Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

Click here to see some testimonials from our members!

“It’s Not A Happy Start”: Second Half Opens With Sea Of Red Across Global Markets

Courtesy of ZeroHedge. View original post here.

JPMorgan's warning that the Chinese rout is far from over "as 2018 becomes 2015" proved prescient, and overnight global sentiment quickly shifted to "risk off" as soon as China opened for trading, leading to a resumption of selling first in China, then across Asia, and finally around the world, resulting in a market snapshot which this morning is another sea of red ahead of this Friday's deadline for the US-Chinese trade war, when 25% tariffs kick in on some $34 billion in Chinese exports to the US.

The underlying concerns are well known: trade-war jitters, political risk in Europe and divergence in fiscal and monetary policy and economic performance between the US and the rest of the world weighed on investors' minds.

“It’s not a happy start to the second half,” Saxo commodity head Ole Hansen said. "Trade war concerns, U.S. sanctions, Trump’s rants and political problems in Europe, as well as worries about slowing emerging-market growth are all playing their part."

Political risks dragged the euro and pound down, the Mexican peso's rally was short lived after the election of the country's first leftist president in decades, while Treasuries climbed and dollar strength again slammed emerging markets. Overnight, Mexico's Andres Manuel Lopez Obrador won a decisive victory in the Presidential election with quick count results showing he received 53.0%-53.8% of votes, while an exit poll also showed that Lopez Obrador is set to get a majority at the lower house.

Once again, it started with China, whose stocks took another battering on Monday as selling returned amid concern about a falling currency, housing curbs and the impact of trade tariffs. The Shanghai Composite Index extended last month’s 8% rout – with real estate and bank stocks heavily offered as leverage and credit exposure is under increasing pressure – sliding another 2.5% on Monday and bringing its bear market rout to -22% since the January high….

… while the yuan touched its weakest level since Oct. 3, resuming its sharpest drop since China’s August 2015 devaluation….

… after another unexpectedly sharp overnight selloff, sent the offshore Yuan down 0.6% to 6.6760 and fast approaching the 6.70 barrier.

What is curious is that the PBOC set the Yuan stronger than the expected fixing, suggesting that China is not yet using yuan depreciation as an active tool in its trade conflict with the U.S., and will likely step in to avert any disorderly decline, according to Morgan Stanley. “The PBOC could step up intervention if depreciation risk intensifies,” according to China economists at the bank, led by Robin Xing in Hong Kong. Goldman strategist on Friday also concluded that the PBOC has been "leaning against excessive depreciation in recent days." We wonder what will happen if China decides to lean in…

Adding to concerns about China, over the weekend, China's June PMI indicated weaker-than-expected manufacturing data and showed that new export orders slid into contraction, suggesting that trade war concerns are starting to seep through the Chinese economy.

Chart: Tom Orlik

It wasn't just China: trade also weakened in export powerhouse South Korea, which reported June exports which were modestly down Y/Y.

Chart: Tom Orlik

The Asian turmoil quickly spread to Europe, where nearly all members of the Stoxx Europe 600 Index retreated. Miners were the biggest losers in Europe as metals fell and West Texas oil traded near $74 a barrel after U.S. President Donald Trump called for 2 million barrels in increased Saudi production. The Stoxx 600 Banks Index fell as much as 1.3%, led by drops in Italian and Spanish lenders. The Spanish Ibex 35 Banks Index fell 2%, with all 6 members dropping. The reason: BBVA and Banco Sabadell are among Spanish companies with exposure to Mexico where leftist Andres Manuel Lopez Obrador won Sunday’s presidential elections. Separately, Deutsche Bank once again tumbled, slides as much as 3.4% to €8.91 and near its all time low, but it has since found a bid.

Italian bonds made the European party complete with BTP futures sliding again, as yields rose as much as 9bps across 2- to 10-year sectors, widening vs core bonds as risk appetite continues to sour following European open. 

Needless to say, investors are no longer enamored with Europe, which in Q2 saw the biggest quarterly ETF outflow in 2 years.

The US wasn't immune to the global rout and futures on the S&P 500, Nasdaq and Dow all dropped, with the S&P set to erase all of Friday's gains (which were far less as a result of that last hour selling rush).

There was more turmoil in FX: after rallying the most in a month Friday, the euro slipped -0.4% on Monday, erasing all earlier losses, as concern about a potential escalation in the German political crisis provides investors with another reason to fade rallies. On Monday, Merkel’s CDU and Bavarian CSU are holding last-ditch talks to reach a compromise over migration policy disputes.

