Summary:

• Asian stocks slumped for the 10th consecutive day, the longest losing streak since 2002.
• European and US stocks reversed Asian losses, trading modestly in the green
• Oil extended previous sessions gains post API’s as Hurricane Florence approaches the Carolinas
• CAD extends overnight gains NAFTA nears a perfect storm on dairy access
• Dark clouds clearing for UK PM May as ERG downplays overthrow but presents an alternate Brexit deal
• Looking ahead, highlights include, DoEs, Fed’s Brainard & Bullard and supply from the US

The “alligator jaws” chart presented by Jeff Gundlach during his Double Line conference call on Tuesday, which showed the unprecedented divergence between the US stocks and the rest of the world…

… was on display overnight, when Asian markets slumped once again, defying repeated calls for a rebound, as the MSCI Asia Pacific Index ex-Japan posted its 10th consecutive decline, the longest losing streak since 2002…

… although European stocks advanced modestly on Wednesday while US stock futures were once again in the green.

MSCI’s all-country equity index inched up marginally, looking to extend two sessions of modest gains that had snapped six straight days of losses. But emerging equities retreated to new 15-month lows, while fresh sparring between Washington and Beijing over trade kept world stocks close to three-week lows on Wednesday, and a slight dollar pullback gave little respite to emerging markets; the Indian rupee plumbing new record lows. Treasury yields edged lower after climbing a day earlier.

Meanwhile, as Bloomberg notes, central banks are back in the spotlight this week, with market participants increasingly preparing for the Fed to raise rates twice more in 2018, and policy meetings on the schedule for the European Central Bank and Bank of England, as well as Turkish and Russian central banks. Meanwhile, investors will be gauging the potential for extreme weather to disrupt economic activity, as threats from trade tension and Brexit negotiations linger.

“What the market needs is a signal of some relaxation in trade rhetoric, a bit of climb down,” said Lombard Odier’s Salman Ahmed. “That should be enough as fundamentals are strong. But you do need a trigger point and so far we have not seen it.” Another catalyst could be signals from the U.S. Federal Reserve that it could slow the pace of rate rises but given the torrent of strong U.S. data, that looks unlikely: data this week showed U.S. small business optimism at the highest level on record.

As a result of these two trends, Asian equities excluding Japan hit their lowest since July 2017 as the Shanghai Composite dipped below the 2016 closing low and most regional currencies declined.

Japan also closed in the red, down -0.3%, as the Yen halted a three-day drop against the dollar, pressuring stocks: “equities, particularly the Nikkei, are not having a good day and as a result USD/JPY has given back some of Tuesday’s gains,” said Rodrigo Catril, a currency strategist at National Australia Bank Ltd. in Sydney.

Emerging currencies also stayed under pressure, with the yuan slipping to a two and a half week lows against the dollar leading Asian peers lower and keeping the Australian dollar heavily linked to Chinese trade, close to its lowest since February 2016.

Australia’s dollar fell toward a more-than two-year low, dropping as low as 0.7094 after the Westpac consumer confidence fell 3% m/m in Sept, after dropping 2.3% in August and as declines in Asian stocks, the offshore yuan and iron ore sapped demand for the currency.  As discussed yesterday, emerging markets have been the biggest victims of the trade spats and rising U.S interest rates. The MSCI index of emerging currencies is down over 8% this year.

Emerging markets’ woes are being exacerbated by heavy dollar-denominated borrowing over the past decade, with Societe Generale analysts noting that “the misallocation of capital following a decade of cheap money is starting to be exposed”

Meanwhile, while the Turkish lira and Argentine peso have steadied off record lows, the Indian rupee continues to plumb new lows, taking year-to-date losses versus the dollar to more than 12%. “The rupee … is symptomatic of the overall situation in emerging markets, but it also embeds some idiosyncratic problems – with the fiscal deficit growing and the current account deficit widening on back of rising commodity prices,” said Cristian Maggio, head of emerging markets strategy at TD Securities.

European stocks shook off Asia’s woes on Wednesday and were modestly in the green, led by energy companies and miners who were among the biggest winners in Europe as Bloomberg’s commodity index rose. Futures on the Dow, S&P 500 and Nasdaq advanced even as America’s East Coast battened down for Hurricane Florence.

