonvoter) speaking at a community forum on Thursday. Though we expect little new from her, Kansas City Fed President George (hawk/voter) may provide some additional color on her dissent from the September rate cut in her speech at a conference of business economists on Sunday, October 6. Governor Bowman’s (neutral) and Vice Chair Clarida’s appearances on Tuesday, Richmond Fed President Barkin’s (hawk/nonvoter) on Wednesday, Governor Quarles’s (neutral) on Thursday, and Boston Fed President Rosengren’s (hawk/voter) on Friday are not expected to yield much new information regarding monetary policy given their respective venues.

In summary, as DB notes, market participants will have much to digest as they gauge how much more monetary stimulus the Fed may need to deliver in the coming months. In our view, mounting downside risks from slowing global growth, depressed business sentiment, trade policy and other geopolitical uncertainties argue for more Fed easing than the policymakers projected in the September dot plot, where even the most dovish participants expected only one more rate cut over the forecast horizon. Indeed, even if some of these downside risks recede, there is still the potential for the Fed to adopt so-called inflation “make-up” strategies at some point next year, whereby they run the economy hot to make up for previous inflation shortfalls. Thus, the bulk of the evidence points towards the Fed having to do more, rather than less easing over the next few quarters.

Courtesy of Deutsche Bank, here is a day-by-day calendar of coming events:

Monday

• Data: Germany September unemployment change, preliminary September CPI; Italy August preliminary unemployment rate, preliminary September CPI; UK final Q2 GDP, August consumer credit, mortgage approvals; Euro Area August unemployment rate; US September MNI Chicago PMI, Dallas Fed Manufacturing Activity.
• Central Banks: Bank of Japan’s Summary of Opinions released.

Tuesday

• Data: South Korea September CPI; Japan August jobless rate, September vehicle sales; September manufacturing PMIs for Australia, South Korea, Indonesia, Japan, India, Russia, Turkey, Italy, France, Germany, Euro Area, UK, South Africa, Brazil, Canada, US and Mexico; Euro Area September CPI estimate; advance September core CPI; US September ISM manufacturing, August construction spending.
• Central Banks: Reserve Bank of Australia policy decision; remarks from ECB’s Lane and Weidmann, Fed’s Evans, Clarida and Bowman.
• Politics: Speech from President Xi Jinping on 70th anniversary of the People’s Republic of China.

Wednesday

• Data: Japan September monetary base; UK September construction PMI; US weekly MBA mortgage applications; US September ADP employment change.
• Central Banks: Remarks from Fed’s Barkin, Harker and Williams.

Thursday

• Data: September services and composite PMIs for Australia, Japan, Russia, Italy, France, Germany, Euro Area, UK, Brazil and US; Euro area August PPI, retail sales; US weekly initial jobless claims, August factory orders; September ISM non-manufacturing index; final August durable goods orders.
• Central Banks: Remarks from BoJ’s Funo, Fed’s Evans, Quarles, Mester, Kaplan, Clarida, ECB’s de Guindos, Rehn, BoE’s Tenreyro.

Friday

• Data: September Germany construction PMI; US September nonfarm payrolls, unemployment rate, average hourly earnings, labour force participation rate, August trade balance.
• Central Banks: Reserve Bank of India policy decision; remarks from Fed’s Rosengren, Bostic, Powell.

* * *

Finally, looking at just the US, Goldman writes that the key economic data releases this week are the ISM manufacturing report on Tuesday, the ISM non-manufacturing report on Thursday, and the employment report on Friday. There are several scheduled speaking engagements from Fed officials this week, including New York Fed President Williams on Wednesday, Vice Chair Clarida on Thursday, and Chair Powell on Friday.

Monday, September 30

• 09:45 AM Chicago PMI, September (GS 49.0, consensus 50.0, last 50.4); We estimate that the Chicago PMI declined by 1.4pt to 49.0 in September, following a 6.0pt increase in August. Some industrial commentary from the region indicates that their business outlook has dimmed somewhat in recent months.
• 10:30 AM Dallas Fed manufacturing index, September (consensus +1.0, last +2.7)

Tuesday, October 1

• 03:15 AM Chicago Fed President Charles Evans (FOMC voter) speaks; Chicago Fed President Charles Evans will speak at a monetary policy conference hosted by the Bundesbank. Prepared text and audience and media Q&A are expected.
• 08:15 AM Fed Vice Chair Clarida (FOMC voter) speaks; Fed Vice Chair Richard Clarida will give introductory remarks at a conference on machine learning in Washington. Prepared text is expected.
• 09:30 AM Fed Governor Bowman (FOMC voter) speaks; Fed Governor Michelle Bowman will speak at the annual St. Louis Fed community banking conference.
• 09:45 AM Markit US manufacturing PMI, September final (consensus 51.0, last 51.0)
• 10:00 AM ISM manufacturing index, September (GS 49.1, consensus 50.1, last 49.1); Our manufacturing survey tracker declined by 0.7pt to 50.8 in September, following slightly softer regional manufacturing surveys on net. After five straight declines, we expect the ISM manufacturing index to remain unchanged at 49.1 in September.
• 10:00 AM Construction spending, August (GS +0.4%, consensus +0.4%, last +0.1%); We estimate a 0.4% increase in construction spending in August, with scope for a rebound in private nonresidential construction and further modest gains in private residential as well as public construction.
• 5:00 PM Lightweight Motor Vehicle Sales, September (GS 16.9m, consensus 17.0m, last 17.0m)

