It is a sea of red on trader screens this morning with U.S. equity futures modestly lower on the last trading day of the month, after European and Asian shares fell following Trump’s latest comments on trade. Emerging Markets were hit again while Treasury yields drifted lower and the dollar rebounded from an early dip.
The deepening rout in the Turkish lira and Argentinian peso spread to other emerging markets, with the Indonesian rupiah dropping to the weakest level since the 1998 Asian financial crisis…
… and the Indian rupee sliding to a record low.
Caution has returned to markets as global stocks end a month that saw a solid rally from mid-August. While the Fed remains on its tightening path and Chinese authorities stepped in to stem declines in the country’s currency, the threat of global growth taking a hit from souring U.S.-China relations remains front and center, and continues to slam emerging markets the hardest.
After emerging markets initially ignored the slide in the Argentine Peso (and Turkish Lira), the correlation between the currency and the broader EM FX index has jumped, as the Argentine contagion has spread to the rest of the world following the latest shock plunge sent the currency to a record low.
More trade uncertainty was in the air as President Donald Trump was said to move ahead with a plan to impose $200 billion in new tariffs on China, pushing the MSCI Asia Pacific down 0.3%. One bright spot, China’s official manufacturing PMI unexpectedly strengthened, signaling some resilience to escalating trade wars and that China’s stimulus may be trickling into the economy:
It has been a busy session so far, with several product-specific moves: the Yuan rallied in Asian trading after stronger-than-expected PBOC fix coupled with domestic PMI beats, however that did not help the Shanghai Composite which closed lower for a 4th day.
The EUR was bid early in European session on hawkish Nowotny comments, however it reversed its gain and slid to session lows below 1.1660 as US traders starting coming in; At the same time, USDJPY made a firm break below 111.00, while the Turkish Lira for once lead EMFX higher after latest de facto tightening measures sought to incentivize local currency savings.
Turkey hiked a tax on up to 6-month FX deposit accounts to 20% from 18%, and raised the tax on FX accounts with maturities of up to 1 year to 16% from 15%, according to decree published in official gazette. At the same time, Turkey cut tax on lira deposit accounts to 5% from 15% for up to 6-month accounts. The result was another squeeze, but also confirmation that the central bank refuses to intervene conventionally by hiking rates. As a result while the lira initially jumped 3%, it has since seen the gain fade to 1.2%
U.S. equity futures trade close to bottom of yesterday’s range. JGB futures spike lower as BOJ purchase schedule for September shows a reduction on a net basis.
European shares fell for a second day on Friday on reports that U.S. President Donald Trump is planning more tariffs on China, while Whitbread surged after clinching a $5.1 billion deal with Coca-Cola. The STOXX 600 dropped 0.5%, on track for its biggest decline in two weeks, led by Germany’s DAX which was dragged lower by trade-sensitive industrial stocks, and fell 1%. Sparring over trade between Trump and the EU hit European car stocks, which were down 1% and the worst-performing sector after Trump told Bloomberg he rejected an EU offer to eliminate car tariffs, saying its trade policies are “almost as bad as China”. In response, European Commission President Jean-Claude Juncker said the EU would respond in kind. Daimler, Volkswagen, BMW, and Continental were the biggest weights on the DAX, falling 1 to 1.3 percent after rebounding in the previous session.
Earlier, Asian markets also traded lower across the board, with sentiment hit by reports Trump will back tariffs on an additional $200BN of Chinese goods as early as next week, although losses in the Asia-Pac region were stemmed as participants also digested a trifecta of encouraging China PMI data. Nonetheless, ASX 200 (-0.5%) was lower as weakness in miners and profit taking in telecoms led the downside in Australia, while the Nikkei 225 (-0.1%) was initially pressured by a firmer currency but then showed resilience and gradually rebounded throughout the session. Shanghai Comp. (-0.5%) was also weighed by the fresh tariff fears although data helped plug losses including Chinese Official Manufacturing and Non-Manufacturing PMI which topped estimates and with Composite PMI higher than previous. The
Hang Seng (-1.0%) was the worst performer as its largest weighted stock Tencent slumped over 5% at the open after China’s regulators said they plan to limit the number of new online games to restrict minors’ playing time. Other game developers join the slump, with Kingsoft falling 2.8% and Youzu Interactive dropping 7.5%.
“It’s very hard to see a decisive resuscitation of risk appetite until these tensions are resolved,” said Janus Henderson strategist Paul O’Connor. “We have learned to under-react to some of the individual headlines because if you try to extrapolate from any of them you could find yourself in big trouble.”
While trade disputes have caused uncertainty and volatility, investors drew comfort from strong earnings strong earnings.
“Concerns around trade are not significantly affecting macro and market fundamentals at this stage. There’s still a fairly strong global recovery, earnings forecasts remain resilient across the board,” said Janus Henderson’s O’Connor. “It limits the upside but isn’t something that is changing our perception of broader market fundamentals.”
For those who missed it, there was a barrage of Trump-related news overnight following an extensive Bloomberg interview, with the highlights below:
In overnight central bank news, the BoK kept the 7-day repo rate unchanged at 1.50% as expected, with the decision not unanimous as board member Lee dissented. BoK stated the economy is to maintain growth momentum and rebound in consumption will continue but also commented that pace of investment will slow. Elsewhere, the RBA said high debt levels could make future policy decisions difficult and could also make the economy less resilient to shocks.