The dollar dipped 0.2% lower against a basket of currencies as hopes grew of concessions by Canada that would resolve disputes over reworking the North American Free Trade Agreement. The euro slipped and German bonds rallied after the news that ECB is to cut its growth outlook for the euro area while euro-zone industrial production fell 0.8% m/m in July vs est. 0.5% drop; the pound fluctuated after comments by European Commission President Jean- Claude Juncker who said he would work “day and night” for a divorce deal with the U.K. on Brexit though Britain can’t stay in “parts” of the bloc’s single market; it also slipped off five-week highs hit this week against the dollar, following the latest news from ITV about a Brexiteer plot to oust Theresa May.

Two-year Treasury yields held near a decade high and the dollar edged lower. Long-dated U.S. bond yields stayed just off the one-month highs hit on Tuesday after data showing sustained strength in the jobs market and the Treasury started a record debt sale amounting to almost $150 billion. The rise in U.S. TSY yields has hit Italy. It has been one of the bright spots in world markets in recent days, as fears have receded of a government spending binge. But Italian 10-year yields rose 2 bps off six-week lows.

BoE Governor Carney warned against complacency in the 10th anniversary of the GFC, while he outlined risks to the UK  economy including high levels of household debt, no-deal Brexit, high debt for China’s economy and a catastrophic cyber-attack.

In geopolitical news, US, North Korea and South Korea mull October for the 2nd summit between US President Trump and North Korean Leader Kim.

In the neverending Brexit drama, a source report noted that Brexit deal summit said to be likely by mid-November, with UK and EU preparing for meeting with leaders to sign deal and that a plan will likely be announced at September 19th-20th meeting in Austria. Downing Street is reportedly drawing up secret plans and has 2 escape options if the EU rejects PM May’s Chequers proposal. The first option would see Chequers parked until talks resume after Brexit day for a loosely-worded fudge on the future relationship instead. The second, is to abandon it altogether and return to a more basic Canada style free trade agreement – but only if the EU gives way on its Irish border hardline.

Elsewhere, cryptocurrencies extended their collapse from a January high to 80 percent, surpassing the Nasdaq’s peak-to-trough bust in the 2000s.

Oil prices extended Tuesday’s $2 surge, with Brent futures closing in on $80 a barrel as Hurricane Florence advanced and U.S. sanctions started weighing on Iran’s exports.

Scheduled economic publications include mortgage applications, PPI data and Fed’s Beige Book. Hudson’s Bay, Pivotal Software are due to report earnings, while Apple is set to unveil its latest iPhones.

Market Snapshot

• S&P 500 futures up 0.2% to 2,894.00
• STOXX Europe 600 up 0.4% to 376.94
• MXAP down 0.2% to 158.57
• MXAPJ down 0.09% to 507.44
• Nikkei down 0.3% to 22,604.61
• Topix down 0.5% to 1,691.32
• Hang Seng Index down 0.3% to 26,345.04
• Shanghai Composite down 0.3% to 2,656.11
• Sensex up 0.7% to 37,682.00
• Australia S&P/ASX 200 down 0.06% to 6,175.92
• Kospi down 0.01% to 2,282.92
• German 10Y yield fell 1.1 bps to 0.419%
• Euro down 0.05% to $1.1600
• Brent Futures up 0.2% to $79.24/bbl
• Italian 10Y yield rose 3.3 bps to 2.581%
• Spanish 10Y yield unchanged at 1.466%
• Brent Futures up 0.2% to $79.25/bbl
• Gold spot down 0.2% to $1,196.35
• U.S. Dollar Index down 0.2% to 95.08