Wednesday, October 2

• 08:00 AM Richmond Fed President Barkin (FOMC non-voter) speaks; Richmond Fed President Thomas Barkin will make opening remarks at a conference on investing in rural America hosted by the Richmond Fed in Harrisonburg, Virginia.
• 08:15 AM ADP employment report, September (GS +155k, consensus +140k, last +195k); We expect a 155k gain in ADP payroll employment, reflecting low jobless claims and higher oil prices which should somewhat offset the impact of a decline in the summer job growth trend. While we believe the ADP employment report holds limited value for forecasting the BLS nonfarm payrolls report, we find that large ADP surprises vs. consensus forecasts are directionally correlated with nonfarm payroll surprises.
• 09:00 AM Philadelphia Fed President Harker (FOMC non-voter) speaks; Philadelphia Fed President Patrick Harker will speak at the annual St. Louis Fed community banking conference. Prepared text and audience Q&A are expected.
• 10:50 AM New York Fed President Williams (FOMC voter) speaks; New York Fed President John Williams will take part in a moderated discussion at the University of California, San Diego.

Thursday, October 3

• 02:45 AM Chicago Fed President Charles Evans (FOMC voter) speaks; Chicago Fed President Charles Evans will speak at a central banking conference in Madrid. Audience and media Q&A are expected.
• 08:30 AM Fed Vice Chair for Supervision Quarles (FOMC voter) speaks; Fed Vice Chair for Supervision Randal Quarles will discuss the Financial Stability Board at a conference in Brussels. Prepared text and audience Q&A are expected.
• 08:30 AM Initial jobless claims, week ended September 28 (GS 210k, consensus 215k, last 213k); Continuing jobless claims, week ended September 21 (consensus 1,654k, last 1,650k): We estimate jobless claims decreased 3k to 210k in the week ended September 28, following a 3k increase in the prior week.
• 09:45 AM Markit US services PMI, September final (consensus 50.9, last 50.9)
• 10:00 AM Factory Orders, August (GS flat, consensus -0.4%, last +1.4%); Durable goods orders, August final (last +0.2%); Durable goods orders ex-transportation, August final (last +0.5%); Core capital goods orders, August final (last -0.2%); Core capital goods shipments, August final (last +0.4%): We estimate factory orders were flat in August following a 1.4% increase in July. Durable goods orders moved up in the August advance report.
• 10:00 AM ISM non-manufacturing index, September (GS 55.5, consensus 55.0, last 56.4); Our non-manufacturing survey tracker declined by 0.4pt to 54.0 in September, following mixed regional service sector surveys. We expect the ISM non-manufacturing index to decline by 0.9pt to 55.5 in the September report.
• 12:10 PM Cleveland Fed President Mester (FOMC non-voter) speaks; Cleveland Fed President Loretta Mester will take part in a panel discussion on inflation with Ben Bernanke at the Brooking Institution in Washington. Audience Q&A is expected.
• 1:00 PM Dallas Fed President Robert Kaplan (FOMC non-voter) speaks; Dallas Fed President Robert Kaplan will speak at a community forum hosted at the Dallas Fed’s Houston branch. Audience and media Q&A are expected.
• 6:35 PM Fed Vice Chair Clarida (FOMC voter) speaks; Fed Vice Chair Richard Clarida will discuss the economic outlook and monetary policy at a Wall Street Journal event in New York. Audience Q&A is expected.

Friday, October 4

• 08:30 AM Nonfarm payroll employment, September (GS +165k, consensus +145k, last +130k); Private payroll employment, September (GS +150k, consensus +128k, last +96k); Average hourly earnings (mom), September (GS +0.2%, consensus +0.3%, last +0.4%); Average hourly earnings (yoy), September (GS +3.2%, consensus +3.2%, last +3.2%); Unemployment rate, September (GS 3.6%, consensus 3.7%, last 3.7%): We estimate nonfarm payrolls increased 165k in September. Our forecast reflects very low jobless claims, a further boost from Census canvassing activities (worth +15k mom sa), and the tendency for September job growth to pick up when the labor market is tight. We also note that employment surveys appear to have stabilized at a level consistent with above-potential job gains. On the negative side, we expect September first-print seasonality to reduce payroll growth in the month by 20-30k. We also note the possibility that recent tariff escalation could weigh on hiring in the manufacturing, retail, and transportation sectors. Importantly, we are not assuming a meaningful drag from Hurricane Dorian, which had moved north into Canada by the beginning of the payroll survey week. We estimate a one tenth decline in the unemployment rate to 3.6%. Continuing claims have edged lower and the jobless rate typically declines following sharp increases in labor force participation (+0.4pp to 63.2% over the last three months). Finally, we estimate average hourly earnings increased 0.2% month-over-month and 3.2% year-over-year, reflecting unfavorable calendar effects.
• 08:30 AM Trade balance, August (GS -$54.4bn, consensus -$54.5bn, last -$54.0bn); We estimate the trade deficit rose by $0.4bn in August, reflecting an increase in the goods trade deficit.
• 8:30 AM Boston Fed President Rosengren (FOMC voter) speaks; Boston Fed President Eric Rosengren will deliver opening remarks at an annual conference hosted by the Boston Fed which this year focuses on geographic disparities in 21st century America.
• 10:25 AM Atlanta Fed President Bostic (FOMC non-voter) speaks; Atlanta Fed President Raphael Bostic will take part in a moderated discussion at the Tulane Business Forum.
• 2:00 PM Fed Chair Powell (FOMC voter) speaks; Fed Chair Jerome Powell will deliver opening remarks at a Fed Listens event hosted by the Fed Board. The event will also feature Fed Vice Chair for Supervision Randal Quarles moderating a panel on the importance of price stability and low inflation, and Fed Governor Lael Brainard moderating a panel on employment in a changing labor market.
• 6:45 PM Kansas City Fed President Esther George (FOMC voter) speaks; Kansas City Fed President Esther George will speak at the annual meeting of the National Association for Business Economics in Denver. Audience Q&A is expected.

