Markets Slide Despite Stimulus Hopes After Dire Chinese Data; Yields Plunge

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It’s about time we had some bad news which, as everyone knows, is great news for central-bank supported, centrally-planned markets.

The global equity bounce following what many misinterpreted as softer rhetoric by President Donald Trump on the trade dispute with China, fizzled on Wednesday despite dismal Chinese data, while fresh Italian debt woes kept BTFDers on the sidelines.

Ironically, China’s data miss was not the catalyst for the drop. As we reported last night, in April every Chinese economic metric posted a sharp decline and missed expectations:

  • Retail sales rose just 7.2% (against +8.7% in March) – lowest since May 2003 (the 7.2% year-on-year rise in retail sales is actually weaker than all the estimates. The lowest was 7.5%, and the median was 8.6%)
  • Industrial Production growth slumped from a hope-filled +6.5% YTD YoY in March to 6.2%.
  • Fixed Asset Investment slowed to just 6.1% YoY.

“Investors had been waiting for data to confirm signs of stabilization in the Chinese economy which, in turn, would bolster expectations that the global economy could start making a sustainable recovery,” said Neil McKinnon at VTB Capital. “The recent escalation in tariffs makes that more difficult and can only add to investor risk aversion and increase the risk of a more prolonged economic downturn.”

However, considering the surge in Chinese stocks, which closed 1.9% higher as traders speculated Beijing will consider more measures to support the economy after data showed weaker-than-expected growth in April, the only thing about the dismal Chinese data is that it wasn’t even worse to prompt even greater global hopes for a Chinese stimulus.

As a result, the MSCI Asia Pacific Index gained for the first time in three days, with China rebounding and Indonesia declining. MSCI Asia Pac rose +0.5%, with top contributors including: CAR Inc +13%, Renesas +11%, Meitu +11%, Luzhou Laojiao +10%, Mitsubishi Estate +9.2%; in Japan, the Topix Index rose 0.6%, the same as the Nikkei 225, while Hong Kong’s Hang Seng Index +0.5%, an the CSI 300 was 2.2% higher.

China’s horrendous economic data was not enough to spark a buying frenzy on stimulus hopes in Europe, where Italian bonds and stocks traded lower with automakers falling the most, though off session lows, as risk sentiment remains nervous in the wake of trade and domestic political concerns. European bank stocks underperformed the SXXP on Wednesday, with the sector index falling 0.9% as three lenders post earnings misses and the latest bout of merger speculation fades.

  • Austria’s Raiffeisen Bank International was the biggest decliner on the Stoxx 600 Banks Index after its 1Q profit missed estimates; stock drops as much as 5.4%
  • Credit Agricole slid as much as 3.9%, also related to a profit miss as higher costs eat into earnings
  • ABN Amro down 2.6%, falling to the lowest since Oct. 2016 after reporting a 20% decline in 1Q profit due to negative interest rates and Brexit preparations
  • Commerzbank erased an early 2.9% gain and is down 2.2% at 10:20 a.m. in Frankfurt; The stock jumped 4.3% on Tuesday on a report that ING and UniCredit are lining up advisers to explore a potential takeover of the German lender

As reported yesterday, investor concerns continue to rise over Italy’s fiscal situation after Rome said it was ready to break EU fiscal rules to spur employment. Italian stocks declined 0.7% to lead European stocks lower while France’s benchmark slipped 0.4%. Data confirming that Germany’s economy had returned to growth in the first quarter cushioned the DAX which eased 0.2%. London’s FTSE rose 0.2%. AS a result, the Euro Stoxx 50 trades down 0.2%, having traded as much as -0.7% earlier, with move lower led by autos and basic resources.

The souring mood also looked to spill over to Wall Street with U.S. futures pointing to a softer open following healthy gains in the previous session. MSCI’s broadest index of world stocks traded flat.

In currency markets, the Australian dollar – a proxy of China-related trades – fell to its lowest level in three months amid the China data fallout. The Bloomberg USD neared session highs, not long after it traded down to unchanged, with most G-10 pairs trading in tight ranges.  The euro remained anchored at $1.1214 while the dollar index against a basket of six major currencies was nearly flat at 97.524 after gaining 0.2% the previous day. The pound remained near a two-week low after Prime Minister Theresa May’s spokesman said late on Tuesday she planned to put forward her thrice-rejected Brexit deal in early June to try to secure an agreement on how to extract Britain from the European Union before the summer holiday.

The Chinese yuan was a shade firmer at 6.9056 per dollar in offshore trade, having edged away from a five-month trough of 6.9200 set on Tuesday.

