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Global Stocks, US Futures Slammed By Quartet Of Risks

Courtesy of ZeroHedge. View original post here.

It is a "risk off" sea of red in global markets this morning, with US equity futures tumbling (Dow -191, ES -18) following European and Asian market sharply lower, as a quartet of growing risks spooks traders, among them i) the ongoing Turkish lira meltdown, ii) unexpectedly weak European PMIs which missed across the board, iii) the ongoing Italian political quagmire where president Matarella is stalling the formation of a new government, and iv) the return of geopol/trade war fears rose after Trump cast doubts over the North Korean summit and expressed dissatisfaction regarding trade talks with China.

While risk assets slumped and treasuries rose alongside the dollar as while oil dropped with most commodities, the main story overnight remains the unprecedented collapse in the Turkish lira, which started with a flash crash just as futures reopened for trading overnight, with many blaming Japanese flows suggesting domestic retail traders – i.e. Mrs Watanabe – were stopped out in TRYJPY, with the consequent spillover pushing USDJPY lower.

As European trading began, the TRY gapped even lower, dropping to a new all time low of 4.9253 after the release of a series of weak European PMIs which slammed the euro to fresh 2018 lows, while the USDJPY broke 110 and EURCHF touched 1.16.

As risk off gripped stocks, treasuries extended the overnight rally with 10Y TSY yields dropping to just above 3.00%.

In Europe, 10Y bund yields broke back under 50bps after further loss in European manufacturing momentum and the bund/BTP spread snapped wider amid growing concerns about the political situation in Italy, where President Sergio Mattarella is due to announce his decision on whether to give law professor Giuseppe Conte a chance to lead a populist government as early as Wednesday. For now, Mattarella has not yet decided whether to give the PM role to Conte according to sources.

As Mark Cudmore pointed out earlier, Matarella has no good options as far as markets are concerned: "If he blocks the coalition, it’ll leave the country in limbo and stir up popular resentment before new elections. But if he approves the coalition, then it’s even more worrying because of the government’s fiscally irresponsible proposals."

And if Italian politics wasn’t enough of a problem for euro longs, German and French PMI data missed forecasts adding to the bearish sentiment surrounding the Euro lately. This morning Europe's PMIs disappointed across the board, with momentum in France’s private sector slowed to the weakest since the start of 2017, with a lull in services offsetting a pickup in manufacturing numbers, while both German manufacturing and services PMIs missed and dropped.

  • EU Markit Manufacturing Flash PMI 55.5 vs. Exp. 56.0 (Prev. 56.2)
  • EU Markit Services Flash PMI 53.9 vs. Exp. 54.6 (Prev. 54.7)
  • German Markit Manufacturing Flash PMI (May) 56.8 vs. Exp. 57.9 (Prev. 58.1)
  • French Markit Manufacturing Flash PMI (May) 55.1 vs. Exp. 53.7 (Prev. 53.8)

Following the release of the soft French, German and EU PMI data, Bund futures pushed to session highs amid renewed concerns the ECB's tapering plans may be delayed.

As a result, European stocks tumbled as the Stoxx Europe 600 Index sank the most since March alongside U.S. equity-index futures, after US President Trump expressed doubt over the US-North Korean summit before further expressing dissatisfaction in regards to trade talks with China. European sectors are almost all in the red, with consumer staples outperforming while energy plumb the depths amid the retreat in oil prices overnight. In terms of stock specifics, Marks & Spencer (+3.5%) is higher (despite reporting a second straight decline in annual profits) amid faster than expected store closures. Standard Chartered (+1.6%) is in the green following an FT report that Barclays (-0.8%) was looking at a potential merger with rival banks, however Reuters later said the FT report was just more fake news.