Source: Deutsche Bank, BofA, Goldman

Certainly the most interesting part of the new 60 Minutes interview with Saudi crown prince Mohammad bin Salman is that for the first time actual on the ground CCTV footage from the moment of impact on the Aramco Abqaiq facility was aired. 

“On Saturday September 14 just before 4 am an onslought of more than two dozen Iranian made drones and low-flying cruise missiles crippled the kingdom’s oil production. These images, never before released are from the Saudi state oil company known as Aramco…” 

“This attack hit the heart of Saudi Arabia’s oil industry, were you blindsighted?” 60 Minutes correspondent Norah O’Donnell asked MbS in the rare interview which aired Sunday. 

Acknowledging the attack “disrupted 5.5% of the world’s energy needs,” the kingdom’s de facto ruler ducked the follow-up question of: given “billions of dollars spent on military equipment, how could it not prevent an attack like this?” In response, MbS merely said his country is “bigger than Western Europe” and that “we have have 360 degrees of threats”.

The 60 Minutes host then noted the kingdom’s US-supplied Patriot and Hawk missile systems “were not designed to shoot down drones”. Indeed as is glaringly obvious from the above stunning attack footage, Saudi air defenses proved an utter failure. 

The Abqaiq facility, which lies about 60 km (37 miles) southwest of Aramco headquarters in Dhahran in Saudi Arabia’s Eastern Province, is the largest oil processing plant in the world, with most of the kingdom’s exported crude processed there. 

Many analysts said such a precision and sophisticated attack required state backing, and came from a Northwest direction.

Detailed satellite photos show extent of ‘surgical’ attack damage to Saudi Aramco oil facilities https://t.co/zCjotu7UDb

— LNG Global (@lngglobal) September 17, 2019

Despite Yemen’s Houthis themselves claiming responsibility for the precision strike using ten drones, unleashing explosions that rocked Abqaiq facility and the Khurais field, US officials from the start pointed the finger at Iran. 

Stillframe just before the moment of impact of one of the projectiles which scored a direct hit on Abqaiq. It appears to be a missile. 

MbS during the 60 Minutes interview also named Iran as the culprit, which the show host seemed willing to accept without much scrutiny, despite elsewhere essentially charging the crown prince with personally overseeing the murder of journalist Jamal Khashoggi last year. 

Meanwhile, Yemen’s Houthis have promised to unleash more such attacks crippling the kingdom’s oil infrastructure should the Saudi-led war on Yemen continue. 

Markets had maintained some gains from the denial of China delisting headlines that sparked selling on Friday. But following Trump advisor Navarro’s comments on CNBC, notably hawkish on China and not directly denying the China investment flows discussion, algops began to get spooked.

Then President Trump retweeted the following quote:

“After many years, the United States is finally waking up to Beijing’s plans and ambitions to pass us as the dominant economic & military superpower in the 21st Century. What’s happening now is that the U.S. is finally responding (thank you President Trump). This is taking….. ….place in TRADE, it’s taking shape in Military Competition.” Johnathan Ward, author and China expert.

Adding that:

“We are winning, and we will win. They should not have broken the deal we had with them. Happy Birthday China!”

And stocks did not receive that well…

 

With quarter-end funding needs supposedly squared away thanks to last week’s three 2-week term-repo operations, moments ago the NY Fed announced that in the final overnight repo operation of the quarter, dealers submitted $63.5BN in collateral ($49.75BN in TSYs, $13.75BN in MBS)…

… in what was the third consecutive undersubscribed overnight repo operation, yet which saw substantially more participation than Friday’s $22.7BN.

Yet those going off by the detail in today’s repo operation may have a slightly more rosy take on the funding situation because according to ICAP, the overnight general collateral repo rate surged almost 1%, from 1.85% on Friday to as high as 2.8% on Monday, as quarter-end funding dynamics added to pressure on borrowing costs amid an already tense environment for money markets.

The rate on G/C overnight repo opened at 2.70%/2.50% according to Bloomberg, and at 2.80% according to Reuters, on the final day of September, which while that’s below the heady levels reached close to two weeks ago, is well above where repo ended last week (around 1.85%) and also above the 1.75%-to-2% target range that the U.S. central bank currently has for the fed funds rate.