In rates, USTs remain supported through Asia and Europe with curve unchanged; bunds traded in a tight range while BTPs rallied after reports of a more pragmatic deficit ratio within the new Italian budget.
Expected data include University of Michigan Consumer Sentiment. Big Lots and Rubius Therapeutics are among companies reporting earnings.
Top Overnight News from Bloomberg
Asian equity markets traded mostly lower with sentiment weighed as trade war fears were reignited by reports US President Trump is said to back tariffs on an additional USD 200bln of Chinese goods as early as next week. This subsequently saw all US majors close in the red and both the S&P 500 and Nasdaq Comp. snap their streak of record highs, although losses in most the Asia-Pac region have been stemmed as participants also digested a trifecta of encouraging China PMI data. Nonetheless, ASX 200 (-0.5%) was lower as weakness in miners and profit taking in telecoms led the downside in Australia, while the Nikkei 225 (-0.1%) was initially pressured by a firmer currency but then showed resilience and gradually rebounded throughout the session. Shanghai Comp. (-0.5%) was also weighed by the fresh tariff fears although data helped plug losses including Chinese Official Manufacturing and Non-Manufacturing PMI which topped estimates and with Composite PMI higher than previous, while Hang Seng (-1.0%) was the worst performer as its largest weighted stock Tencent slumped over 5% at the open on government plans to control the amount of new online game releases. Finally, 10yr JGBs were marginally higher with demand supported by early safe-haven flows and with the BoJ also present in the market for nearly JPY 1tln of JGBs ranging from 1yr-10yr maturities.
PBoC skipped open market operations for a net weekly drain of CNY 170bln vs. last week’s CNY 40bln net injection.
Top Asian News
European equities are largely on the backfoot (Eurostoxx 50 -1.1%) after extending opening losses. In terms of sectors, IT, materials and consumer discretionary names underperform. Material names are lower on base metal price action while consumer discretionary names are weighed on by autos following comments from EU’s Juncker stating the EU will increase auto tariffs if the US does, hence denting sentiment in the sector. In terms of individual movers, Whitbread (+15.1%) opened higher by over 18% on reports the company proposed the sale of Costa to Coca Cola for GBP 3.9bln, while Whitbread’s CEO added the deal offers a significant premium to anything that could be achieved from spinning off Costa alone.
Top European News
In FX, JPY benefited from month end-related demand and risk aversion amidst heightened US-EU/China import tariff tensions, with Usd/Jpy reversing further from near 112.00 highs to circa 110.70 and Jpy crosses strong bar Chf/Jpy for the aforementioned reasons. EUR/GBP – Both slightly firmer vs the Greenback and on a par with each other as the single currency meanders between 1.1690- 60 and Cable circles 1.3000 ahead of more Brexit talks and less positive EU vibes about the 2 sides still being a long way from resolving the NI backstop. The cross has been volatile, albeit rangy around the 21 DMA at 0.8972, with stops and/or RHS orders for month end from 0.8975-80 pushing the pair up towards 0.8990 at one stage. Back to Eur/Usd, option expiries abound from 1.1675 (1.1 bn), through 1.1700-05 (1.7 bn) to 1.1720-25 (1.85 bn). AUD/NZD – No real sign of any lasting comfort from better than expected Chinese PMIs overnight, as the Aussie and Kiwi remain on track to end a torrid week with extended losses vs their US counterpart due to increased US-China and global trade threats. Aud/Usd has tumbled through 0.7250 and Nzd/Usd is struggling to hold 0.6650 as the cross rotates around 1.0900, but hefty option expiry interest may exert influence in Aud/Usd into the NY cut (almost 1.2 bn at 0.7250). EM – Interestingly, Turkey got a bit more purchase from latest measures to halt Lira losses via prolonging tax exemptions on wealth repatriation by 6 months, increasing withholding tax on up to 1 year foreign currency deposits and setting taxes on Try deposits of up to 1 year at 0% than Argentina with its eye-catching (watering) 1500 bp rate hike on Thursday. Indeed, Usd/Try reversed sharply from just over 6.7900 to sub-6.3800 before settling around 6.5000 amidst more verbal intervention.
In commodities, WTI and Brent futures are softer on the day while the former is still holding onto the USD 70/bbl handle heading into the end of the month. Next month will be interesting as the OPEC and non-OPEC technical committee meet on 11th to potentially discuss a production strategy, while the JMMC are to meet in Algeria on the 23rd. Elsewhere, gold is benefitting from the softer dollar while copper lags on reports the US may impose tariffs on USD 200bln worth of Chinese goods as soon as next week. Separately, the Shanghai Futures Exchange are to launch copper options on September 21st.
US Event Calendar
Don Kaufman delivers what readers are calling 'HIS BEST YET!' In this exclusive Guide, Don will give you ALL the secrets he's taught millions of other traders to help guide them along in their successful options trading journey...
Now, this is NOT for those who only want to make a HALF attempt...nope...this is ONLY for those serious about becoming a better trained, more profitable, and long term options trader!
If that's YOU...Download Your Copy below: