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“Confidence Could Crumble”: Global Markets Slide After Trump Threatens More China Tariffs, Hong Kong Tensions Soar

Courtesy of ZeroHedge View original post here.

One day after Trump's long-awaited NY Economic Club speech proved to be a dud, with the president having nothing positive or "optimistic" to say about the China trade deal instead slamming the Fed again for not cutting rates to negative, the investing public today will focus on Fed Chair Powell's testimony in Congress in which he lays out his own take on things.

Until then, however, US futures and global stocks are a sea of red after Trump threatened to “substantially” increase tariffs if China failed to agree a trade deal and said there may also be tariffs to come for other countries “that mistreat us”, while European stocks followed Asia into the red following a subdued start, with Hong Kong tensions also denting sentiment.

"The market was anticipating something more positive from Trump, but he didn’t deliver,” said Legal and General PM Justin Onuekwusi. “In recent weeks, we saw the balance of probabilities shift to the positive side, risks being taken off the table, but people have realized that risk is still there,” Onuekwusi said. He’s been reducing his equity allocations.

The Eurostoxx 600 dropped 0.6% from four-year highs with banks and auto sectors weighing, while Treasuries led a bond rally, with the 10Y yield sliding from 1.94% to 1.87% one day after Dennis Gartman said the 30Y TSY bull market has run its course.

The value/momentum reversal is over, buy TSYs:

"the case can be made that the three decade long bull run in 30 Year Treasuries has run its course to the end." – Gartman

— zerohedge (@zerohedge) November 12, 2019

Wall Street was set to open weaker as well, equity futures showed, with the S&P 500 index indicated 0.5% lower; the S&P 500 backed off record highs after Trump spoke. Nasdaq and Dow Jones futures were also down 0.5%. The S&P 500 has risen 2% this month and 23% so far in 2019 thanks to interest rate cuts, trade hopes and NOT QE by the Fed even as the S&P is now officially in a profit recession.

Besides Trump slamming once again slamming China, the other issue weighing on sentiment is the intensifying unrest in Hong Kong which many fear will lead to a Chinese crackdown. That pushed Hong Kong shares 2% lower and down over 1000 points in the past few days, while weighing on markets across Asia.

MSCI’s index of world shares slipped 0.3%, following a 1% fall in Asian shares outside Japan. Asian stocks retreated, led by financial firms, as U.S. President Donald Trump threatened more tariffs on Chinese goods and Hong Kong protesters disrupted public transit for a third straight day. Nearly all markets in the region were down, with Hong Kong leading declines. Japan’s Topix fell 0.6% as service-sector companies and food producers weighed on the gauge, while the Nikkei slipped almost 1%, moving further off last week’s 13-month highs. The Shanghai Composite Index dropped 0.3% to a six-week low, with large insurers and PetroChina among the biggest drags. Hong Kong’s Hang Seng Index declined 1.8% as local property developers led losses. India’s Sensex slipped 0.1%, dragged by ITC and ICICI Bank, as investors awaited the outcome of a new round of trade talks between Indian and U.S. officials.

Asian markets were also rattled by Trump’s speech and Hong Kong’s turmoil. Onshore spot yuan fell to a low of 7.0270 per dollar at one point, the weakest since Nov. 5. Hong Kong protesters planned to paralyze parts of the city for a third day, with transport, schools and many businesses closing after violence escalated across the city.

European markets were down across the board with the Stoxx 600 Bank Index falling 1.4% in early trading, making it the worst performing sector on the broader gauge, as trade and macro sensitive groups decline while an index of European auto companies slipped 2%. Spanish banking stocks remain weak amid the prospects of political uncertainty following Sunday’s election. Bankinter fell 3.4%, the biggest decliner in the SX7P, while Bankia is down 3.1% and Banco Santander is down 2.3%. ABN Amro dropped 3.4% after 3Q earnings missed estimates amid ongoing costs for anti-money laundering projects.

Markets were disappointed after Trump’s speech threatened to raise tariffs on China, but he also said a trade deal was “close”, without offering details on when or where it would be signed. He also criticized EU trade policies before a Nov. 14 deadline to decide whether to raise tariffs on European and Japanese carmakers. That deadline will probably be extended, but investors remain jittery. A pan-European equity index fell 0.6, coming off Tuesday’s four-year highs, when optimism before Trump’s speech and better-than-expected economic indicators from Germany boosted stocks.

Expectations for "phase 1" of a trade deal this month have supported stocks and riskier assets recently. Investors were led to cut the share of cash in their portfolios to six-and-a-half-year lows, according to Bank of America Merrill Lynch’s monthly survey of global managers. The poll also showed growth optimism at 18-month highs.

However, lack of progress on an agreement has started to increase doubts about whether a trade truce will happen at all.

“I’m absolutely concerned. The clock is ticking,” said Michael McCarthy, chief market strategist at CMC Markets in Sydney. “Markets are now expecting substantial progress in the next week or so, and if not, then confidence could crumble.”

A more prolonged standoff will revive fears for the world economy. Oxford Economics estimates the trade war has trimmed eight-tenths of a percentage point off U.S. growth. Having started 2019 with 3.1% growth, the economy eased to 1.9% in the third quarter, they noted.

In other news, Fed's Kashkari, a 2020 Fed voter and uberdove, said he is feeling a little bit better about the US economy than a few months ago and there is a lot of consensus at the Fed that monetary policy is modestly accommodative, perhaps as a result of the $60 BN in monthly liquidity injections by the Fed.

Separately, the National Association of Manufacturers was hacked over the summer and hired a cybersecurity firm, who concluded the attack came from China, according to two sources said; noting, that the incident occurred before a round of formal negotiations between US and Chinese government officials over the contents of potential deal.

In FX, the U.S. dollar gained continued its relentless gains, rising to fresh three-week highs. The damage to risk appetite pushed down yields on U.S. and German safe-haven debt. Yields on 10-year Treasury notes fell to a six-day low around 1.87% as noted above; 10-year Bund yields were down 4 basis points to minus 0.28%. Hong Kong interbank rates rose, with one-month HIBOR at its highest since Aug. 6.

The standout currency performer was the New Zealand dollar which jumped 1% after the central bank unexpectedly left interest rates unchanged at 1%. RBNZ kept the Official Cash Rate unchanged at 1.00% vs. consensus for a 25bps cut, while it said it is prepared to act and will add further monetary stimulus if needed but noted economic developments do not warrant a change to monetary policy at this time and that low rates, as well as government spending will support domestic demand. RBNZ Governor Orr also commented there was no urgency to further ease at this point and suggested ups and downs in data since the August statement broadly offsets each other, while RBNZ's Hawkesby commented that data will determine what the RBNZ does.

In geopolitics, senior US administration official said President Trump's priorities in northeast Syria are to prevent IS resurgence and prevent atrocities in the region, while the official added the US has no intention to end alliance with Kurdish-led SDF militia and needs to resolve the issue with Turkey regarding the latter's purchase of the Russian S-400 system. Additionally, President Trump and Turkish President Erdogan are due to meet today at noon.

In commodities, Brent crude oil futures fell more than 1% as the diminishing prospects for a resolution to the 16-month long trade war suggested less future demand for energy.

Markets now await data that is expected to show U.S. inflation rose in October. Federal Reserve Chairman Jerome Powell will also testify to a Congressional committee.  The main economic focus is the October CPI report where expectations are for a +0.2% mom core reading. Away from the data we’ve got the aforementioned speech from Powell before the Joint Economic Committee, while Kashkari speaks later this evening. Elsewhere, Turkish President Erdogan is due to meet President Trump. Canada Goose, Cisco, and NetApp are among companies reporting earnings.

