After a brutal two-day selloff that wiped out trillions in market cap and saw the most aggressive selling pressure in the S&P since the flash crash on Thursday afternoon, prompting some to speculate that the bottom had been hit…

… global shares staged a broad recovery on Friday enjoying their best day in nearly a month as strong trade data from China propped up markets at the end of a tumultuous week.

Still, despite the sea of green on trader monitors this morning which showed the E-mini future up as much as 40 points in early trading, rebounding once again above the 200-DMA the S&P was set for its worst month since Sept. 2011 while the Nasdaq was looking at the worst monthly carnage since the financial crisis.

After a partial recovery in Asian shares overnight, European stocks opened higher, with the pan-European STOXX 600 up 0.5% on the day, trimming earlier gains of over 1%; the broad index gained for the first time in three days, though still headed for its worst week since February, led by miners as most industrial metals gained. Germany’s DAX up 0.5% while Britain’s FTSE 100 gained 0.7%.

“Some traders are cautiously buying back into the market today, but the underlying issues which brought about the sell-off are still relevant,” said CMC Markets analyst David Madden.

Earlier, the MSCI Asia Pacific Index rose from the lowest level since May 2017, with shares in Hong Kong and South Korea leading the way, while China’s Shanghai Composite rose 0.9%, recouping earlier losses of 1.8% after the latest trade data from China showed China’s trade surplus with the United States hit a record high in September as well as solid expansion in China’s overall imports and exports, suggesting little damage from the tit-for-tat tariffs with the United States.

Still, China’s bounce came after the index fell 3.6% on Thursday to hit a one-and-a-half-year low; on the week, it is still on track for a weekly loss of 3.6 percent. So far this week, Chinese and U.S. shares are among the worst performers, a sign investor worries about the trade war are growing. China A shares are still down 8.7% this week.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 2.15%, the biggest in more than two years, as China’s trade data eased some concern about the impact of the trade war and added to bullish sentiment on Friday, while some noted that the decision by U.S. Treasury staff to refrain from labeling China a currency manipulator was a positive for stocks, although as noted last night, the latest PBOC yuan fixing that was the weakest relative to the dollar since February sent the Yuan sliding.

Boosted by China’s trade data, emerging-market stocks headed for the biggest gain in more than two years, and most developing-nation currencies advanced against the dollar.

U.S. equity-index futures gained 0.9% as the S&P 500 was set to snap its six-day losing streak – the longest of the Trump administration – when American markets open on the first official day of earnings season.

Meanwhile, as traders debate whether the correction is i) over and ii) has created buying opportunities, the focus turns to third-quarter earnings, with JPMorgan, Citigroup and Wells Fargo kicking off Q3 earnings season this morning.

MSCI’s U.S. index has dropped 5.5%, compared with a 4.9%  fall for MSCI’s world stock index as the US now appears to be catching down to the world.

“We’re still left with the sense that there has been a significant shift that markets now have to take stock of,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.

“There could be more risk reduction into the weekend as investors position more defensively,” Oanda head of trading Stephen Innes wrote in a note. “But this does offer a significant window of opportunity for the not so meek of heart.”

Meanwhile, Gold, which had risen to a 10-week high on the back of the selloff, fell half a percent on Friday, down to $1.217.31 an ounce.

The yield on 10-year Treasuries edged up to 3.170%, reversing earlier falls on flight-to-quality bids. It is still off its seven-year high of 3.261 percent touched on Tuesday, but a further rise in the U.S. borrowing costs could hurt risk sentiment.

“Asian stocks appeared to have stabilized, but ultimately where U.S. bond yields will settle down will be key,” said Teppei Ino, senior analyst at MUFG Bank.

Also adding to the confusion for investors, Trump launched a second day of criticism of the Federal Reserve on Thursday, calling its interest rate increases a “ridiculous” policy. While that does not appear to have shaken investor confidence in the Fed’s independence, some investors suspect expectations on future rate hikes could be undermined if Trump raises his threats levels.

“I doubt Trump will tolerate further rise in U.S. rates ahead of U.S. mid-term elections. I believe the rise in U.S. yields and the dollar’s rally are coming to a turning point,” said Naoki Iwami, fixed income chief investment officer at Whiz Partners in Tokyo.