On Sunday, Germany Interior Minister and CSU party leader Seehofer offered to resign, which follows a meeting over the weekend with Chancellor Merkel that Seehofer described as pointless and in which he rejected the migration deal that was negotiated at the EU summit. However, reports later stated that Seehofer is said to remain in politics if Chancellor Merkel's CDU party backs down regarding migration, while he also said he wants to avoid the collapse of Merkel's government and is said to be seeking one more discussion with the CDU. SU caucus chief Dobrindt opposed the resignation and requested an internal vote, while there were also comments from Economy Minister Altmaier who stated that the German coalition is in a serious situation.

As a result of the escalating German political crisis, the common currency dropped as much as -0.5% to touch 1.1626 day low, before paring losses. CFTC data published on June 29 shows hedge funds sold the euro for a seventh week in a row, a bearish momentum unseen in more than five years.

Some were quick to assure traders not to dump the euro: "Principally, it can be quite relevant for the euro if the political situation in Germany changes dramatically,” wrote Commerzbank FX strategist Esther Maria Reichelt. “However, for now there is little reason to doubt that all parties who might be suitable for a formation of the government support a similar economic and principally pro-European course. That means that the stability of the euro is not under threat even if the disagreements on asylum escalate further."

Similarly, the Mexican peso turned lower, reversing an early advance of 1.3%, after Mexicans elected leftist Andres Manuel Lopez Obrador as their first left-wing president in decades.

On the other hand, the dollar kicked off the second half of the year on a strong footing as global equities slid amid trade concerns, while the yuan hit a nine-month low.

The return of dollar strength led to another drop in emerging-market stocks, which gave up half of Friday’s gain.

Crude futures gap lower at the Globex reopen, pressured as markets react to a tweet from US President Trump over the weekend that he spoke with Saudi Arabia’s King Salman on raising production maybe by as much as 2mln barrels and that prices were too high which the Saudi ruler agreed with. However, the White House were quick to clarify that Saudi Arabia stated they could raise output if required and that there was no actual agreement to raising output by the said amount. In regards to this, Iran’s OPEC Governor Ardebili said on Saturday “there is no way one country could go 2mln BPD above their production allocation unless they are walking out of OPEC”. An Iranian official later stated that adjustments to the OPEC output levels would require an emergency meeting.

Elsewhere, gold (-0.3%) is subdued by a slightly firmer dollar as the yellow metal continues to be detached from the risk sentiments. Chinese iron ore futures fell almost 2% on Monday, due to a fresh increase in iron ore stocks at China’s ports, after a hat trick of positive closes last week.

Looking ahead, highlights include US mfg PMIs, US construction spending, ISM manufacturing and ECB’s Praet.

Market Snapshot

  • S&P 500 futures down 0.6% to 2,705.00
  • STOXX Europe 600 down 0.9% to 376.36
  • MXAP down 1.2% to 164.11
  • MXAPJ down 0.7% to 535.26
  • Nikkei down 2.2% to 21,811.93
  • Topix down 2.1% to 1,695.29
  • Hang Seng Index up 1.6% to 28,955.11
  • Shanghai Composite down 2.5% to 2,775.56
  • Sensex down 0.5% to 35,240.17
  • Australia S&P/ASX 200 down 0.3% to 6,177.79
  • Kospi down 2.4% to 2,271.54
  • German 10Y yield fell 0.9 bps to 0.293%
  • Euro down 0.4% to $1.1637
  • Italian 10Y yield fell 9.9 bps to 2.413%
  • Spanish 10Y yield fell 1.4 bps to 1.307%
  • Brent Futures down 1.1% to $78.39/bbl
  • Gold spot down 0.3% to $1,248.72
  • U.S. Dollar Index up 0.4% to 94.83