What is most notable is that despite a barrage of overnight and term repo operations, repo rates remain elevated, with the overnight approaching 3.0%, while the term repo was last around 2.6% according to Curvature Securities’ Scott Skyrm. To be sure, this overnight GC repo is well below the 10% it jumped to on Sept. 17, however it does take into account the Fed’s deployment of a series of overnight and term repo operations to help keep the fed funds rate within its target range.

The Fed will continue conducting overnight repo operations through at least Oct. 10, with many traders expecting funding needs to ease to end into the new quarter.

As famously observed on Dec 31, 2018, overnight rates tends to move sharply higher at the end of the quarter as dealers “window-dress” their balance sheets and curtail activity in the financing markets. Adding to the upward pressure is an influx of additional collateral, with settlements on Monday of more than $100 billion in new Treasury coupon-bearing securities, according to Bloomberg.

With Tesla releasing V10 of its vehicle software earlier this week, owners were chomping at the bit to get their hands on the long touted “Smart Summon” feature, which is supposed to allow drivers to summon their vehicles to them in parking lots using their cell phones. 

But, as things go with Tesla, the idea of the idea was worlds away from the actual implementation of it. In fact, early customer videos and reports of the “feature” are making Smart Summon look extremely dangerous and nothing short of a complete disaster. 

As soon as the software update pushed to drivers, videos began popping up on social media showing a litany of negative consequences of everyday users beta testing Smart Summon in real life. 

Tesla says that with Smart Summon “customers who have purchased Full Self-Driving Capability or Enhanced Autopilot can enable their car to navigate a parking lot and come to them or their destination of choice, as long as their car is within their line of sight. It’s the perfect feature to use if you have an overflowing shopping cart, are dealing with a fussy child, or simply don’t want to walk to your car through the rain.”

Tesla claims that “customers who have had early access to Smart Summon have told us that it adds both convenience to their trips and provides them with a unique moment of delight when their car picks them up to begin their journey.”

Let’s compare Tesla’s description of the feature with the real world results.

First, there’s this video of another vehicle backing into a Model 3 while it was being summoned in a crowded parking lot. 

Soday 1 with V10 Smart Summon was working beautifully. But someone didn’t notice my M3 and made a front bumper damage. We will claim our insurances but who’s fault do you guys think it’ll be ? Should I present this videos ? @teslaownersSV @Model3Owners @LikeTeslaKim @TesLatino pic.twitter.com/fhSA78oD6C

— David F Guajardo (@DavidFe83802184) September 28, 2019

Then there is exceptionally alarming video where a driverless Tesla pulls across a lane of live traffic, forcing another driver to slam on their brakes. 

So, @elonmusk – My first test of Smart Summon didn’t go so well. @Tesla #Tesla #Model3 pic.twitter.com/yC1oBWdq1I

— Roddie Hasan – راضي (@eiddor) September 28, 2019

There’s also been adamant warnings from Tesla owners that summon “isn’t safe or production ready”. 

Be forewarned @Tesla @elonmusk Enhanced summon isn’t safe or production ready. Tried in my empty drive way. Car went forward and ran into the side of garage. Love the car but saddened. #Tesla #TeslaModel3 pic.twitter.com/tRZ88DmXAW

— AB (@abgoswami) September 28, 2019

There was also this drone footage of two failed attempts in a crowded parking lot, one of which shows a Tesla pointing itself at oncoming traffic and causing a traffic jam. 

There was this wildly inefficient drive in a completely empty parking lot…

What’s worse then Tesla Enhanced Summon in daylight?
If you guessed at night, well, you’d be right.
Smooth as broken glass, she is. Now picture this feature in a crowded holiday parking lot. #ComingSoon #TeslaEntitlement $TSLA $TSLAQ #TheSociopathicBusinessModel #FraudFormula pic.twitter.com/p9oa2BGnnm

— KillingMyCareer (@MelaynaLokosky) September 28, 2019

And this photo showing a Tesla grinding against the outside of a garage…

…and this video of a Tesla pointing directly at parked cars and driving over white lines in a crowded parking lot.

Looks like Tesla CEO Elon Musk isn’t the only one who likes white lines:
This $TSLA Enhanced Summon owner’s car heads TOWARDS parked cars going over the white parking lines.@TheJusticeDept allowing human beta testing will kill more people than guns or climate change.$TSLAQ pic.twitter.com/utbjYdpQyl

— KillingMyCareer (@MelaynaLokosky) September 27, 2019

And while there’s been outrage by members of the Tesla community – it has been because other Tesla owners are actually sharing their experiences.

After a #Tesla owner posted a crash video that was caused by him playing around with his “smart summon” feature in a parking lot, he got chastised by another Tesla enthusiast because he could have easily gotten away with it if he had only lied about what happened. $TSLAQ pic.twitter.com/Jik6FaRIvD

— Nixon’s Head (@Nixons_Head_) September 29, 2019

As usual, FinTwit summed things up the best…

Watching all these summon videos….$TSLAQ pic.twitter.com/DTlDOzGbJX

— Carl Kobelke (@carlkobelke) September 29, 2019

…and arrived at the one simple, obvious question about the feature that we’re all asking:

Why in the everloving fuck is this legal https://t.co/mkjfdnBJUt

— Quoth the Raven (@QTRResearch) September 28, 2019

 

Unlike last week, when every day was marked by either full-on trade deal euphoria or, as was the case on Friday afternoon, despair amid speculation of trade war escalation, overnight markets were relatively muted and fluctuated in Europe while US equity futures jumped as the lack of explicitly negative trade war news was interpreted as good news. Indeed, investors generally shrugged off reports that Washington is considering delisting Chinese companies from U.S. stock exchanges, with traders downplaying the likelihood of such radical escalation of the U.S.-China trade war.

