- President Trump is set to go ahead with USD 200bln in new Chinese import tariffs, the WSJ reported; China will retaliate instantly
- Asian equities traded negative and European started off poorly but rebounded; FX markets stable with the dollar dropping and EMs underperforming
European stock markets followed Asia – where Japan was closed for holiday – lower to start the week, as investors pulled back after weekend news Trump was set to announce a new round of $200BN in tariffs on Chinese goods as soon as today.
For those who missed it, over the weekend the WSJ reported that President Trump would go ahead with USD 200BN in China tariffs despite talks and told advisers to proceed with the tariffs according to reports on Friday which cited people familiar with the matter. Furthermore, separate reports over the weekend stated that the tariffs will go into effect within weeks and that an announcement could be made within days, while the tariffs are said to likely be set at about 10% but could be raised to 25% if China does not appear willing to comply to US trade demands at proposed meetings in Washington on September 27th-28th Additionally President Trump tweeted “Tariffs have put the U.S. in a very strong bargaining position” and “If countries will not make fair deals they will be “Tariffed!” In response, China may not participate in planned trade discussions with the US if the Trump administration goes ahead with additional tariffs.
After all that, US equity futures on the S&P 500, Dow and Nasdaq all pointed to a red open following a weak session in Asia, where the MSCI’s index of Asia-Pacific ex-Japan dropped 1%, snapping three straight sessions of gains, dragged lower by China, where the Shanghai Composite closed at the lowest level since 2014, erasing the last trace of China’s recovery from a stock bubble that turned into a $5 trillion bust. The SHCOMP dropped 1.1% to 2,651.79, below its January 2016 bottom when officials had just introduced and then scrapped a disastrous circuit-breaker program as they scramble to offset the bursting of the 2015 Chinese stock bubble.
The weaker yuan has not helped make local stocks any more attractive as the Chinese currency has fallen almost 7% since the end of March amid speculation the government was trying to counter the impact of U.S. tariffs. “It’s hard to buy Chinese stocks even if they sell down” given the trade war and weak company fundamentals, said Takamoto strategist Toshihiko Takamoto. “Even if the valuation gets cheaper, there’s a reason for that. It’s hard to find factors that would spark a sharp rebound.”
As Bloomberg notes, this year’s hefty declines – the Shanghai index is down 20% in 2018 and is stuck deep in a bear market – ends a period of relative stability for the stock market that began with the appointment of Liu Shiyu as the top securities regulator in early 2016 after his predecessor Xiao Gang was blamed for the crash. Under Liu, the stock index climbed 32 percent from the end of February 2016 though its high in January this year.
With Chinese stocks wiping out all gains after the 2015-2016 crash, stock turnover is dwindling and some companies are finding themselves cut off from equity financing, forcing them to raise more debt. The benchmark index is heading for a fourth quarter of losses, its longest string of declines since 2008, and – to Trump at least – clear evidence that Trump is winning the trade war. The bear market in Chinese equities contrasts with gains for global stocks. The MSCI All-Country World Index is up 21 percent since Nov. 27, 2014, while the S&P 500 Index has handed investors a 40 percent rally. However, since May – when the trade war erupted in earnest – only the S&P500 has pushed to new highs, while the rest of the world has been stagnant at best.
In fact, world shares remain more than 5 percent off their record highs touched in January, based on the MSCI world equity index which tracks shares in 47 countries.
Overnight, the European STOXX 600 index fell as much as 0.2%, while Germany’s export-heavy DAX dropped half a percent. France’s CAC 40 and Britain’s FTSE 100 fell 0.2 percent and 0.1 percent respectively. However, after the initial drop there were signs that some investors were ready to look past the dispute, with European markets reducing their losses to trade close to flat shortly after the open. The Stoxx 600 Automobiles & Parts index was among the worst performing sectors ahead of Trump’s tariff announcement. Worst performers were Ferrari -1.4%, PSA Group -1.2%, BMW -0.8%, Volkswagen -0.4, Fiat Chrysler -0.3%.
