While U.S. cash markets will be closed to mark the death of President George H. W. Bush, S&P futures were open and rebounded modestly from yesterday’s furious selloff, rising 0.5% after yesterday’s 3.2% drop, as “Tariff Man” Trump said he sees a China trade deal coming “either now or into the future”…
… while European and Asian stocks trimmed losses after China pledged to start delivering on trade agreements reached with America, provide a modest risk backstop.
China’s announcement, another twist in the trade war saga, was a much-needed dose of positive news, as it ended days of silence from the Asian nation following a weekend meeting between Presidents Donald Trump and Xi Jinping. Upbeat statements from Trump had not been immediately matched by Beijing, helping fuel the equity tumult which sent US stocks plunging over 3% on Tuesday.
After initially rising against all majors, the dollar has since dipped to session lows, currently trading barely changed from yesterday’s closing level.
Global markets were left reeling after Tuesday’s steep sell-off in New York, but nerves steadied after China’s Commerce Ministry said on Wednesday morning that Beijing will start to “quickly implement” specific items where there’s consensus with the U.S. and will push forward on trade negotiations within the 90-day “timetable and road map.”
Asian stocks slid across the board on Wednesday, dragged down by Wall Street’s tumble as sharp declines in long-term U.S. Treasury yields and resurgent trade concerns stoked investor worries about global economic growth. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.3 percent. The Shanghai Composite Index slipped 0.6% and Japan’s Nikkei dropped 0.5 percent, but rebounded from session lows. Australian stocks lost 0.8%, pressured by global losses. The mood further soured after data showed Australia’s third-quarter growth fell short of expectations. The Australian dollar D4 was down 0.7 percent at $0.7288.
Worries about U.S. bond markets signaling an impending recession, and a still rumbling trade war between the world’s top two economies, sent European shares to a 2 week low, yet while the Stoxx Europe 600 Index slumped as much as 1.2%, hitting the lowest since Nov. 23, and traded down 0.7% last, that was far less than the 3.2% plunge recorded by the S&P 500 a day earlier. Financials were the biggest drag on European shares as investors dumped sectors highly sensitive to economic growth. Europe’s bank index fell 1.7%, while oil and mining sectors fell 1.5 percent each.
“Cyclicals are really dependent upon accelerations in growth, they’re very real economy sensitive for higher revenues,” said John Ricciardi, CEO and lead portfolio manager at Kestrel Investment Partners. The inversion of parts of the U.S. yield curve means investors are beginning to panic about future growth and inflation, Ricciardi added.
Chipmakers AMS, STMicroelectronics and Infineon fell 1.2 percent to 4.5 percent following a sharp drop in Apple and chip stocks on Wall Street, while German carmakers outperformed the DAX as investors digested what seemed a relatively positive outcome from auto executives’ meeting at the White House. President Trump pressed carmakers to increase investments in the United States, something the executives said they planned to do but wouldn’t be able to if the administration went ahead with threatened tariffs.
Concerns about slowing U.S. growth have accelerated the flattening of the yield curve, which has preceded the last seven US recessions. “The market decline in the U.S. overnight and the flattening of the yield curve reflect that economic growth momentum is taking over as the primary concern for investors, even as the latest ISM manufacturing data is holding up well,” wrote Tai Hui, market strategist at J.P. Morgan Asset Management. On Wednesday, the Treasury cash/futures will remain closed.
The German curve steepened slightly, yields lower by ~1bp across the curve and touching the lowest since mid-2017 amid the risk-off mood, while Italian bonds jumped. UK Gilt yields rose by ~4bps as the curve bear flattens, widening 4.5bps to Germany after yesterday’s Brexit votes. BTPs push higher, supported by decent demand at the Spanish bond auctions and a turnaround in FTSE MIB off the lows.
The dollar initially advanced versus all major peers before reversing and turning slightly lower on the day. The Aussie dollar led losses among majors after 3Q GDP data missed forecasts, adding to fears of a global slowdown. The pound climbed as investors digested legal advice over Prime Minister Theresa May’s Brexit deal, which confirmed that the so-called customs backstop could remain “indefinitely.”
In commodities, WTI (-0.2%) and Brent (-0.3%) bounced off lows as the latest OPEC+ meeting goes underway, with the Omani Oil Minister hinting at a 3-6 month production cut ahead of tomorrow’s key OPEC meeting. Furthermore, The WSJ reports that OPEC delegates are concerned that Saudi and Russia are making output agreements without input from OPEC; it was also stated that the Russia-Saudi relationship was a key factor in Qatar’s withdrawal. Markets will be looking ahead to the postponed EIA weekly data coming out tomorrow following the unexpected API build, alongside the OPEC meeting with emphasis on any decision to cut oil production that may arise. Reports today by RIA stating that OPEC wants Russia to reduce oil output by a minimum of 300k BPD. However, TASS has reported that Russia is only seeking a symbolic production cut which follows previous reports that they would only agree to a 140k BPD cut. Elsewhere, Libya’s NOC stated that all port terminals are shut due to bad weather, with storage capacity at Zawiya (usual production of 120k BPD) affected and the 300k BPD Sharara oil field production to be cut by 50% tomorrow morning.