The dollar lacked momentum against a basket of major currencies as U.S. bond yields stayed off recent peaks. The index which measures the greenback against a basket, traded within a tight range, last at 95.009. The euro was 0.1 percent lower at $1.1582, after a gain of 0.65 percent on Thursday. But the yen eased to 112.27 to the dollar after hitting a three-week high of 111.83 on Thursday.

In commodities, West Texas oil recovered, but is still heading for the biggest weekly drop since May, while gold slipped and copper led a gauge of industrial metals higher. Brent crude futures rose 1.1 percent to $81.14 a barrel, holding off a four-year high of $86.74 touched on Oct 3.

Market Snapshot

  • S&P 500 futures up 0.9% to 2,769.75
  • STOXX Europe 600 up 0.5% to 361.44
  • MXAP up 1.2% to 153.93
  • MXAPJ up 2.1% to 483.63
  • Nikkei up 0.5% to 22,694.66
  • Topix up 0.03% to 1,702.45
  • Hang Seng Index up 2.1% to 25,801.49
  • Shanghai Composite up 0.9% to 2,606.91
  • Sensex up 2.2% to 34,751.36
  • Australia S&P/ASX 200 up 0.2% to 5,895.67
  • Kospi up 1.5% to 2,161.85
  • German 10Y yield rose 0.7 bps to 0.525%
  • Euro down 0.1% to $1.1581
  • Brent Futures up 1% to $81.04/bbl
  • Italian 10Y yield rose 5.7 bps to 3.19%
  • Spanish 10Y yield rose 0.6 bps to 1.649%
  • Brent Futures up 1% to $81.04/bbl
  • Gold spot down 0.6% to $1,216.43
  • U.S. Dollar Index up 0.1% to 95.11

Top Headlines from Bloomberg

  • China’s exports rebounded, while imports remained robust, thanks to strong demand at home and abroad despite worsening relations with the U.S.
  • Britain’s Chancellor of the Exchequer Philip Hammond said he was readying the government’s reserves in case Brexit hits the economy and he needs to intervene
  • Options traders are bracing for bigger swings in the pound as the U.K.’s exit talks from the European Union approach the finishing line
  • Singapore’s central bank tightened monetary policy for a second time this year, encouraged by steady economic growth despite worsening U.S.-China trade tensions
  • Man Group Plc, whose assets have soared to a record after posting better-than- expected inflows, said it plans to incorporate a new holding company in Jersey in a move that aligns its corporate structure with some of the world’s largest money managers
  • The International Energy Agency cut forecasts for oil demand this year and next because of growing threats to global economic growth, yet warned that dwindling spare oil supplies will keep prices high
  • Andrew Brunson, a preacher from North Carolina who has lived in Turkey for two decades, will appear in court on Friday near the Aegean port of Izmir over his alleged involvement in a 2016 coup attempt to topple President Recep Tayyip Erdogan
  • BlackRock Inc. won a mandate to manage 30 billion pounds ($40 billion) of assets owned by Lloyds Banking Group, the latest twist in a hotly contested battle to win a slice of 109 billion pounds that Schroders Plc is also vying for

Asian equities traded mixed as the bourses attempted to mount a recovery following the downbeat lead from Wall St. where the region was pressured by energy names, closely followed by the financial sector which entered correction territory. The Dow eroded over 500 points, bringing the two-day loss to over 1,300 points, while S&P notched a six-day losing streak and closed below its 200 DMA. ASX 200 (+0.1%) recuperated initial losses as the commodity names recovered, while Nikkei 225 (-0.2%) traded off lows as the Japanese currency showed some mild weakness. Elsewhere, China traded mixed with the Hang Seng (+0.8%) buoyed by industrial and finance names while Shanghai Comp. (-0.6%) was pressured by oil names following the recent decline in the complex.

