Stocks, Bonds Rise As Earnings Season Begins
Global markets edged higher on Tuesday even as safe havens were bought as markets tried to balance fading optimism over the latest China-U.S. trade truce with the likelihood of a Brexit deal by Thursday’s European Union summit.
However, S&P futures trimmed dropped a quick 15 points and treasuries rallied after Bloomberg reported China may “struggle” to buy the volume of American goods proposed in the “phase one” trade deal unless the US cuts tariffs.
MSCI’s index of world stocks rose 0.2% with European stocks climbing briefly to a two-week high after comments from the European Union’s chief Brexit negotiator that a deal with Britain over the terms of their divorce was still possible this week. The European STOXX 600 added 0.2%, with 18 of 19 sectors advancing led by retailer shares, with France’s CAC and Germany’s export-oriented DAX both rising while Britain’s FTSE was a touch lower as sterling rose against the dollar and the euro, reflecting the cautious optimism about talks between Britain and the EU.
Yet capping broader gains in equities was a perceived lack of progress coming out of U.S.-China trade negotiations.
Earlier in the session Asian stocks climbed for a third day, led by health care firms, as Japanese shares staged a catch-up rally after a Monday holiday when trade optimism buoyed regional equities. Most markets in the region were up, with Japan leading gains and China retreating. The Topix advanced 1.6% for its biggest gain in more than a month, as Toyota Motor and Daiichi Sankyo provided strong support. The Shanghai Composite Index fell 0.6%, dragged by PetroChina and 360 Security Technology. China’s factory deflation deepened in September due to slowing economic growth and the comparison with faster gains a year ago.
India’s Sensex rose 0.8%, set for a third day of gains, as investors looked toward September-quarter earnings reports. HDFC Bank and Kotak Mahindra Bank were among the biggest boosts for the index
Reports of a “Phase 1” trade deal between the United States and China last week had earlier cheered markets but the dearth of details around the agreement has since curbed this enthusiasm with oil prices extending declines, Chinese stocks weaker and the safe-haven yen holding gains versus dollar.
“Not enough was achieved to alter meaningfully the fundamental global economic outlook,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “Global growth is still slowing and is below trend … There is still scope for earnings disappointment and the remaining uncertainty from trade tensions means business investment is unlikely to improve markedly.”
The focus is now on Europe where officials from Britain and the EU will meet at a make-or-break summit on Thursday and Friday that will determine whether Britain is headed for a deal to leave the bloc on Oct. 31, a disorderly no-deal exit or a delay. The main sticking point remains the border between EU member Ireland and Northern Ireland, which belongs to Britain. Some EU politicians have expressed guarded optimism that a deal can be reached. However, diplomats from the EU have indicated they are pessimistic about British Prime Minister Boris Johnson’s proposed solution for the border and want more concessions. Yet those concerns did little to quash market optimism for now, with Britain expected to make new proposals on Tuesday.
Meanwhile, as algos and buyback programs bought stocks, humans bought bonds, with the 10Y yield dropping to 1.675% while Eurozone bond yields rose with Germany’s benchmark 10-year bond yield was 0.5 basis points higher on the day at -0.45%, flirting with a two-and-a-half month highs reached at the end of last week.
In the currency markets, optimism over a possible Brexit deal lifted sterling by as much as 0.7% to the dollar and approaching a three-month high of $1.2708 and climbing to a five-month high against the euro. The yen, often considered a safe haven in times of economic uncertainty, held steady at 108.33 versus the dollar.
Markets were still analyzing the lack of perceived progress in resolving a prolonged trade row between the United States and China. The United States agreed to delay an Oct. 15 increase in tariffs on Chinese goods while Beijing said it would buy as much as $50 billion of U.S. agricultural products after tense negotiations last week. However, Washington has left in place tariffs on hundreds of billions of dollars of Chinese goods. Trade experts and China market analysts say the chances are high that Washington and Beijing will fail to agree on any specifics – as happened in May – in time for a mid-November meeting between U.S. President Donald Trump and Chinese President Xi Jinping.
Chinese data also added to the woes. The latest numbers showed that China factory gate prices declined at the fastest pace in more than three years in September. That followed customs data on Monday that showed Chinese imports had contracted for a fifth straight month.