In rates, Italian yields rise across the 2y-10y tenors, with curve bear flattening, with 2-yr yields +8bps and 10-yr yields +3bps.

Haven bonds outperform, with 10-yr bund yield -3bps to -0.10%, lowest level since 2016, and 10-yr UST yield -2bps to 2.39%. In the US, Treasury yields sank to the lowest level since March, while yields on 10-year German bunds slipped to the lowest since 2016, but they jumped for Italy’s debt, as the nation’s deputy premier Matteo  Salvini racheted up tensions over the country’s deficit.

In commodities, both WTI ($61.38) and Brent ($71.03) traded lower after API reported a bigger-than-expected build in crude inventory and IEA cut its forecast for 2019 oil demand. U.S. crude inventories rose by 8.6 million barrels in the week to May 10 to 477.8 million, compared with analysts’ expectations for a decrease of 800,000 barrels. Brent and WTI surged the previous day after Saudi Arabia said explosive-laden drones launched by a Yemeni-armed movement aligned to Iran had attacked facilities belonging to state oil company Aramco.

Expected data include mortgage applications, retail sales, and industrial production. Alibaba, Macy’s, and Cisco are among companies reporting earnings

Market Snapshot

  • S&P 500 futures little changed at 2,839.25
  • MXAP up 0.5% to 155.33
  • MXAPJ up 0.4% to 510.12
  • Nikkei up 0.6% to 21,188.56
  • Topix up 0.6% to 1,544.15
  • Hang Seng Index up 0.5% to 28,268.71
  • Shanghai Composite up 1.9% to 2,938.68
  • Sensex up 0.5% to 37,485.81
  • Australia S&P/ASX 200 up 0.7% to 6,284.20
  • Kospi up 0.5% to 2,092.78
  • STOXX Europe 600 down 0.1% to 375.80
  • German 10Y yield fell 2.4 bps to -0.094%
  • Euro up 0.08% to $1.1213
  • Italian 10Y yield rose 2.9 bps to 2.355%
  • Spanish 10Y yield fell 0.5 bps to 0.966%
  • Brent futures down 0.3% to $71.06/bbl
  • Gold spot up 0.1% to $1,298.37
  • U.S. Dollar Index down 0.1% to 97.47

Top Overnight News

  • Theresa May set a date for her final Brexit showdown, promising to bring her deal back to Parliament at the start of June
  • China’s economy lost steam in April, underscoring the fragility of the world’s second-largest economy as it girds for an intensified face-off with the U.S. over trade. Industrial output, retail sales and investment all slowed more than economists forecast
  • Trump rejected a report that his administration is planning for war with Iran, but then warned he’d send “a hell of a lot more” than 120,000 troops to the Middle East in the event of hostilities
  • President Donald Trump called on the Federal Reserve to “match” what he said China would do to offset economic hardship being caused by tariffs as he sought to draft the U.S. central bank into his simmering trade war
  • New York Fed President John Williams and his Kansas City colleague Esther George, who vote on policy this year, acknowledged that new tariffs on Chinese imports could affect the outlook for U.S. inflation and growth. But both saw no need for the central bank to react
  • Japanese Prime Minister Shinzo Abe said propping up domestic demand would be a priority for his government as economic data show signs of weakness ahead of a planned increase in the sales tax in October
  • Germany’s economy emerged from stagnation at the beginning of 2019, returning to growth despite a slump in manufacturing that continues to plague the nation.
  • U.K.’s Theresa May will bring her Brexit deal back to Parliament at the start of June in the hope that she can persuade MPs to support it

Asian equity markets eventually traded mostly higher following the positive lead from the US where sentiment was underpinned by President Trump’s optimism regarding a US-China trade deal, but with gains in the Asia-Pac region capped as participants digested earnings, as well as disappointing Chinese Industrial Production and Retail Sales data. ASX 200 (+0.7%) was led higher by strength in tech as the sector tracked the outperformance of its counterpart stateside, while Nikkei (+0.6%) mirrored a somewhat indecisive currency with heavy losses seen in Takeda and Nissan shares post-earnings. Hang Seng (+0.5%) and Shanghai Comp. (+1.9%) were positive after President Trump’s encouraging rhetoric and with the first phase of the PBoC’s targeted RRR adjustment taking effect today which would release around CNY 100bln of long-term funds and resulted to a decline in Chinese money market rates, although the gains across the region were somewhat capped by disappointing Chinese Industrial Production and Retail Sales data. Finally, 10yr JGBs were flat with price action hampered by the ambiguous risk tone in Japan and with today’s BoJ Rinban operation at a relatively paltry JPY 505bln concentrated in the belly.