Market Snapshot

  • S&P 500 futures down 0.4% to 3,079.75
  • STOXX Europe 600 down 0.7% to 404.22
  • MXAP down 0.9% to 164.30
  • MXAPJ down 1.1% to 524.62
  • Nikkei down 0.9% to 23,319.87
  • Topix down 0.6% to 1,700.33
  • Hang Seng Index down 1.8% to 26,571.46
  • Shanghai Composite down 0.3% to 2,905.24
  • Sensex down 0.4% to 40,169.02
  • Australia S&P/ASX 200 down 0.8% to 6,698.36
  • Kospi down 0.9% to 2,122.45
  • German 10Y yield fell 2.9 bps to -0.281%
  • Euro up 0.04% to $1.1013
  • Italian 10Y yield fell 4.3 bps to 0.871%
  • Spanish 10Y yield fell 2.6 bps to 0.417%
  • Brent futures down 1% to $61.44/bbl
  • Gold spot up 0.5% to $1,463.40
  • U.S. Dollar Index little changed at 98.31

Top Overnight News from Bloomberg

  • President Donald Trump said the U.S. will increase tariffs on China in case the first step of a broader agreement isn’t reached. “If we don’t make a deal, we’re going to substantially raise those tariffs,” he said Tuesday in a speech to the Economic Club of New York.
  • President Donald Trump renewed his assault against the Federal Reserve, saying it was hurting the U.S. by not copying other central banks in deploying negative interest rates.
  • Hong Kong’s security chief John Lee cautioned that “unthinkable” consequences may come if violence continued, as the city’s financial center braced for a third-straight afternoon of protest.
  • New Zealand’s two-year swap rate jumped the most in a decade on Wednesday as the central bank defied money- markets pricing for more easing.
  • Boris Johnson chairs a meeting of the British government’s “Cobra” emergency committee after opposition parties accused him of downplaying the severity of flooding in northern England — a key battleground in the election campaign. Around 400 homes have been flooded and 1,200 properties have been evacuated, according to the BBC.
  • Global oil demand will hit a plateau around 2030 as the use of more efficient cars and electric vehicles ends an expansion that dominated the past century, the International Energy Agency predicts.

Asian equity markets were lower across the board and US equity futures pulled back from record levels amid continued uncertainty and disappointment following US President Trump’s speech at the Economic Club of New York which failed to provide any fresh insight on US-China trade, with news the USTR office will submit a report on possible auto tariffs to the White House also clouding over the risk climate. ASX 200 (-0.8%) and Nikkei 225 (-0.9%) declined as weakness in the energy, mining and financials sectors weighed on Australia, while Tokyo was also subdued by underperformance in commodity stocks and detrimental currency inflows. Hang Seng (-1.8%) and Shanghai Comp. (-0.3%) conformed to the downbeat tone after US President Trump largely stuck to the script regarding US-China trade but also renewed his criticism on China and threatened higher tariffs if they fail to reach an agreement, with the losses in Hong Kong exacerbated again due to the current no end in sight for the disruption which has already plunged the city into a recession. Finally, 10yr JGBs were in recovery mode after the prior day’s slump with the rebound aided by support around 152.50 and the broad risk averse tone in the region.

Top Asian News

  • Alibaba Said to Win HKEx Approval for Mega Hong Kong Listing
  • Lebanon Crisis Has Templeton Uttering R-Word as Debt Woes Deepen
  • Apple Assembler’s Profit Beat Signals Good iPhone 11 Demand
  • Thai Anti-Graft Agency Seeks Charges Against Sino-Thai President

Risk off trade sees major European bourses (Euro Stoxx 50 -0.8%) lower this morning, following a cautious APAC session in light of US President Trump’s disappointing speech at the Economic Club of New York and separate reports that the USTR office is to submit new potential auto tariffs which Trump could implement on the EU. Potentially contributing to the jitters; today is the approximate deadline for US President Trump to make a decision on EU auto-tariffs. European autonames, including Peugeot (-2.7%) and BMW (-2.0%), are amongst the underperformers. Sector performance is reflective of the markets lack of risk appetite; the more defensive Consumer Staples (+0.7%), Utilities (-0.5%) and Health Care (+0.2%) sectors are the outperformers, the latter buoyed by gains in GlaxoSmithKline (+0.5%), whose Phase III study of Nucala met its primary endpoint. Strong earnings from SSE (+2.0%), meanwhile, is helping to prop up the Utilities sector. The Financial sector (-2.0%) is the marked underperformer; yields have been coming off but the downside likely has as much to do with soft ABN AMRO (-5.5%) earnings. In terms of other notable movers; strong earnings from Salvatore Ferragamo (+3.3%), Bechtle (+1.6%) and Deutsche Wohnen (+1.7%) saw their respective share prices underpinned. Conversely, soft earnings from Lanxess (-3.3%) saw the Co.’s shares pressured. Elsewhere, ArcelorMittal (-3.5%) shares were on the back foot on the news that Italy’s Foreign Minister said he did not seek Chinese investors for the Ilva plant and it would be too soon to discuss alternative options. Finally, Tullow Oil (-26.0%) sunk on after the Co.’s FY19 group oil production forecast came in slightly below guidance, largely due to performance in Ghana.

