A sense of "risk off" has returned to the the market, with 10Y yields sliding, the dollar rebounding from session lows and the Turkish Lira resuming its plunge, renewing concerns about emerging market contagion, leading to a "red return" across global market monitors, following yesterday's torrid surge in the S&P500.
The USDTRY surged over 8% on Friday, infecting risk sentiment in a generally subdued and low volume session.
There wasn't one specific catalyst for the latest sharp selloff, although some cited the latest credit measures to help domestic corporates as potentially increasing pressure on banking system.
In its latest steps to shield the economy and mitigate the impact of "economic attacks on our country", Albayrak’s finance ministry on Friday said that non-financial companies’ credit worthiness wouldn’t be affected by failure to service debt amid the recent rout. Credit lines to firms would remain open, and pricing and repayment periods would be kept flexible, it said. The finance ministry also said that:
- It would limit breaches due to lira decline in loans won’t be taken into consideration; banks won’t demand loan closings in such instances
- Banks won’t demand additional collateral for corporate loans whose collateral value have declined due to lira depreciation
- Force majeure may be declared on loan repayment delays, dud cheques and protested bills. Thus, companies’ access to credit won’t be impaired
In other words, the government is giving banks a blank slate to continue business as usual even if they are on the verge of collapse, not only intensifying the deterioration of the economy, but breaking down traditional risk signaling pathways.
Another reason behind today's slide was potential risk-shedding before week long Turkish public holiday and upcoming S&P comments on Turkish rating.
Overnight, President Trump stated that Turkey has taken advantage of US for many years and are now holding US pastor, while he added the US will not pay anything for the release an innocent man but are cutting back on Turkey. Separately,
a report in Middle East Eye said that Turkey is ready to release Pastor Brunson but the US is offering nothing in return.
TRY traders are also spooked as we may see the the outcome of the appeal court's consideration of Pastor Brunson's release request today: it is expected some time this week after the second criminal court rejected the request on Wednesday. On Thursday, Treasury Secretary Mnuchin also threatened more sanctions overnight over Brunson's ongoing detention, suggesting further headline risk for US-Turkey tensions. "It still looks like we’re headed to more conflict," Kathy Jones, chief fixed-income strategist at Charles Schwab Inc. “Neither side seems to be backing down yet.”
Meanwhile, that other closely watched FX pair, the USDCNH briefly pushed lower on reports that the U.S. will pressure for a stronger yuan, however the move was s not sustained given similar reports from WSJ yesterday; and as a result the offshore Yuan was trading around 6.87, just fractionally lower than the Thursday close. Also notable, the offshore yuan interbank rates (Hibors) rose sharply in delayed response to yesterday’s liquidity move via forwards.
European and U.S. equity futures grind lower, in cash equities the bank and auto sectors underperform in typical risk-off manner. S&P index futures were little changed as investors await further developments in the renewed dialog between the U.S. and China. Attention will shift later to leading indicators and University of Michigan Confidence Index, while the only big company to report earnings is Deere & Co. According to Bloomberg, Department-store stocks will be in focus after Nordstrom boosted forecasts and surged after hours, as well as chip stocks after Nvidia and Applied Materials disappointed investors with their outlook.
In Europe, tech shares weighed on the Stoxx Europe 600 Index after disappointing results from U.S. chipmakers including Nvidia and Applied Materials. And while most Asian stocks advanced, Chinese shares slid again as U.S. President Donald Trump prodded Beijing to offer more at the bargaining table in their first major negotiation planned in more than two months. The Shanghai Composite tumbled to a new two year low.
Emerging-market stocks were relatively steady following a seven-session sell-off that brought them to the brink of a bear market, although if the TRY plunge continues contagion may re-emerge: as noted above, the market convulsions were again on show on Friday, as the lira slid to as low as 6.32 per dollar, bringing its losses for the year to more than 40%.