Top Asian News

  • Singapore Tightens Monetary Policy on Steady Growth Outlook
  • Europe’s Iran Sanctions Vow Takes a Hit as Ministers Desert Bali
  • China Says Keeping Communication with U.S. over Dialogue
  • Bond Funds See ‘Massive’ Weekly Outflows, BofAML Says

Major European indices are in the green, albeit off best levels (Euro Stoxx 50 +0.3%) after bouncing back from yesterday’s global downturn; the SMI is out in front up by just under 1%, spurred on by the resolution of a Novartis (+1.7%) patent dispute. Major sectors are all up, with consumer discretionary leading by just over 1% as well as financials and IT by over 0.6% indicating that market confidence is returning; further emphasised by the dip in gold. In terms of individual equities there is continued support for Dialog Semiconductor (+4.3%) following yesterday’s news of a deal with Apple. Man Group is up by 3% following quarterly net inflows of USD 0.4bln. An upgrade to outperform at Credit Suisse for Zalando sees them up by 3.5%. Victrex are down 3.5% after being downgraded to underweight at Morgan Stanley.

Top European News

  • Knorr-Bremse Holds IPO Price at Open, Defying Volatile Market
  • Italian Lawmakers Approve Deficit Goal as EU Showdown Nears
  • A $90 Billion Fund Manager in Norway Sets Up Shop in Luxembourg
  • Chemring Sinks as Barclays Double Downgrades After Plant Blast


In currencies, the DXY was dull and rangy trade, with Usd/major pairings mostly going through the motions approaching the end of a relatively volatile week. Consequently, the index is straddling 95.000 and anchored near the lows in wake of softer than forecast US PPI and CPI reports, a drift back from multi-year peaks in Treasury yields, and yet more Fed critique from President Trump about the pace of policy normalisation. GBP/TRY – Not necessarily the biggest outright movers, but certainly among the most choppy as Cable rallied to marginally fresh wtd highs just shy of 1.3260 on latest positive Brexit deal vibes (ostensibly) before hitting a brick wall and reversing sharply towards 1.3200. The swift price action and retreat may also be option related given mega expiry interest between 1.3235-50 (1.5 bn) for Monday when some have speculated that an agreement between the UK and EU could be reached, although this appears to be very doubtful with a few big issues still unresolved. Similarly, the Lira rebounded further through 6.0000 vs the Usd, and all the way to circa 5.8400 at one stage on a wave of expectation that the Turkish court will grant the release of US Pastor Brunson (latest appeal hearing now underway), but then retreated abruptly to around 5.9835 alongside a broader downturn in domestic stocks and bonds awaiting the verdict. SEK/NOK – The Scandi crowns continue to strengthen and outperform on Swedish and Norwegian inflation reports that will keep both the Norges Bank and Riksbank firmly on course to hike rates well before the ECB (and in the case of the latter that means further after September’s 25 bp tightening). Eur/Sek has now breached previous October lows to trade down at 10.3625 and Eur/Nok is back under 9.5000.

In commodities, gold has dropped by 0.5% today following a reduction in the risk sentiment as markets calm and traders begin to move out of the safe havens. The yellow metal is currently at just under USD 1220/oz, although this is still close to a 10 week high. Copper prices have benefited from data showing that China has imported a near record amount last month; similarly, iron ore prices to their highest levels in 4 months from high Chinese imports. Steel prices rose, resulting in the best week since mid-August as Tangshan steel mill output is halved from October 11th-18th. WTI and Brent are both up by 1% at just under USD 72/bbl and USD 81/bbl; With the weekly change at -4% for both WTI and Brent. In terms of energy commentary, the IEA notes that global spare oil capacity is down to 2% of global demand, additionally noting that further falls are likely. Additionally, global oil supply is rapidly increasing, with production up by 2.6mln bpd compared to a year ago. With the weekly change at -4% for both WTI and Brent.

Today, earnings season will begin with JP Morgan, Wells Fargo, and Citi all reporting. DB equity analysts expect JPM to  miss expectations, Citi to miss very slightly, and Wells Fargo to surprise to the upside, but DB remain bullish on the sector due to the positive macro outlook and rising rate environment. Later in the day, the September import price index reading and the preliminary October University of Michigan consumer sentiment survey will be out. September trade data in China should also be  out at some stage, while the Fed’s Evans and Bostic are due to speak.