Top Overnight News

• European Commission President Jean-Claude Juncker says in annual State of the Union address that the union should propose measures for strengthening the status of the euro
• Japanese Economy Minister Toshimitsu Motegi and U.S. Trade Representative Robert Lighthizer will likely hold second round of trade talks in U.S. on September 21, Reuters reports, citing unidentified source familiar with the matter
• The U.K. and the EU are preparing for a special summit to sign the Brexit deal in November and the meeting could be announced within days, according to people familiar with the matter
• Luigi Di Maio, one of Italy’s two deputy prime ministers, renewed his push for a so-called citizen’s income, saying abandoning the key pledge would threaten the government
• Russian President Vladimir Putin rejected British allegations that the Russians suspected of carrying out a nerve- agent attack on a former spy in the U.K. are intelligence agents and called on them to go public, making his first official comments on the charges
• Chancellor Angela Merkel offered implicit support for military action against Syria, upbraiding her coalition partner for ruling out German participation in a response to an offensive in the country’s last rebel stronghold
• On Sept. 21, China will ask the Geneva-based organization to sanction trade retaliation against certain U.S. products, according to a Tuesday statement from the WTO. China asked the WTO to approve annual retaliatory trade measures against $7 billion in U.S. goods, according to a separate release
• The Canadian government is poised to release a blueprint to reform the World Trade Organization as countries adjust to a newly protectionist America that has threatened to leave the organization entirely
• After one of the most tumultuous elections in modern Swedish history, the country’s future may now depend on the content of about 200,000 ballots that were just added to a recount
• Oil futures in New York advanced beyond the session’s 2.5 percent jump after the American Petroleum Institute was said to report an 8.64 million-barrel drop in domestic inventories last week. Supplies also declined at the important storage complex in Cushing, Oklahoma, the API was said to disclose, a strong signal of tightening markets
• Islamic State claimed responsibility for an attack on the headquarters of Libya’s main oil company in Tripoli and said oil fields in the North Africa nation are a “legitimate target” for its militants

Asian equity markets were lower across the board after the region failed to sustain the early momentum from US, where the Nasdaq outperformed as Apple shares were lifted ahead of its special event and with energy names boosted by a rally in oil prices. ASX 200 (flat) was subdued as losses in telecoms and financials overshadowed the upside in energy stocks and with Myer shares hit after it reported a full-year loss, while Nikkei 225 (-0.3%) slipped amid a pullback in USD/JPY. Elsewhere, Hang Seng (-0.3%) delved deeper into bear market territory and Shanghai Comp. (-0.3%) also conformed to the downbeat tone despite the PBoC’s first open market operation after a 15-session hiatus, as trade uncertainty lingered and amid Chinese commodity losses. Finally, 10yr JGBs were flat with trade kept in a very tight range as prices failed to benefit despite the risk averse tone and BoJ’s presence in the market in the belly to super-long end.

Top Asian News

• Indonesia Wants Tighter FX Rules for Exporters to Bolster Rupiah
• Rupee Rallies as India Considers Steps to Support the Currency
• India Measures Likely on Rupee, Oil After Modi Reviews Economy
• Hikvision Slumps on News U.S. May Sanction China on Muslim Camps

Core European bourses trade mostly higher (Euro Stoxx 50 +0.2%) despite the negative lead from Asia. UK’s FTSE 100 lags its peers as the index is weighed on by currency effects and weakness in utility names following a profit warning from SSE (-7.6%), dragging the sector (-1.0%) and fellow utility names such as Centrica (-3.7%) and National Grid (1.6%) in sympathy. In terms of individual movers, FTSE 100 heavyweight Rolls-Royce (-3.0%) rests near the foot of the index, while traders cite reports of an emergency landing made by an Iberian flight with Rolls-Royce XWB engines.

Top European News

• Swedish Establishment Mulls Collaboration to Block Nationalists
• Inditex Says Revenue May Accelerate After Four-Year Lull
• Playing With Fire in Europe’s Powder Keg as Balkan Tensions Rise
• Goldman Sees ‘Meaningful Upside’ in European Bank Stocks

In FX, focus was on cable, where more positive EU Brexit vibes, and this time from EC President Juncker have given Sterling another boost, with the pount back on the 1.3000 handle after a dip below on more reports about Tory plots against UK PM May, while EUR/Gbp slips back towards 0.8900 irrespective of the single currency’s rebound vs the Usd to retest 1.1600 before dipping again amidst ECB ‘source’ reports suggesting downgrades to staff GDP forecasts and downside risks to the growth outlook tomorrow. EM – Some comparative calm across the region ahead of what could well be another storm or at least volatile session on Thursday when the CBRT decides on policy and needs to deliver given aggressive/hawkish market expectations. However, reports about potential intervention from India have lifted the Rupee pre-emptively and to the benefit of others to a degree. AUD/NZD – Narrowly mixed vs their US rival with the Aud recovering quite well from another 0.7100 downside probe given deteriorating Aussie consumer confidence overnight, and the Kiwi also keeping its head above a big figure (0.6500), albeit just.

