So much for yesterday’s Amazon bounce.
Just before 4AM EDT, a Bloomberg headline hit which has not only unleashed a furious global selling wave, sending the S&P lower by nearly 2% and the Dow 600 lower, but may have changed the course of history: that’s when China announced it was striking back in the ever faster and more furious trade war between the US and China:
While we detailed the response earlier, for those who missed it, China announced it would launch reciprocal tariffs on 106 US products worth $50bln in bilateral trade, setting a new tariff rate of 25% on soybean, autos and chemicals. While the Chinese response was expected, the inclusion of soybeans was not, and will likely infuriate Navarro/Trump and lead to another round of US tariffs. China Ministry of Commerce also said it would adjust tariffs on ethylene glycol and diethylene glycol sold by firms including Dow Chemical (DOW), Ineos and BASF (BAS GY) among others.
And in an ominous warning that more is coming, China said that while its door to the US remains open for negotiations, if the US wants to keep fighting, China will hold onto the last, according to the Chinese Vice Commerce Minister.
The result was a freefall in both S&P futures, which were down nearly 50 points from Tuesday’s close…
… but also in the Dow Jones, which plunged as much as 600 points…
… and, of course, Emerging Markets, with the MSCI EM stock index heading for its lowest close in two months with EM currencies a sea of red across the board.
And speaking of sea of red, this is what global cash markets and futures look like right now.
And while we previously discussed China’s response, which for now includes a 25% tariffs on 106 items with a trade value of $50 billion, traders are already thinking about what happens next, should Trump proceed to a third round of measures. Commenting on this, Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis, said that “China will probably reduce its net purchases of U.S. Treasuries, as it has done from the beginning of the year, but more rapidly. This should push up longer-term yields in the U.S. but also widen spreads of investment grade U.S. credit.” There is also the FX angle: “There is a chance (although I doubt it will be immediate) that the PBOC engineers a staggered depreciation of the renminbi against the dollar.”
For now, however, keep an eye on the plunge in Boeing which is down 6% this morning, and soybeans, the most important US food import into China…
… whose price is plunging this morning as a result of China’s unexpected announcement the commodity would make the list.
Amusingly, China picked a good time to retaliate, with its own markets closed for the rest of the week, even if industrial metals were hammered overnight as one would expect.
To be sure (as the charts above reveal) the return of trade wars front and center dominated traders’ attention, as global markets reacted in traditional risk-off fashion: the USD/JPY slumped, with 106 so far proving support; AUD was weaker across the board given correlation to China demand and commodities, while the yuan weakened into North American crossover. The euro filled stops above $1.23 as short-term accounts were caught short.
Mining and tech sectors lead European equity markets lower, while risk-off assets such as USTs and bunds, rallied. The Treasury curve steepened and credit spreads edge wider.
Oil was trading at session lows in response to China’s retaliation; oil prices continued to slip further after yesterday’s APIs, which showed a surprise drawdown of 3.3mln for headline crude, but a build in the other product components. Gold climbed higher as risk-aversion spreads across the market and flows move into safe-havens. Base metals also suffered losses after more tariffs were imposed on steel and as trade war fear continues to dictate global sentiment with copper futures -2%, and soybeans, as noted previously, tumbled -5%
Top Overnight News