Top Asian News

  • China’s Xi Calls Efforts to Reshape Other Nations ’Foolish’
  • Turkey Imposes 0.1% Tax for Some Foreign Exchange Transactions
  • Rich Asia Investors Face Rising Risk in Leveraged Bond Funds
  • Wanda to Plow Billions Into China After Dumping Assets Abroad

Choppy trade in European equities [Eurostoxx 50 -0.6%] following on from a positive Asia-Pac as sentiment deteriorated in early trade. Major indices are now mostly lower after opening with marginal gains, although initial downside coincided with defensive comments from China’s Foreign Minister, which seemed to have dampened the prospects of a US-China trade deal in the near term. Sectors are mostly lower with defensive stocks buoyed for the time being and broad-based losses seen across the rest. In terms of individual movers, Renault (-4.0%) fell to the foot of the CAC as shares of its alliance partner Nissan tumbled in the wake of dismal earnings. Meanwhile, Italian banks [Intesa Sanpaolo -1.7%, Unicredit -1.5%, Banco BPM -1.5%] fell in tandem with the decline in BTPs (albeit off lows), given the banks’ large holdings of the sovereign debt. Elsewhere, given the looming US auto import tariffs deadline (May 18th), analyst at Morgan Stanley believe that the German economy will be hit the hardest due to direct impact and through supply chains, adding that Germany’s exports of vehicles and auto parts to the US make up around 2% of the total goods exports, thus, “a US car tariff increase to 25% could lower growth in Germany by ~0.25pp, with any knock-on impact on sentiment on top.”

Top European News

  • German Economy Rebounds From Stagnation With 0.4% Expansion
  • Credit Agricole Revenue Misses Estimates on Key Italian Market
  • Italy Rocks European Bond Markets Over Its Deficit Once Again
  • Pound Turns Currency Laggard as Brexit Bad News Is Seen Looming

In FX, we start with CHF/JPY/EUR/GBP – The Franc is back in favour and outperforming after a temporary loss of safe-haven appeal on Tuesday as a combination of sub-forecast Chinese data (IP and retail sales) and Italian fiscal jitters offset less acute angst on the US-China trade front, although the latest barbs from Beijing have been quite inflammatory. Usd/Chf has retreated towards 1.0050 again and Eur/Chf is back down below 1.1300 even though the single currency remains relatively resilient vs a broadly firm Dollar having survived another test of 1.1200 with the aid of some firm Eurozone GDP prints. Meanwhile, Usd/Jpy has also pulled back from yesterday’s rebound highs to probe bids under 109.50 and expose Fib support at 109.23 that was breached on Monday when the headline pair got to within a whisker of 109.00. Note, however, decent option expiry interest may keep the headline pair afloat given 1.2 bn rolling off between 109.00-20 and almost 1.8 bn at 109.40-50. Elsewhere, the Pound has also defended poignant big figure levels at 1.2900 in Cable and 0.8700 vs the Euro as UK PM May prepares for Thursday’s 1922 showdown and another stab at getting the WA through the HoC in early June.

  • AUD/NZD/CAD – All under pressure and down vs their US counterpart, with the Aussie hit by soft wages on top of the aforementioned disappointing Chinese macro releases ahead of tomorrow’s jobs report that has been flagged by the RBA as key in terms of near term policy and whether a rate cut is required. Aud/Usd is just off fresh multi-month lows around 0.6920 and Aud/Nzd is pivoting 1.0550 as the Kiwi hovers just above 0.6550 against the Greenback. Meanwhile, the Loonie is meandering between 1.3476-56 and in a tighter range than on Tuesday awaiting some independent impetus/direction from Canadian CPI that is due alongside US retail sales and with the DXY equally contained within 97.432-578 parameters and just above the 30 DMA (97.417).
  • EM – The Lira remains in the spotlight and volatile after yesterday’s seemingly impressive recovery, as Usd/Try bounced back over 6.0000 despite more efforts by the CBRT to stop the rot via a return of tax

