Asian stocks and emerging markets slumped, while European stocks rebounded from early losses as S&P futures traded 10 points with US cash markets closed for Labor Day. The pound dropped after Theresa May’s Brexit proposal came under attack and following a UK PMI report, while the dollar initially declined then rebounded in a a choppy session.

European shares opened lower, although they have since regained most losses with the DAX marginally underperforming due to weakness in auto sector as VW (-2.2%) faces further emissions allegations; while in Asia, MSCI’s broadest index of shares outside Japan and the Nikkei shed about 0.7 percent each. In early trading, MSCI’s All-Country World Index fell 0.2% and the main emerging equity index fell 0.5%, once again bearing the brunt of global trade fears with the US set to launch a new round of $200 billion in Chinese tariffs on Thursday.

In European bond markets, Italian bond yields edged lower after Fitch Ratings left its credit rating unchanged at BBB, revising only its outlook to negative.

China equities started off on the back foot, as the Shanghai Composite dropped over 1% back under 2,700 in the morning session, sliding after the Caixin manufacturing PMI printed at 50.6, below the 50.7 forecast, leaving the CSI 300 down 1%. The gloom spread across Asian stocks with MSCI Asia Pacific falling 0.8% and Nikkei down 0.7%. However, the SHCOMP found a second wind coming into the close, with some speculating that the national team had made a fresh appearance, pushed the Composite back to almost unchanged by the close of trading, and down just -0.17% at the close.

In Europe, gains in energy shares were offset by declines in automakers and construction firms in thin trading on the Stoxx Europe 600 Index, following Asian’s downbeat session. U.K. equities bucked the market, climbing as the pound weakened.

The pound dropped for a third day after British Prime Minister Theresa May ruled out a second referendum on Brexit. GBPUSD slipped as much as 0.5% after May wrote in the Sunday Telegraph that another vote “would be a gross betrayal of our democracy,” and said Britain would leave the EU by March 29. The pound also weakened after EU Chief Negotiator Michel Barnier said he was “strongly opposed” to British proposals on future trade ties after it leaves the EU. Finally, cable saw even more downside after the UK manufacturing PMI printed at 52.8, down from 53.8, and below the 53.8 expected.

The weakness in the pound however helped lift London’s blue-chip FTSE rose 0.7%.

Emerging-market equities fell. Emerging economies remain a key battle ground for investors, with Argentina and Turkey proving the latest epicenters for crises that are denting sentiment after a stronger dollar and tighter trade policies sent shock waves across markets in August.

As a result, EM turbulence continued with the Indonesian rupiah falling again to the lowest levels against the dollar since the country’s economic crisis two decades ago, and the central bank said it was intervening in foreign exchange and bond markets.

Turkey’s lira, which plunged again late last week, firmed on Monday to 6.56 per dollar, lifted by a statement from the central bank which said it would “adjust” its monetary stance at its upcoming Sept. 13 meeting. Inflation was above expectations in August, surging 18% and touching the highest since December 2003. “This morning’s inflation number was very high and the authorities still haven’t got a credible strategy to deal with that,” said Chris Scicluna, head of economic research at Daiwa Capital Markets. Turkish Finance Minister Berat Albayrak told Reuters that the central bank was independent of government and it would take all necessary steps to combat inflation.


While US exchanges are closed for Labor Day, S&P futures continue to trade and after initially hugging the flatline, ES jumped around 4am EDT, rising as much as 10 points on no news, and virtually no volume, in what appears to have been an algo-driven push higher to sniff out short stops.

“My view is to continue trading on the trends — staying bearish on emerging markets,” Chris Weston, head of research at Pepperstone Financial Pty Ltd., told Bloomberg TV from Melbourne. “We need to see a perception of the U.S. dollar going lower and clarity that the trade tensions are coming to some sort of a close. I don’t think we’re there yet.”

Global trade concerns supported the U.S. dollar, with dollar index nearing its highest level since Aug. 27. It has gained nearly 7% since mid-April when trade tensions first arose.

President Donald Trump said over the weekend that there was no need to keep Canada in NAFTA and warned Congress not to meddle with the trade talks. Worries about U.S. tensions with China were also kept alive by a Bloomberg report last week that Trump had told aides he was ready to impose tariffs on an additional $200 billion worth of imports from China as soon as a public comment period on the plan ends on Thursday. That would be a major escalation given the United States has already applied tariffs on $50 billion of exports from China.

