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Futures Slide As China, Brexit Optimism Fizzles

Courtesy of ZeroHedge View original post here.

European equities opened lower and US equity futures dropped as China threatened unspecified "strong countermeasures" if the US Congress enacts legislation supporting Hong Kong protesters, in a sign of the deepening strain between the world’s two largest economies, crippling optimism for a US-China trade deal, even as investors awaited the next batch of major corporate earnings, although Europe's Stoxx 600 pared its decline, as gains in technology shares offset drops miners.

In the US, S&P index futures fell a day after the S&P 500 index closed just shy of record highs, after China threatened to retaliate if the U.S. Congress passes a bill offering support to pro-democracy protesters in Hong Kong. The U.S. House passed legislation to require an annual review of whether Hong Kong is sufficiently autonomous from Beijing to justify its special trading status under American law. In the city itself, Chief Executive Carrie Lam announced housing initiatives that boosted property and finance stocks.

Following China's angry response, stocks dipped in Shanghai and the yuan weakened. A dollar gauge was steady as Treasuries and most core European bonds gained.

Meanwhile, after a torrid 3-day rally, the pound retreated off a five-month highs on Wednesday as the chance of an imminent Brexit deal appeared to fade as the EU and Britain resumed talks in Brussels to avert a disorderly Brexit before an EU summit on Thursday and Friday.

Hopes of a Brexit breakthrough lifted markets on Tuesday, but investors turned more cautious stance after looking for a deal during the night that never came. “Most of the good news that could have been anticipated has been priced in, and now there’s caution it seems on whether we get a deal today or not,” said Kallum Pickering, senior economist at Berenberg. The pound fluctuated against the dollar with investors trading every headline, sending GBP volatility to levels not seen since the 2016 June Brexit referendum.

The pound had strengthened by close to 5% over the past week as investors rushed to reprice the prospect of a last-minute Brexit deal before the Oct. 31 deadline.

For those following the impossible twists and turns in Brexit here is a brief recap of some of the key overnight events via RanSquawk:

  • EU Brexit Negotiator Barnier told EU Commissioners he is optimistic of clinching a deal today, could go down the wire; VAT has emerged as a last minute problem, alongside concerns over "level playing field" provisions.
  • EU source states there is now not enough time to formally sign a Brexit deal at tomorrows summit, though there can still be a political 'yes' after-which EU/UK will need to return to finalise this., Express' Barnes.
  • EU said to see a Brexit deal as impossible unless the UK moves; talks have reached an impasse amid DUP resistance according to sources adding the fate of a deal now hinges on the UK, according to sources.
  • Chances of a Brexit deal are low, DUP seem unlikely to support anything that is negotiable, according to ITV's Peston citing a government source. Additionally, UK Official says the Government are downbeat on the prospect of a Brexit deal, stating the DUP are holding up progress and currently the chances of a deal are low
  • A large split reportedly opened up among Tory Eurosceptics whether to back PM Johnson's Brexit plan with some in the ERG supporting it, whilst others spoke out against it, the Sun reported. DUP said gaps remain before it will support any fresh Brexit agreement following meeting with PM Johnson and reportedly will not back a Brexit deal if UK PM Johnson makes more concessions to the EU according to a source. However, reports later noted the DUP was said to be asking for billions for Northern Ireland for them to accept PM Johnson's deal. UK PM Johnson is to brief his cabinet at 1600BST today, prior to a scheduled 1922 Committee meeting at approx.19:30BST.

The Hong Kong crisis and Brexit doubts have pushed geopolitical risks back to the forefront for investors after positive earnings from corporate heavyweights including JPMorgan and Johnson & Johnson boosted spirits on Tuesday.