Today's instability followed news of a possible breakthrough in the U.S.-China trade dispute which brought some calm to markets whipsawed by the brewing financial crisis in Turkey and renewed angst over technology stocks. Traders are catching their breath after a sell-off in commodities and emerging-market stocks, which are on the brink of their worst weekly performance since the February volatility blow-up, signaling the trade war remains the wildcard for many markets.
"I don’t think we’re quite out of the woods yet," Marcus Miholich, a managing director at State Street Global Advisors Ltd., told Bloomberg TV in Sydney. “Investors have definitely taken note of these tensions and have reallocated into more defensive sectors and defensive names. Given we don’t seem to have the light at the end of the tunnel just yet, that will continue."
In other geopolitical news, US administration official said President Trump and Russian President Putin agreed in principle that Iran should exit Syria, although the official added that Russia sees this as a difficult task. US Pentagon report stated China has been expanding fleet of long-range bombers during last 3 years and are 'likely' training for missions which target the US.
The Bloomberg Dollar Spot Index headed for a third straight week of gains, and rebounded from session lows on Friday as the Turkish Lira slumped. The euro hit a one-week high versus the Swiss franc as risk sentiment keeps improving and filled option-related supply above 1.14 versus the greenback.
The euro extended its advance and gained as much as 0.4% to touch 1.1419 high as stops above 1.14 were triggered, before falling back below that handle. Yen and New Zealand dollars led gains against the greenback, with many short-term accounts citing yuan performance as a driver for the moves; USD/JPY fell as much as 0.4% to 110.49 low with the pair continuing to consolidate between 110-111. The pound erased gains as leveraged supply near highs absorbed buying pressure; the currency headed for its sixth weekly loss.
Treasuries extend gains as the lira weakens, with the UST curve led by 10-year. The yield on 10-year TSYs dropped 1 bp to 2.85%, the lowest in more than four weeks. Italy’s 10-year yield rose less than one basis point to 3.12%.
Elsewhere, oil climbed despite a surprise gain in U.S. crude stockpiles,
while zinc fell, heading for its worst weekly performance since 2011. Oil prices are up this Friday but are still set to end the week in the red for the third week in a row. WTI and Brent are both up ~0.25% on the day as energy specific news flow remains light. In the metals scope, Gold is up marginally off the back of USD weakness and testing the USD1180/OZ level to the upside, but is still set for its largest weekly fall in 15 months. Precious metals are slightly in the green with all of silver (+0.2%), platinum (+0.4%)and palladium (+0.1%) up on the day.
Expected data include Conference Board U.S. Leading Index and University of Michigan Consumer Sentiment Index. Deere reports earnings.
- S&P 500 futures down 0.1% to 2,841.25
- STOXX Europe 600 up 0.06% to 381.65
- MXAP up 0.5% to 161.95
- MXAPJ up 0.5% to 521.93
- Nikkei up 0.4% to 22,270.38
- Topix up 0.6% to 1,697.53
- Hang Seng Index up 0.4% to 27,213.41
- Shanghai Composite down 1.3% to 2,668.97
- Sensex up 0.8% to 37,952.37
- Australia S&P/ASX 200 up 0.2% to 6,339.23
- Kospi up 0.3% to 2,247.05
- German 10Y yield fell 1.5 bps to 0.305%
- Euro up 0.3% to $1.1412
- Italian 10Y yield fell 5.1 bps to 2.844%
- Spanish 10Y yield fell 0.5 bps to 1.44%
- Brent futures up 0.5% to $71.80/bbl
- Gold spot up 0.3% to $1,177.61
- U.S. Dollar Index down 0.3% to 96.33
Top Headlines from Bloomberg
- President Donald Trump prodded China to offer more at the bargaining table as the two countries prepared for their first major negotiation in more than two months in an effort to head off an all-out trade war
- U.S. Treasury Department will seek to pressure China to lift the value of yuan in coming trade talks, NYT reports, citing unidentified person briefed on the plans
- In government offices and think tanks, universities and state-run newsrooms, there is an urgent debate underway about what many in Beijing see as the hidden motive for Washington’s escalating trade war against President Xi Jinping’s government: A grand strategy, devised and led by Trump, to thwart China’s rise as a global power
- Australian central bank chief Philip Lowe said he’d still like to see the nation’s currency weaken further and sees interest rates remaining at a record low “for a while yet”
- Oil headed for the longest run of weekly declines in three years, dragged down by everything from an emerging-market rout to rising global supplies and lingering concerns over a spat between the world’s biggest economies
- Investors withdrew money from a range of asset classes over the past week analysts at Jefferies write in research note, citing EPFR Global data for week ended Aug. 16.