Concerns over the health of the global economy weighed heavily on oil prices, with U.S. crude and Brent crude both falling around 1.5% to $52.75 and 58.48 per barrel respectively. By early last week, hedge funds had become the most bearish toward petroleum prices since the start of the year, according to an analysis of position records published by the U.S. Commodity Futures Trading Commission and ICE Futures Europe.
Bank earnings start with Goldman Sachs, JPMorgan, Citigroup and Wells Fargo.
- S&P 500 futures up 0.6% to 2,981.75
- STOXX Europe 600 up 0.6% to 391.93
- MXAP up 0.6% to 158.82
- MXAPJ up 0.05% to 509.44
- Nikkei up 1.9% to 22,207.21
- Topix up 1.6% to 1,620.20
- Hang Seng Index down 0.07% to 26,503.93
- Shanghai Composite down 0.6% to 2,991.05
- Sensex up 0.8% to 38,524.63
- Australia S&P/ASX 200 up 0.1% to 6,652.01
- Kospi up 0.04% to 2,068.17
- German 10Y yield fell 0.2 bps to -0.459%
- Euro down 0.02% to $1.1025
- Brent Futures down 0.6% to $59.00/bbl
- Italian 10Y yield fell 2.8 bps to 0.572%
- Spanish 10Y yield fell 1.0 bps to 0.201%
- Brent Futures down 0.6% to $59.00/bbl
- Gold spot down 0.09% to $1,491.86
- U.S. Dollar Index down 0.04% to 98.42
Top Overnight News
- British negotiators submitted a revised set of Brexit plans to Brussels amid growing optimism that a deal could be struck this week
- There will be a lot to watch when bank earnings kick off on Tuesday morning, with reports from JPMorgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc., Wells Fargo & Co. and money manager BlackRock Inc. all set to hit at or before 8 a.m.
- Federal Reserve Bank of St. Louis President James Bullard said U.S. policy makers are facing too-low rates of inflation and the risk of a greater-than-expected slowdown, suggesting he’d favor an additional interest rate cut as insurance.
- Some of Europe’s strictest ESG funds are snubbing the world’s most liquid investment — the $16 trillion U.S. Treasuries market
- Investor confidence in Germany’s economic outlook remained weak in the latest sign of concern that the nation has slipped into a recession amid trade tensions
Asian equity markets traded mixed following the lacklustre lead from Wall St where the recent US-China trade optimism was tempered by discrepancies in language between the sides and with China wanting more discussions before signing the deal, while looming earnings added to the tentativeness as the large US banks are to begin announcing Q3 results today. ASX 200 (+0.2%) was choppy with the index pressured by underperformance in the commodity-related sectors and Nikkei 225 (+1.9%) outperformed as it played catch up on return from the extended weekend with Japanese officials willing to consider an additional budget for the typhoon recovery if required. Hang Seng (Unch.) and Shanghai Comp. (-0.6%) were indecisive after the trade exhilaration faded, with the HKMA’s announcement of a countercyclical capital buffer reduction and influx of CNY 40bln from the PBoC’s previously announced targeted RRR cut, doing little to spur risk appetite. The latest inflation figures from China were also somewhat inconclusive as CPI topped estimates to print its highest since 2013 although PPI declined at its fastest pace in more than 3 years. Finally, 10yr JGBs traded subdued as demand was dampened amid the strength in Japanese stocks but with downside also restricted by the BoJ’s presence in the market for JPY 1.21tln of JGBs heavily concentrated in 1yr-10yr maturities.