Earlier, shares rose in Asia. MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.5%, advancing for a fourth day, led by health-care firms, as China made a surprise $28 billion cash injection into its financial system and Hong Kong unveiled measures to bolster growth. Most markets in the region were up, with Australia and South Korea leading gains. The Topix climbed 0.7%, driven by Toyota Motor and Fanuc. China, however, faded the regional optimism as the Shanghai Composite Index reversed earlier gains to close 0.4% lower, as Kweichow Moutai and Longi Green Energy Technology weighed on the gauge after quarterly results. China threatened to retaliate if the U.S. Congress passes a bill that would require an annual review of whether Hong Kong is sufficiently autonomous to justify its special trading status. India’s Sensex fluctuated after rising for three days, as Housing Development Finance gained and ITC retreated. The nation’s stocks will see further gains in the coming months under an accommodative policy-rate environment, analysts at Credit Suisse Wealth Management India wrote in a note

"Even though we are most optimistic that a deal does happen, we don’t think the most likely outcome is that it happens by October 31, so you would be looking at some form of extension and potentially elections," said, Andrew Sheets, chief cross asset strategist at Morgan Stanley. Third-quarter earnings are expected to show an overall decline in earnings, which could also weigh on morale, Sheets said. Morgan Stanley had a below-consensus view on how companies would fare this quarter, he said.

Meanwhile, structural concerns remain with Europe’s companies struggling with uncertainties ranging from Brexit and the U.S.-China trade war to Germany’s manufacturing recession. Companies listed on the STOXX 600 index are now expected to report a decline in third-quarter earnings of as much as 3.7%, worse than the 3% expected a week ago, according to I/B/E/S data from Refinitiv.

In emerging markets, Turkey’s Halkbank saw its shares and bonds plunge after U.S. prosecutors charged the state-owned lender with taking part in a multibillion-dollar scheme to evade U.S. sanctions on Iran. A day earlier, Washington imposed sanctions on Turkish officials, raised tariffs and halted trade talks after Turkey invaded northeastern Syria in a campaign again Kurdish fighters. Before Turkish markets opened, authorities banned short selling on seven large Turkish bank stocks, including Halkbank. Selling shares in the banks only to buy them later in the session was also banned, authorities said.

In geopolitics, the Trump administration said that China's Cosco tankers carrying Iranian oil that shut off transponders are engaging in "dangerous behavior", according to senior US officials. Eslewhere, US Senator Graham said he will introduce a bill on Thursday sanctioning Turkey for Syria incursion and that US prosecutors charged Turkey's Halkbank in regards to alleged Iran sanctions violations. In response, Turkey President Erdogan says he will evaluate whether to visit the US next month, after meeting US delegation in Turkey this week.

In commodities, Brent crude shed about 0.1 cent to $58.66 a barrel. U.S. crude rose 10 cents to $52.91 after falling the day before over fears the trade war would keep squeezing the global economy.

Looking at the day ahead, this morning data releases include September new car registrations for the EU, September inflation data in the UK and for the Euro Area, while this afternoon in the US the big release is the September retail sales report. Also out this afternoon in the US is the October NAHB housing market index and August business inventories, along with the Fed’s Beige Book. It’s also another busy day for central bank speakers with the Fed’s Evans and Brainard, ECB’s Knot, Lane and Villeroy, and BoE’s Carney all due to speak. Earnings wise the highlights are Bank of America, IBM and Netflix.

Market Snapshot

  • S&P 500 futures down 0.3% to 2,987.50
  • STOXX Europe 600 down 0.3% to 392.79
  • MXAP up 0.6% to 159.71
  • MXAPJ up 0.5% to 512.51
  • Nikkei up 1.2% to 22,472.92
  • Topix up 0.7% to 1,631.51
  • Hang Seng Index up 0.6% to 26,664.28
  • Shanghai Composite down 0.4% to 2,978.71
  • Sensex down 0.2% to 38,441.68
  • Australia S&P/ASX 200 up 1.3% to 6,736.54
  • Kospi up 0.7% to 2,082.83
  • Brent futures down 0.4% to $58.50/bbl
  • Gold spot up 0.2% to $1,484.44
  • U.S. Dollar Index up 0.1% to 98.36
  • German 10Y yield unchanged at -0.418%
  • Euro up 0.03% to $1.1036
  • Italian 10Y yield rose 2.4 bps to 0.596%
  • Spanish 10Y yield rose 0.6 bps to 0.233%

