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S&P Futures Drift Higher Unaware That 2s10s Inverts Most Since Financial Crisis

Courtesy of ZeroHedge View original post here.

In what has been a relatively quiet session, US equity futures and European stocks first drifted lower as trade war concerns dominated the early part of the trading session when China’s Communist Party flagship newspaper, People’s Daily, said the U.S. shouldn’t misjudge the nation’s ability and determination to firmly retaliate if America follows through with higher tariffs, before rebounding following positive auto-relative news out of China.

US equity futures faded drifted lower into the European open, erasing much of the last minute burst higher noted at the Monday close…

… before climbing today’s wall of worry, which as Robeko Jeroen Blokland showed, consisted of stumbling Italian coalition, German economic fears and geopolitical concerns about Iran.

Europe’s Stoxx 600 erased a decline of as much as 0.3% as traders shrugged off earlier data showed Germany was on the brink of recession as final Q2 GDP printed at -0.1%…

… with carmakers surging after Xinhua reported that China will ease car-purchase restrictions, and “actively” support purchases of new-energy vehicles in some cities. According to the report, China is considering relaxing and removing restrictions on auto purchases, looking through the full release it appears to be on the domestic front referring to restrictions around the circulation of used cars.

The Stoxx 600 autos rallied 1.1% for a second daily advance, with Porsche, Fiat Chrysler and Volkswagen up 1.3% or more.  Suppliers gaining include Pirelli +1.6%, Valeo +1.5%, Hella +1%. The Stoxx 600 traded up 0.3% last, with carmakers as top performers, offsetting declines in media and insurance shares.

Earlier in the session, Asian stocks advanced, led by technology and consumer discretionary firms, after Trump softened his tone toward China, allaying fears for a further escalation of trade tensions. Most markets in the region were up, with China and Indonesia leading gains. The Topix added 0.8%, with technology companies and automakers among the biggest boosts. The Shanghai Composite Index climbed 1.4%, nearly erasing Monday losses, as 360 Security Technology and large financial firms offered strong support. However, as Bloomberg notes, Chinese companies have dialed back dollar-denominated junk bond sales just as demand for the riskier assets weakens. India’s Sensex rose 0.2%, heading for a third day of gains, with ICICI Bank and Larsen & Toubro advancing. The Indian government is deciding whether to use a 1.76 trillion-rupee ($24.4 billion) windfall from the central bank to reduce its borrowing or stimulate the economy.

In Hong Kong, Chief Executive Carrie Lam said her government can handle unrest without assistance from Chinese forces, and still wants to hold talks with protesters despite a flare-up in violence.

But the biggest risk which algos have yet to notice is that the 2s10s curve inverted as much as -2.5bps this morning, the most inverted the curve has been since the financial crisis.

The reason behind today’s inversion: the 10Y yield drifted lower by 3bps to 1.505% while the 2Y was down just 1.3bps pushing the yield curve to the biggest inversion in 12 years. Meanwhile, German Bunds settled down after a few wobbles alongside Gilts and US Treasuries with latest Chinese commentary on trade still suggesting that relations are strained and tetchy compared to President Trump’s more cordial view of the current situation. However, BTPs have pulled back quite sharply from just a few ticks away from 144.00 towards 143.00 on more political party bickering in Rome and another delayed meeting before President Mattarella finally calls time and has to defer to another election.

While futures levitated higher, it was on zero volumes as investors remained cautious over this week’s dialing down of trade tensions as fresh evidence emerged that increased protectionism is weighing more on the global economy – and to blame for Germany’s deepening manufacturing recession. Sentiment remains fragile, according to Bloomberg, as investors remember that previous periods of trade calm have been quickly ended by surprise escalations.

“August may be coming to a close, but volatility does not appear to be going anywhere,” Erik Knutzen, chief investment officer, multi-asset class, at Neuberger Berman, said in a note Tuesday. “As the late cycle continues, markets will likely remain sensitive to the daily news flow, with many letting headlines drive short-term decisions.”

In FX, the yen gained the most among G10 currencies as skepticism sets in about the prospect of any future U.S.-China trade negotiations. Haven assets rose after China’s Communist Party flagship newspaper People’s Daily says the U.S. shouldn’t misjudge the nation’s ability and determination to firmly retaliate if America follows through with higher tariffs. The Bloomberg Dollar Spot Index extended losses after the London open. The euro gained with Italian bonds on hopes the country could avert fresh elections despite reports that negotiations had hit a snag, while the pound rose for a third day in four as the opposition Labour party stepped up efforts to stave off a no-deal Brexit.