There was also bad news on the economic data front as euro zone manufacturing growth slowed to a near two-year low in August as amid growing trade war fears, a survey showed on Monday.

“As we head into a new week and month, trade concerns will remain front and center of investors’ minds, along with increasing concerns about stability in emerging markets, after the sharp declines seen in Argentina and Turkey’s currency last week,” said Michael Hewson, chief market analyst at CMC Markets.

Elsewhere, oil prices steadied on Monday, weighed down by rising supply from OPEC and the United States but supported by concerns that falling Iranian output will tighten markets once U.S. sanctions bite from November. Brent crude oil was up 23 cents at $77.87 a barrel. WTI was unchanged at $69.80. Copper steadied after last week’s losses.

Top Overnight News from Bloomberg

  • President Donald Trump will skip two major summits in Asia in November, a move that could stoke concerns in the region about the U.S.’s reliability as a counterweight to China
  • Michel Barnier, the European Union’s chief Brexit negotiator, tells Frankfurter Allgemeine Sonntagszeitung in interview he is strictly against U.K. blueprint for economic ties. “Exit agreement is about 80 percent negotiated. We will be close to our goal if we can find a pragmatic and realistic solution for Northern Ireland”
  • Events are likely to unfold quickly for emerging markets this week following the battering some currencies suffered in August. Monday alone sees the release of Turkish inflation data and the unveiling of a new fiscal plan in Argentina. Meanwhile, Brazil will remain on tenterhooks after the country’s top electoral court banned imprisoned Luiz Inacio Lula da Silva — who was leading in the polls — from running in October’s presidential elections
  • Italy’s yield spread will narrow as budget details are unveiled over the next month, Finance Minister Giovanni Tria predicted in an interview with la Repubblica
  • European Aug. Manufacturing PMIs: Spain 53.0 vs 52.5 est; Italy 50.1 vs 51.2 est; France 53.5 vs 53.7 est; Germany 55.9 vs 56.1 est; Eurozone 54.6 vs 54.6 est; Markit say Italian manufacturing sector could slip into technical recession in 2H unless demand picks up
  • U.K. Aug. Manufacturing PMI 52.8 vs 53.9 est; Markit note foreign demand declined for the first time since Apr 2016 despite the GBP weakness, future outlook at a 22-month low
  • BBC: BOE’s Carney is in talks to extend his term as Governor, according to people familiar; FT reports decision could be revealed tomorrow
  • Italy Deputy PM Salvini: Italy will ’touch’ 3% deficit limit without breaching it; Finance Minister Tria says Bund/BTP spread will tighten once budget plan is made fact
  • Turkish Central Bank says policy stance will be adjusted at Sept. meeting; Aug. CPI y/y 17.9% vs 17.6% est.
  • China Aug. Caixin Manufacturing PMI 50.6 vs 50.7 est.

Asian equity markets traded mostly lower with the region cautious heading into an event-packed week and as trade-related concerns clouded over risk sentiment. This followed a lack of breakthrough in last week’s NAFTA related talks between US and Canada with President Trump suggesting a willingness to go ahead without Canada, while fresh tariff concerns also lingered with the public comment period for the proposed US tariffs on a further USD 200bln of Chinese goods is set to expire by Thursday. This weighed on Nikkei 225 (-0.6%), Hang Seng (-0.9%) and Shanghai Comp. (-0.9%), with underperformance seen in China following disappointing Caixin Manufacturing PMI data, while the ASX 200 (Unch.) bucked the trend and remained afloat on mixed data which showed solid growth in Company Profits and as the local currency depreciated to its weakest since January 2017.