- NYT: U.S. Treasury will seek to pressure China to lift the value of yuan in coming trade talks, according to people familiar
- Fed’s Powell speech on monetary policy at Jackson Hole confirmed for 10 a.m. New York time on Aug. 24; full agenda to be released at 8 p.m. New York time on Aug. 23.
- Eurozone July CPI unrevised y/y at 2.1%; Core CPI unrevised at 1.1%
- China People’s Daily: China has ‘big room’ for macro-economic control; will take more proactive policies to stabilize trade, including pushing forward signing of free-trade agreements
- Mnuchin says Turkey faces more sanctions if pastor not released
Asian equity markets were mostly higher as the region tracked the performance on Wall St where all majors gained as sentiment was buoyed by trade optimism from the announcement of upcoming US-China trade talks. ASX 200 (+0.1%) and Nikkei 225 (+0.4%) were both higher although the former somewhat lagged after having stalled at fresh highs last seen in over a decade, while gains in Japanese exporters were contained by a stable currency. Hang Seng (+0.4%) and Shanghai Comp. (-1.3%) both initially conformed to the positive risk tone amid the trade-related hopes, continued PBoC liquidity efforts and as Hong Kong-heavyweight Tencent also rebounded from post-earnings losses, although the Shanghai Comp. eventually gave back its gains and then some, as sentiment deteriorated across the mainland. Finally, 10yr JGBs saw mild gains as prices rebounded from the prior day’s weakness and with the BoJ also in the market under its bond buying programme. PBoC injected CNY 90bln via 7-day reverse repos for a net weekly injection of CNY 130bln vs. neutral last week.
Top Asian News
- Turkey-Exposed Cos. May Be Back in Focus After Mnuchin Comments
- U.S. Said to Seek to Pressure China to Lift Yuan in Talks: NYT
- Interest Rates in China Below the U.S. Level Risks Outflows
- Apple Supplier Luxshare Said to Plan Camera Module IPO: Nikkei
European equities have started the day marginally lower (Euro Stoxx 50 -0.3%) as we approach the week’s end. The AEX is currently the underperforming bourse, with losses lead by Vopak (-7.0%) (whom are also at the foot of the Stoxx 600) after missing expectations on all of net profit, EBITDA and revenue. AP Moeller Maersk (+4.7%) also reported earnings, wherein revenues came in above least years results. The co. also confirmed source reports it is looking to spin-off it’s drilling unit and list it on the NASDAQ so as to focus on their transport business. Air France appointed the Ex-COO of Air Canada last night, Ben Smith, as CEO. Despite opening higher Air France shares reversed course amid protests from French unions about the Canadian’s appointment, and are currently down 4.0%.
Top European News
- Tycoon Deripaska Weighs Moving Sanctioned Companies to Russia
- Barclays Scraps Long Stance on Italy Bonds After Latest Selloff
- Draghi’s Richer Toolbox Keeps ECB Calm as Turkey and Italy Rage
- Air France-KLM’s New CEO Faces Immediate Union Threat of Strike
- Atlantia Gains on Report of Talks to Pay Fine on Bridge Collapse
In FX, the dollar index saw some downside deviation from the relatively tight range around 96.500 that has been prevalent since the Try-led EM exodus subsided amidst reports (albeit dated) that the US will urge China to revalue the Yuan during trade negotiations scheduled for next week. The index dipped just under 96.300 amidst broad Usd declines, but still restrained trade overall.