Top Overnight News

  • U.K. and European Union officials edged closer to a last-minute Brexit deal — but it risks being jeopardized by Prime Minister Boris Johnson’s Northern Irish allies.
  • China threatened unspecified “strong countermeasures” if the U.S. Congress enacts legislation supporting Hong Kong protesters, in a sign of the deepening strain between the world’s two largest economies as they attempt to seal a trade deal.
  • Democratic presidential candidates treated Elizabeth Warren like a front-runner in the fourth debate Tuesday, ripping into the progressive contender on her sincerity and poking holes in her signature policy plans to provide health care for all and tax the rich
  • Hong Kong’s legislature adjourned shortly after Chief Executive Carrie Lam began her annual policy address on Wednesday, as opposition lawmakers repeatedly shouted protest slogans
  • Reserve Bank of New Zealand Deputy Governor Geoff Bascand said there’s a reasonable chance of another cut in interest rates to stimulate growth and inflation.
  • The German political class is preparing itself to deliver bold fiscal stimulus if the economy needs it. Lawmakers from Merkel’s Christian Democrat-led group have been among the most crucial opponents of finance ministry plans to respond to an economic hit and their stance is beginning to soften, according to two people familiar with party discussions.
  • One of London’s top money managers, responsible for overseeing billions of pounds of assets at M&G Prudential Plc, is alleged to have sexually harassed female colleagues over several years.
  • The U.S. brought a criminal case against one of Turkey’s largest banks for aiding a scheme to evade sanctions against Iran, a move that carries political overtones as tensions build over Turkey’s military incursions in Syria

Asian equity markets traded mostly higher after taking impetus from the gains across global peers which were spurred by Brexit-related hopes on reports negotiators were closing in on a draft Brexit deal and as several large US banks kicked off a predominantly strong start to Q3 earnings season. ASX 200 (+1.3%) was led by Consumer Staples although commodity names lagged especially the gold producers due to recent losses in the complex and with Rio Tinto choppy despite strong Q3 iron ore shipment updates. Nikkei 225 (+1.2%) rose to a fresh YTD high and Chinese markets also initially conformed to the upbeat tone helped by strong loans and financing data, as well as the PBoC injection of CNY 200bln through its Medium-term Lending Facility, although the gains in Hang Seng (+0.6%) and Shanghai Comp. (-0.4%) were short-lived/trimmed as China urged US lawmakers to stop interfering and threatened to retaliate with strong measures after the US House passed a bill aimed at supporting the Hong Kong protests. Finally, 10yr JGBs were lower as they tracked the declines in T-notes with safe-haven demand subdued by the rally in stocks and with the BoJ also only in the market for T-bills.

Top Asian News

  • Hong Kong Helps First Home Buyers as Inequality Fuels Unrest
  • Huawei Defies U.S. Ban With Torrid Growth in Smartphone Sales
  • Turkey Bans Short-Selling in Top Banks as U.S. Indicts Halkbank
  • Latitude Financial Shelves Australia’s Biggest IPO of 2019

Major European bourses are flat (Euro Stoxx 50 +0.1%) in what has been a choppy session thus far, as global equities consolidate following yesterday’s rally, spurred by increasing hopes that a Brexit deal may soon be struck. Given the associated rally in Sterling since the start of the week, the FTSE 100 (-0.1%) modestly underperforms. Looking ahead, traders will be eyeing earnings from US heavy weights Netflix, IBM, Bank of America and PayPal, US Retail sales data and a slate of Fed, ECB and BoE speak. In terms of the sectors; Materials (-0.8%) and Financials (-0.4%) are laggards, with the former pressured by a decline in base metal prices and a fall in yields (as bonds rebound off yesterday’s lows) pressuring the former. Conversely, Health Care (+0.5%) is an outperformer, with Roche (+0.4%) providing support after solid earnings. In terms of other notable movers; Asos (+20.1%) shares shot higher at the open after strong earnings; the Co. reported pretax earnings and revenue that exceeded forecasts. Meanwhile, disappointing numbers kept shares of ASML (-0.6%), TomTom (-5.0%) and Wacker Chemie (-1.4%) on the back foot. Elsewhere, Infineon (-1.4%) shares were under pressure following a broker downgrade at SocGen.