Bloomberg reported that President Trump was looking at a broader effort to limit U.S. investment in Chinese companies, although Treasury officials denied that this was being considered “at this time”, and it remained unclear how any such delisiting would work. As a result, MSCI’s world equity index, was little changed, down 0.1%. MSCI’s broadest index of Asia-Pacific shares outside Japan also slipped just 0.1%. Some optimism crept into European markets with the Stoxx 600 turning positive, ekeing out a 0.1% gain after opening lower. Markets in Frankfurt, Paris and London were flat.

In the US, futures on all main indexes pointed to a green open, and the dollar spiked higher after the U.S. issued a partial denial that it was discussing new limits on Chinese access to American finance.  The concern around the latest Sino-U.S. tensions had caused U.S. stocks to fall on Friday, with the Nasdaq losing 1%. The news also knocked Chinese shares listed on U.S. exchanges on Friday. Alibaba Group and JD.com both lost 5% to 6% on Friday.

Earlier in the session, Chinese equities slumped almost 1% in the final session before a week-long holiday even though both the official and Caixin manufacturing PMIs beat expectations: the NBS manufacturing PMI increased to 49.8 in September and the Caixin manufacturing PMI rose to 51.4. Financial markets and offices in Taipei closed Monday due to the approach of Typhoon Mitag.

“This is better than what the market was expecting,” said Alessia Berardi, senior economist at Amundi Pioneer, adding that markets were downplaying the likelihood of a major escalation in the trade war by Washington. “The probability of implementing the (delisting) decision for the market is still quite low,” she said.

Overall Asian stocks dropped for a second day, led by utility and health care firms, as Washington’s potential move to restrict U.S. fund flows to Chinese firms dented risk sentiment. Most markets in the region were down, with Japan leading declines and South Korea advancing. The Topix fell 1%, with automakers and pharmaceutical firms among the biggest drags, as Japan’s factory production dropped in August amid a global slowdown. The Shanghai Composite Index retreated 0.9%, driven by Kweichow Moutai and Ping An Insurance Group. Chinese markets will trade only on Monday before a week-long holiday that marks the 70th anniversary of the founding of the People’s Republic of China.

China pledged to continue opening up its financial markets and encourage foreign investment ahead of trade talks with the U.S. India’s Sensex declined 0.5%, as ICICI Bank and Housing Development Finance weighed on the gauge. Indiabulls Housing Finance plunged as much as 38% after the Indian central bank placed curbs on a lender it plans to acquire.

China warned on Monday of instability in international markets from any “decoupling” of China and the United States following the reports, noting a U.S. Treasury response that said there were no immediate plans to block Chinese listings.

Most traders said equity markets thought the threat of delisting was just a tactic before U.S.-China trade talks resume next week. Investors are accustomed to belligerence from Trump before he dials down his rhetoric, said Luca Paolini, chief strategist at Pictet Asset Management.

“It’s a strategy that we have seen in the past – keeping the pressure very high and then settling for whatever deal is possible,” he said. Any progress in talks next month would probably fall short of a comprehensive deal, he added. “It’s more likely than not that there will some kind of agreement that would be more cosmetic in nature.”

Separately, Hong Kong protesters clashed with police for a 17th week with further protests planned for China’s 70th anniversary of Communist rule on Tuesday 1st October. Furthermore, Hong Kong police confirmed an officer fired a live round Sunday near Wan Chai MTR station, according to CNN International Correspondent Will Ripley. Subsequently, China Global Times says Police have received information about Hong Kong protest activity on 1 October creating a highly dangerous situation.

In rates, Treasuries were slightly cheaper across the curve, following wider losses across bunds after ECB President Draghi urged greater public spending in a Financial Times interview; Treasuries were choppy in Asia session while yields edged higher in poor volumes after solid China Caixin PMI print. Bond markets captured the early focus as 10y bund and USTs yields rise 3bp with 10y Aussie yields climbing 8bp to 1.02% ahead of the local session close with no fresh news flow cited for the move. Overall, yield curves bear steepened with the German long-end rising ~3.5bps. Core European bond futures remain around session lows after mixed CPIs readings from the German regions and softer peripheral European data although spreads tighten to core. Gilts and short sterling brush off domestic 2Q GDP data.

In geopolitics, Saudi Crown Prince Mohammed Bin Salman said the attacks on the Saudi oil facilities were an act of war by Iran, hopes military response will not be necessary as a political solution is “much better”. MBS also called on US President Trump to meet with Iranian President Rouhani to craft a new deal. Iranian Government Spokesman notes that they are prepared for a dialogue with Saudi Arabia if they alter their behavior and stop a war in Yemen; follows news of Iranian President Rouhani receiving a letter from Saudi Arabia.

In FX, the Kiwi was the stark underperformer, tumbling to its weakest level in four years Monday following dismal overnight confidence data, while GBPUSD edged back above 1.2300. The Bloomberg Dollar Spot Index was set to end this quarter stronger than all of its G-10 peers, with the Japanese yen seeing the smallest declines and the New Zealand dollar the largest.