Gold has weakened from the 5-week high reached in the previous session, as the dollar is marginally firmer. The majority of base metals have fallen due to being weighed on by US-China trade tensions following US President Trump commenting that there will have a real deal or no deal at all with China.
Treasury markets are closed for a day of mourning in the U.S. in honor of ex-President George H.W. Bush
- S&P 500 futures up 0.4% to 2,713.75
- STOXX Europe 600 down 0.7% to 355.78
- MXAP down 1% to 153.65
- MXAPJ down 1.3% to 495.24
- Nikkei down 0.5% to 21,919.33
- Topix down 0.5% to 1,640.49
- Hang Seng Index down 1.6% to 26,819.68
- Shanghai Composite down 0.6% to 2,649.81
- Sensex down 0.8% to 35,836.22
- Australia S&P/ASX 200 down 0.8% to 5,668.35
- Kospi down 0.6% to 2,101.31
- German 10Y yield fell 0.8 bps to 0.255%
- Euro down 0.02% to $1.1341
- Italian 10Y yield rose 1.0 bps to 2.789%
- Spanish 10Y yield fell 1.0 bps to 1.475%
- Brent Futures down 1% to $61.45/bbl
- Gold spot down 0.2% to $1,236.00
- U.S. Dollar Index up 0.03% to 97.00
Top Overnight News
- China said Wednesday the trade meeting with the U.S. was “very successful” and is “confident” of implementing the results agreed upon at the talks, but didn’t provide any further details on the outcome
- Federal Reserve Bank of New York President John Williams gave an optimistic review of the U.S. economy, reiterated his support for further gradual interest-rate increases and expressed no concern that market participants have dialed back expectations for policy tightening in 2019
- Australia’s economy slowed last quarter as commercial construction fell and household spending slowed, casting doubt on the central bank’s outlook and all but ruling out an interest-rate increase next year
- Bank of Japan Deputy Governor Masazumi Wakatabe gave a more cautious view on the outlook for prices as economists increasingly see inflation weakening over the next year
- With less than 48 hours to go before a critical OPEC gathering, Saudi Arabia and Russia are set to meet in Vienna for a make-or-break preparatory meeting on Wednesday that’s going to set the direction for the oil market
- Italy’s Di Maio says ’climate is changing’ in budget talks with EU
- U.K. Trade Sec Fox says possibility of no Brexit if parliament rejects deal
- Trump believes will make China deal ’either now or into the future’
- China calls U.S. trade meeting ’very successful’; will quickly implement
- OPEC+ nations didn’t yet discuss proposals to cut production: Kuwait Min
Asian stock markets were pressured following the sell off on Wall Street where doubts regarding a US-China trade deal saw all US majors drop over 3% in which the S&P 500 fell below its 200DMA and DJIA lost near 800 points on the day. This weighed heavily on the China-sensitive sectors in the US such as Industrials, Materials and Tech, while Financials took the biggest hit amid a slump in yields and ongoing yield-inversion. ASX 200 (-0.8%) was led lower by tech and financials with disappointing Q3 GDP adding to the downbeat tone, while Nikkei 225 (-0.5%) also finished negative albeit off worse levels as USD/JPY attempted to nurse losses. Elsewhere, Hang Seng (-1.6%) and Shanghai Comp. (-0.6%) conformed to the downbeat tone but with the declines in the region less drastic than the bloodbath observed stateside following stronger than expected Chinese Caixin Services PMI which jumped to a 5-month. Furthermore, there was a seemingly concerted effort by some officials to dispel the trade-related doubts in which White House Trade Adviser and ‘China hawk’ Navarro suggested to give talks a chance and that it is premature to lose faith in US-China discussions, while Mofcom also declared the US-China trade meeting was successful although Trump remained unrelenting and reiterated his threat of tariffs if they fail to reach a deal. Finally, 10yr JGBs initially rose to levels last seen over 2 years ago amid safe-haven demand and as they tracked the upside in T-notes. However, prices then pulled back to return flat after the BoJ’s bond buying operation in which it upped purchases in the 10yr-25yr maturities by JPY 20bln, as the bank is on course to reduce monthly purchases of superlong JGBs by JPY 150bln if it continues at the current pace given the previously announced reduction of operations for December.