Asia traded somewhat indecisive as the region failed to take full impetus from the rebound on Wall St, where all major indices recovered lost ground and reprieve for tech stocks pushed the Nasdaq back into the green YTD. ASX 200 (+0.1%) and Nikkei 225 (+0.1%) initially caught a tail wind from the momentum stateside and both opened higher, but then failed to hold on to the gains as trade concerns lingered after the US announced its proposed China tariff list. This was met by condemnation from China which is also said to be planning reciprocal tariffs of equal scale and strength. Conversely, Hang Seng (-2.2%) was choppy and Shanghai Comp. (+0.2%) shrugged-off the trade tensions and disappointing Caixin PMI data, to trade with a positive tone ahead of the extended weekend for the mainland and following reports of a USD 9.7bln bailout for Chinese conglomerate Anbang Insurance. Finally, 10yr JGBs were uneventful amid the indecisive risk tone in the region and as JGBs took a breather from yesterday’s gains which saw the 20yr yield drop to its lowest since late 2016. The BoJ were also present in the market under its bond buying program for 1yr-10yr JGBs, although it maintained the purchase amounts in line with the prior. Chinese Caixin Services PMI (Mar) 52.3 vs. Exp. 54.5 (Prev. 54.2). Chinese Caixin Composite PMI (Mar) 51.8
Top Asian News
Markets have been shaken up amid China’s most recent tit-for-tat tariff announcement on 106 US products. As a result, European equities have slipped firmly into the red (Eurostoxx 50 -1.3%). The tech sector opened softer following US President Trump proposing a tariff list on China consisting mostly of tech products. Industrials and materials have edged lower amid fears of a lag in global growth as trade disputes escalate. Energy and utilities are the only sectors in the green. Elsewhere, in terms of stocks specifics, WPP (-1.8%) is lower as CEO Martin Sorrell is under investigation for misconduct claims. Swiss Re (-3.4%) shares are lower following reports the company is in talks with Softbank over a minority stake of no more than 10%.
Top European News
In currencies, the Dollar index is clinging to 90.000+ levels amidst more US vs China import tariff measures and countermeasures as the trade war ratchets up a few more notches. JPY was one of the more volatile majors again, but this time on broader risk sentiment factors rather than BoJ policy statements and misperceptions. Usd/Jpy hit highs near 106.70 overnight, but is now retreating through modest bids at 106.40 to a circa 106.00 low as China backs up strong words with action via 25% taxes on 106 US products totalling Usd50 bn (ie equal and opposite to the US). EUR/CHF was firmer vs the retreating Greenback and revisiting recent peaks (around 1.2300+ and 0.9550 respectively) as aversion and safe-haven positioning resurfaces. EUR was largely unphased by the latest Eurozone CPI data with the headline printing in-line with expectations. Sterling was undermined by a much weaker than expected UK Construction PMI (47.0 vs. consensus 50.9), with cable down below 1.4050 vs almost 1.4100 at best and Eur/Gbp close to 0.8750 from near 0.8715. Loonie lost some NAFTA-related gains and the headline pair back over 1.2800 vs 1.2775 earlier, with the global trade rift threatening to undermine if not neutralise any positives from a tri-party agreement between Canada, the US and Mexico. USD/CNY was up sharply on the latest US-Chinese protectionism offensives to around 6.3000 vs the PBOC’s 6.2926 mid-point fix.
In commodities, oil is trading at session lows after China responded with extensive retaliatory measures against the US. Oil prices continue to slip further after yesterday’s APIs, which showed a surprise drawdown of 3.3mln for headline crude, but a build in the other product components. Looking at the metal complex, gold climbs higher as risk-aversion spreads across the market and flows move into safe-havens. Base metals also suffered losses after more tariffs were imposed on steel and as trade war fear continues to dictate global sentiment.
Looking at the day ahead, we’ll get the March ADP employment print, final PMI revisions for March (services and composite), ISM non-manufacturing for March, factory orders data for February and final durable and capital goods orders revisions for February. The Fed’s Bullard and Mester are also scheduled to speak.
US Event Calendar
11am: Fed’s Mester Speaks on Diversity in Economics
DB’s Jim Reid concludes the overnight wrap
A few days of quiet evening markets and well behaved babies wouldn’t go amiss as tonight Liverpool are back in the Champions League quarter finals for the first time since 2009 and tomorrow sees the start of the Masters at Augusta – possibly the most perfect event to get televisually lost in. However the reality will probably be that I’ll be scrambling to work out why the S&P 500 dived 2% into the close for the EMR and why the twins have decided to wake up in tandem and cry uncontrollably. Regardless of this I’m backing a Liverpool / Mcllroy / stronger average hourly earnings treble this week.