Elsewhere, oil futures edged higher after Trump struck a more conciliatory tone on the trade war with China. Gold pushed above $1,530 an ounce.

Market Snapshot

  • S&P 500 futures down 0.1% to 2,879.75
  • STOXX Europe 600 down 0.2% to 370.61
  • German 10Y yield fell 0.7 bps to -0.673%
  • MXAP up 0.5% to 150.95
  • MXAPJ up 0.3% to 486.61
  • Nikkei up 1% to 20,456.08
  • Topix up 0.8% to 1,489.69
  • Hang Seng Index down 0.06% to 25,664.07
  • Shanghai Composite up 1.4% to 2,902.19
  • Sensex up 0.2% to 37,568.93
  • Australia S&P/ASX 200 up 0.5% to 6,471.22
  • Kospi up 0.4% to 1,924.60
  • Euro up 0.05% to $1.1108
  • Italian 10Y yield rose 0.9 bps to 0.978%
  • Spanish 10Y yield fell 2.2 bps to 0.111%
  • Brent futures up 0.7% to $59.12/bbl
  • Gold spot up 0.2% to $1,530.84
  • U.S. Dollar Index down 0.2% to 97.93

Top Overnight News from Bloomberg

  • A collapse in exports pushed Europe’s largest economy to the brink of recession in the second quarter, in a sign that an increasingly hostile trade war between the U.S. and China is at least partially to blame for Germany’s deepening manufacturing malaise
  • Trump left the G-7 summit on Monday taking a softer tone toward China, just days after spooking financial markets with another escalation in their trade war
  • Hong Kong’s leader said her government can handle unrest without assistance from Chinese forces, and still wants to hold talks with protesters despite a flare up in violence
  • Iran’s top officials all but ruled out talks with the U.S. a day after President Donald Trump extended his most expansive offer yet to the Islamic Republic. The U.S. must lift sanctions on Iran if it wants to negotiate, President Hassan Rouhani said on Tuesday

Asian stock markets were higher as they followed suit to the rebound across their global peers after US President Trump provided a more conciliatory tone at the G7 regarding US-China trade, while he was also optimistic about reaching a deal with EU and was open to meeting Iran President Rouhani under the right circumstances. ASX 200 (+0.5%) was led by the tech sector amid trade hopes and as retailers cheered encouraging earnings from Wesfarmers, while Nikkei 225 (+1.0%) rode on the currency wave and eyed a reclaim of the 20.5k level. Shanghai Comp. (+1.4%) was underpinned after US President Trump’s softer tone on China in which he suggested that negotiations will begin shortly and thinks a deal will be reached. Furthermore, the PBoC injected liquidity through reverse repos and Chinese Industrial Profits returned to growth, although Hang Seng (Unch.) lagged amid a deluge of earnings, ongoing unrest and continued contraction in both Imports and Exports. Finally, 10yr JGBs weakened amid the improvement in risk sentiment and as prices homed in on the 155.00 level to the downside, although it eventually found some mild support following improved demand at the enhanced liquidity auction for super-long JGBs.

Top Asian News

  • India Is Said to Mull Cutting Borrowings After Record Windfall
  • Hedge Funds Betting on Yen Strength Have One Implacable Foe
  • Iran Spurns U.S. Talks as Rouhani Says No to Photo-Op With Trump

European equities are mixed [Eurostoxx 50 +0.2%] following on from a mostly higher Asia-Pac handover as optimism surrounding President Trump’s conciliatory tone somewhat waned. Italy’s FTSE MIB (+1.0%) outperforms its peers as the Italian political landscape seems to be shifting away from a snap election, with a PD/5SM coalition seemingly materialising, albeit some sticking points remain around Conte’s role. Sectors are also mixed with the energy sector outperforming amid price action in the oil complex, whilst consumer discretionary follows a close second amid reports that China considers relaxing and removing restrictions on auto purchases, albeit it appears to be on the domestic front referring to restrictions around the circulation of used cars. Nonetheless, the European car and auto supplier index rose 1.0% amid hopes of spurred activity in China. In terms if individual movers, G4S (+1.9%) and E.ON (+1.5%) shares are supported by positive broker moves at RBC and Barclays respectively. Also of note, US judge ruled against Johnson & Johnson (JNJ) in a landmark opioid case in Oklahoma. JNJ have been ordered to pay USD 572mln; however, the fine is less than investors had feared it may be, thus the Co. are +1.9% in the pre-market.

Top European News

  • Weidmann Revisits Dr. No Stance as ECB Stimulus Decision Nears
  • Siemens, GM Fuel Bond-Sales Rebound as Market Wakes After Lull
  • In Switzerland, the Trade War Is Mixing Up a Painful Cocktail
  • Norway’s $1 Trillion Wealth Fund Wants a Bigger Bite of Big Tech

In FX, not quite all change down under, but there has been shift in cross-currents to the detriment of the Aussie vs its Antipodean peer with Aud/Nzd back under 1.0600 and Aud/Usd slipping back below 0.6750. Comments from RBA’s Debelle overnight about the potential for further Aussie depreciation are weighing alongside guidance suggesting that other policy options would have to be mulled if the OCR was lowered to 0.5% (from 1% at present) and more stimulus is needed. Meanwhile, China’s Foreign Ministry continues to deny reports that calls were made to US trade negotiators over the weekend and maintains that Beijing will respond to additional US tariffs, but Nzd/Usd is holding up better between 0.6397-61.

  • JPY/GBP/EUR – All firmer vs the Dollar as the DXY loses grip of the 98.000 handle again and Yen retains an underlying safe-haven bid above 106.00 where decent option expiries reside (1.2 bn) as a counterweight to similar size interest at 105.00 (1.1 bn). Meanwhile, Cable is rebounding from the low 1.2200 area to 1.2250+ and Eur/Gbp has retreated from just shy of 0.9100 as Brexit deal hopes vie with expectations that Italy could be on the verge of forming a new Government coalition and avoid a snap election. However, talks between the 5SM and PD to that end are contingent on the former party’s insistence that PM Conte is reinstalled and Eur/Usd appears reluctant to rally too far from the 1.1100 mark in advance.
  • CAD/CHF – The Loonie and Franc are narrowly mixed against the Greenback, with the former recovering from recent lows and meandering between 1.3257-28 amidst firmer crude prices and technical resistance providing support vs expiries forming resistance (1.3260 Fib and 1.3 bn at the 1.3200 strike respectively). Conversely, Usd/Chf is back up around 0.9800 and Eur/Chf is closer to 1.0900 than 1.0850 in wake of latest weekly updates showing record high Swiss sight deposits.
  • SEK – The Swedish Krona is outperforming on the back of supportive data in the form of household spending and trade over mixed PPI, with Eur/Sek down around 10.7000 vs 10.7550+ at one stage, while Eur/NOK straddles 10.0000 in tighter parameters.
  • EM – The steady rise in official Usd/Cny fixes continues, but the on-shore and off-shore Yuans are still trading considerably weaker than the official rate despite Chinese bank intervention to calibrate the declines. Indeed, the former closed at 7.1670 compared to 7.0810 and Usd/Cnh is currently around 7.1725 even though reports are circulating that China may relax and/or remove restrictions on auto purchases.

In commodities, WTI and Brent futures have come off worst levels but remain in largely side-ways trade with little by way of catalysts to influence price action thus far. The benchmarks have been fluctuating on either side of 54/bbl and 59/bbl respectively throughout most of the session after finding bases at 53.60/bbl and 58.60/bbl. Ahead of the 12th September JMMC meeting, the committee noted that healthy oil demand and slowing global oil inventory growth should lead to significant draws in the second half of this year. The JMMC also noted that average July compliance among members stood at 159%, +22ppts M/M. Looking further ahead, the committee notes that the forecast for oil market fundamentals by major forecasters remains robust in 2019 and 2020. Elsewhere, gold prices have retreated from overnight highs but remain comfortably above the 1500/oz mark with little news-flow to sway prices. Copper posts mild gains, albeit more on the back of a slightly softer Buck. Finally, Chinese steel fell in excess of 3%, declining the most since November amid fears of weakening demand.

DB’s Jim Reid, who is back from vacation, concludes the overnight wrap

So first day back in two and a half weeks after a lovely holiday in the Alps. It’s nice that the first thing I do in the mornings again now is the EMR and all the overnight surprises that brings rather than double nappy duty and all the nighttime surprises that brings. Please don’t tell my wife but the best moment of my time off was undoubtedly the climax of the third test match of the Ashes two days ago. As a global daily I’d imagine 80-90% of the readers would have been blissfully unaware of this greatest English Ashes cricketing victory of all time, only 6 weeks after the previous greatest game of all time where England won the World Cup. It truly is a majestic summer for cricket in England in spite of the frailties of our team.