TRY/YUAN - The Lira maintained enough recovery momentum to trade a fraction above 5.7500 vs the Dollar, but stopped short of Thursday’s circa 5.7000 high that is very close to a key Fib level and in volatile conditions reversed to hit 6.0000+ levels. Meanwhile, the PBoC halted a run of daily Cny depreciations via the official mid-point fix to leave the offshore Cnh off recent lows and also bolstered by the provision of 7 day liquidity.
NZD/AUD - Highlighting the considerably improved risk tone, the Kiwi is making a more concerted effort to form a base at 0.6600 vs its US counterpart, while the Aud has extended above 0.7250 again, though still unable to reach 0.7300 with technical resistance just a head of the big figure and the RBA reiterating no rush or rationale to raise rates anytime soon (Governor Low overnight and message rammed home by Ellis earlier today).
EUR/JPY - The next best G10s, as the single currency revisits 1.1400 vs the Greenback where big option expiries run off today (1.9 bn from the big figure to 1.1410) and Usd/Jpy retreats from 111.00 again and also eyes hefty expiry interest, with 2.2 bn at the110.50 strike.
In commodities, oil prices are up this Friday but are still set to end the week in the red for the third week in a row. WTI and Brent are both up ~0.25% on the day as energy specific news flow remains light. In the metals scope, Gold is up marginally off the back of USD weakness and testing the USD1180/OZ level to the upside, but is still set for its largest weekly fall in 15 months. Precious metals are slightly in the green with all of silver (+0.2%), platinum (+0.4%) and palladium (+0.1%) up on the day.
Looking at the day ahead, we end the week with the July leading index and the preliminary August University of Michigan survey.
US Event Calendar
- 10am: Leading Index, est. 0.4%, prior 0.5%
- 10am: U. of Mich. Sentiment, est. 98, prior 97.9; Current Conditions, prior 114.4; Expectations, prior 87.3
DB's Jim Reid concludes the overnight wrap
Every time it gets a knock it has tended to wobble a little, find its feet, shake off the blow and then power ahead. After the weakness on Wednesday the S&P 500 rallied +0.79% yesterday and is now back to only 1.1% off the record highs again. Meanwhile the VIX - which spiked to 16.86 late morning on Wednesday - closed at 13.45 last night. We’ve had quite a few spikes in equity vol this year and whilst we’ve never returned fully back to the lowest end of the range we saw prior to the early February VIX melt down period, we have repeatedly retraced back most of the way prior to each fresh spike coming along.
In a world of much higher macro uncertainty, earnings have perhaps played a big part in keeping the S&P 500 in good health (perhaps a similar trend to marriage). Yesterday it was the turn of US retail to shine with Walmart up +9.33% after earnings showed that comparable sales rose 4.5% in the three months ending in July, more than double the consensus forecasts. Grocery sales rose the most in 9 years and they also boosted their full-year forecasts for comparable sales and adjusted profit.
From groceries to Turkey and in this ongoing story the highlights over the last 24 hours has been a continued rally in the Lira (+1.89%) yesterday, an investor call from the finance minister and comments from treasury secretary Mnuchin that Turkey faces fresh sanctions if they don't release pastor Brunson soon. The sanctions headlines took the shine off the Lira and showed that the saga still has a long way to go. This came after the call with investors that reiterated there are no plans for capital controls or to call on the IMF. The ministry talked up the banking sector and an acknowledgement of the need for fiscal discipline. There was a small rally in the Lira during the call which indicated that there were no nasty surprises.