US Event Calendar

  • Oct. 12-Oct. 18: Monthly Budget Statement, est. $75.0b, prior $7.9b
  • 8:30am: Import Price Index MoM, est. 0.2%, prior -0.6%; Import Price Index YoY, est. 3.1%, prior 3.7%
  • 8:30am: Export Price Index MoM, est. 0.2%, prior -0.1%; Export Price Index YoY, est. 2.9%, prior 3.6%
  • 10am: U. of Mich. Sentiment, est. 100.5, prior 100.1; Current Conditions, prior 115.2; Expectations, prior 90.5

DB’s Jim Reid concludes the overnight wrap

It was difficult to pull your eyes away from any screen yesterday as it was another turbulent day for risk assets, with red across the board. The S&P 500 shed -2.06%, falling for the 6th consecutive session. That’s the longest such streak since November 2016, just ahead of the US presidential election. In a small silver lining, the index bounced off its intraday lows of -2.70%, but it’s still 6.91% off its all-team peak reached a short three weeks ago. The DOW, NASDAQ, and FANGs fell -2.13%, -1.25%, and -0.43%, respectively, as selling was broad-based and high-volume. Contrary to the recent trend Tech actually out-performed. The energy sector underperformed though, losing -3.09%, as oilprices fell -3.50% The S&P 500 is now only +2.05% higher year- to-date (though it’s up +3.58% on a total return basis), with the DOW up +1.35% YTD (+3.11% total return basis) and the NASDAQ +6.17% (+7.05% total return). To be fair across the globe it’s difficult to find an equity market that is up for the year so the US is still a shining beacon.

The VIX continued to rise, closing up 2.02pts at 24.98, eclipsing its March peak and now at the highest levels since February. Before the February episode, you’d have to go back to the Brexit vote to find the last instance of volatility this high. In fact, in the 1716 days of trading since mid December 2011, the VIX has only been higher than current levels 38 times, or 2.2% of the time. Gold had its best day since Brexit, gaining +2.42% as investors sought safe-havens. Nevertheless the normal traditional safe haven of US Treasuries still struggled to rally significantly (-1.9bps yesterday) and are back up +2bps in Asia to 3.17%. Interestingly EM FX (+0.82%) had their best day since August 24th, as the soft US CPI print (more below) outweighed the generalised risk-off fears.

This morning in Asia markets are in a bit better shape with the Hang Seng (+1.16%) and Kospi (+1.25%) up while the Nikkei (-0.45%) and Shanghai Comp (-0.12%) are trading lower. Elsewhere, futures on S&P 500 are up +0.61%. China’s September trade balance came in at $31.69bn (vs. $19.20bn expected) on the back of higher exports (+14.5% yoy vs. +8.2% yoy expected) and lower imports (+14.3% yoy vs. +15.3% yoy expected). It’s possible that Golden week and the prospect of the next round of tariffs could have led to the front loading of exports. Growth in exports to the US accelerated to 14% from a year earlier in US dollar terms, up from August’s 13.2% while imports from the US contracted 1.2%, the first contraction since February. In other news, Politico reported, citing undisclosed sources, that the US Treasury Department didn’t recommend China to be labelled as a currency manipulator in a report submitted internally to secretary Steven Mnuchin.

Back to yesterday. In Europe, equities were similarly pressured, with the STOXX 600 retreating -1.98% and reaching a new year-to-date low, eclipsing the levels from the February-March selloff. The FTSE-MIB (-1.94%) entered a bear market, now down -21.14% from its peak earlier this year. Other European markets were similarly pressured, with the DAX, CAC, and IBEX closing down -1.48%, -1.92%, and -1.69%, respectively. As alluded to above, none of the major European indexes are positive for the year, with the DAX, IBEX, and FTSE-MIB all down more than 10%. The CAC has been a relative outperformer, only down -3.88% on the year.

President Trump reiterated his rhetoric of the Fed yesterday which was an interesting aside, blaming the stock market slump on higher interest rates as opposed to his tariff policy. Trump said the central bank is “out of control,” but of Chair Powell, he said that “I’m not going to fire him”.

Given the extent of the sell-off one wonders how bad it would have been if US  CPI had come in above expectations. Headline and core both came in weaker than consensus at +0.1% mom (vs. +0.2% expected). The unrounded CPI print was unimpressive at +0.059%, with unrounded core CPI only slightly higher at +0.116%. Used cars and trucks weighed on the print by around 9bps, possibly as a result of hurricane disruptions. This is likely to bounce back over the next few months. Overall, nothing in today’s report should change the Fed’s plan to hike rates gradually moving forward but for those of us that think inflation is moving higher we would have liked to see more evidence of this.