On my return from holidays I spent yesterday trying to work out where next for markets. On reflection I would say there are five things negatively impacting markets at the moment. 2 were very predictable, one less so and 2 have come more from left-field. Higher US inflation and tighter monetary policy/less QE were very predictable at the start of the year. The speed of the loss of momentum in growth has been less easy to predict though. The two curve balls are the sudden move towards tariffs/protectionism, and the tech sector woes although the former was always the direction of travel but the scale and speed of Mr Trump’s actions would have been difficult to predict at the start of the year. The problem going forward is that the first two are going to continue to be an issue this year. The growth outlook is more uncertain than it was but we think it likely holds up and the recent loss of momentum stabilises soon. However the final two will remain curveballs. If you can second guess how far and fast Mr Trump pushes protectionism then please let me know. As for the tech sector, again much depends of how far the authorities want to increase regulation and maybe taxes. It feels like it’s on the up but it’s very difficult to analyse. Overall we continue to believe the low vol world is over (as we felt in our 2018 Outlook) but where the higher vol regime settles is probably down to whether global growth holds up from here.
Last night saw a recovery in US markets (S&P 500 +1.26%) as one of the five factors above – namely tech – seemingly got a reprieve as Bloomberg reported that the White House isn’t planning to follow through on Mr Trump’s attacks on Twitter on Amazon. Staying with tech, Tesla’s shares rallied +6.0% after the company said it did not need to raise capital this year and announced better than expected Model 3 production numbers. This all helped the S&P rise back above its 200 day moving average (that it breached on Monday for the first time since the Brexit vote) with all sectors up and gains led by the energy, health care and financials sectors. The Dow (+1.65%) and Nasdaq (+1.04%) also recovered around half of Monday’s losses, while the VIX fell 10.7% to 21.10. In Europe, bourses pared back losses and the Stoxx 600 (-0.49%), DAX (-0.78%) and FTSE (-0.37%) ended modestly down.
Overnight the US trade representative office (USTR) has proposed imposing 25% tariffs on c$50bn worth of Chinese made imports. The list of 1,300 products include high tech items that “benefit from Chinese industrial policies, including (the) Made in China 2025 (strategy)” such as semi-conductors as well as products ranging from TV sets, motor vehicles, dishwashers and even flamethrowers! Looking ahead, there is a 60 day consultation period where the public can provide feedback and the government will hold hearings on the tariffs on 15th May. On the other side, the Chinese Ministry of Commerce indicated “China plans to bring relevant US practice to the dispute settlement body of the WTO and is ready to take counter measures on US products with the same intensity and scale that will be published in the coming days”.
This morning in Asia, markets are trading little changed in part awaiting to see whether trade tensions escalate from here. The Nikkei (+0.14%) and Shanghai Comp. (+0.80%) are up while the Hang Seng (-0.08%) and Kospi (-1.24%) are modestly down as we type. Datawise, China’s March Caixin composite PMI (51.8 vs. 53.3 previous) and Japan’s Nikkei composite PMI (51.3 vs. 52.2 previous) both slowed from the prior month.
Now recapping other markets performance from yesterday. In government bonds, core European 10y bonds yields were slightly higher (Bunds +0.5bp; Gilts +0.9bp) while UST 10y rose 4.5bp to 2.776% partly driven by the risk on tone in equities and tech shares. In FX, the US dollar index and Sterling gained 0.16% and 0.09% respectively while the Euro fell -0.26%. Elsewhere, WTI oil was up 0.79% to $63.51/bbl while precious metals weakened and partly reversed Monday’s gains (Gold -0.64%; Silver -1.06%).