Earlier in the session, Asian stocks likewise traded mostly negative after US President Trump placed doubts on the summit with North Korea and expressed dissatisfaction regarding trade talks with China. ASX 200 (-0.2%) was led lower by the energy sector following weakness in crude as Santos shares slumped about 9% after the Co. rejected the approach from Harbour Energy and disengaged from further talks. Nikkei 225 (-1.2%) underperformed as exporters suffered the brunt of a firmer currency, while Shanghai Comp. (-1.4%) and Hang Seng (-1.8%) conformed to the broad risk averse tone amid Trump discontentment with trade discussions. Furthermore, the PBoC conducted a net daily liquidity drain from the interbank market, while basic materials names were pressured by NDRC plans to reduce benchmark coal prices and after US Treasury Secretary Mnuchin clarified that steel and aluminium tariffs were not part of the recent truce and will remain in place for China.

Finally, S&P futures dropped in Asian hours and accelerated further to the downside as European cash equity markets opened, trading near session lows just above 2,700.

In FX, the euro tumbled to a six-month of 1.17 as the abovementioned PMI misses added to concern economic momentum is slowing. The yen strengthened more than 1% against the dollar in the London session as European stocks followed Asia lower, with gains boosted amid a scramble among Japanese margin traders to cut losses from a slide in the Turkish lira as hopes faded that the central bank may step in to rescue the battered currency. Risk sensitive currencies such as the Swedish krona and Norwegian krone were the worst Group-of-10 performers as the worsening geopolitical climate as well as weak European PMIs weighed on the sentiment; EUR/USD fell to a day low of 1.1699 before paring some losses. The pound slid and U.K. government bonds rose as U.K. inflation unexpectedly slowed to a 13-month low in April, denting prospects for rate increases with money markets reducing bets of a Bank of England interest-rate hike in August.

As expected, thanks to the latest move higher in the dollar, emerging markets continue to be a bloodbath, with the TRY sticking out meanwhile the Turkish central bank continues to do nothing.

In commodities, oil has extended the losses seen over night in the current risk averse environment, with downward pressure seen from both a rising USD and overnight source reports suggesting OPEC could increase production in June to offset Venezuelan and Iranian shortages. Prices were also dealt a blow by the latest API reports which posted a narrower  than expected drawdown in headline crude inventories (-1.3mln vs. Exp. -1.6mln). Elsewhere, gold is trading range-bound with participants tentative ahead of today’s FOMC minutes release, while copper was lacklustre overnight alongside the downbeat risk sentiment. Steel has fallen for the fourth consecutive session hitting one month lows as supply glut concerns continue. OPEC and non-OPEC producers are to discuss potential changes to way in which they assess oil stockpiles, according to sources.

In other overnight news, ECB's Coeure said QE will not end abruptly after September and is not worried by the slowdown in growth, confident that inflation will rise.  US President Trump said the House Ways and Means Committee are working on additional tax cuts by November and that he will propose new tax cuts before that month. 

US House passed the Dodd-Frank rollback bill which was then sent to President Trump to sign, while the US House also passed the "right to try" bill which seeks to permit terminally ill patients to try experimental drugs still in clinical trial stage.

Expected data include mortgage applications, new home sales, and PMIs. Fed is scheduled to publish its latest FOMC meeting minutes, while Lowe’s, Target, Tiffany, Synopsys, and CIBC are among companies reporting earnings

Bulletin Headline Summary from Ransquawk

  • Sentiment remains downbeat in Europe amid Trump comments on China and NK. EZ data added to woes
  • TRY at record lows, GBP at 2018 lows with CPI below forecast, CHF at month highs in risk averse markets
  • Looking forward, highlights include, US New Home Sales, DOEs, FOMC minute and a slew of speakers