Top European News

  • U.K. Inflation Hits 3-Year Low as Energy Price Cap Takes Effect
  • European Industry Delivers Surprise Gain at End of Third Quarter
  • Sexual-Harassment Whistle-Blower Sues Lloyd’s of London Insurer
  • Steel Royalty No More, Thyssenkrupp Sells Itself Off to Survive

In FX, in stark contrast to its non-US Dollar counterparts and other high beta/risk sensitive currencies, the Kiwi is sharply outperforming, albeit off 0.6400+ overnight highs vs the Greenback and 1.0670 against the Aussie, on the back of an unexpected unchanged OCR from the RBNZ. To recap, the Bank confounded forecasts for a 25 bp cut that were underpinned and actually rising in wake of a dip in NZ inflation projections just ahead of the latest policy meeting, but the RBNZ opted to hold fire given no immediate need to ease further at the current juncture and with Governor Orr noting that data since the August assessment has been broadly balanced (netting beats and misses vs consensus). Conversely, Aud/Usd is languishing towards the base of a 0.6825-60 range and Usd/Cad has rebounded back above 1.3250 amidst a broad downturn in risk appetite and less optimism on the global trade front after US President Trump failed deliver good news about Phase 1 or auto tariffs late yesterday.

  • CHF – The next best G10 performer and only partially heeding more verbal SNB intervention following a meeting with the Swiss Government to discuss a variety of issues, but pertinently fragile FX markets and a Franc that is still deemed to be highly valued. Usd/Chf skirting 0.9900 and Eur/Chf 1.0900.
  • GBP/JPY/EUR – All relatively flat or rangebound against the Buck as Cable pivots 1.2850 and largely shrugs off UK inflation data including headline CPI that slowed to 1.5% vs 1.6% expected, but bang in line with the BoE estimate, while the Yen straddles 109.00 and Euro holds above 1.1000, albeit after a miniscule downside breach and as the DXY drifts back from a fresh recent peak of 98.449 to the middle of its band (down to 98.289 at the other extreme).
  • NOK/SEK – The Scandi Crowns are slipping in wake of more Swedish data raising questions over the Riksbank’s commitment to hiking the repo in December, with Eur/Sek up over 10.4400 at one stage and Eur/Nok soaking up offers at 10.1600 before fading and also fuelled by a retracement in crude prices
  • EM – Amidst widespread losses vs the Dollar, Usd/Zar has revisited 15.0000+ territory against the backdrop of Eskom’s ongoing power travails and with SA retail sales missing the mark by some distance. However, Usd/Try is hovering below highs ahead of Turkish President Erdogan’s meeting with his US peer and Usd/Rub is meandering mid-range into Russian Q3 GDP and after the Finance Minister pulled a 2025 OFZ offering.

The crude complex is lower, in fitting with the market’s risk-off feel. Front month WTI and Brent futures have been moving lower in line with equities, with WTI earlier testing Monday’s USD 56.25/bbl low and Brent easily clearing this level and making progress towards last week’s USD 60.70/bbl low (although, at USD 61.30/bbl, Brent is still some way off). In terms of crude specific developments; ahead of the December 5-6th OPEC and OPEC+ meetings, OPEC Secretary General Barkindo said it is too early to say if further output cuts are needed. As a reminder; sources have noted that Saudi Arabia and Russia do not want to bear the brunt of deeper reductions, with the former wanting members to comply with the current pact, which could see around 500k BPD out of the market. In separate news, the IEA forecast that global oil demand growth is expected to slow from 2025 as fuel efficiency improves and the use of electrified vehicles increases but is unlikely to peak in the next two decades. Elsewhere, Nigeria's NNPC said current crude output stands at 1.6-1.7mln bpd (vs. 1.93mln in October), and assured the nation will continue to comply with OPEC cuts. Looking ahead, EIA’s Short-Term Energy Outlook is set for release in the afternoon, followed by API Inventory data after the US equity market close, both having been delayed one day due to a Monday holiday in the US. Over in metals, gold prices are modestly firmer and Copper softer, as the broader lack of risk appetite gives havens a boost at the expense of more risk sensitive assets. Following a steep decline so far in the month of November, the precious metal has managed to stabilise, and reclaim the USD 1460/oz mark from USD 1450/oz lows. Meanwhile, downside for copper is being cushioned on the news that further strikes are disrupting operations at Chilean Codelco's northern copper mines.