In commodities, WTI and Brent futures took a breather following yesterday’s rally amid hurricane concerns, which was exacerbated by a larger than expected draw API crude inventories. Inventories showed a draw of 8.636mln barrels against the expected draw of 800k barrels. WTI futures retreated back below USD 70/bbl in recent trade. The latest from the NHC states Hurricane Florence heading towards the US East Coast and is expected to bring life-threatening storm surge and rainfall to portions of the Carolinas and mid-Atlantic states. While there are only a few refineries in Florence’s path, the hurricane poses problems in terms of cargo shipping. Laden energy cargos have not been heading towards the North/South Carolina region ahead of the hurricane. Elsewhere, gold is uneventful while copper outperforms following the recent decline in the red metal.

On today’s calendar, the main focus in the US should be on the August PPI report where a +0.2% mom print is expected for both the headline and core readings. The Fed’s Beige Book is also out this  evening while St Louis Fed President James Bullard speaks at 2.40pm BST and then Governor Lael Brainard will speak at 5.45pm BST.

US Event Calendar

• 7am: MBA Mortgage Applications, prior -0.1%
• 8:30am: PPI Final Demand MoM, est. 0.2%, prior 0.0%;
  • PPI Ex Food and Energy MoM, est. 0.2%, prior 0.1%; PPI Ex Food, Energy, Trade MoM, est. 0.2%, prior 0.3%
  • PPI Ex Food and Energy YoY, est. 2.7%, prior 2.7%; PPI Ex Food, Energy, Trade YoY, prior 2.8%
• 2pm: U.S. Federal Reserve Releases Beige Book

DB’s Jim Reid concludes the overnight wrap

Today is the day where every year I wake up completely happy with my current phone but go to bed completely dissatisfied with it and the day I have to justify to my wife why I need a new phone while realising after listening to myself that I don’t. However, since having children this conversation has gotten easier as the camera usually gets ever so slightly better each year and I can persuade my wife that the photos of the kids will be enhanced. So yes, it’s the annual Apple iPhone launch day. Given their status as the world’s biggest company it does matter for markets as well as for personal curiosities. They’ve added $160bn of market cap since the start of August which to put in some context that amount would equate to the 35th biggest S&P 500 company and the 13th biggest STOXX 600 company.

Talking of Apple, a weak early European session and US open was reversed as tech rebounded from recent weakness with Apple (+2.53%) firm ahead of its big day. The S&P 500, DOW and NASDAQ closed +0.37%, +0.44% and +0.61% after hitting lows of -0.36%, -0.40% and -0.55% respectively just after the open. Europe also fought back from earlier losses of as much as half a percent or so with the STOXX 600 finishing -0.05%. The early dip seemed to be sparked by a WTO news release suggesting that China was to ask the WTO to sanction trade retaliation against the US over failure to comply with a dispute ruling from last year which found that parts of the US anti-dumping regime had proven to be illegal. This was slightly stale news though and as such was downplayed somewhat but nevertheless did have a bit of an impact on markets.

Meanwhile bond markets continued to climb after last week’s bumper US earnings number and additional positive data yesterday (more below) with Treasury yields climbing +4.4bps to 2.976% and to the highest since August 2nd, while yields in Europe were broadly 2-3bps higher following a busy day for supply. EM FX had been fairly calm for much of the session until currencies in Latam started trading with the Argentine Peso (-1.58%) and Brazilian Real (-1.60%) leading losses, though the broader EM FX index was more or less flat as the Russian Ruble (+1.66%) and South African Rand (+0.90%) bounced.

Brazilian assets had a fairly tough day all round with the IBOVESPA tumbling -2.33% and hard and local currency 10 yields rising +11.6bps and +12.0bps respectively.This followed the latest polls (Datafolha) ahead of the October 7th Presidential election, which showed steady support for the right-wing candidate Jair Bolsonaro at 24%. Potentially worrying for markets, two centre-left, marketunfriendly candidates – Ciro Gomes and Fernando Haddad – were looking towards second place on 13% and 9%, and the poll indicates that either candidate would defeat Bolsonaro in the second round runoff.