On Italy, Deputy Premier Matteo Salvini continued with his offensive on the budget saying that the rating agencies are in “a virtual world” and the possibility of downgrades won’t budge the Italian administration from its budget targets. He said, “We won’t take even a cent of a euro off the measures we have prepared for Italians.” Separately, in BTP auctions yesterday the long end was better bid than the short end and helped BTPs to momentarily pare back some of the yield rising witnessed during the day. Nevertheless, 10-year spreads  to bunds traded 9.2bps wider on the day, passing their widest levels of the year and reaching a new 5-year high. Bunds rallied 3.5bps which given the risk off wasn’t a huge move.

On trade, China’s commerce ministry spokesman Gao Feng said that China hopes the US will stop unilateralism, protectionism and take constructive, concrete be taken with a pinch of salt as the US President Trump continued with his rhetoric on China saying his policies have hurt China’s economy and “I have a lot more to do. There is some possibility though that the US President Trump might meet China’s President Xi Jingping at a meeting of the Group of 20 nations at the end of November, as indicated by the White House economic adviser Larry Kudlow last week and reiterated yesterday.

Elsewhere, Germany’s economy ministry trimmed the growth forecast for 2018 to +1.8% from +2.3% and 2019 forecast was also   trimmed to +1.8% from +2.1% citing “protectionist tendencies” and “ international trade conflicts” as the key reasons for the cut.

In Turkey, interior minister Suleyman Soylu sent an order to governorships, suggesting they implement stricter price controls to prevent Lira weakness from bleeding into domestic prices. The country’s August current account balance printed better than expected as well, at TRY +2.59bn (vs. TRY +2.50bn expected), the biggest monthly surplus on record and first since September 2015. Both of these developments boosted the Lira in early trading, and it was further helped by the soft US CPI print, as well. Later in the day, news broke that the White House had reached a deal with the Turkish government to release Pastor Brunson from his detainment in Turkey. While both countries subsequently denied the story – Erdogan insisted he will simply respect today’s court decision and the US State Department said it was unaware of any deal – the Turkish lira nevertheless rallied +2.74% for its fifth consecutive daily gain.

On Brexit, DUP leader Arlene Foster warned the UK PM Theresa May from agreeing to the EU’s Irish backstop plan saying PM May should not “recommend a deal which places a trade barrier on United Kingdom businesses moving goods from one part of the Kingdom to another.” She added that under the EU’s plan post-Brexit checks on goods between Northern Ireland and the rest of the U.K. would be the “worst of one world” rather than the “best of both worlds.” Despite the negative news flow, sterling is stable.

Now looking at other data releases from yesterday. In Europe, the final September EU harmonized CPI for France and Spain came in line with the flash estimates at -0.2% mom (+2.5% yoy) and +0.6% mom (+2.3% yoy), respectively. In US, the real average September weekly earnings came in at +1.1% yoy vs. +0.5% yoy in the previous month while latest weekly jobless claims stood at +214k (vs. +207k expected).

Looking ahead to this weekend, our Germany economists have published a preview of this weekend’s Bavarian state election, which should be a key test for Chancellor Merkel’s political future. Polls indicate that both the CSU (the sister party to Merkel’s CDU) and the center-left SPD will both lose votes, though we expect the CSU to be able to form a government with other smaller parties (either the FDP and the Free Voters, or the Greens), which should give Merkel more breathing room in Berlin. She might be able to oust the more combative elements within her government, and could therefore gain leeway over asylum and European policy.

Today, the focus will be on Germany’s final September CPI revisions along with the euro area’s aggregate industrial production print. In the US, earnings season will begin with JP Morgan, Wells Fargo, and Citi all reporting. Our equity analysts expect JPM to  miss expectations, Citi to miss very slightly, and Wells Fargo to surprise to the upside, but DB remain bullish on the sector due to the positive macro outlook and rising rate environment. Later in the day, the September import price index reading and the preliminary October University of Michigan consumer sentiment survey will be out. September trade data in China should also be  out at some stage, while the Fed’s Evans and Bostic are due to speak.

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