Top European News

  • European Car Sales Jump Masks Gloomy Outlook for Industry
  • U.K. Inflation Holds Below BOE Target as Fuel Costs Fall
  • Roche Boosts Outlook for Third Time as New Drugs Surge
  • Santander Follows Goldman Sachs With Bet on German Fintechs

In FX, the Pound’s almost interminable and total dependence on Brexit developments continues, with only a token nod to mixed/softer elements via UK CPI and PPI metrics, before returning to headline and screen watch amidst dwindling hopes that a deal can be found in time for the looming ‘deadline’. In short, prospects of a compromise on the Irish backstop and compatible customs arrange for the border looks set to be dashed at the final hour by ongoing DUP resistance, and in stark contrast to the mood late yesterday when negotiations were said to be close to draft stage. Accordingly, Cable has reversed further from around 1.2800 to just above 1.2650 before picking up again and Eur/Gbp rebounded to circa 0.8720 vs 0.8628 or so at one stage.

  • NOK/NZD – The other G10 underperformers, as the Norwegian Krona plunges to fresh ytd lows under 10.1350 and not far from weakest levels on record on a mixture of bearish technical impulses, less supportive Norges Bank policy vibes and perhaps more data reflection/retrospection following September’s trade balance swinging from surplus to shortfall. Conversely, the Kiwi has pulled back from 0.6300+ recovery highs towards 0.6260 even though NZ CPI was a tad firmer than forecast, as subsequent comments from RBNZ Deputy Governor Bascand reaffirmed that there is scope for more easing as the economy is still prone to contagion from external shocks.
  • JPY/CHF/EUR/CAD/AUD – The safe-haven Yen and Franc (plus Gold on the commodity side) have pared some losses due to the aforementioned dampened Brexit/broader risk sentiment and have both returned to range trade mode awaiting more unfolding news on top of anything else on the US-China and geopolitical front. Usd/Jpy and Usd/Chf are meandering between 108.86-60 and 0.9990-62 parameters respectively, while the Euro and Loonie are also relatively contained after the former reclaimed 1.1000+ status and latter rebounded through 1.3200. Eur/Usd is currently just under 1.1050 and some tech levels close by (50 DMA at 1.1040 and a 1.1055 Fib), with decent option expiries also keeping the headline pair in check (1.1025 in 1.1 bn, 1.1050-60 in 1.2 bn and 1.3 bn at the 1.1075 strike), while Usd/Cad is consolidating back over the big figure in the run up to Canadian inflation data. Elsewhere, the Aussie is also on the defensive into data (labour report tomorrow) within a 0.6755-25 band, albeit holding up a bit better than its Antipodean peer on favourable crosswinds as Aud/Nzd bounces firmly (1.0750+ at present).
  • EM – The Rand and Lira are trying to withstand another bout of selling pressure in wake of more negative factors in the form of Eskom cutting power supply and more sanctions against Turkey from the US. Usd/Zar and Usd/Try have been up at 15.0500 and 5.9310, but the latter is now sub-5.9000 after probable state bank intervention.