Top Asian News
- China’s Factory Deflation Worsens, Adding to Global Economy Woes
- Sun Hung Kai Properties Cuts Rents at Some of Its H.K. Malls
- China Fertilizer Maker on Brink of Bankruptcy Rallies 51%
- Fund Managers Expect Latitude IPO to Be Pulled: AFR
A choppy session for European equities thus far [Eurostoxx 50 +0.7%] following on from a mixed Asia-Pac session. European equity futures saw upside heading into the cash open amid refuelled Brexit hopes after EU’s Chief Brexit Negotiator Barnier struck an upbeat tone regarding a potential Brexit deal by the end of the week; although this has been caveated somewhat by EU Diplomatic sources. That said, futures pared back around half of its gains at the open and continued declining with downside exacerbated by source reports that China will struggle to purchase USD 50bln worth of agri goods. Major bourses in the region are ultimately higher, although UK’s FTSE 100 trades flat as exporters bear the brunt of a firmer Sterling, induced by positive comments from various EU lawmakers. Sectors are all in broadly positive territory although the IT sector is somewhat underperforming as Wirecard shares (-18.5%) plumbed the depths after a fresh FT investigation raised prospect of a concerted effort to fake substantial sales and profit at the company. Wirecard has since dismissed the report as “market speculation”. On the flip side, the financial sector fares better as current Brexit optimism spurred gains in domestic banks with Lloyds Banking Group (+3.4%), RBS (+3.4%) Barclays (+2.1%) all at the top of the FTSE 100. Further, the Italian banking sector is propped up by source reports that Italy is mulling reducing the amount of loan losses that banks can deduct from their taxable income next year. Hence the Italian Banking index opened higher by circa. 1% but has since come off of highs. In terms of individual movers, Indivior (+8.0%) shares spiked higher at the open after the Co. boosted its earnings guidance for a second time this year amid a strong performance of its drug used to treat opioid addiction. Meanwhile, Kloeckner & Co. (-14.3%) shares slumped following a downgrade to its profit outlook due to weaker market conditions.
Top European News
- U.K. Employment Falls as Brexit Strains Spread to Labor Market
- U.K. Carmakers Hit by $628 Million Brexit Tab Call for EU Deal
- Wirecard Drops on News Report Suggesting Accounting Misdeeds
- German Steelmaker Kloeckner Slumps as Global Slowdown Bites
In FX, cable seemed destined for or at least drawn towards a hefty option expiry at the 1.2600 strike before another bout of Brexit deal positivity boosted the Pound across the board, and this time from the EU’s chief negotiator Barnier who remains hopeful that a deal can still be struck in time for Thursday-Friday’s Summit, but warns that latest UK proposals remain inadequate. He added that the deadline to reach an agreement is COB today, but separate reports suggest that another meeting could be convened before the current October 31 deadline if needed, while the UK Government believes that the cut-off for this week is actually Wednesday evening. However, the situation remains highly fluid and uncertain, with Sterling hostage to headlines, breaking news and unfolding developments, as Cable fades just ahead of 1.2700 and Eur/Gbp rebounds from just under 0.8700 towards highs of 0.8750.
- NZD/AUD – Not much respite for the Antipodean Dollars following further reflection and assessment by China and the US about the state of trade relations and significance of Phase 1 even though Beijing and Washington appear to be more convergent on certain elements of the accord in principle. Indeed, the Kiwi is still capped ahead of 0.6300 awaiting NZ Q3 CPI after the latest GDT auction, while the Aussie remains some way below 0.6800 in wake of RBA minutes underlining guidance for keeping rates low or easing further if required, and with a decent 625 mn expiry at the big figure.
- JPY/CAD/EUR/CHF – Comparatively contained trade vs the Greenback again, as the Yen meanders between 108.23-45 and just shy of decent expiry interest residing at 108.00-20 (1.5 bn), while the Loonie is striving to limit losses beyond 1.3240 amidst a deeper retreat in oil prices and Euro remains top heavy into 1.1050, and perhaps also rooted by expiries given 1 bn rolling off just above 1.1000 (1 bn from 1.1015-20). Elsewhere, more soft Swiss inflation inputs via producer/import prices are keeping the Franc depressed just off parity and around 1.1000 against the single currency, as the DXY continues to flit either side of 98.500.
- EM – More volatility for the Lira, but a recovery of sorts following US sanctions against Turkey that were perhaps not as severe as many were anticipating. Nevertheless, Usd/Try remains elevated within a 5.8605-9320 range and underpinned on the back of a rise in unemployment plus a big swing in the budget balance from small surplus to onerous deficit.