Hennes and Mauritz beat forecasts to help retailers buck the generally downbeat mood. Italian bonds rallied while other European debt held steady with U.S. Treasuries. Sweden’s krona climbed versus major peers as Riksbank members warmed to higher rates.
Naturally, trade is once again the key topic of (non-stop) conversation, with JPM writing in a client note that “China may potentially pull out of trade talks entirely and escalate on the new front of outright export restrictions. This would of course only inflame the situation further.“
Others chimed in:
- “Escalating trade tensions will once again be a central theme to driving sentiment and trading this week,” Jasper Lawler, head of research at London Capital Group, wrote. “Trade concerns have been simmering for months and it is growing increasingly clear that neither side is prepared to back down, which is fanning fears that the world’s two biggest economies are heading towards a trade war.”
- “On the Chinese side, Mr. Trump has burned a lot of political capital so it’s hard to see how talks can resume if Mr. Trump goes ahead on the $200 billion,” Freya Beamish, chief Asia economist at Pantheon Macroeconomics, told the Reuters Global Markets Forum. “China’s scope to retaliate is surprisingly limited however, especially since the outbreak of swine flu, which will anyway push up CPI inflation.”
Elsewhere, in FX, the dollar dropped against its G-10 peers, with the DXY index down 0.2% at 94.778, having bounced from a low of 94.359 at the end of last week ahead of President Trump’s likely announcement of additional tariffs on Chinese goods and with Tokyo markets closed for holiday; the dollar slipped and Treasuries edged up as the London session began while the euro advanced. Despite dollar weakness, emerging-market currencies again declined against the dollar on fears the of imminent Chinese retaliation to the US would lead to further global weakness, while a US rate hike next week would put further pressure on EM currencies. The Turkish lira tumbled as much as 3% on no news in thin volume, before recovering some losses, down 1.1% to 6.2369, while Russia’s rouble dropped 0.2% to 68.146 as the effect of the Russian central bank rate rise on Friday faded.
Major currencies saw low volumes, with choppy trading at times. The Swedish krona advanced versus all G-10 peers, also dragging up the Norwegian currency, after Riksbank minutes from the September meeting suggested the central bank is committed to raising rates in December or February. The pound gained for the fifth time in six days amid mounting optimism on the Brexit talks ahead of a key European summit later in the week. The yen was little changed with Tokyo markets closed for a public holiday.
US 10Y yields rose above 3.00% as TSY bears seek to make a decisive break above the key level; Italian government yields fell 6-8 basis points amid growing hopes Italian ministers, who meet later on Monday, will agree a market-friendly 2019 budget and a report that FinMin Tria will hold the deficit below the EU limit of 3%.
Elsewhere, oil prices rebounded from earlier losses as supply concerns outweighed assurances from Washington that Saudi Arabia, Russia and the United States can raise output fast enough to offset falling supplies from Iran and elsewhere. Gold traded 0.28% higher at $1,196.26 an ounce while copper and nickel dragged industrial metals lower. Emerging-market stocks weakened and their currencies were led lower by led by a slide in India’s rupee, Turkey’s lira and South Korea’s won.
In the latest update on the neverending Brexit saga, the Times reported that the EU is secretly preparing to accept a frictionless Irish border after Brexit in a move that raises the prospect of PM May striking a deal by the end of the year. In a concession to British concerns, EU negotiators intend to use technological solutions to minimise customs checks between Northern Ireland and the Irish Republic. Further to this, the FT reported that the EU are in discussions with Brussels over allowing British officials (as opposed to EU ones), to check goods bound for Northern Ireland, in a bid to unlock stalled talks on the “backstop” plan for the Irish border.
Today’s data include Empire State Manufacturing Survey, while FedEx and Oracle are among companies reporting earnings.
- S&P 500 futures down 0.2% to 2,906.75
- STOXX Europe 600 down 0.2% to 377.01
- MXAP down 0.5% to 161.09
- MXAPJ down 1% to 514.97
- Nikkei up 1.2% to 23,094.67
- Topix up 1.1% to 1,728.61
- Hang Seng Index down 1.3% to 26,932.85
- Shanghai Composite down 1.1% to 2,651.79
- Sensex down 0.9% to 37,731.09
- Australia S&P/ASX 200 up 0.3% to 6,184.97
- Kospi down 0.7% to 2,303.01
- German 10Y yield rose 0.4 bps to 0.454%
- Euro up 0.3% to $1.1658
- Italian 10Y yield rose 3.0 bps to 2.619%
- Spanish 10Y yield fell 0.6 bps to 1.48%
- Brent futures up 0.5% to $78.46/bbl
- Gold spot up 0.2% to $1,197.28
- U.S. Dollar Index down 0.2% to 94.77
Top Overnight News from Bloomberg:
- Beijing is considering declining the offer of trade talks led by U.S. Treasury Secretary Steven Mnuchin, the Wall Street Journal reported, citing officials with knowledge of the discussions. China is considering potential retaliation steps, according to the report
- Prime Minister Theresa May left no doubt she was prepared to be a “bloody difficult woman” in defense of her Brexit plans, amid growing signs that a deal with the European Union is within reach. PM May made it clear she has no intention of wavering, telling the BBC in an interview to be broadcast Monday she was “irritated” at the talk of a leadership contest and ready for a fight
- The British Chambers of Commerce lowered its forecast for the U.K. economy for the next two years, citing a weaker outlook for trade and investment on uncertainty over exiting the European Union
- Japan’s Shinzo Abe told U.S. President Donald Trump that it’s dangerous to broach the topic of currencies, the prime minister said on Sunday. He added that Trump hasn’t attacked Japan on the topic of currencies since their first meeting. In January 2017, Trump said Japan and China “play the devaluation market,” a charge Japan’s top currency official refuted
- The U.K. banking system is stronger than it was after it almost brought the nation to its knees a decade ago, but people who oversaw the crash are still fearful of a repeat. “The big lesson to me is that although banks today are safer than they were then, they’re not safe,” Mervyn King, governor of the Bank of England as the financial crisis broke, said in a Bloomberg Television interview
- South African President Cyril Ramaphosa shared parts of a package of reforms to kickstart an economy that’s in recession with business and labor leaders last week.
- Treasury is set to sell $90b of Treasury bills on Monday. Bill rates have been on the rise, with the rate on the 1-month security trading around 2%, despite the recent spate of paydowns
- South Korean President Moon Jae-in will hold a summit with North Korean leader Kim Jong Un in Pyongyang this week on the first visit to North Korea by a South Korean leader in 11 years
- Turkey is preparing to announce a set of measures to help lenders cope with their bad loans, four people with knowledge of the plan said
Asian equity markets began the week with a subdued tone amid the absence of Japanese participants due to public holiday and with sentiment dampened by trade concerns after US President Trump reportedly told advisers to proceed with tariffs on a further USD 200bln of Chinese goods which could be announced as early as today. Furthermore, reports noted the tariffs could be set at about 10% and raised to 25% if China shows an unwillingness to adhere to US demands at proposed meetings later this month, while China was said to consider abandoning discussions if the US proceeds with the tariffs. This pressured both ASX 200 (+0.3%) and KOSPI (-0.7%) from the open with healthcare the underperformer in Australia as the sector faces scrutiny from a royal commission inquiry, although the index later recovered amid strength in utilities, tech and financials. Elsewhere, Hang Seng (- 1.3%) and Shanghai Comp. (-1.1%) were negative and took the brunt of the Trump tariff threats, while gambling stocks saw heavy losses after Macau shut down its casinos and floods hit the territory due to Typhoon Mangkhut.
Top Asian News
- Graticule Hits Ugly Patch as Bets on Rupee, Asia Stocks Sour
- China’s Stocks Sink Past Lowest Level Seen in $5 Trillion Crash
- China Is Said to Consider Skipping Trade Talks With U.S.: WSJ
- India’s Underwhelming Rupee Response Puts Rate Hike on Agenda
European equites started the day negative as the dour tone driven by US-China trade concerns in Asia extended into European trade. Stocks directionless now, however, and the IBEX is outperforming, with the DAX the underperformer. The German index is being weighed on by falling Linde shares, as more divestments by Praxair may be necessary to satisfy regulatory requirements ahead of their possible tie-up.
Top European News
- European Luxury Stocks Decline on Trade Woes, Typhoon in Asia
- Pound Optimism Returning as Analysts See Gains Against the Euro
- Countdown to Italy Budget Sees Investors Getting More Confident
In FX, the DXY index and broad Usd have lost some ground in early EU trade amidst a general upturn in risk sentiment/appetite, on more positive Italian fiscal vibes and latest reports about the EU looking at ways to resolve differences over the Irish border that could pave the way for a Brexit deal with the UK, or at least raise prospects of an accord. The DXY has drifted back from just a fraction below 95.000 overnight towards 94.725 after extending post-US data gains on Friday with the added impetus of President Trump upping the ante on $200 bn Chinese import tariffs. NZD/AUD/CHF/EUR/GBP – All firmer vs the Greenback and marginally outperforming other majors, bar the Scandi crowns that are benefiting from relative Norges Bank and Riksbank policy outlooks vs the ECB especially, but for the former also against the Fed in the very near term given overwhelming expectations for a 25 bp hike this Thursday. The Kiwi has reclaimed 0.6550+ status, the Aud is back over 0.7150 and the Franc has rebounded through 0.9650, while the single currency has bounced firmly off 10 and 21 DMAs circa 1.1616 to test offers/resistance around 1.1650 and Cable is looking at 1.3100 again. Back to the Nok and Sek, both have extended gains vs the Eur to trade around 9.5750 and 10.4750 respectively, and with the latter seemingly latching on to the
more hawkish elements of latest policy meeting minutes. EM – The Try has been back in the spotlight and renewed pressure after last week’s massive CBRT boost, with a retreat to almost 6.3000 before some losses were clawed back with the aid of better than forecast Turkish ip data.
In commodities, the oil sector is marginally positive as the USD is easing slightly, with WTI finding some support from its 100DMA at USD 68.89, currently trading around the USD 69.50 level. Traders remain mindful of the impact of Tropical Depression Florence, as ports remain shut in North Carolina due to flooding. Saudi Arabia Energy Minister Al-Falih and Russian counterpart Novak met over the weekend in which they pledged to continue working on cooperation. Russian Energy Minister Novak says that Russia is ready to discuss cooperation with the US to balance the oil market, but isn’t holding these discussions at the moment. In the metals scope, gold is currently benefitting from a softer dollar and US-China trade tensions, with the yellow metal lagging at the USD 1195/oz level. Base metals have dropped on increased trade concerns, with both copper and nickel both down over 1.5%.
Looking at the day ahead, it’s a fairly quiet start to the week with the highlight being the final August CPI revisions for the euro area. Away from that we’ll get the September empire manufacturing reading in the US.
US Event Calendar
- 8:30am: Empire Manufacturing, est. 23, prior 25.6
DB’s Jim Reid concludes the overnight wrap
Happy Monday. After playing golf all day last Sunday the payback this weekend was attending rolling 3rd birthday parties with each parents outdoing their rivals for activities, food and party bags. It was Maisie’s 3rd birthday yesterday but we’ve yet to have a proper party for her on any birthday as we’re not sure we can keep up the party arms race. Things are incredibly busy at home with the twins hard work, activities every day and my wife running a renovation project for our new house. The busy period has meant we’ve delayed and delayed potty training Maisie. However Maisie has obviously got fed up with waiting as last week she got up, took her clothes and nappy off and just sat on the toilet and performed. Not sure whether to be proud or ashamed that she was forced to work it all out herself!!