In commodities, crude futures drift lower, Iron ore and nickel lead gains in the metals complex while Palladium rises above a record $1,700 an ounce

Expected data include MNI Chicago Business Barometer. Thor Industries is reporting earnings.

Market Snapshot

• S&P 500 futures up 0.4% to 2,974.25
• STOXX Europe 600 up 0.01% to 391.81
• MXAP down 0.4% to 156.37
• MXAPJ down 0.1% to 501.35
• Nikkei down 0.6% to 21,755.84
• Topix down 1% to 1,587.80
• Hang Seng Index up 0.5% to 26,092.27
• Shanghai Composite down 0.9% to 2,905.19
• Sensex down 0.8% to 38,529.84
• Australia S&P/ASX 200 down 0.4% to 6,688.35
• Kospi up 0.6% to 2,063.05
• German 10Y yield rose 1.7 bps to -0.556%
• Euro down 0.05% to $1.0934
• Italian 10Y yield unchanged at 0.486%
• Spanish 10Y yield rose 1.3 bps to 0.163%
• Brent futures down 1.6% to $60.94/bbl
• Gold spot down 0.6% to $1,487.53
• U.S. Dollar Index up 0.1% to 99.21

Top Overnight News from Bloomberg

• The Trump administration has issued a partial — and qualified – – denial to the revelation that it is discussing imposing limits on U.S. investments in Chinese companies and financial markets as China vowed to continue opening its markets to foreign investment
• Johnson hoped to use his Conservative Party’s annual convention to launch his campaign to win the next British general election. Instead, he is fighting for his credibility as prime minister as he faces allegations of sexual impropriety and plots to oust him. To add to that the opposition Labour Party has demanded an investigation into alleged potential conflicts of interest
• The U.K. economy experienced major distortions in the second quarter after firms stockpiled goods in the run-up to the original March 29 Brexit deadline, figures published Monday show. The Office for National Statistics confirmed the economy shrank 0.2% between April and June. It was the first quarterly contraction for seven years
• British businesses are getting increasingly gloomy about the economy as Brexit approaches, according to the Lloyds Business Barometer. A measure of optimism in September fell to its lowest since the immediate aftermath of the 2016 referendum, and concerns about Brexit intensified. A negative impact from Brexit is expected by 43% of businesses now, up from 39%
• Germany’s labor market unexpectedly improved this month, easing concerns that the economy is sliding into recession. The number of people out of work decreased by 10,000 to 2.276 million in September, the first drop in five months. The unemployment rate was at 5%, near a record low.

Asian equities showed a mixed performance after a negative lead from Wall Street in which major bourses fell deeper into the red amid reports which suggested that the White House is mulling limits on portfolio flows into China, albeit a US Treasury official later noted that there are no current plans regarding market access. ASX 200 (-0.4%) turned green as Nufarm shares rose in excess of 25% after the Co. reported an increase in revenue alongside the sale of its South American unit to Sumitomo. Meanwhile, Nikkei 225 (-0.6%) was subdued throughout the session as heavyweight Softbank fell over 2% amid the ongoing concerns surrounding WeWork after CEO Neumann left his position following the failed IPO. Elsewhere, Hang Seng (+0.5%) nursed the initial losses which emanated from continuing disarray in Hong Kong as protesters clash with police for yet another week, with further protests planned for China’s 70th anniversary of Communist rule tomorrow. Losses in Hong Kong later pared amid gains in large-cap energy names and as AB InBev’s Budweiser APAC soared over 5% at its debut today, which was seen as a litmus test for the IPO environment in Hong Kong. Meanwhile, Shanghai Comp (-0.9%) received a short-lived boost after the Chinese Caixin Manufacturing metric beat (see below from RANsquawk analysis). Furthermore, the PBoC skipped open market operations today which resulted in a modest net daily drain of CNY 20bln ahead of the Mainland’s absence for the remainder of the week due to the National Week Holiday.

Top Asian News

• China Factory Outlook Improves in September Ahead of U.S. Talks
• BOJ Paves Way to Buy Fewer Bonds in October to Steepen Curve
• Japan Nuclear Scandal Deepens as Payoff Timelines Widen
• ‘Frightening’ Thai Baht Surge Hurts Tourism, Industry Body Says

Major European bourses (Euro Stoxx 50 +0.3%) are mostly higher, but consolidating within recent ranges ahead of this week’s slate of important macroeconomic data releases, following a mixed AsiaPac session, in which sentiment was initially downbeat on recent negative US/China trade reports that the US was mulling China portfolio flows limits and the delisting of Chinese stocks from US exchanges; although there are no current plans to do so according to a Treasury Official. The sectors are mixed and unreflective of any definitive risk tone. In terms of individual movers; GlaxoSmithKline (+1.0%) are up on the news that the Co’s Phase 3 PRIMA trial for Zejula is the first study which illustrated a significant benefit, which, according to GSK, justifies the earlier acquisition of Tesaro for approximately USD 4.1bln. Saint Gobain (+2.4%) caught a bid on reports that the Co. announced the sale of their construction glass business in Korea. Separately, Ab InBev (-0.2%) are lower, despite the co’s APAC Budweiser unit opening at HKD 27.40/shr, which is above the initial IPO price of HKD 27.0/shr, before extending gains to over 28.0/shr. Elsewhere, BBVA (+1.0%) is higher on the news that the bank may sell EUR 5bln of bad loans to Deutsche Bank (+0.4%). Finally, Whitbread (-5.1%) is under pressure after being downgraded at Barclays.