In commodities, WTI and Brent futures are mixed/flat with little by way of fresh catalysts for the complex as eyes remain on any US-Sino and Brexit developments alongside geopolitical news-flow. The former resides just around the 53/bbl mark after having traded on either side of the level during APAC trade, whilst its Brent counterpart trades just below the 59/bbl level as Brexit optimism spurred some gains in energy futures. In terms of production figures, TASS reported that Russian oil output in the first half of October stood at 11.23mln BPD, which is 19.7k BPD less than September levels. On the geopolitical front, the Trump Administration said that China's Cosco tankers carrying Iranian oil that shut off transponders are engaging in "dangerous behaviour", according to senior US officials. The announcement itself did little to sway prices but it’s worth keeping in mind future implications/impact it may have on trade talks. As a reminder, tonight will see the release of the weekly API crude inventory data. Looking at metals, gold is relatively flat within a tight range below the 1500/oz mark, albeit the yellow metal is supported by the latest Brexit sources which stated that the UK and EU are reportedly at an impasse. Meanwhile, copper is underperforming with the red metal back below the 2.60/lb mark despite seemingly bullish supply side developments with copper disruption and lower Rio Tinto copper output. ING highlights that MMG has halted almost 90% of mining capacity at its Peruvian Las Bambas mine (400k tpa) whilst Chilean mineworkers at its Carmen de Andacollo (60K tpa) have been on strike for the past two days. Further reports also stated that Antofagasta’s Antucoya (72k tpa) Chillean mine will see strikes amid a row.

DB's Jim Reid concludes the overnight wrap

In the battle for ‘deals’ it was Brexit that dominated column inches yesterday with the big development being the late afternoon Bloomberg headlines suggesting that EU and UK negotiators are closing in on a draft Brexit deal. Sterling immediately surged back above $1.270 and held that move into the evening where it eventually closed up +1.42% on the day at $1.279. It’s trading at $1.276 as we go to print this morning and that puts it at around the highest in five months. Unsurprisingly there were also big moves across UK assets more broadly. Indeed the FTSE 100 erased deeper losses to end -0.03%, which was still impressive given the pound’s strength. In rates, Gilts underperformed the rest of Europe with 10y yields up +5.3bps while inflation breakevens were stronger.

As for the specifics, the story suggested that draft legal text will still ultimately rely on whether PM Johnson gets DUP support, as the unconfirmed reports suggest that the deal will include some form of border between Northern Ireland and the rest of the UK. However, the fact that Johnson has reportedly been willing to concede on that key point is ultimately the most important factor here. The Reuters headlines were less bullish with one quoting a senior EU diplomat as saying that reports of an imminent deal are “way too premature.” Late last night, ERG members met with PM Johnson and reportedly many of the senior MPs were displeased with his concessions. Talks continued into late last night and DUP party leader Arlene Foster released a statement saying that “it would be fair to indicate gaps remain and further work is required”. So clearly there are still key issues to be ironed out but that being said it would appear a deal is in the crosshairs. Stay tuned for more news this morning.

All-in-all though the improved Brexit mood music combined with US earnings helped equity markets surge higher across the board. That was the case in the US with the S&P 500 ending +1.00% which means the index has now climbed in four of the last five sessions for a cumulative gain of +3.55%. It’s also back to within a whisker – 1.00% to be exact – of the all-time highs again, albeit it was unable to close above the psychologically significant 3,000 level. The NASDAQ (+1.24%) and DOW (+0.89%) were up a similar amount while at a sector level it was healthcare and financials which led the move. The former was helped by earnings beats from UnitedHealth and Johnson & Johnson while the latter was a reaction to the slew of bank earnings. Indeed there were earnings beats for JP Morgan and Citigroup – although the latter did miss at the revenue line – which saw share prices climb +2.98% and +1.41% respectively. Wells Fargo results were a little more disappointing however shares still closed up +1.62% while Goldman Sachs (+0.29%) shares closed off the lows. Nevertheless, a five-day winning run for US banks means the sector is now back to within 0.56% of the 2019 high from July.

Contributing to the move also was a bit of a reversal in rates which appeared to be mostly due to the Brexit-fuelled Gilt selloff more than anything else. In the end 10y Treasuries rose +4.2bps and +9.8bps off the intraday lows to close at 1.773%. The Gilt move saw 10y yields go from as low as 0.608% to as high as 0.716% before closing at 0.686%. At the short end, 2y treasury yields rose +2.7bps, helping the yield curve to steepen. Indeed the 3m-10y steepened +5.5bps to 10.5, after spending most of this year in negative territory. It was a similar story across the rest of Europe where Bunds finished +3.9bps higher and OATs +2.3bps. The Greenback was the main loser with the Dollar index down -0.17%.