European equities trade mixed (Eurostoxx 50 -0.1%) with UK’s FTSE 100 outperforming (+0.8%) with the aid of currency effects amid weekend reports that EU’s Chief Negotiator Barnier strongly opposes UK PM May’s Brexit trade proposals. Softer-than-expected UK manufacturing PMI gave the GBP another leg lower, providing further support to the index. Energy names outperform, in-line with the recent price action in the complex, while consumer discretionary names lag, weighed on by German auto names amid reports an increase in US auto import tariff would cost German carmakers EUR 7bln per annum in revenues. In terms of individual movers, SBM Offshore shares spiked higher by 11.3% at the open after the Co. reached a final settlement on Saturday with MPF over alleged improper sales practices

In FX,  DXY traded within tight 95.000-230 trading parameters, and largely dependent on indirect impulses/drivers given the aforementioned US market holiday until a scheduled speech from Fed’s Evans that may provide some independent impetus. In EM the Try has been especially volatile around Turkish inflation data that saw CPI accelerate further and prompt a swift CBRT response flagging a policy adjustment at next Thursday’s meeting and pledge to use all tools available to restore price stability. The Lira rebounded from 6.7300 lows vs the Usd to 6.5075, but has lost some recovery momentum even though the Finance Minister seemed to ‘approve’ of the Central Bank’s tightening signal, awaiting to see how much official rates are hiked. AUD: Aud/Usd has reclaimed 0.7200+ status (albeit marginally) and 1.0900 vs the NZD on the back of less risk averse sentiment overall and a broadly softer Greenback in thin US Labor Day holiday trade. Note, the Aud was weaker overnight amidst mixed Aussie data in the form of a retail sales miss vs higher Q2 company profits, while the Kiwi is straddling 0.6600 vs its US peer.

WTI and Brent trade in the green, nursing some overnight losses, with the former eyeing USD 70/bbl to the upside amid comments from a few oil officials. The Nigerian Energy Minister stated he is comfortable with oil prices around the mid-70s, while an Omani oil official noted some OPEC+ states have trouble reaching their own output quotas, while adding oil prices may rise to USD 90/bbl due to a lack of investments leading to shortfalls. Elsewhere, gold benefits from a domino effect caused by the Turkish Central Bank, whose comments sparked some TRY strength, in turn weighing on the USD.

US event calendar

  • Markets in the US will stay closed for the Labour Day holiday

DB’s Jim Reid concludes the overnight wrap

So we now move into September and the end of the meteorological summer… and what a summer it’s been. In market terms US equities still seem to be bathed in near permanent sunshine at the moment whereas for parts of the EM complex winter is most definitely coming!! European markets seem to have skipped straight to autumn this year and pretty much stayed there. So with a spring in our steps we’ve left behind an eventful August as we’ll discuss below. Today will be quieter given US Labour Day but there is plenty for markets to get excited about this week. We have a payrolls Friday to look forward to but before that the final PMIs are out today through Wednesday. Elsewhere the trade war could also come back under the spotlight with Thursday marking the deadline for the end of a public comment period on a plan for the US to impose tariffs on $200bn in Chinese imports.

This would mean the US administration could impose tariffs as early as the back end of this week with headlines at the back end of last week suggesting that could be the case. We could have some fireworks on Wednesday as executives from Twitter, Facebook and Google are due to testify to Congress on possible Russia election interference. Outside of the PMIs today, watch out for Turkish CPI. It might be too early for the big FX move to have had a major impact on inflation but that’s the risk over the months ahead. Clearly Turkish and Argentinian headlines will be closely watched all week too. The full week ahead is at the end.

Talking of EM, it was obviously the main under performer in August. Our normal performance review is at the end today including some new additions to reflect current market focus. Worst performers in our sample were the Argentinian Peso  (-25.8%) and the Turkish Lira (-25.0%) driving the EM FX index to a -6.2% loss – the largest since 2012. However the S&P 500 (+3.3%) continues to be bullet proof for now driven by the best month for Apple (+20.0%) since 2008 ($178bn increase in market cap) and a remarkable $115bn added to the value of Amazon! The full performance review is at the end.

Over the weekend there hasn’t been a great deal of newsflow although that hasn’t stopped markets in Asia from starting the week on the backfoot. The Nikkei (-0.87%), Shanghai Comp (-0.94%), Kospi (-0.68%) and Hang Seng (-0.98%) are all in the red as we go to print while EM currencies including the Turkish Lira (-1.50%) are also generally weaker. China’s Caixin manufacturing PMI didn’t move the dial too much with the August reading declining 0.2pts to 50.6 and a fraction below expectations for 50.7. Meanwhile Sterling (-0.27%) has also been on the move with various Brexit related headlines once again doing the rounds over the weekend including comments from the EU’s Barnier who said he is “strongly” opposed to key parts of PM May’s proposals for a future trade agreement. We’ve also had the usual daily budget related headlines from Italy this morning with Ansa quoting Deputy PM Salvini as saying that Italy will “touch” the 3% deficit limit without breaching it. The Euro is little moved despite that comment.