Top Overnight News from Bloomberg

  • Mexicans elected Lopez Obrador as their first left-wing president in decades, according to exit polls that showed him headed for a landslide victory over two business-friendly rivals
  • Fate of German Chancellor Merkel’s ruling bloc is due to be decided Monday as a coalition dispute over migration policy reaches its endgame
  • German Chancellor Angela Merkel’s Christian Democratic Union and its Bavarian sister party will hold joint talks later Monday in Berlin in an effort to broker an 11th-hour compromise after separate discussions failed to end the standoff over migration policy
  • Chinese stocks took another battering on Monday as selling resumed amid concern about a falling currency, housing curbs and the impact of trade tariffs. The Shanghai Composite Index extended last month’s 8 percent rout, while the yuan touched its weakest level since Oct. 3
  • A one-day rally in Chinese stocks fizzled out as the yuan resumed declines and data showed further signs of weakness in the economy. Purchasing manager index readings for June released Saturday showed a gauge of export orders tumbled
  • Commodity powerhouse Australia warned that rising trade protectionism will hurt global growth, adding its voice to a chorus of alarm just days before the U.S. and China slap duties on each other, risking a spiral of tit-for-tat tariffs
  • Confidence among Japan’s large manufacturers cooled after reaching a 13-year high at the end of last year. While trade tensions are casting a shadow over companies globally, big producers in Japan cited a lack of workers and the rising cost of materials as key concerns
  • After decades of pleading for easier access to the China’s car market, manufacturers saw duties on overseas imports almost halved to 15% on Sunday. But the reprieve for producers of those models is set to end in five days. For BMW AG, Tesla Inc. and other global automakers whose future is ever-more dependent on China’s burgeoning market, any gains from lower import tariffs this week will likely be short-lived — thanks to President Donald Trump’s trade war

Asian equity markets began H2 softer with the region constrained by disappointing data releases including Chinese Official & Caixin Manufacturing PMIs which both fell short of estimates, while the latest BoJ Tankan survey was mixed with headline Large Manufacturing Index also below forecasts. As such, ASX 200 (-0.3%) and Nikkei 225 (-2.2%) were lacklustre although strength in Property and Healthcare sectors kept Australia afloat for most the session, while Japan was dampened following mixed Tankan data but with a weaker JPY intiially limiting the downside. Elsewhere, Shanghai Comp. (-2.5%) was among the underperformers after both the Official and Caixin Manufacturing PMI missed estimates, while PBoC inaction resulting to a net daily drain and the absence of participants in Hong Kong for public holiday also ensured a subdued tone. Finally, 10yr JGBs were marginally higher amid the cautious risk tone in Japan and BoJ’s presence in the market, while the less than impressive BoJ tankan survey and source reports the BoJ are to revise lower its CPI forecasts at this month’s Outlook Report is also seen to likely to keep the BoJ maintaining its ultra-loose policy for a prolonged period.

Top Asian News

  • Global Automakers Prepare for ’Nightmare’ China Tariff Whiplash
  • Sentiment Sours in Asian Stocks as Trade War Hits China Exports
  • Top Iron Ore Shipper Cuts Outlook as Price Seen Back in $50s

European equities kick off the week in negative territory, albeit off lows (Eurostoxx 50 -1.0%) following the tone seen in the AsiaPac session, with sentiment also dampened by the latest developments in Germany. Over the weekend, German Interior Minister Seehofer rejected Chancellor Merkel’s deal with the EU on migration whilst also threatening to resign. Trade war woes continue to linger after the EU threatened to impose new retaliatory tariffs worth USD 300bln if the US continues with the EU auto tariffs. Financials and industrials underperform amid the uncertainty surrounding the potential fall of the German government (Interior Minister Seehofer is to meet Chancellor Merkel today) and the fall of base metals. Energy names take a hit following the recent decline in oil prices. In terms of stocks specifics, Microfocus (+5.1%) shares were lifted following reports they’re to sell their SUSE business to EQT partners for USD 2.4bln. Vedanta (+26.8%) shares spiked higher after Volcan approached the company with a buyout offer. Meanwhile, Playtech (-29.3%) shares slumped after the company lowered their guidance.

Top European News

  • UBS Makes Sweeping Changes to Europe Investment Bank Leadership
  • Brexit Banker Kids Leave Top U.K. Schools With Rare Empty Seats
  • German Banks Are Plotting a Counter-Attack Against MiFID II
  • U.K. Manufacturing Growth Holds Up in June After Subdued Quarter

In FX, the EUR has been under pressure in early EU trade, as 1.1700 held firm vs the Usd amidst reports of decent selling against vs the JPY after the cross breached 129.00 to the downside, from 128.95 to 125.80. Meanwhile, a prominent US bank has also implemented a short Eur position on unstable German political grounds and despite the prospect of SNB  intervention via the CHF around 1.1550, targeting 1.1200 with a 1.1660 stop. Back to the headline pair, 1.1623 represents 10 DMA support just below the base so far. USD - Although the Dollar has retreated from best levels vs several major counterparts the DXY remains underpinned above 94.500 with Usd/Jpy holding midway between 110.50-111.05 and the Greenback broadly firmer across the board. Sub-forecast Chinese PMIs suggest that trade wars may hit the world’s 2nd largest economy more than the US, and the YUAN continues to weaken in response if not by design. AUD/NZD - Among the G10 underperformers on the latest downturn in overall risk sentiment, and with the Aud also undermined by a slower PMI print and decline in job ads overnight, as it slips further below 0.7400 vs its US peer and pivots 1.0900 against the Kiwi that is striving to keep its head above 0.6750 vs the Usd. MXN – Off recent peaks vs the Usd, but with the Peso still  holding above 20.000 in wake of the election and convincing win for AMLO.

In commodities, oil traded lower with WTI (-0.4%) and Brent (-0.9%) pressured as markets react to a tweet from US President Trump over the weekend that he spoke with Saudi Arabia’s King Salman on raising production maybe by as much as 2mln barrels and that prices were too high which the Saudi ruler agreed with. However, the White House were quick on clarifying that Saudi Arabia stated they could raise output if required and that there was no actual agreement to raising output by the said amount. In regards to this, Iran’s OPEC Governor Ardebili said on Saturday “there is no way one country could go 2mln BPD above their production allocation unless they are walking out of OPEC”. An Iranian official later stated that adjustments to the OPEC output levels would require an emergency meeting. Amongst the weekend  comments, Saudi crude output reached a near-record 10.7mln BPD according to a survey while Russian June output reached over 11mln BPD according to the oil ministry. Libya’s NOC declared a force majeure at Hariga and Zeutina ports while weekend reports suggested around 850K BPD may be offline in the country. Elsewhere, gold (-0.3%) is subdued by a slightly firmer dollar as the yellow metal continues to be detached from the risk sentiments. Chinese iron ore futures fell almost 2% on Monday, due to a fresh increase in iron ore stocks at China’s ports, after a hat trick of positive closes last week.

Looking at today's calendar, in the US the June ISM manufacturing will also be closely watched in the afternoon. Other data due out includes May PPI and the unemployment rate reading for the Euro area. Meanwhile the ECB’s Praet is due to speak.

US Event Calendar

  • 9:45am: Markit US Manufacturing PMI, est. 54.7, prior 54.6
  • 10am: Construction Spending MoM, est. 0.5%, prior 1.8%
  • 10am: ISM Manufacturing, est. 58.5, prior 58.7

    • 10am: ISM Employment, prior 56.3
    • 10am: ISM Prices Paid, est. 74.8, prior 79.5
    • 10am: ISM New Orders, prior 63.7

DB's Jim Reid concludes the overnight wrap

Welcome to the second half of the year. For all the fire and fury in H1, the S&P 500 continues to be the star core equity market performer but at +2.6% in total return terms, it has struggled to maintain its flying start where it was +5.7% alone in January. The large majority of equity markets are lower in 2018 with EM leading the way as trade wars and higher US yields and a firmer dollar take their toll. Actually June saw the Renminbi (-3.3%) see its worst month since FX markets were established in China back in 1994. On the other hand the best performer in our global suite of assets in June, Q2 and YTD has been Oil.

This weekend the main stories have concerned Mrs Merkel, US/China tariffs and a Trump tweet on Saudi Oil production. The other main story is that one of Russia, Croatia, Sweden, Switzerland, Colombia or England will be in the World Cup final in just under 2 weeks!! Expect the low expectations previously seen in England to reach fever pitch optimism before tomorrow’s game!

Firstly on Germany, according to the DPA, the CSU party leader Mr Seehofer has offered his resignation as German interior minister following policy differences on migration issues with Merkel, but said he’ll stay in politics if she backs down. The Euro initially traded higher but later reversed gains to be -0.2% lower this morning. Looking ahead, both the CSU and CDU are expected to reconvene for more meetings today, with Mr Seehofer telling reporters in the early hours of Monday morning that “all other steps will be decided after the discussion” with Mrs Merkel’s Party. So it could still be a big day for German politics and the survival of Germany’s government.

Moving onto oil, which rose 8.1% last week (WTI) to a fresh c3.5 year high. Over the weekend Potus indicated mixed messages on oil on social media and in a live interview. This morning, WTI oil is trading -1.2% lower.

In terms of trade tensions, Canada’s retaliatory tariffs on $12.6bn worth of US goods went into effect yesterday. The country has imposed a 25% tariff on metal products and a 10% tariff on 250 other goods. The Canadian Foreign minister Freeland noted “we’ll not escalate and we’ll not back down”. Meanwhile, the US treasury department is also due to release its report outlining investment restrictions on Chinese investments in certain US industries soon.