US Event Calendar

  • 8:30am: US CPI YoY, est. 1.7%, prior 1.7%; CPI MoM, est. 0.3%, prior 0.0%

     

     

    • CPI Ex Food and Energy YoY, est. 2.4%, prior 2.4%; CPI Ex Food and Energy MoM, est. 0.2%, prior 0.1%
  • 8:30am: Real Avg Weekly Earnings YoY, prior 0.85%
  • 2pm: Monthly Budget Statement, est. $130.0b deficit, prior $100.5b deficit

DB's Jim Reid concludes the overnight wrap

Let me start by sharing with you a WhatsApp message I got overnight from my wife as I woke up a short while ago. “Jim. You mixed up the twins and put them to bed in the wrong bedrooms last night. They both started crying at 2am and it took me ages to work out why as I couldn’t tell them apart in the dark and didn’t think I’d need to check. You slept right through it. Nightmare!!” The lack of kisses or an emoji indicates I’ll be in the doghouse tonight and Bronte will be taking my place in the bedroom. Whoops.

I was obviously tired from listening so intensely to the highly-anticipated speech from President Trump yesterday lunchtime NY time. However, it ended up not containing any major policy announcements. There had been some expectation for an announcement or new news on trade, either regarding a deal with China or a decision about auto tariffs on Europe. Today is the decision deadline after the 6-month extension on whether to impose them. As we discussed yesterday, Politico highlighted on Monday night that the decision is likely to be postponed again for a similar period of time but we should hear for sure today. Bloomberg also carried a story yesterday suggesting that there’s been an intense and successful lobbying campaign by German carmakers that have included plans to shift global production to American suppliers.

Back to President Trump’s speech. He used it to tout the US’s recent economic performance and record-high equity valuations, which he attributed to his tax and regulatory policies. On trade, President Trump did say that a deal “could happen soon,” but he also said that “if we don’t make a deal, we’re going to substantially raise those tariffs.” There were separate reports that US negotiators had reached an agreement with China to roll back tariffs but that President Trump had vetoed the deal, but this remains unconfirmed. Elsewhere, the WSJ reported overnight that tariffs are emerging as the main stumbling block in efforts by the US and China to come to a limited trade deal.

US equities were already trading higher going into President Trump’s speech, partially boosted by his tweet forecasting “yet another record day,” which some interpreted as a signal that he would use his speech to deliver some market-boosting news. Ultimately, the major indexes retraced a bit to close slightly higher. The S&P 500 and NASDAQ closed +0.16% and +0.26%, while the DOW traded flat. That’s the first time that the DOW has ended a trading session exactly flat since 2014, and only the third time over the last 20 years. In Europe the STOXX 600 finished +0.38% to push the index back up to within 1.73% of its all-time high in April 2015. As for bond markets, 10y Treasuries were hovering around 1.930% before Trump and finished lower at 1.912% – a -3.0bps move on the day after being closed on Monday. The 2s10s curve flattened -0.3bps to 25.7bps. Meanwhile, EM equities retreated -0.65%. The big news in EM land was the price action in Chile – including the biggest decline for the Peso since 2011 (-2.26%) – as the fallout from anti-government protests and riots hit new heights.