Meanwhile on trade, President Trump told his cabinet members yesterday that “we’re talking to China….they just are not able to give us an agreement that is acceptable, so we’re not going to do any deal until we get one that’s fair to our country” (per Bloomberg). So lots bubbling along before the formal trade talks resume from 22 August. Elsewhere Reuters noted the US trade representative Lighthizer expressed hope that a revised NAFTA trade deal with Mexico could be reached in the next few days.
This morning in Asia, equities are trading modestly higher following the positive leads from the US. Across the region, the Nikkei (+0.44%), Kospi (+0.32%) and Hang Seng (+0.50%) are all up while Chinese bourses are down c0.5% as we type. Meanwhile futures on the S&P are pointing to a marginally positive start while the Yuan and Lira are both little changed.
Now turning back to yesterday, where equities started on a positive footing as trade tensions eased on news of further trade talks between the US and China. Then the improved sentiment gathered pace with a rebound in commodities and sound corporate earnings as noted earlier. In the US, the DOW rallied +1.58% with the help of trade bellwethers such as Caterpillar (+3.2%) and Boeing (+4.3%), while the S&P (+0.79%) and Nasdaq (+0.42%) also advanced. Back in Europe, the Stoxx 600 firmed for the first time in five days (+0.52%) with all sectors in the black while the DAX (+0.61%) and FTSE (+0.78%) also rose. The exception was Italy’s FTSE MIB which fell -1.83% to the lowest since April 2017, in part playing catch up as trading resumed post a holiday Wednesday while the motorway operator (Atlantia) for the recently collapsed bridge tumbled -22.3%.
Meanwhile core government bonds softened along with the risk on tone, with 10y bond yields up 1-2bp (UST +0.4bp; Bunds & Gilts +1.5bp) while Italian BTPs outperformed (-5bp). Domestic Turkish bonds yields remained volatile with 5y and 10y yields up 63bp and 66bp respectively. Turning to currencies, the US dollar index softened for the second day (-0.05%) while the Euro and Sterling gained +0.28% and +0.15% respectively. Meanwhile commodities staged a broad based recovery to recoup most of Wednesday’s losses, with LME lead (+5.86%), Zinc (+4.0%) and Copper (+2.36%) all up. Elsewhere WTI oil nudged up for the first time in four days to $65.46/bbl (+0.69%).
Before we look at the data our US economists have published a detailed update on the inflation outlook. In the near-term, they expect goods inflation to rise further, supporting the broader core inflation gauge. In the medium-term, the macro backdrop supports modestly higher inflation as Phillips curve effects should dominate some dollar headwinds even without accounting for potential non-linearities in the former. Overall the team continues to forecast core PCE and core CPI inflation at 2.3% and 2.5% for end-2019, respectively. If the data evolve as they anticipate, more Fed officials should support taking a restrictive stance. Refer to their note for details
Yesterday’s economic data was a bit mixed. In the US, initial and continuing jobless claims both ticked lower to 212k and 1,721k respectively. Both series remain extremely healthy around their lowest levels in 35 years. While July building permits rose, actual housing starts surprisingly fell, probably reflecting reduced activity in the western US amid ongoing wildfires. The August Philadelphia Fed Business Outlook surprisingly dropped to 11.9 (a positive value indicates expansion), its weakest level since 2016. After yesterday’s strong Empire State manufacturing survey, the picture for this month’s ISM Manufacturing PMI is somewhat muddled. Despite the headline softness however, forward looking subsections looked strong, especially capital expenditure expectations. Wage and inflation expectations remained healthy as well, supporting our economists’ view for further robust US growth and continued Fed rate hikes. In Europe, the June trade balance printed at a seasonally adjusted €16.7 billion, its lowest level since January last year, potentially signalling less robust global demand. In the UK, July retail sales rose 0.7% mom, a more robust pace than expected,though possibly attributable to warm weather and the World Cup rather than stronger fundamentals.
Looking at the day ahead, in Europe, we get June current account data and the final July CPI prints for the Euro area (1.1% yoy expected). In the US, we end the week with the July leading index and the preliminary August University of Michigan survey.
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