Stocks Slide On Hong Kong Protests, Catalan Independence Fears

While the bond market is still reeling from Friday’s shocking Bill Gross departure, and PIMCO has already started to bleed tens of billions in redemptions (see “Billions Fly Out the Door at Pimco About $10 Billion Is Withdrawn After Departure of Gross“), stocks which may have been hoping for a peaceful weekend after Friday’s ridiculous no volume ramp in the last two hours of trading, got hit by a double whammy of first Catalan independence fears rising up again after Catalan President Mas signed a decree committing Catalonia to a referendum bid on November 9th, leading to a move wider in Spanish bond yields, and second the sharpest surge in Hong Kong violence in decades, which led to a 2% drop in the Hang Seng, are now solidly lower across the board, with the DAX dropping below its 50 DMA, while US equity futures are printing about 9 points lower from Friday’s close despite another epic ramp in the USDJPY which flited with 110 briefly before retracing to 109.50, and also threaten to push below the key technical support level unless the NY Fed’s “Markets group” emerges out of its new Chicago digs and buys up enough E-minis to restore confidence in a rigged market.

Turning to the Asian session overnight, the focus is mostly on the pro-democracy demonstrations in Hong Kong over the weekend in which protestors opposed Beijing’s decision to rule out fully democratic elections in HK in 2017. The protest later escalated into Sunday evening as tear gas and pepper sprays were used against demonstrators. Into Monday morning HK time, thousands of protestors are reported to still remain near government’s main offices although there are some signs that the unrest is spreading with fresh demonstration sites being sighted away from the Central/Admiralty district. Hong Kong has closed down schools in neighbouring districts affected by the demonstrations. More than 200 bus routes have been cancelled or diverted and some subway exits in protest areas have been blocked. Several banks have suspended operations in affected areas. China’s People’s Liberation Army (PLA) in Hong Kong said that it was confident the city’s administration could handle the protests (BBC). The movement in HK has also brought out supporters in Taiwan which saw hundreds of people gathering in Taipei in support of the movement in HK (WSJ). The situation remains rather fluid ahead of the China’s National Holiday 1 October.

Within the first hour of trade, the DAX-future fell below the 50DMA at 9496 and last Friday’s lows as political woes knock confidence across the continent. The possibility of Spain going through a phase of political uncertainty (as was the case in the UK throughout the Scottish Independence bid) rose over the weekend after the Catalan President Mas signed a decree committing Catalonia to a referendum bid on November 9th. This resulted in a widening of the SP/GE 10yr yield spread to the tune of 5bps and some underperformance in the Spanish IBEX-35 as large cap banks BBVA and Banco Santander lead the decline.

Looking at the day ahead, personal income/spending, pending home sales and the Dallas Fed Manufacturing survey are the main releases in the US. We have a fairly quiet day today in Europe but things will pick up over the course of this week. Indeed preliminary inflation readings for September are due today (for Germany) and tomorrow (for Euroland and Italy). Following the 0.4% final print on euro inflation in August today’s and tomorrow’s releases will attract much interest and could further stoke the QE debate (more below for DB’s change of view on this). Away from European inflation prints the other key release will be US payrolls on Friday. On that the market is expecting a +215k and +210k print for the headline and private payrolls in August whilst the unemployment rate is expected to remain unchanged at 6.1%. Staying in the US we will also get the Chicago PMI on Tuesday, the ISM manufacturing and ADP report on Wednesday, and factory orders on Thursday. Back to Europe, besides the inflation reading we also have the final PMI estimates (Wed for manufacturing and Fri for services) along with the revision to Euro area GDP (Wed) but the real focus will likely be on the ECB meeting this Thursday.