In commodities, WTI (-1.3%) and Brent (-0.9%) futures are on the backfoot with the initial decline sparked by a substantial surprise build in API crude inventories (+8.6mln vs. Exp. -1.3mln). Crude prices then recovered off lows amid positive sentiment in Asia-Pac trade before an intensifying risk-averse mood pressured the complex. Upside in the energy market is also capped by the IEA Monthly Oil Report which cut 2019 oil demand growth estimate by 90k bpd to 1.3mln bpd, in contrast to yesterday’s OPEC monthly report where the total world oil demand growth for 2019 was left unchanged at 1.21mln BPD. On a technical front, WTI Jun’19 futures reside just below its 50 DMA (61.45) ahead of its 200 DMA (60.40) whilst its Brent counterpart seems to have been recently finding support its 50 DMA (currently at 69.78). Looking ahead, traders will be keeping an eye out for the more widely followed EIA crude stocks release later today wherein ING agrees that numbers similar to the API would likely be seen as bearish in the immediate term. Elsewhere, the receding buck and soured risk tone has modestly supported gold (+0.3%) in recent trade, as the yellow metal fluctuates above its 100 DMA (1296.64) and in close proximity to the 1300/oz level. Meanwhile, Chinese steel production increased by 12.7% Y/Y to the highest level on record as stronger margins allowed steel mills to increase utilisation rates. However, ING believes that margins can come under pressure moving forwards as “the more recent strength in Chinese steel prices [are] reflecting stock building following the Chinese New Year.”

US Event Calendar

  • 7am: MBA Mortgage Applications, prior 2.7%
  • 8:30am: Empire Manufacturing, est. 8, prior 10.1
  • 8:30am: Retail Sales Advance MoM, est. 0.2%, prior 1.6%; Retail Sales Ex Auto MoM, est. 0.7%, prior 1.2%; Retail Sales Control Group, est. 0.3%, prior 1.0%
  • 9:15am: Industrial Production MoM, est. 0.0%, prior -0.1%; Manufacturing (SIC) Production, est. 0.0%, prior 0.0%
  • 10am: NAHB Housing Market Index, est. 64, prior 63
  • 10am: Business Inventories, est. 0.0%, prior 0.3%
  • 4pm: Net Long-term TIC Flows, prior $51.9b; Total Net TIC Flows, prior $21.6b deficit

DB’s Jim Reid concludes the overnight wrap

Given the thousands of cold, dark, early starts that have been associated with writing the EMR over the last 12-13 years, I hope readers will forgive me one indulgence in setting the scene in front of me in contributing to today’s edition. I’m on the US West Coast and the moon is alighting the coastline and I can hear the gentle caressing of waves upon the shore below. I have a small glass of red and I’m about to fall into a blissful sleep as jet lag catches up with me. After a tough 10 days, even markets are starting to look better. However, this scene won’t last forever and maybe the recovery might not either.

Indeed, although markets might have staged a mini recovery yesterday it wasn’t like there was a material piece of new news to help drive a change in view on the US-China trade spat.The fact that both sides appear willing to continue conversing is perhaps fuelling some hope that there will still be a positive outcome to this down the line but it’s hard to see it disappearing from our screens anytime soon. The next point of call will be the data with a number of sentiment indicators due out from the end of this month which should capture this recent escalation. Indeed, yesterday NY Fed President Williams said he is focused on the latest survey data to gauge the impact of the trade stress. Until then, its likely markets remain in a state of relative flux.

The recovery for risk yesterday included a +0.80% gain for the S&P 500 – only the second positive day in the last six sessions. At a sector level some of the biggest gains were reserved for the recently beaten up tech and financials sectors. Indeed the NASDAQ closed up +1.14% although is still down -2.30% this week while the DOW rose +0.82%. The semi-conductor index also closed up +2.40%, halving its loss on the week. In Europe the STOXX 600 finished +1.01% and DAX +0.97%. The VIX (-2.2pts) also dipped back below 20 while in credit US HY spreads ended -2bps tighter. The recent rally for Treasuries also abated with 2y and 10y yields both rising +0.9bps, although Bunds did hold back down at the lowly levels of -0.072%. BTPs (+2.9bps) did however underperform on the back of headlines quoting Northern League head Salvini as saying that Italy is ready to break EU fiscal rules. His coalition partner Luigi di Maio of the Five Star Movement directly contradicted him to reporters, calling Salvini’s comments “irresponsible” and cited the widening spread to bunds as a concern. In normal times that might be encouraging to hear from an Italian politician, but since it currently also implies stress within the coalition and potentially elevated odds of an early election, such internal dissent is not optimal. Elsewhere EM FX (+0.14%) had a rare up day, helped by the offshore yuan’s +0.12% rally, its first in six sessions. That also helped the MSCI EM equity index gain +1.40%, while safe haven currencies like the Yen (-0.28%) and Swiss Franc (-0.23%) slipped.