- RBA Minutes from October 1st meeting stated the board judged case for easing at October meeting outweighed arguments against a move and that it is prepared to ease policy further if needed. RBA also reiterated that it is reasonable to expect that an extended period of low rates would be required, while board members noted global trend of lower rates and discussed the possibility rate cuts could have less impact than in past but judged lower rates will still have an effect through AUD. (Newswires)
In commodities, A downbeat day for WTI and Brent futures thus far as downward pressure resumed as markets tilted towards risk aversion in early EU trade and as optimism surrounding the US-China mini deal fizzles out. Analysts at ING highlight that the ICE Brent Dec/Jan time-spread has also narrowed to a backwardation of around 0.17/bbl vs. 0.77/bbl at the end of September which suggests the “tightness in the prompt market is easing”. In terms of newsflow, OPEC Secretary General Barkindo noted that the physical oil market is relatively tight now and current demand is the market driver. WTI futures took out 53/bbl to the downside and tests 52.50/bbl ahead of the psychological 52.00/bbl mark whilst its Brent counterpart eyes 58/bbl to the downside. As a reminder the weekly API crude inventories have been postponed by a day due to US observing Columbus Day yesterday; as has the EIA release. Elsewhere, gold has climbed off lows amid a turnaround in sentiment and remains in close proximity to 1500/oz vs. an intraday low of around 1488/oz. Copper meanwhile has pulled back during the session, albeit prices remain above 2.62/lb.
US Event Calendar
- Oct. 15-Oct. 18: Monthly Budget Statement, est. $83.0b, prior $119.1b
Central Bank Calendar
- 4:25am: Fed’s Bullard Speaks at Bloomberg Conference in London
- 9am: Fed’s Bostic Speaks on Community Development
- 12:45pm: Fed’s George Speaks at Payments System Conference
- 3:30pm: Fed’s Daly Speaks Los Angeles World Affairs Council
DB’s Jim Reid concludes the overnight wrap
With it being fairly quiet in markets yesterday – not helped by US bond markets being closed for a holiday – even a small smattering of trade headlines was likely to be the only talking point for investors. Indeed, after radio silence over the weekend, initially it looked like ‘Phase One’ was turning more into ‘Phase Nought Point Five’ after Bloomberg reported that China wants to hold more talks before signing a trade deal with the US. The story went on to say that China may send a team of negotiators led by Vice Premier Liu He to finalise a deal that could be signed at the Asia-Pacific Economic Cooperation summit next month. The story also suggested that China were advocating for Trump to cancel tariff hikes due in December.
Markets faded immediately after the story broke and continued the trend from late Friday however the S&P 500 later bounced back towards flat on the day after Global Times Editor Hi Xijin tweeted that “based on what I know, China-US trade talks made breakthrough last week and the two sides have the strong will to reach a final deal”. US Treasury Secretary Mnuchin hardly made things any clearer, with CNBC quoting him as saying that he has every expectation that if a US-China trade deal is not in place, December tariffs will be imposed, but that he also expects a deal. So make of that what you will. Clearly there is still lots of headline volatility likely in the weeks ahead with my concern being less about “phase one” but what happens to all the unresolved issues after that. Anyway by the end of play the S&P 500 closed -0.14% lower with materials (-0.74%) leading the move lower, while financials eked out a +0.12% gain ahead of earnings season starting today. The DOW and NASDAQ finished -0.11% and -0.10% respectively, though volumes were around 30% lower than usual. In Europe, the STOXX 600 ended -0.49% but that was after trading as low as -1.15% while elsewhere Gold (+0.21%) was slightly higher and WTI (-2.15%) fell sharply to perfectly retrace Friday’s gain. The small risk off also helped 10y Bund yields edge down -1.5bps. 10 year Gilts rallied -6.7bps as Brexit deal euphoria was dampened down after the mixed weekend news (more below). As mentioned, US bond markets were closed, but the dollar did strengthen +0.22%. One of the bigger underperformers was the Turkish lira (-0.73%) which depreciated after reports that the US is preparing financial sanctions on individuals in response to the offensive in Syria. We indeed got those sanctions as US markets closed with the US Treasury Secretary Steven Mnuchin saying that the US has sanctioned the Turkish ministers of defense, interior and energy while adding that there will also be primary and secondary sanctions for any financial institutions doing significant transactions. The sanctions will also include penalties which will raise steel tariffs on Turkey back to 50%, the level before a reduction in May, and the US would halt negotiations over a $100 bn trade pact. He added that, “these sanctions are very, very strong”. However, House Speaker Nancy Pelosi, accused Trump of unleashing “an escalation of chaos and insecurity in Syria” and added, “His announcement of a package of sanctions against Turkey falls very short of reversing that humanitarian disaster.” In spite of the imposition of these sanctions, the Turkish lira is actually trading up +0.10% this morning.