Market Wrap:

Hang Seng down 1.9% to 23,229
S&P 500 futures down 0.4% to 1968.5
Stoxx 600 down 0.1% to 342.1
US 10Yr yield up 1bps to 2.53%
German 10Yr yield up 1bps to 0.99%
MSCI Asia Pacific down 0.7% to 141
Gold spot up 0% to $1218.9/oz

Bulletin headline summary from RanSquawk and Bloomberg

Political disharmony rears its ugly head in Europe, as Catalan independence fears knock Spanish assets lower and the far-right gain access to the upper house of Parliament in France for the first time
Regional German CPIs indicate the disinflation trend in Germany may have bottomed, however negative Spanish CPI affirms the argument for further action from the ECB
Looking ahead, US Personal Income/Spending crosses the wires at 1330BST/0730CDT, followed by Pending Home Sales at 1500BST/0900CDT
Treasuries mostly steady overnight after 2Y and 5Y closed higher Friday on speculation the departure from Pimco of Bill Gross, who favored those sectors in bond funds he managed, will be followed by redemptions.
Stocks fell around the world and the dollar strengthened to a four-year high as U.S. economic data boosted the outlook for higher interest rates
Daniel Ivascyn, Pimco’s new Group CIO, is about to go head to head with Bill Gross in the fastest-growing segment of fixed income: unconstrained funds
The ruble weakened to a new record low, approaching the level at which Russia’s central bank said it would intervene to support the currency
Pro-democracy protesters vowed to press ahead with demonstrations unless Hong Kong’s top official steps down, with thousands of people surrounding government offices after violent clashes paralyzed the city center
Standard Chartered and HSBC were among banks that shuttered some branches in Hong Kong as pro-democracy protesters remained on the streets following weekend clashes with police
Turkish President Recep Tayyip Erdogan called for the establishment of a “secure zone” inside Syria to repatriate Kurdish refugees who fled to Turkey to escape an Islamic State onslaught
President Obama said U.S. airstrikes in Iraq are an example of the country leading a coalition to aid an ally, not a direct confrontation with Islamic State militants
Sovereign 10Y yields mostly higher, led by Greece, Italy and Spain. USD strengthens to highest since June 11, 2010. Asian, European stocks mostly lower. U.S. equity-index futures drop. WTI crude lower, gold higher, copper falls

US Event Calendar

8:30am: Personal Income, Aug., est. 0.3% (prior 0.2%)
- Personal Spending, Aug., est. 0.4% (prior -0.1%)
- PCE Deflator m/m, Aug., est. -0.1% (prior 0.1%)
- PCE Deflator y/y, Aug., est. 1.4% (prior 1.6%)
- PCE Core m/m, Aug., est. 0.0% (prior 0.1%)
- PCE Core y/y, Aug., est. 1.4% (prior 1.5%)
10:00am: Pending Home Sales m/m, Aug., est. -0.5% (prior 3.3%)
- Pending Home Sales y/y, Aug., est. -1.4% (prior -2.7%)
10:30am: Dallas Fed Manufacturing Activity, Sept. 10.5 (prior 7.1)
11:00am: Fed to purchase $2b-$2.5b notes in 2021-2024 sector

ASIA

Asian equity markets traded mixed with notable underperformance in the Hang Seng (-1.9%) after pro-democracy protests in Hong Kong dramatically escalated after riot police resorted to using force including firing tear gas at crowds. The Nikkei 225 (+0.5%) was underpinned by a weaker JPY after trading at a 6yr low against the greenback.

FIXED INCOME

Following German regional CPIs, the German
curve trades a touch steeper ahead of the National figure at 1300BST/0700CDT as the modest uptick in most of the inflation numbers lessens the case for immediate intervention from the ECB. As such, focus shifts to the ECB press conference on Thursday, where Draghi is expected to be quizzed on the most recent dismal TLTRO take up. The political uncertainty has not been limited to Spain though, as the FR/GE spread had widened by as much as 0.4bps (circa 1.1%) after Marine Le Pen’s right-wing National Front party gained further ground in the 170 seat French upper house of parliament on Sunday.

Pan Euro Agg month-end extensions +0.08yrs (Prev. +0.03yrs), 12-month average +0.07yrs (IFR)

RANsquawk sources report large Sterling month-end extensions, ranging between +0.28yrs to +0.31yrs – Unconfirmed. Note, that this is much higher than the monthly average of +0.05yrs, but broadly in-fitting with this time last year at +0.33yrs.