Market Snapshot

  • S&P 500 futures down 0.6% to 2,708.75
  • STOXX Europe 600 down 0.9% to 393.22
  • MXAP down 0.4% to 173.52
  • MXAPJ down 0.8% to 563.63
  • Nikkei down 1.2% to 22,689.74
  • Topix down 0.7% to 1,797.31
  • Hang Seng Index down 1.8% to 30,665.64
  • Shanghai Composite down 1.4% to 3,168.96
  • Sensex down 0.4% to 34,498.59
  • Australia S&P/ASX 200 down 0.2% to 6,032.51
  • Kospi up 0.3% to 2,471.91
  • German 10Y yield fell 4.7 bps to 0.513%
  • Euro down 0.5% to $1.1718
  • Italian 10Y yield fell 6.1 bps to 2.066%
  • Spanish 10Y yield fell 1.5 bps to 1.442%
  • Brent futures down 0.6% to $79.10/bbl
  • Gold spot up 0.2% to $1,294.02
  • U.S. Dollar Index up 0.2% to 93.79

Top Overnight News from Bloomberg

  • European May Composite PMIs: France 54.5 vs 56.8 est; Germany 53.1 vs 54.6 est; Eurozone 54.1 vs 55.1 est; Markit note it’s becoming increasingly evident that underlying growth momentum has slowed
  • U.K. Apr. CPI y/y: 2.4% vs 2.5% est; Core CPI 2.1 vs 2.2% est; ONS note base effects of airfare prices dropping out of calculation
  • Italian President Mattarella is due to announce his decision as early as Wednesday on whether to give law professor Giuseppe Conte a chance to lead a populist government following a last-minute wobble over the candidate’s suitability; according to Repubblica he is taking extra time before the decision as he is critical of Finance Minister candidate Savona.
  • Trump says House panel is working on more tax cuts by November
  • President Donald Trump expressed pessimism about whether the summit with North Korea’s leader would take place, even as U.S. officials continue to press ahead with plans for a historic meeting to be held on June 12
  • Emerging-market companies and governments straining to deal with the rising cost of borrowing in dollars face increasing pressure as a record slew of bonds come due
  • Divisions among Federal Reserve officials over the yield curve and inflation will be under scrutiny on Wednesday when the U.S. central bank releases minutes of its policy meeting at the start of the month
  • Turkey’s main stock exchange in Istanbul converted its foreign-currency assets into liras, a mostly symbolic gesture meant to express confidence in the nation’s rapidly depreciating currency
  • Add skittish Japanese investors to the list of woes for Turkish assets. With Turkey’s lira breaking below the 24-yen level on Tuesday for the first time, Japanese margin traders cut their losses early Wednesday in Asia, said Takuya Kanda, general manager at Gaitame.Com Research Institute Ltd. in Tokyo
  • Italian President Sergio Mattarella is due to announce his decision as early as Wednesday on whether to give law professor Giuseppe Conte a chance to lead a populist government following a last-minute wobble over the candidate’s suitability
  • Foreign Secretary Boris Johnson set Theresa May a list of Brexit demands, saying she must “get on with” taking the U.K. out of the European Union’s trading rules as fast as possible
  • The Spanish Budget Ministry is working on a plan to reorganize the debt of the country’s regional governments to help them sell bonds in the public markets again after a six- year absence

Asian equity markets traded mostly negative as the downbeat sentiment rolled over from US where stocks retreated and DJIA pulled back from the 25k level, after US President Trump placed doubts on the summit with North Korea and expressed dissatisfaction regarding trade talks with China. ASX 200 (-0.2%) was led lower by the energy sector following weakness in crude as Santos shares slumped about 9% after the Co. rejected the approach from Harbour Energy and disengaged from further talks. Nikkei 225 (-1.2%) underperformed as exporters suffered the brunt of a firmer currency, while Shanghai Comp. (-1.4%) and Hang Seng (-1.8%) conformed to the broad risk averse tone amid Trump discontentment with trade discussions. Furthermore, the PBoC conducted a net daily liquidity drain from the interbank market, while basic materials names were pressured by NDRC plans to reduce benchmark coal prices and after US Treasury Secretary Mnuchin clarified that steel and aluminium tariffs were not part of the recent truce and will remain in place for China. Conversely, baby related stocks gained in Hong Kong as participants reacted took their first opportunity to react to the prospects of China relaxing its child policy restrictions and Standard Chartered was boosted on reports Barclays was examining a potential merger with rivals including the dual-listed lender. Finally, 10yr JGBs are marginally higher amid gains in T-notes and a broad risk-averse tone, while the BoJ were also present in the market for JPY 840bln of JGBs in maturities spread across the curve.