Elsewhere, bucking the recent trend of late was the slightly more subdued performance for Italian assets. The FTSE MIB ended -0.31% while 10y BTP yields rose as much as +9.5bps from the intraday lows and closed higher for only the second time this month. To be fair there wasn’t a great deal of newsflow and it’s hard to really attribute the move to Finance Minister Tria’s comments. He said at an event in Rome that the government was committed to reducing taxes on personal income in the hotly anticipated 2019 budget but that “it remains to be seen whether this is compatible with budget limits” and also that any cuts might come after eliminating existing tax breaks in other areas. After Italian markets closed, Deputy Prime Minister and head of the League Salvini said in an interview that Italy will respect the 3% deficit limit and that new fiscal policies will be implemented over a 5-year program. Our economists believe that the highest deficit that would still allow the debt to remain sustainable is around 2.3%, and they published a report yesterday focused on the interaction between the budget and macroeconomic growth.

As far as markets overnight have fared, that positive tone from the US session appears to have ended within the first few minutes of Asia trading with bourses back in the red.The Hang Seng (-0.44%) in particular has fallen further into the bear market it entered yesterday while the Nikkei (-0.50%), Shanghai Comp (-0.33%) and Kospi (-0.33%) are also down. It’s worth noting that the Shanghai Comp at one stage traded below its December 2014 closing this morning, meaning its now also down over 25% from its YTD peak. Futures markets in the US and Europe are also lower while Oil (+0.94%) has continued to rise following the +2.53% rally yesterday over supply fears related to Hurricane Florence. Meanwhile the main news overnight came from Reuters suggesting that a second round of trade talks between the US and Japan could take place on September 21st, following a summit between Abe and Trump on the sidelines of the UN General Assembly General Debate. With similar positive headlines about the US and EU this puts the spotlight firmly back on the China trade war situation. Away from that it’s quiet but remember we’ve got super Thursday tomorrow with the ECB, BoE and CBT all meeting and with US CPI also out. So we could easily see a livelier end to the week than the start.

Back to yesterday. In terms of data, in the US the NFIB small business optimism reading jumped to the highest in August  (108.8 vs. 108.0 expected) since data started getting collated in 1974. Capital spending plans were also reported as being the highest since 2007 and inventory investment intentions the highest since 2005. If that wasn’t enough, then the net 26% of owners (on a seasonally adjusted basis) planning to increase employment was also the highest ever. Separately, the monthly jobs openings and labour turnover survey showed several indicators of labour market tightness: there are only 91 unemployed people per 100 job openings, the lowest ever, and the quits rate is at its highest level since 2001. Both series suggest that inflationary wage pressures will continue.

In Germany the September ZEW survey for current conditions jumped an unexpected 4.4pts to 76.0, far exceeding expectations for a small decline to 72.0, while the survey component also improved to -10.6 from -13.7. Both components are well off their recent highs but clearly the positive momentum is welcome.

Here in the UK there was also some decent numbers out of the July earnings data with average weekly earnings ex-bonuses jumping two-tenths and more than expected to +2.9% yoy (vs. +2.8% expected). In July alone basic earnings came in at +3.1% which was the most since 2015. While we’re on the UK, yesterday we got confirmation that BoE Governor Carney was to extend his term as Governor for an extra seven months, taking his term to January 2020 and therefore around half of the way through the period from which the UK will withdraw from the EU. Sterling finished flat yesterday despite those headlines. Late in the US session, media outlets reported that the UK and EU are preparing to formally sign off on a Brexit withdrawal agreement in November, possibly in the week of November 12. The pound edged up around +0.3% on the headlines but failed to hold there, as the more contentious issues, e.g. how to resolve the Irish border, will likely not be completely resolved before the UK withdraws from the EU.

As for what we should be keeping an eye on today, this morning we’ll get the July industrial production print for the euro area which is expected to show a small month on month decline. This afternoon the main focus in the US should be on the August PPI report where a +0.2% mom print is expected for both the headline and core readings. The Fed’s Beige Book is also out this  evening while St Louis Fed President James Bullard speaks at 2.40pm BST and then Governor Lael Brainard will speak at 5.45pm BST.