Looking ahead, the good news for markets today is that we should at least get a temporary distraction from trade and Brexit with some potentially important earnings to dissect with JP Morgan, Goldman Sachs, Citigroup and Wells Fargo all due to report. Our US equity strategists recently put out a note and highlighted that the bottom-up analyst consensus for S&P 500 EPS has been falling for a year and with a typical beat implies flat earnings (+0.8% vs +3.5% in Q2). Their top-down model, however, points lower (-1.5%) suggesting below average beats and a disappointing earnings season. The top-down drivers of earnings have weakened across the board with falling macro growth the biggest drag (-7pp). There is growing evidence of a weakening in pricing power, with corporates focused on the next set of levers to press, including cuts in hours worked and slowing employment growth. See their report here .
Ahead of all this, Asian markets are trading mixed with the Nikkei up +1.88% after reopening from the long weekend while the Shanghai Comp (-0.53%) is down. The Hang Seng (-0.06%) and Kospi (+0.05%) are flattish. Elsewhere, futures on the S&P 500 are up +0.22% and crude oil prices are down a further c. -0.70% this morning. As for overnight data releases, China’s September CPI came in at +3.0% yoy (vs. +2.9% yoy expected) while PPI printed in line with consensus at -1.2% yoy. The rise in CPI was mainly due to food prices climbing 11.2% and a more than 69% jump in pork prices, according to China’s National Bureau of Statistics.
As for Brexit, there were some back-and-forth headlines and a corresponding seesaw in the pound. Sterling fell as much as -1.20% during yesterday’s trading session to 1.252, but has retraced and is up 0.81% from that level this morning. Initially, there was some fading of last week’s slightly premature euphoria and also concern over Barnier’s comments about potential technical challenges and the DUP Dodds’ cautious comments over the weekend. Notwithstanding the weakness yesterday, the most significant point to make right now is that the UK government position has undergone a notable transformation over the last couple weeks to a position where they are negotiating around a version of the EU’s 2017 backstop with potential concessions for the DUP. DB’s Oli Harvey made the point yesterday that assuming PM Johnson doesn’t have a change of heart, this removes the tail risks – if there isn’t a deal by Saturday we will either get a caretaker government, or an election fought between parties that all want a deal (with the exception of the Brexit Party). Overnight the U.K. Telegraph say their sources suggest that talks are inching positively towards a deal, citing “last-minute compromises,” even if they might require an additional EU summit next week to get things over the line. The DUP leadership were also reported to be in talks at no.10 last night so things are hotting up behind the scenes. Elsewhere, Ireland’s foreign minister Simon Coveney said that there was goodwill and determination from both sides to get a deal, but that “it’s too early to say whether it’s possible to get a breakthrough this week or whether it will move into next week”. The BBC also reported overnight that the EU is mulling new emergency summit to ‘get Brexit deal done’. In addition, Mr Barnier will update the EU ministers today at the General Affairs Council in Luxembourg where he is expected to give a press conference. So one to watch.
Finally, it was a very quiet day for data yesterday with only the August industrial production print for the Euro Area. The +0.4% mom reading was slightly ahead of expectations for +0.3% and it followed a -0.4% mom reading in July. Combined with slightly better retail sales data, that points to a very modest positive for Euro Area growth. In the US, the Empire manufacturing survey rose to 4.0, from 2.0 in September.
To the day ahead now, which this morning includes final September CPI revisions in France, August/September employment data in the UK and the October ZEW survey in Germany. In the US the only data due out is the October empire manufacturing print. Away from that it’s a busy day for Fedspeak with Bullard, Bostic, George and Daly all scheduled. The BoE’s Carney is also due to testify on the financial stability report this morning while the BoE’s Vlieghe speaks at lunch time. As mentioned above, US bank earnings from JP Morgan, Goldman Sachs, Wells Fargo and Citigroup will also be a big focus. Finally, the World Bank and IMF meetings will kick off with the World Outlook document expected around 2pm London time, which always gets headlines. This time notable global growth downgrades are likely.
Tue, 10/15/2019 – 07:07