Top European News

• Funcom Surges as Gaming Giant Tencent Purchases 29% Stake
• KPN Drops After It Cancels Hiring of Proximus’s Leroy as CEO
• Microsoft’s Largest Reseller SoftwareONE Plans Swiss IPO
• Lagarde Inherits ECB Tinged by Bitterness of Draghi Stimulus

In FX, NZD/GBP – Contrasting fortunes for the Kiwi and Pound at the start of the final session of September and Q3, as the former props up the G10 table in wake of a downbeat NBNZ business survey, but the latter shrugs off broadly soft UK data and outperforms in corrective trade following recent weakness. Nzd/Usd is hovering near the base of a 0.6303-0.6250 range, while Cable reclaims 1.2300+ status and Sterling also recoups losses vs the Euro after a test of resistance at 0.8900, but no clean break and a subsequent cross reversal down towards 0.8865. However, the Gbp is on tenterhooks awaiting further political developments and latest moves by opposition party Remainers to request another Brextension rather than risk a no deal departure on October 31.

• NOK/SEK – Marginal divergence between the Scandi Crowns as in line Norwegian retail sales keeps Eur/Nok rooted towards the bottom of 9.9450-9.9180 parameters in contrast to Eur/Sek that is nudging 10.7350 compared to lows of around 10.7060 following recent disappointing Swedish consumption and consumer sentiment reads.
• JPY/CAD/EUR/AUD/CHF – All weaker against a generally firm Greenback, as the DXY holds above 99.000 in a relatively narrow 99.047-216 range, with the Yen paring gains between 107.75-108.00 and flanked by decent option expiries at 107.50 (1.5 bn) and 108.00-05 (1.2 bn), while the Loonie meanders from 1.3225-47 ahead of Canadian PPI data. Elsewhere, the single currency has faded into 1.0950 amidst soft Eurozone inflation updates from Germany’s states and Spain, but Eur/Usd may derive underlying support from a hefty expiry at the 1.0900 strike (2.3 bn) and the fact that the big figure fended off several attempts to the downside last week. Similarly, the Aussie is keeping afloat around 0.6750 and within 1.0740-1.0800 extremes vs its Antipodean rival on the back of a better than expected Caixin Chinese manufacturing PMI and with the jury out on tomorrow’s RBA policy verdict (full preview available in the Research Suite), but the Franc is lagging across the board after a marked decline in the Swiss KOF indicator and downward revision to the previous print. Usd/Chf currently just shy of 0.9950 and Eur/Chf is straddling 1.0850 with latest weekly sight deposits suggesting more intervention.
• EM – Bucking the broad trend of losses vs the Dollar, Turkey’s Lira has climbed over 5.6500 after trade data showing a smaller deficit and typically upbeat comments/forecasts from the Finance Minister, bar a sharp downgrade to 2019 GDP.

In commodities, crude futures are lower, but well within recent ranges, as the market mostly shrugs off recent news flow; Russian oil output for the month of September is lower than in August, according to sources, at 11.24mln BDP (vs 11.29mln BDP). Additionally, following last Friday’s reports of Saudi Arabia agreeing to a partial ceasefire in Yemen, the Iran backed Yemeni Houthis reportedly offered to release 350 prisoners, 3 of whom are Saudis. Separately, an Iranian Government Spokesman said that they are prepared for a dialogue with Saudi Arabia if they alter their behaviour and stop the war in Yemen, following reports that Iranian President Rouhani had received a letter from Saudi Arabia. Spot Gold is lower, in line with the modestly better risk tone, and is back below the USD 1500/oz mark, an area which has been a solid base since mid-August. Separately, Copper prices are higher, after Chinese Caixin Manufacturing surprised to the upside, easing demand concerns in the red metals biggest market, although some of the forward-looking sub-components were more disappointing

US Event Calendar

• 9:45am: MNI Chicago PMI, est. 50, prior 50.4
• 10:30am: Dallas Fed Manf. Activity, est. 1, prior 2.7

DB’s Jim Reid concludes the overnight wrap

A happy wet Monday to you all. Last week we briefly mentioned how the Opposition party here in the U.K. outlined plans for a 4-day work week within a decade. To be honest after the weekend I’ve had ferrying children to parties and having to endure rolling crying tantrums between them, at the moment I would happily vote for a party who suggested a 7-day working week.

The first day of this working week, and the last of Q3, sees us go straight to Asia where Chinese markets have only today (due to holidays for the rest of the week) to digest Friday’s news that the US are considering limiting portfolio flows into China and their companies. The Bloomberg story suggested the options Mr Trump’s team are considering include delisting Chinese companies on US exchanges, limiting US government pension fund exposure to China and even limiting private US investment firm’s access. On Friday the US shares of Alibaba lost -5.2%, JD.com fell c.6% and Baidu down -3.7%. So a big story but the article didn’t suggest that the debate is particularly advanced so a difficult one to price at the moment. If you took it to it’s most negative you’d have to point out the amount of US Treasuries that China hold and the impact that any retaliation might have. A fair amount of water will need to flow under the bridge before we get there though.