So onto this week. There are less scheduled headline grabbing events than last week but we still have enough to keep us on our toes. The flash September PMIs in Europe and the US on Friday are the key data, while there’s a number of interesting meetings including a North and South Korean summit (Tues- Thurs), an informal EU summit where Brexit will be a focus (Weds-Thurs), US and Japan trade talks, and the UN General Assembly (Tues start). There’s also a BoJ meeting to be aware of (Weds) that is not expected to see any policy change but should see focus on Kuroda’s press conference and any guidance on possible widening of the 10yr JGB band. Another event to watch in Japan this week is the LDP leadership election on Thursday. The only candidates are Abe and former defence minister Ishiba. The expectation is that Abe will win reelection to a third term.
Going into those events markets in Asia have started the week very much on the back foot with trade related headlines at the back end of last week and then over the weekend dominating. Just on markets first, the Hang Seng (-1.61%) and Shanghai Comp (-1.06%) have seen the biggest drops with the Kospi (-0.72%) also lower. Markets in Japan are shut for a public holiday however EM bourses have also struggled in the early going including those in the likes of Indonesia (-1.23%), India (-0.85%) and Taiwan (-0.50%). EM FX is only very modestly weaker while US equity futures are down about -0.15%.
With regards to those trade headlines, at the end of last week various media outlets including Bloomberg and Reuters reported that the US Administration was ready to implement tariffs on another $200bn of imports from China, possibly as soon as today although Reuters did suggest that the tariff level could be 10% rather than the 25% generally expected. Over the weekend the WSJ reported that China is considering skipping trade talks offered by the US last week and that were planned for later this month as the country is not prepared to negotiate with a “gun pointed to its head”. So more newsflow today wouldn’t be a huge surprise. The CNY is little changed as we go to print.
As for other news over the weekend, on Brexit the FT reported on Sunday that the EU was considering allowing British officials, rather than the bloc’s inspectors, to check goods heading to Northern Ireland from mainland Britain, to help “de-dramatize” the border issue. The report also added that the checks could also be handled away from the border using “trusted-trader schemes”.
Meanwhile, according to EU diplomats, British negotiators have hinted they would be ready to make concessions once May has navigated a crucial speech at the Conservative Party annual conference in October. Sterling (+0.11%) is a shade stronger this morning.
Back to Friday where US politics dominated for the most part, with those trade headlines and also the news that former Trump campaign manager Paul Manafort had pled guilty to conspiracy charges the main focus. The S&P 500 shed as much as -0.43% on Friday after reports of imminent tariffs, though the index crawled back into the green (+0.03%) by the end of the day.
Despite a mixed session on Friday, global equities generally rallied last week. The S&P 500 (+1.16%) and Stoxx 600 (+1.09%) recorded their best weekly performances since July. The NASDAQ and DOW gained +1.36% and +0.92%, respectively, while European banks (+2.58%) outperformed strongly versus US banks (-1.83%). Emerging markets mostly rallied as well, with the MSCI EM index advancing +0.54%, though stocks in China sold off as trade war concerns continued to simmer. The Shanghai Composite fell -0.76% and is now -24.66% of its January peak.
The dollar (-0.46%) depreciated for the fourth time out of the last five weeks, as soft PPI and CPI prints encouraged investors to sell the greenback. The euro gained +0.63% on the week and the EM index advanced +0.98%. Treasuries sold off 6-8bps across the curve last week and 10yr yields touched 3% on Friday (and are hovering just below that this morning) while Bund yields rose 6.3bps on the week. Outside Germany, other major European bond markets rallied, with yields on Portuguese, Italian, and Greek 10-year debt down 10.9bps, 11.6bps, and 26.5bps, respectively.
Despite the relatively soft US inflation data, other hard data indicated strong growth for the third quarter. Retail spending and industrial production both printed strong overall, though the former was a bit nuanced given a headline miss but strong underlying details and positive revisions. The Atlanta Fed GDPnowcast is at 4.4% qoq saar for the third quarter, up from 3.8% the week prior. We maintain our forecast at 3.1%, and, for what it’s worth, the NY Fed’s model has stayed steady at 2.2%. Other global data was mostly positive as well, with August activity data beating expectations in China and wage growth printing strong in Europe.
It’s a fairly quiet start to the week with the highlight being the final August CPI revisions for the euro area. Away from that we’ll get the September empire manufacturing reading in the US.