This morning in Asia, markets are trading lower with the Nikkei (-1.35%), Kospi (-1.57%) and Shanghai Comp. (-1.13%) all down while the Hang Seng is closed for holiday. In Mexico, exit polls by El Financiero showed Lopez Obrador winning the  election with 49% of the votes where he will be the country’s first left wing President in c4 decades (as per Reuters). The Mexican Peso is trading c0.9% higher this morning. Datawise, over the weekend China’s June manufacturing PMI slowed 0.4pt mom to 51.5 (vs. 51.6 expected), but this was partly offset by a stronger non-manufacturing PMI print of 55, leading to a still solid composite PMI of 54.4 (-0.2pt mom). Earlier this morning, the June Caixin China manufacturing PMI also edged down 0.1pt to 51 (vs. 51.1 expected).

As for this week, it will be a disjointed one as the US celebrates AMEXIT day on Wednesday with markets closing early tomorrow ahead of this. Around this the data highlights are today’s final global PMIs/US ISM, Wednesday’s services equivalent in Europe (Thursday in US) and then Friday’s US payrolls. Current consensus is for a 195k print (May was 223k). Average hourly earnings is expected to come in at a solid +0.3% mom which, if realised, would push the annual rate up one-tenth to +2.8% yoy and back to the January highs just before the vol shock. We also have the latest Fed minutes on Thursday where more details should emerge about the hawkish hike seen a few weeks back. Elsewhere, outside of this weekend’s trade stories, Friday is when the US is scheduled to impose tariffs on $34bn of Chinese goods. So plenty of time for some more trade headlines.

As for markets back on Friday. European equities were all higher (Stoxx 600 +0.81%; DAX +1.06%), boosted by a rebound in tech stocks and a lift in sentiment as EU leaders reached a preliminary agreement on migration issues. In the US, the S&P also traded c1% higher initially, but fell late in the session following an Axios report which suggested President Trump was keen for the US to withdraw from the WTO. Later on, White House officials denied the story, but the damage was partly done with the S&P only closing +0.08% higher.

Meanwhile European bond yields were broadly lower, in part as Reuters reported that the ECB is considering recycling more of its maturing assets into longer-term bonds. Across the region, the 10y yields on Bunds (-1.7bp), OATs (-4bp) and Italian BTPs (-10.1bp) were all down, while treasuries (+2.4bp) and Gilts (+1.5bp) nudged higher. In FX, the US dollar index weakened for the first time in four days (-0.88%) while the Euro and Sterling both jumped +0.99%.

Before we take a look at today’s calendar, we wrap up with other data releases from Friday. In the US, the May core PCE was firmer than expected at 0.213% mom, leading to an annual growth of 2% yoy (vs. 1.9% expected) – the highest since April 2012. The three-month and six-month annualized rates of inflation also nudged up to 2.2% and 2.3% saar respectively. Meanwhile the May personal income growth was in line at 0.4% mom while personal spending was weaker than expected at 0.2% mom (vs. 0.4% expected). Elsewhere, the June Chicago PMI was above market (64.1 vs. 60 expected) while the final reading of the June University of Michigan consumer confidence index was revised down by 1.1pt to 98.2. Following the above, the Atlanta Fed’s estimate of Q2 GDP growth was cut by seven-tenths to 3.8% saar.

In Europe, the Euro area’s core June CPI edged down 0.1ppt mom to an in line print of 1% yoy while France’s CPI was also in line at 2.4% yoy. In Germany, the June unemployment rate was in line at 5.2% while the May retail sales disappointed at -1.6% mom (vs. 1.9% expected). Over in the UK, the final reading of the 1Q GDP was unchanged at 1.2% yoy. Elsewhere, the May mortgage approvals was the highest since January (64.5k vs. 62.3k expected) while the net lending on secured dwellings also beat at £3.9bn (vs. £3.7bn expected).

Looking at today's calendar, the flash June manufacturing PMIs for Spain, Italy and the UK along with final June manufacturing PMI reads for France, Germany, the Eurozone and the US are due. In the US the June ISM manufacturing will also be closely watched in the afternoon. Other data due out includes May PPI and the unemployment rate reading for the Euro area. Meanwhile the ECB’s Praet is due to speak.


Do you know someone who would benefit from this information? We can send your friend a strictly confidential, one-time email telling them about this information. Your privacy and your friend's privacy is your business... no spam! Click here and tell a friend!





You must be logged in to make a comment.
You can sign up for a membership or get a FREE Daily News membership or log in

Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

Click here to see some testimonials from our members!