Top Asian News
- India’s Sensex Extends Decline as RBI Holds Rates, Policy Stance
- IPhone Lens-Maker Largan Warns of December Sales Slide
- India Holds Interest Rates After Inflation Undershoots Forecast
- Japan Eases Changes for Tariffs on Delayed Solar Projects
European bourses (Eurostoxx -0.9%) have followed suit from their US and Asia-Pac counterparts to trade lower across the board as the trade-inspired optimism seen at the start of the week continues to dissipate. China’s Mofcom declared the USChina trade meeting as successful, although were said to be puzzled and irritated by the Trump administration’s triumphant rhetoric. This came after Trump yesterday branded himself as a ‘Tariff Man’ and also tweeted that the US will either have a real deal with China or no deal at all and that the US will levy major tariffs against imports of Chinese products if a deal is not made with China. In terms of sector specifics, all ten majors trade in the red with IT, materials and industrials lagging their peers. Downside in financial names has also been hampered by the current yield environment as markets continue to speculate over the Fed’s 2019 rate hike plans in lieu of recent comments from Fed Chair Powell and with the German 10yr yield briefly slipping below 0.25%. UK homebuilders have seen some reprieve this morning (Berkeley Group +8.1%, Taylor Wimpey +6.3%, Barratt Developments +6.5%) after Barclays highlighted the sector as a potential major beneficiary of a Brexit deal being passed in Parliament. Individual movers include Shire (+2.6%) who stand near the top of the Stoxx 600 after amid shareholder approval for their merger with Takeda Pharmaceutical. Elsewhere, broker downgrades have placed weight on names such as Hargreaves Lansdown (-3.3%), Saint Gobain (-3.2%) and Osram Licht (-1.7%).
Top European News
- Weak Euro-Area Growth Is Here to Stay as Italy Recession Looms
- U.K. Services Unexpectedly Weaken to Worst Since July 2016
- Yandex Starts Selling $270 Smartphone to Rival Google in Russia
- Telia Sells Uzbek Unit That Cost It Almost $1 Billion in Fines
In FX, AUD,NZD – AUD the major G10 underperformer in light weaker-than-expected Q3 Aussie GDP (slowest pace of growth in two years, and well below consensus) which dragged AUD/USD to sub-0.7300 levels vs. highs of 0.7356 and not far from 0.7400 in recent sessions. Meanwhile, AUD/NZD slumped through 1.0600 to circa 1.0525, to the benefit of the Kiwi that managed to maintain 0.6900+ vs. the buck.
- GBP – Choppy trade for the Pound amid ongoing Brexit pandemonium after UK PM May suffered a hat-trick of defeats, giving more power to Parliament if her deal is voted down in next week’s meaningful vote. Cable currently trying to recover having slumped to a new YTD low yesterday at 1.2659 (ahead of the psychological 1.2650), with a rebound through 1.2700 and 1.2750, albeit amidst a generally softer USD and despite a worryingly weak services PMI (headline just above 50). Similarly, Sterling has regained composure against the EUR, with the cross back down below 0.8900 even though the single currency has pared losses elsewhere amid ECB sourced talk about discussions over further policy normalisation next year. Indeed, EUR/USD is back above 1.1350 from close to 1.1300 at one stage.
- CAD – USD/CAD is within striking distance of 1.3300 (vs. yesterday’s lows of 1.3160) as retreating oil prices weigh on the Canadian currency with traders also eyeing the BoC interest rate decision later today. No change in the policy is expected though focus will be on the tone of the statement given the recently battered energy complex. For a more detailed preview, refer to our research suite or headline feed.
- EM – Lira trades around the middle of a 5.4518-.3345 range vs. the Greenback after the CBRT set their inflation target at 5% (vs. November CPI at 21.62%) and pledged to do more to bring consumer prices back down, cushioning the TRY from wider bearish and risk averse sentiment.
- DXY – Given all the above, the broad Dollar and index have handed back some of Tuesday’s pronounced gains made amidst the Wall St. selloff, and ahead of today mark of respect day for passed President George H.W Bush. DXY pivoting 97.000 within a range 97.206-96.827.
In commodities, WTI (-0.2%) and Brent (-0.3%) bounced off lows as the JMMC meeting goes underway, with the Omani Oil Minister hinting at a 3-6 month production cut ahead of tomorrow’s key OPEC meeting. Furthermore, The WSJ reports that OPEC delegates are concerned that Saudi and Russia are making output agreements without input from OPEC; it was also stated that the Russia-Saudi relationship was a key factor in Qatar’s withdrawal. Markets will be looking ahead to the postponed EIA weekly data coming out tomorrow following the unexpected API build, alongside the OPEC meeting with emphasis on any decision to cut oil production that may arise. Reports today by RIA stating that OPEC wants Russia to reduce oil output by a minimum of 300k BPD. However, TASS has reported that Russia is only seeking a symbolic production cut which follows previous reports that they would only agree to a 140k BPD cut. Elsewhere, Libya’s NOC stated that all port terminals are shut due to bad weather, with storage capacity at Zawiya (usual production of 120k BPD) affected and the 300k BPD Sharara oil field production to be cut by 50% tomorrow morning. Gold has weakened from the 5-week high reached in the previous session, as the dollar is marginally firmer. The majority of base metals have fallen due to being weighed on by US-China trade tensions following US President Trump commenting that there will have a real deal or no deal at all with China. Separately, China’s construction steel rebar is up
US Event Calendar
- 7am: MBA Mortgage Applications, prior 5.5%
- 2pm: U.S. Federal Reserve Releases Beige Book