This morning markets have been stopped in their tracks a bit, most notably in Hong Kong and China, after China’s Foreign Ministry issued a statement threatening “strong countermeasures” should US Congress enact a bill supporting the Hong Kong protests. This bill already has strong bipartisan support and was passed by the House yesterday. The CNY is trading -0.2% weaker while the Hang Seng is flat and Shanghai Comp pared gains to trade down -0.28%. Futures on the S&P 500 are also down -0.30%.

A spokesman for the Chinese Ministry of Foreign Affairs said “China strongly urges certain people in the U.S. Congress to grasp the situation, immediately stop advancing the bill regarding Hong Kong and interfering in Hong Kong’s affairs to avoid further damaging China-U.S. relations”. The SCMP also reported “In a crucial period in which China and the US are meeting each other halfway (on trade), some American politicians are effectively putting the car in reverse by pushing this bill and flagrantly meddling in China’s internal affairs”.

In other news, the Central Bank of South Korea cut its policy rate for the second time this year to 1.25%, matching a previous record low and warned that growth would be weaker than forecast as a global economy hit by trade tensions slows. Elsewhere, the PBoC injected CNY200 bn ($28bn) into the financial system via loans to banks, maturing in one year, through the medium-term lending facility today while keeping the interest rate steady. The move was a bit of a surprise as the authorities usually inject liquidity when previously offered loans come due, and the next batch won’t mature until November 5.

Back to yesterday, where trade headlines played second fiddle to Brexit but nonetheless included ongoing uncertainty over what exactly the US and China agreed to last week. Reports from China(per Bloomberg) suggested that they want the US to formally remove the threat of new tariffs in December and also to remove existing tariffs on $50 billion of goods, which would be a substantively larger request than the prior report of simply referring this week’s tranche of tariffs. Still, the two sides also continued to say that they are on the same page, so the rhetoric remains mostly positive.

Speaking of trade, the fallout thus far from the trade war saw the IMF make a fifth-straight forecast cut to their 2019 global growth forecast yesterday. They now expect growth to fall to 3.0% this year, the lowest forecast since the financial crisis, and down from 3.2% in their April report. For 2020, they lowered their forecast 0.1pp to 3.4%. Significantly, they expect trade volumes to grow just 1.1% this year, down from 3.6% in 2018. On a regional level, the Fund cut their 2019 and 2020 forecasts for Germany, France, Italy, and Spain. For the US, they cut the 2019 figure but raised the 2020 figure to offset it.

Finally, the data was by and large secondary to everything else yesterday. In Germany the October ZEW survey was mixed with the current situations component deteriorating 5.4pts and more than expected to -25.3 (vs. -23.6 expected) but the expectations component little changed at -22.8 (vs. -26.4 expected). In the UK a slightly better earnings print for August (+3.8% vs. +3.7% expected) was offset by a surprising one-tenth pickup in the unemployment rate to 3.9%. On top of that the three-month/three-month employment change was negative (-56k) so a clear sign of a slowdown. The Brexit news clearly overshadowed this but it’s significant for the BoE nonetheless given that weaker soft data is showing signs of filtering into the hard data. In the US, the New York Fed’s 3-year inflation expectations survey fell to 2.37%, its lowest level since the survey started over six years ago.

Looking at the day ahead, this morning data releases include September new car registrations for the EU, September inflation data in the UK and for the Euro Area, while this afternoon in the US the big release is the September retail sales report. Also out this afternoon in the US is the October NAHB housing market index and August business inventories, along with the Fed’s Beige Book. It’s also another busy day for central bank speakers with the Fed’s Evans and Brainard, ECB’s Knot, Lane and Villeroy, and BoE’s Carney all due to speak. Earnings wise the highlights are Bank of America, IBM and Netflix.

 


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