The frailties of markets have been exposed in my absence led by the deepening trade war, and the US yield curve inversion claiming its final and in my opinion most important victim – namely 2s10s. Given there hasn’t been a single lead indicator as good as the yield curve at predicting US downturns in the past 70 years, then the inversion has to be taken very seriously. My views on this have been well documented but feel free to use “ Yield Curve 101 ” from last year for more on this.

Turning to yesterday’s news now. The trade war again drove market action, this time in a supportive way. President Trump told reporters that “China called last night our top trade people and said let’s get back to the table.” Though no one in the US administration could offer specifics on the calls, and the Chinese Foreign Ministry did not confirm them, the change in tone was enough to push risk assets higher. Trump said that “we’re having meaningful talks, much more meaningful than I would say at any time” and also predicted “we’re going to make a deal.” This apparent optimism helped the S&P 500 to end +1.12% higher, while the NASDAQ and DOW gained +1.32% and +1.05%, respectively. Before Trump’s remarks, S&P 500 futures had opened -1.58% lower, in their first trading since the US increased tariffs on Friday, on top of the -2.58% drop from Friday.

To quickly recap that yo-yoing trade action from the end of last week now for those who have also been on holidays or have understandably struggled to keep up. Markets were pressured overnight on Thursday as China expanded tariffs on another $75 billion of imports from the US, in retaliation for the US’s announced tariffs earlier this month. Those duties will be at 5-10% and will take effect on either 1 September or 15 December, depending on the product, thus mirroring the US’s timetable. President Trump responded by escalating the trade war even further, first saying that the US “would be far better off without” China and then declaring “our great American companies are hereby ordered to immediately start looking for an alternative to China.” The S&P 500 dropped -2.58% on Friday, with semiconductor stocks, who disproportionately rely on Chinese supply chains, down -4.36%. After markets closed, Trump announced a suite of across-the-board tariff hikes on China, taking the existing set of taxed products from a rate of 25% to 30% and increasing the rate on the duties due later this year from 10% to 15%. So most of the commentary over the weekend was that yesterday was going to be horrible for markets. However Mr Trump made his much more positive trade comments three minutes before Europe opened, completely changing the complexion of the day.

Eventually the STOXX 600 ended -0.02% lower, and with London closed, trading volumes were 66% below normal. Other European indexes were similarly muted, though bank stocks did gain +1.00%. Moves in bonds were also subdued, with Bund yields rising +0.9bps and BTPs up +0.5bps. Treasury yields rose slightly, up +0.3bps to 1.54% although 2s10s stayed marginally inverted. Cash HY credit spreads were -6bps tighter in the US but flat in Europe with most London traders out. The dollar rallied +0.45%, appreciating against both DM and EM currencies, while gold gained +0.16% to a fresh six-year high of $1,529.

This morning in Asia, markets are following Wall Street’s lead with the Nikkei (+1.25%), Shanghai Comp (+1.68%), Kospi (+0.71%) and Hang Seng (+0.10%) all up. In FX, the Japanese yen is trading up +0.44% this morning while the Chinese onshore yuan is trading down -0.13% to 7.1603. Elsewhere, futures on the S&P 500 are trading flattish while WTI is up +0.65%. In terms of overnight data releases Japan’s July services PPI came in one tenth lower than consensus at +0.5% yoy.

We also saw some more trade headlines overnight with China’s People’s Daily saying in a commentary today that the US shouldn’t misjudge China’s ability and determination to firmly retaliate if the US follows through with higher tariffs while adding that anyone who wants to use maximum pressure to force China to accept unreasonable demands is doomed to fail. The commentary also added that, facing maximum pressure from the US, China maintains a rational and measured attitude, and will never cave on major matters of principle.

As for economic data, the highlight was the durables goods figures from the US. While the headline measure rose +2.1% mom compared to expectations for 1.2%, the more important core orders rose only 0.4%. That beat expectations for 0.0%, but the prior month was revised down by 0.6pp, leaving the overall trend roughly flat and taking the yoy figure to -0.5%, its first negative reading since November 2016. Core shipments, a direct input into the GDP figures, fell -0.7% mom. That will likely drag down third quarter GDP trackers a touch. In Europe, the only major data release was the German IFO survey, which fell to 94.3 from 95.7. Based on the historical link between the survey and GDP growth, that print would be equal to a contraction of -0.6% qoq. Our economists are not that bearish, but they do expect Germany to enter a technical recession this quarter.

Data releases for the day includes Germany’s final Q2 GDP and France’s August confidence indicators. Meanwhile in the US, we get the Q2 house price index, June FHFA house price index and S&P CoreLogic house price index along with the August Richmond Fed manufacturing index and Conference board confidence indicators.


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