A quick check on Asia this morning shows that the Hang Seng (-2.02%) is leading the declines as the city faced a third-straight day of heightened protests and the city’s security chief John Lee cautioned that “unthinkable” consequences may come if violence continued. The Nikkei (-0.88%), Shanghai Comp (-0.19%) and Kospi (-1.01%) are also heading lower. As for FX, the New Zealand dollar is up +1.09% after the country’s central bank shied away from cutting rates at today’s monetary policy meeting saying there are signs that the domestic economy will stop slowing and inflation will pick up. The decision also caused two-year swap rates to jump the most in a decade surging by as much as 21bps. Elsewhere, futures on the S&P 500 are down -0.31% while yields on 10yr USTs are down -1.4bps. In commodities, spot gold prices are up +0.27% while WTI crude oil prices are down -0.33%.

The U.K. opinion polls were a mixed bag yesterday. A Survation poll conducted last week (but only released yesterday) showed only a 6% lead for the Tories (down 2% on the previous week) but a YouGov poll conducted after the Brexit Party stand down news showed a 14% lead (up 1% from before the news). These polling agencies have generally been at the extreme ends of the scale in terms of how much the Conservative Party is leading. Most other polls have split the difference, such as the latest ComRes poll late last night which gives the Conservatives an 8% lead (up 1% from the previously week), though it was conducted before the Brexit Party news. Sterling had traded down as much as much as -0.31% on the day but ended the session flat after responding well to the YouGov poll.

As far as today is concerned, Powell’s testimony before the Joint Economic Committee of Congress at 4pm GMT will garner some attention. That being said it would be a surprise if Powell deviates much from his post-FOMC press conference in which he emphasised that the easing done to date has supported the economy and helped offset some of the external risks stemming from slowing growth. Our US economists do, however, expect the Chair to stress that, given that the balance of the incoming economic data has largely held in, it would take a “material reassessment” of the outlook for the Committee to consider further rate cuts. The House Intelligence Committee will also hold its first public hearings in their impeachment inquiry of President Trump.

Though Powell will be the most market-moving Fed official to speak this week, there were remarks from three other FOMC members yesterday. Barkin and Harker both leaned hawkishly, with Barkin saying the labour market is currently tight, though he is not a voting member of the committee. Harker explicitly said that he was against cutting rates at the last meeting, which is noteworthy since he will be a voter next year and there seems to be a growing wing against any further rate cuts. Lastly, Vice Chair Clarida discussed the fall in long-term interest rates but did not update his macro or policy outlook, though he did mention some pros and cons regarding “make up strategies” as the Fed continues its policy review.

Back to yesterday where Spain’s IBEX (-0.87%) underperformed the rest of Europe after reports that the Socialists had reached a preliminary post-election agreement to form a coalition with the far-left Podemos. The important point to note though is that this would be a minority government and therefore will still require the support of smaller or regional parties in order to form an administration, likely coming down to Catalan separatists and/or Citizens and Basque regionalists according to our economists. For completeness, Spanish 10y bond yields were +1.4bps higher yesterday. That compares with a -0.9bps move for Bunds. BTPs were down -4.4bps yesterday after a near 7bps climb the previous day.

Staying in Europe, the November ZEW survey in Germany was again slightly mixed. The current situations component improved 0.6pts to -24.7 but that was still weaker than the -22.3 expected. More encouraging though was the 20.7pt jump in the expectation component to -2.1. That matches the May level and marks an impressive improvement of 42.0pts from the August low.

Meanwhile, in the UK the latest earnings data was softer than expected with basic wage growth slowing to +3.6% 3m/yoy in September compared with estimates for +3.8%. The unemployment rate did, however, tick back down to 3.8% – a decrease of one-tenth – however the overall pace of hiring remained weak. For completeness, in the US the October NFIB small business optimism reading rose 0.6pts to 102.4 (vs. 102.0 expected).

Looking at the day ahead, this morning we’ll get confirmation of the final October CPI revisions for Germany followed later by the October CPI/PPI/RPI data dump in the UK. Also out this morning is September industrial production for the Euro Area while in the US the main focus is the October CPI report where expectations are for a +0.2% mom core reading. Away from the data we’ve got the aforementioned speech from Powell before the Joint Economic Committee, while Kashkari speaks later this evening. Elsewhere, Turkish President Erdogan is due to meet President Trump.

 

 

 


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