Friday’s trading session continued to be buffeted by the main recent themes around trade negotiations, stress in certain emerging markets, and the evolving rhetoric concerning Italy’s budget. Despite headwinds on all these fronts, the S&P 500 refused to stay down and rallied into the close (+0.01%) to end the week +0.93% stronger. The NADSAQ gained +0.26% on Friday while the DOW slipped -0.09%. The VIX index dropped 0.67pts to 12.86 and Treasuries traded 0.5bps higher.

Markets in Europe were not as resilient, with the Stoxx 600 shedding -0.80%. Trade-sensitive sectors led declines, with the auto and mining sectors falling -1.55% and -1.59%, respectively. The main driver was the news that the US will likely institute tariffs on another $200bn of Chinese goods as soon as this week, which broke last Thursday night. Separately on the trade front, the US formally announced a new NAFTA agreement with Mexico. The deal makes changes to supply chain requirements and rules of origin, but it will need to be approved by Congress. Canada has not agreed to the deal, and multiple Republican Senators have expressed a strong preference for a trilateral deal. Canada may still join, so negotiations will continue this week.

Despite the broadly negative trade headlines, EM equities (-0.18%) were only a shade lower and the DB EM currency basket rose +0.32% as the situations stabilized in both Argentina and Turkey. The Peso gained +4.48%, including a late afternoon rally after S&P affirmed Argentina’s long-term foreign currency debt rating at B+. They switched the outlook to negative, but the immediate result was apparently better than some investors feared. In Turkey, the authorities raised the tax rate on FX deposits and cut the rate on local currency deposits, effectively incentivizing market participants to buy lira. The Lira rallied as much as +6.36% off the intraday lows before closing +1.75% stronger on the day. Finally on the EM front, the Brazilian Real gained +2.35% on Friday as investors positioned ahead of a potential court ruling which may bar Lula da Silva from running for President.  He has been leading in polls but is viewed as market unfriendly.

Back to Europe, where the Italian budget saga rumbles on. Ten-year spreads to Bunds rose 12.0bps off their intraday lows on Friday and are now only 0.5 basis points away from their widest level of the year, following a series of unfavourable rhetoric. Outright 10-year yields are at 3.222%, their highest level since 2014. EU Economic and Financial Affairs Commissioner Pierre Moscovici said budget talks with Italy “risk not being easy,” and the Italian Cabinet Undersecretary Giancarlo Giorgetti said the deficit could exceed 3% “if necessary.” For context, a deficit number around 2% of GDP will likely be sufficient to mollify the European Commission and financial markets, while a number up near 3% would be more problematic. This saga is likely to continue throughout September. Staying with Italy it’s worth noting that Fitch revised down Italy’s rating outlook to Negative from Stable on Friday night reflecting a combination of the fiscal outlook and fragile political situation. The BBB sovereign rating was however maintained.

On the data front, August Eurozone core inflation printed at 1.0% and headline at 2.0%, both 10bps softer than consensus expectations but consistent with the slowdown seen in Germany’s print earlier in the week. Our economists believe that around half of the slowdown is attributable to transient, idiosyncratic factors, while the other half is more secular and worrisome. We’ve lowered our yearend Eurozone inflation target accordingly. Separately, the first piece of hard data for Q3 German activity printed, with July retail sales falling 0.4% mom. Not a great start to the quarter, but there is a long road ahead. In the US, the August Chicago PMI beat expectations at 63.6, still a bit softer from last month’s 65.5. The University of Michigan consumer sentiment survey for August was revised higher to 96.2 from 95.3. The 5-10 years inflation expectations sub-reading rose 0.1 percentage point to 2.6%, matching its highest level in over 2 years. Overall, the data remains consistent with robust US growth

Looking at today’s calendar, we will get the release of the final August manufacturing PMIs in Japan (Nikkei), China (Caixin), the Eurozone and UK. August CPI data in Turkey was closely watched in light of recent events in the country. Away from that the Fed’s Evans will speak on a policy panel in Argentina and the ECB’s Mersch will make comments in Paris. Markets in the US will stay closed for the Labour Day holiday

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