EQUITIES

COMMODITIES

After holding their ground for much of last week, the energy complex has stayed the course on Monday, within USD 1.00/bbl of last week’s highs at USD 93.86/bbl. Overnight, copper slumped 0.8% to its lowest level in 3 months as broad-based USD strength and doubts over growth in Chinese demand continue to weigh on the industrial metals complex. This was particularly evident in Dalian iron ore, which fell 3.8% to a fresh contract low on ongoing oversupply and Chinese slowdown worries. Nickel fell further after Philippine lawmakers clarified last week they won’t seek an ore-exporter ban for at least 7 years and aluminium fell 0.2%, its first monthly drop in 8.

* * *

DB’s Jim Reid completes the weekend event recap

Apart from still decent fundamentals and ultra low defaults, everything seems to have transpired against HY in the last few weeks and months. Friday again saw the US credit market under some pressure due to concerns about the future direction of funds formerly managed by Bill Gross. His career move shocked the market and left it selling first and asking questions later. The US CDX IG index widened 4bps (a big intra-day move in this environment) on the news before settling 2bps wider on the day at around 63.5bp. The CDX HY was nearly a point lower before closing broadly unchanged at a cash price of around 106. In Europe we saw Main and Xover moved by around 3bps and 10bps respectively. Quarter end pressures in what is already a balance sheet constrained world in fixed income also seems to be weighing on the credit at the moment. In other markets, equities ended Friday on a positive note with the S&P 500 (+0.86%) perhaps supported by an upward revision in US Q2 GDP and also a rebound in Apple’s share price (+2.9%). The Dollar continued to rise whilst Treasuries were a little softer supposedly not helped by good data and Gross’ move.

Turning to the Asian session overnight, the focus is mostly on the pro-democracy demonstrations in Hong Kong over the weekend in which protestors opposed Beijing’s decision to rule out fully democratic elections in HK in 2017. The protest later escalated into Sunday evening as tear gas and pepper sprays were used against demonstrators. Into Monday morning HK time, thousands of protestors are reported to still remain near government’s main offices although there are some signs that the unrest is spreading with fresh demonstration sites being sighted away from the Central/Admiralty district. Hong Kong has closed down schools in neighbouring districts affected by the demonstrations. More than 200 bus routes have been cancelled or diverted and some subway exits in protest areas have been blocked. Several banks have suspended operations in affected areas. China’s People’s Liberation Army (PLA) in Hong Kong said that it was confident the city’s administration could handle the protests (BBC). The movement in HK has also brought out supporters in Taiwan which saw hundreds of people gathering in Taipei in support of the movement in HK (WSJ). The situation remains rather fluid ahead of the China’s National Holiday 1 October.

The market reacted negatively to the above with the Hang Seng and the HSCEI benchmarks both down around 1.7%. Although off their intraday lows, the move has also effective unwound all of the Hang Seng’s YTD gains so far. The declines have been largely led by Consumer and Property sectors on concerns of weaker retail and investment sentiment ahead. China, however, is holding up fairly well with the Shanghai Composite up 0.4% as we type. Indonesia is also underperforming with both local equity and currency markets weaker after the outgoing parliament passed a law last Friday to scrap direct elections for mayors and governors.

Credit markets are also weaker overnight with Asian benchmark IG curves around 4-5bps wider across the board. China CDS and benchmark cash bonds are around 5bps wider not helped by the situation in HK. In currency markets, the NZD fell below 78 cents against the USD for the first time in about a year after the RBNZ told the market that it sold a net NZ$521m in August (the biggest sale of such since July 2007). The AUD is also under pressure as the currency tested its January lows at around 87 cents against the Greenback. On the brighter side of things, India’s BBB- sovereign rating was reaffirmed by S&P with its Negative outlook also revised to Stable. Whilst this helps remove any lingering uncertainty of a potential downgrade by the rating agency the situation in HK/China is still largely the key market driver in Asia for now.

via Zero Hedge http://ift.tt/10d8DvF Tyler Durden

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