This morning Asia has followed the lead from Wall Street with gains led by China with the Shanghai Comp and CSI 300 gaining +1.10% and +1.35% respectively. That actually comes despite disappointing data following the release of the April activity indicators in China. Industrial production (+5.4% yoy vs. +6.5% expected), retail sales (+7.2% yoy vs. +8.6% expected) and fixed asset investment (+6.1% ytd yoy vs. +6.4% expected) all missed and slipped from March, although a bright spot was property investment which rose one-tenth to +11.9% yoy. Overall though the data does throw a little bit of doubt into the recovery thesis especially given the timing just before the latest ratcheting up in the trade war which makes next month’s data of significance. We should note that the data has been countered by a comment from a spokesman for the National Bureau of Statistics who said China still has ample room to step up policy support – suggesting further scope for policy stimuli – which appears to be helping to support markets this morning. The Hang Seng (+0.73%), Nikkei (+0.18%) and Kospi (+0.55%) are posting more modest gains.

Back to yesterday where the main trade headlines of note included China’s Global Times running an editorial carried by the Xinhau News Agency that included a reference to the “people’s war” against Washington’s “greed and arrogance” and the Chinese “fighting back to protect its legitimate interest”. A separate story from the Global Times claimed that “what is important is how much pain the US economy will be forced to endure”.

As for Trump, the President tweeted that “when the time is right we will make a deal with China” and that “my respect and friendship with President Xi is unlimited but, as I have told him many times before, this must be a great deal for the United States or it just doesn’t make any sense”.Trump also tweeted that “China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing….if the Federal Reserve ever did a ‘match’, it would be game over”. Away from that Axios reported a senior administration official as saying that a “trade deal with China isn’t close and the US could be in for a long trade war”.So all in all nothing that really suggests there is a feeling of de-escalation around the corner. Markets seemed to like the fact that Trump is still focused on a deal and that he continues to speak in good terms about President Xi.

One last mention of trade for this morning, yesterday Craig published a short note looking at potential returns and spreads for USD HY under scenarios of further trade escalation filtering through to the trade proxy PMI, as well as relative sector betas and r-squareds to trade. See his note here .

In other news, Sterling underperformed again yesterday, sliding -0.41% versus the dollar and -0.25% versus the euro (to its lowest level since February), as the situation around Brexit continued to deteriorate.The government confirmed last night that it plans to bring a Brexit bill back to Parliament in early June. There are two problems with this: 1) Labour is not on board, with one official saying “today hasn’t helped” after the hard-Brexit wing of the conservative party dug in their heels against a customs union, and 2) the European Parliament elections are likely to show a big setback for the Conservative party, which would weaken Prime Minister May’s position. A poll yesterday (Kantar Public) showed Labour 9pts ahead of the Tories. Something has to give soon and perhaps this will be Mrs May last roll of the leadership dice.

We also got some Fedspeak yesterday, with NY Fed President Williams speaking in Zurich and repeating the mantra that “policy is in the right place.” He went on to say that he doesn’t “see any reason to have a bias up or downward,” confirming that policy is on hold for now. This view was subsequently reiterated by The Kansas City Fed’s Esther George, considered the most hawkish member of the committee, who said “the wait-and-see approach is appropriate.” She did hedge a little, saying that a 50bps undershoot of the 2% inflation target was acceptable to her, which is more in-line with her prior views but shouldn’t signal any change to the centre of the committee’s thinking.

As for economic data, the highlight was the latest UK jobs report which showed the unemployment rate down 0.1pp to 3.8%, a fresh 44-year low, while wage inflation was softer than expected at 3.2% from 3.5%. In Germany, April headline CPI was confirmed at 2.0% yoy, while the ZEW survey was mixed. The current situation assessment rose to 8.2 from 5.5, but the expectations component slid to -2.1 from 3.1. The euro area ZEW expectations index similarly fell to -1.6 from 4.5. In the US, import prices were softer than expected at 0.2% mom versus expectations for 0.7%. That miss can largely be explained by the dollar’s recent rally, so the effect should fade over the next few months. Separately, the NFIB small business optimism survey rose to 103.5 from 101.8, better than expected and the third consecutive rise.

Looking at the day ahead, this morning we’re due to get a first look at Q1 GDP for Germany where the consensus is for a +0.4% qoq reading. Later on this morning we’ll also get a second reading of Q1 GDP for the Euro Area. A reminder that the flash showed a +0.4% qoq print. Also due this morning is the final April CPI revisions in France and Q1 employment data for the Euro Area. In the US this afternoon we’ve got the April retail sales report due up where the consensus expects a +0.3% mom core and control group reading. We’ll also get the May empire manufacturing reading, April industrial production reading, May NAHB housing market index reading and March business inventories print. Away from the data we’ve got the Fed’s Quarles and Barkin due to speak, along with the ECB’s Coeure and Praet.


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