Top Asian News

  • Lira Tumbles to Record as Lack of Central Bank Action Fuels Rout
  • Bank Indonesia Conducting Dual-Intervention as Rupiah Weakens
  • Fallen Singapore High-Flyer Gets Court Protection to Reorganize

European equities are firmly in the red as the downbeat sentiment rolled over from Asia overnight and Wall St. yesterday. Markets took a risk averse stance after US President Trump expressed doubt over the US-North Korean summit before further  expressing dissatisfaction in regards to trade talks with China. European sectors are almost all in the red, with consumer staples outperforming while energy plumb the depths amid the retreat in oil prices overnight. In terms of stock specifics, Marks & Spencer (+3.5%) is higher (despite reporting a second straight decline in annual profits) amid faster than expected store closures. Finally, Standard Chartered (+1.6%) is in the green following an FT report that Barclays (-0.8%) was looking at a potential merger with rival banks, however source reports denied this news later

Top European News

  • Politics Engulf Euro Junk Bond Market With Big Italy Exposure
  • StanChart Says Focus Is on Strategy, Denting Merger Speculation
  • Boris Johnson Warns May to ‘Get on With It’ and Deliver Brexit
  • Thyssenkrupp’s CEO Under Fire as Activist Elliott Buys Stake
  • Bond Investors Burned by Sanctions Creep Back Into Russian Debt

In FX, the JPY has been a beneficiary of the broad risk aversion which subsequently took USD/JPY below 111.00 during Asia-Pacific trade, thereafter the pair continued to fall victim to selling pressure and took out the widely-watched 200DMA at 110.21 and psychological 110.00 (which holds USD 2bln in option expiries due to roll-off at the NY cut) before eventually taking out Fib support at 109.78. The potential damage for the USD from the JPY has been somewhat offset by the softer EUR (DXY +0.25%) with the shared currency dealt a blow by this morning’s PMI releases which thus far have painted a dreary picture for the Eurozone. IFR highlight that if we get a break of the 1.1700 level to the downside, large stops and gamma below this level could see 1.1500 on the cards. The EUR initially also lost ground to the GBP with the EUR/GBP cross around 0.8750 before the cross was dealt some reprieve by softer than expected UK inflation figures (Y/Y CPI 2.4% vs. Exp. 2.5%) which saw GBP/USD briefly slip below 1.3350. Elsewhere, commodity-linked currencies have been subdued as oil prices retreated from multi-year highs with AUD also dampened after weak construction data, while NZD has seen a bout of pressure after the RBNZ published an article on unconventional monetary policy in which it stated it has significant room for easing in a conventional manner with the OCR at 1.75%. The losses in NZD were then instantly pared given the context of the comments which were made as an implicit argument against adopting unconventional measures, before the broad risk averse sentiment pressured currencies across the FX space and saw NZD/USD test 0.6900 to the downside. Elsewhere, TRY experienced a flash crash which saw the currency drop over 2.5% against the greenback and extend on its recent trend of record lows approaching into next month’s election, in which President Erdogan has vowed to take greater control of the central bank if he wins, although the currency has since pared some of the losses amid a lack of immediate fresh news catalyst behind the latest bout of selling

In commodities, oil extended the losses seen over night in the current risk averse environment, with downward pressure seen from both a rising USD and overnight source reports suggesting OPEC could increase production in June to offset Venezuelan and Iranian shortages. Prices were also dealt a blow by the latest API reports which posted a narrower than expected drawdown in headline crude inventories (-1.3mln vs. Exp. -1.6mln). Elsewhere, gold is trading range-bound with participants tentative ahead of today’s FOMC minutes release, while copper was lacklustre overnight alongside the downbeat risk sentiment. Steel has fallen for the fourth consecutive session hitting one month lows as supply glut concerns continue. OPEC and non-OPEC producers are to discuss potential changes to way in which they assess oil stockpiles, according to sources.