Moving on, with the March monthly manufacturing PMI/ISM data now in, we have updated our usual charts showing the data regressed against the YoY change in equity markets over the last 20 years. Previously, equity markets looked very cheap relative to the very elevated level of PMIs across the globe. Something had to give. However while the data has softened from recent highs, the plunge in equity markets in recent weeks means that this argument still holds true. This is particularly true in Europe where the data suggests that the current level of the Stoxx is about 21% cheap. Indeed the equity PMI implied level for the Stoxx is 50.0 compared to the actual reading of 56.6. The export-heavy DAX, which has fallen sharply in recent weeks, is 28% cheap while the CAC is 11% cheap and IBEX 23% cheap. The FTSE MIB, however, is just 2% cheap with the index largely outperforming other bourses in recent weeks, and Italy’s PMI seeing a pullback in the last two months. That said, when we again re-benchmark to take into account currency moves the gaps are less exaggerated given the 15% appreciation in the Euro over the last 12 months. Indeed the Stoxx is just 6% cheap when we do this, while the DAX and IBEX are 15% and 10% cheap. The CAC and FTSE MIB are actually 5% and 14% expensive, respectively.
Meanwhile, for the US the S&P 500 is up 9% over the last twelve months however the ISM implied level (given it remains elevated) is 24% implying a performance gap of 15%. For the UK the FTSE 100 is similar (14% cheap) however when we again dollar adjust the data the gap shrinks to being just 4% cheap. Finally in Asia the Nikkei is 2% cheap in local currency terms and 5% expensive in dollar terms, while China’s Shanghai Comp is 18% and 11% cheap, respectively. See the tables and charts in the PDF for more info. We’ve included both local currency and dollar adjusted numbers. As we always say we use this as a rough guide to valuations and try to concentrate on the general cheapness/expensiveness of global markets rather than individual ones where distortions can occur, especially for indices where the constituents are more/less exposed to their domestic markets.
Now turning to the various Fed speak yesterday. The Fed’s Brainard reiterated that US fiscal stimulus and other economic tailwinds creates a backdrop that “warrant continual gradual increases in rates”. She added that while these stimulus “should boost the economy” when we are close to full employment, but “it’s hard to know with precision how the economy is likely to respond”. On asset valuations, she noted “valuations in a broad set of markets appear elevated… even after taking into account recent movements”. Elsewhere, the Fed’s Kashkari reiterated his dovish views and noted “we’re probably pretty close to the neutral (rates) right now” and that while US tax cuts have clearly lifted enthusiasm among businesses but it’s still unclear if the cuts are “actually going to lead to more investments”. Finally, the San Francisco Fed president John Williams has been confirmed to replace William Dudley as the next head of the NY Fed. Following on, our US economists have taken a closer look at the degree of slack in the US labour market. Their analysis reinforces their previous assessment that there is little, if any, remaining slack in the labour market. This conclusion is based on two findings: i) most groups within the marginally attached workers (those that want a job but not currently in the labour force) are either near pre-crisis levels or are not particularly sensitive to the business cycle and ii) data on labour market flows indicate that the probability of this group entering the labour force has fallen to near record low levels. Hence, they continue to expect the unemployment rate to fall to 3.4% this year and to 3.2% by end-2019, which would be the lowest level since 1953. Refer to their note for more details.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the March total vehicle sales were above market at 17.4m (vs. 16.9m expected) and the highest for YTD CY18. In Europe, the final reading on the Euro area’s March manufacturing PMI was confirmed at 56.6, which is -2pt mom and -4pt from the 20 year high in last December. Across the region, Germany was revised down by -0.2pt to 58.2 while France was revised up by 0.1pt to 53.7. For flash manufacturing PMIs, Italy was below market at 55.1 (55.5) while the UK was above expectations at 55.1 (vs. 54.7), although the new orders measures expanded the least since June. Elsewhere, Germany’s February retail sales was below expectations at -0.7% mom (vs. 0.7%) and fell for the third consecutive month, thus lowering annual growth to 1.3% yoy.
Looking at the day ahead, the most significant release is likely to be the March CPI report for the Euro area, while February unemployment data is also due. In the afternoon in the US we’ll get the March ADP employment change print, final PMI revisions for March (services and composite), ISM non-manufacturing for March, factory orders data for February and final durable and capital goods orders revisions for February. The Fed’s Bullard and Mester are also scheduled to speak.
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