Maybe conscious of the impact on the Asian open and follow through to the rest of global markets, a US Treasury spokesman made an emailed statement on Saturday that read that “The administration is not contemplating blocking Chinese companies from listing shares on US stock exchanges at this time”.

This statement has probably calmed the Asian session with bourses trading a lot better than feared on Friday night. The Nikkei (-0.55%) and Shanghai Comp (-0.40%) are still lower but the Hang Seng (+0.52%) and Kospi (+0.38) are up. Elsewhere futures on the S&P 500 are up +0.37% and 10y JGB yields are up +1.8bps to -0.230%.

Overnight, we’ve seen China’s official September PMIs with manufacturing PMI coming in at 49.8 (vs. 49.6 expected), marking the fifth continuous month of contraction while the services PMI came in at 53.7 (vs. 53.9 expected) bringing the composite PMI to 53.1 (vs. 53.0 last month). In terms of underlying details, the new orders component of the manufacturing reading printed at 50.5 (vs. 49.7 last month), marking the first above 50 reading since April while the new export orders component also improved to 48.2 from 47.2 last month. Separately, China’s September Caixin manufacturing PMI stood at 51.4 (vs. 50.2 expected), the highest reading since February 2018. In terms of other overnight data releases, Japan’s August retail sales came in at +2.0% yoy (vs. +0.7% yoy expected) and the preliminary August industrial production stood at -1.2% mom (vs. -0.5% mom expected).

Elsewhere the FT has an an exclusive interview with Mr Draghi this morning as he nears the end of his tenure. The key section is a direct quote where he says that “I (have) talked about fiscal policy as a necessary complement to monetary policy since 2014. Now the need is more urgent than before. Monetary policy will continue to do its job but the negative side effects as you move forward are more and more visible.” He then added, “Have we done enough? Yes, we have done enough — and we can do more. But more to the point what is missing? The answer is fiscal policy, that’s the big difference between Europe and the US.” He also said a long term commitment to a fiscal union was essential for Europe to compete.

Talking of fiscal, new Italian Finance Minister Roberto Gualtieri said that the government will use “all the flexibility available” with the country’s finances and plans “a slight expansion in order to reconcile the balance of public finances and the credibility of our commitment to cut debt,” while adding that any tightening “would have a negative effect on the economy.” On the deficit target, Gualtieri hinted that the number for 2020 would be between this year’s original goal of 2.4% and the revised target of 2.04%. Elsewhere, Ansa reported that the cabinet will present a framework for the budget after a meeting scheduled at 6:30 pm local time today. The deadline for submitting the draft budget to Brussels is October 15. So one to watch.

Market action on Friday was dominated by the US-China capital controls story. The negative impact of that news offset the earlier, positive impact of optimistic comments from President Trump and other officials on the scope for a near-term trade deal. The S&P 500 ultimately closed -1.01% lower on the week (-0.52% on Friday), while the DOW fell only -0.43% (-0.26% Friday) and the NASDAQ dropped -2.19% (-1.13% Friday). The former outperformed due to its greater exposure to bank stocks, which ended +0.26% higher on the week (+1.03% Friday), while the latter was dragged down by its exposure to China trade. Despite the seesawing moves, the VIX only rose +1.9pts on the week (+1.2pts Friday) to 17.3.

In Europe, the STOXX 600 fell a more modest -0.30% (+0.47% Friday), though it had already closed before the selloff in the US session. Bonds rallied across Europe, with the biggest driver being the poor PMI data last Monday which showed the German manufacturing sector reading falling to 41.4, its worst reading in around a decade. Bund yields fell -5.2bps (+0.9bps Friday), while OATs and BTPs rallied -5.9bps (+0.7bps Friday) and -9.8bps (flat on Friday), respectively. The five year-five year inflation swap rate fell below its pre-ECB level at 1.18%, down -6.7bps on the week (-1.2bps Friday) and is now just 5bps away from its all-time low just after Draghi’s Sintra speech in June. In the US, the curve steepened slightly as the front-end rallied more than the long-end, with 2- and 10-year yields down -5.4bps and -4.3bps (-2.6bps and -1.4bps Friday) respectively.

There’s plenty to look forward to this week with the rest of the global PMIs/ISM (manufacturing tomorrow, services Thursday) pretty important before US payrolls at the end of the week. The flash numbers showed a worrying deterioration in services in Europe after months of holding up well in the face of big declines in manufacturing so the final reading will help show more about this trend. Tomorrow sees China celebrate the 70th anniversary of the People’s Republic of China, which will see financial markets closed until October 7. The start of the event will also see a major speech from President Xi Jinping. It’ll be interesting to hear the tone and the substance. In the UK, the Conservative Party Conference is currently taking place until Wednesday, with PM Johnson giving his first conference speech as party leader on the final day unless it’s brought forward by events overtaking them in Parliament. On Friday the government suggested they would outline firm legal proposals for a Brexit deal in days after the conference. So we could know more about that by the end of the week. The PM may also face a vote of no confidence this week if press stories are to be believed. So a busy week in U.K. politics awaits.

Finally it’s a busy week for Fed-speak with all but three of the seventeen principals speaking, including all five Governors and nine of twelve regional Fed Presidents. For more on these see DB’s Brett Ryan’s preview of the US week ahead here.