Looking at the day ahead, the highlight is the May PMIs across the globe, which includes the manufacturing, services and composite prints in Europe and the US. Away from that, Q1 employment indicators in France and April’s  CPI/RPI/PPI in the UK is due in the morning (CPI 0.5% mom; core CPI 2.2% yoy expected), while April new home sales in the US is due in the afternoon. The May consumer confidence print for the Euro area is also due in the afternoon, while in the evening the latest FOMC meeting minutes will be released. Also worth noting is the House Foreign Affairs Committee holding a hearing to question Secretary of State Mike Pompeo regarding Trump's foreign policy priorities, and the European Commission publishing country specific recommendations for economic policy.

US Event Calendar

  • 7am: MBA Mortgage Applications, prior -2.7%
  • 9:45am: Markit US Manufacturing PMI, est. 56.5, prior 56.5; US Services PMI, est. 55, prior 54.6
  • 10am: New Home Sales, est. 679,500, prior 694,000; New Home Sales MoM, est. -2.09%, prior 4.0%
  • 2pm: FOMC Meeting Minutes
  • 2:15pm: Fed’s Kashkari Speaks in Moderated Q&A in North Dakota

DB's Jim reid concludes the overnight wrap

How time flies. Yesterday was the 5th anniversary of the start of the taper tantrum as Mr Bernanke hinted at an upcoming reduction in stimulus and created a few weeks of mini-panic. Meanwhile we’re only a few months away from the 10th anniversary of the Lehman Brothers collapse and its 6 and half years ago this week that Italy was on the brink with 10 years yields at over 7.25% and around +500bp over Bunds. Makes one feel very old.

Italy continues to grab the headlines even if yesterday was a much calmer day market wise 24 hours after the highest yields since ECB QE started. The main story was confusion surrounding who will be Italy’s next Premier, as La Repubblica reported that President Mattarella still needs time to consider the proposed candidate Giuseppe Conte  while the paper also noted that endorsement from the two populist parties for the Florence University law professor may no longer be certain and that the 5SM Party leader Di Maio may be back in running for the Premier. This morning, Bloomberg noted the President will decide on a PM as soon as today.

In government bonds yesterday, peripherals bonds outperformed with yields on Italian 10y BTPs down for the first time in three days (-5.3bp) while treasuries were unchanged and Bunds partly reversed its gains on Monday (+3.7bp). Meanwhile, 10y Gilts also rose 4.7bp in part as BOE Governor Carney told Parliament that “it made sense to take a bit of time” to assess the economic outlook in light of the soft advance GDP reading for 1Q, while noting that “it's more likely to have been temporary and idiosyncratic factors that slowed the economy”.

Over in equities, US bourses closed modestly lower following President Trump’s comments on trade and North Korea. The S&P initially traded +0.34% higher on news that China will cut import tax on passenger cars from 25% to 15%, but later reversed gains to close -0.31% as Trump noted that trade talks with China “were a start” and that he was “not really” pleased with the recent results so far. Elsewhere on next month’s scheduled summit with North Korea, he noted “there’s…a very substantial chance, it won’t work out” but added that this is “OK” and “that doesn’t mean it won’t work out over a period of time”. Meanwhile in Europe, the Stoxx 600 (+0.27%), FTSE (+0.23%) and Italy’s FTSE MIB (+0.54%) were all modestly higher while the DAX (+0.71%) led the gains as it resumed trading following Monday’s holiday.

As for today when the market isn’t fixating on Italy or North Korea the big focus will be on the flash May PMIs around the globe and the Fed minutes tonight. Overnight we’ve already had the manufacturing reading out of Japan which came in at 52.5 compared to 53.8 in April. In a couple of hours’ time it’ll be Europe’s turn and the current market consensus is for no change in the composite reading for the Euro area at 55.1. Indeed the manufacturing reading is expected to fall a very modest 0.1pts to 56.1 – although this would make it the fifth consecutive monthly decline if so and also the lowest reading since February last year – while the services reading is expected to stay at 54.7. As always with the flash print we’ll also get the data for Germany and France. Germany’s manufacturing reading is expected to also fall very modestly, by 0.2pts to 57.9 while the data in France is expected to fall a marginal 0.1pts to 53.7. Later this afternoon we’ll get the flash PMI data for the US where the manufacturing reading is expected to stay steady mom at 56.5, and the services reading nudge up 0.4pts to 55.0. So all that to look forward too.

This morning in Asia, markets are trading lower with the Nikkei (-1.08%), Hang Seng (-1.01%) and Shanghai Comp. (-0.77%) all down while the Kospi is modestly higher (+0.36%), In the US, President Trump told Reuters he will  propose “new tax cuts prior to November”, when the mid-term elections are due but did not provide more details. Elsewhere, the Lower House has approved a bill (258 to 159 vote) to give regulatory and capital relief to smaller lenders by raising the asset threshold from $50bn to $250bn before lenders face stricter oversight from the Federal Reserve.

Now recapping other markets from yesterday. The US dollar index fell for the first time in seven days (-0.07%), while the Euro dipped -0.10% and Sterling nudged up 0.04%. Elsewhere, the Turkish Lira closed -2.04% vs. the USD yesterday after Fitch noted it was concerned about the erosion of its central bank’s independence. This morning it is down a further c2% to mark another fresh record low. In commodities, WTI oil fluctuated before closing -0.21% lower while precious metals were little changed (Gold -0.11%; Silver +0.21%).

Finally we turn to some Brexit headlines. The BOE Governor Carney has told Parliament that the UK economy is up to 2ppt worse off than they would have been without Brexit, which is equivalent to £900 worse off for each British household, to which Foreign Secretary Johnson quickly refuted “it’s absolutely not the case” but did not elaborate more. Meanwhile Chancellor Hammond noted “…the future trajectory of household income…will depend in part on the quality of the deal that we negotiate as we exit the EU…” Elsewhere, the BOE’s Vlieghe seemed slightly hawkish as he sees one or two rate hikes a year for the next three years, in part as a tightening labour market is supporting wage growth.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the May Richmond Fed manufacturing index rebounded 19pts mom to an above consensus print of 16 (vs. 10 expected). In the details, the shipments and new orders indices rebounded from even weaker April readings and there were more evidence of pricing pressure with the wages component at the highest since 1997 while the prices paid index was the highest in 6 years. These broad trends on pricing pressure were also similar to readings from the NY and Philly surveys. Meanwhile in the UK, the CBI’s industrial trends total order book index fell 7pts mom to -3 in May, marking the softest reading since November 2016. Elsewhere, the April public sector net borrowing ex-banking groups was slightly lower than expected at £7.8bln (vs. £8.5bln).

Looking at the day ahead, the highlight is the May PMIs across the globe, which includes the manufacturing, services and composite prints in Europe and the US. Away from that, Q1 employment indicators in France and April’s  CPI/RPI/PPI in the UK is due in the morning (CPI 0.5% mom; core CPI 2.2% yoy expected), while April new home sales in the US is due in the afternoon. The May consumer confidence print for the Euro area is also due in the afternoon, while in the evening the latest FOMC meeting minutes will be released. Also worth noting is the House Foreign Affairs Committee holding a hearing to question Secretary of State Mike Pompeo regarding Trump's foreign policy priorities, and the European Commission publishing country specific recommendations for economic policy.


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