Futures Rally Fizzles After Trump China “Great Deal” Headline Sparks Algo Confusion

Yesterday’s violent reversal which saw the Dow tumble nearly 1000 points intraday from session highs on the Bloomberg report that Trump was preparing to unleash tariffs on all Chinese imports if upcoming talks with China’s president do not yield results, continued in the overnight session with headline scanning algos launching a global buying frenzy on a late Monday headline that Trump expects a “great deal” with China during a Fox News interview, while completely ignoring the rest of what Trump said, namely that China has “drained” the U.S. which has “really helped rebuild China” adding that “we are going to win that one,” referring to China trade battle, but the piece de resistance was that Trump doesn’t think China is “ready” to make a deal. Trump also confirmed the Monday’s Bloomberg report, saying that he is ready to impose $250BN in additional tariffs if deal doesn’t go through and adding that $267BN in tariffs was “waiting to go if we can’t make a deal.”

As it turned out, however, the “great deal” quote was enough to push Chinese stocks out of negative territory, and send Chinese stocks higher on the day, closing up 1%…

… while US futures followed suit and rose as much as 20 points from Monday’s close. However, it took some human intervention to temper the algo enthusiasm and read between the lines and trim the entire S&P futures rally…

…. while European stocks dropped as traders turned their focus to a slew of company results while realizing the what Trump said was not at all positive, and instead confirmed the next phase of a trade standoff between America and China.

While Europe’s Stoxx 600 index opened higher after better-than-expected results for major companies including BP and Volkswagen, earnings were mixed overall and promptly European bourses went into reverse after Germany’s DAX slumped to session lows dragging the broader Stoxx 600 into the red. Automakers declines were the culprit, which as Bloomberg noted is a sign that any inkling of good news, like VW’s earnings beat for example, faces a high bar in convincing investors the worst is over for the sector.

Optimists meanwhile noted that U.S. futures were still up, if well off session highs, while there’s was little spillover into other asset classes. Core euro-area bonds were underperforming the periphery, while risk-sensitive currencies like AUD and NZD in G-10, or TRY and ZAR in the EM are keeping their gains for the moment even as the dollar surged to session highs.

Earlier, the MSCI Asia Pacific Index outside Japan swung in and out of negative territory in morning trade and last traded 0.3 percent higher on the day, halting a five-day losing streak. The yen slid and Aussie rose as Japanese and Australian shares rallied. China’s stocks climbed after authorities made a fresh attempt to stabilize its stock markets by saying they’d encourage long-term funds to invest, although activity was choppy with investors cautious about further escalations in the Sino-U.S. trade war.

The index has lost 12 percent this month and is on track for its biggest October decline since 2008, during the global financial crisis: “At this point, nobody can say the equity market is bottoming out. Global investor sentiment remains shaky,” said Yasuo Sakuma, chief investment officer at Libra Investments in Tokyo.

China’s Shanghai Composite and the blue-chip CSI 300 gained to 1.0% and 1.1%, respectively, winning back earlier losses in a volatile session after China’s securities regulator said it would encourage share buybacks and mergers and acquisitions by listed firms, and would enhance market liquidity, in the latest attempt to put a floor under the country’s skidding equity markets. Japan’s Nikkei average also erased early losses and climbed 1.5%.

Adding to the jitters, China’s yuan continued to weaken, drawing closer to the closely watched support level of 7.00 vs the dollar. In onshore trade, the yuan slipped 0.15 percent to 6.9774 per dollar, a more than 10-year low, stirring speculation over whether the central bank will tolerate a slide beyond the key level of 7 per dollar.

According to Reuters, major state-owned Chinese banks were seen swapping yuan for dollars in forwards on Tuesday, but there was no immediate evidence of dollar selling in the spot market as the currency neared a key support level, three traders said.

As a result of the rising volatility, sentiment has continued to deteriorate: “The probability of global stocks turning to a bear market is increasing,” said Masanari Takada, cross-assets strategist at Nomura Securities. “While some investors who look at fundamentals buy stocks on dips, there are other players who keep selling automatically in response to heightened volatility. At times like this, buyers can easily be overwhelmed by negative headlines on tariffs, etc.”

In FX, the dollar extended its recent advance as month-end flows that kicked off the London session lent support, sending the euro and sterling to fresh day lows. The common currency subsequently got brief support from regional German inflation data and rebounded while Antipodean currencies led gains in G-10. The dollar gained on a decline in the euro after news German Chancellor Angela Merkel would not seek re-election as head of her CDU party and a big miss in European GDP (Q3 GDP 0.2%, vs Exp. 0.4%). Merkel said she would not seek re-election as party chairwoman, heralding the end of a 13-year era in which she has dominated European politics.

Oil prices were mixed after easing overnight as Russia signaled that output will remain high and as concern over the global economy fueled worries about demand for crude. West Texas Intermediate crude futures dropped below $67/barrel, while Brent crude futures dipped 0.3 percent to $77.13.

Expected data include Conference Board Consumer Confidence. Aetna, Allergan, Fiat Chrysler, GE, Mastercard, Pfizer, Amgen, Facebook, Hyatt, and T-Mobile are among many companies reporting earnings.

Market Snapshot

  • S&P 500 futures up 0.1% to 2,646.00
  • STOXX Europe 600 up 0.1% to 355.88
  • MXAP up 0.6% to 146.61
  • MXAPJ up 0.3% to 462.99
  • Nikkei up 1.5% to 21,457.29
  • Topix up 1.4% to 1,611.46
  • Hang Seng Index down 0.9% to 24,585.53
  • Shanghai Composite up 1% to 2,568.05
  • Sensex down 0.2% to 34,009.09
  • Australia S&P/ASX 200 up 1.3% to 5,805.10
  • Kospi up 0.9% to 2,014.69
  • German 10Y yield rose 2.0 bps to 0.397%
  • Euro down 0.01% to $1.1372
  • Italian 10Y yield fell 10.7 bps to 2.967%
  • Spanish 10Y yield rose 0.3 bps to 1.547%
  • Brent futures down 0.4% to $77.02/bbl
  • Gold spot down 0.5% to $1,223.42
  • U.S. Dollar Index up 0.2% to 96.76

Top Overnight Headlines

  • President Trump tells Fox News a deal with China has to be “great” because China has “drained” the U.S. “We have really helped rebuild China,” Trump says
  • U.S. is preparing to announce by early December tariffs on all remaining Chinese imports if talks next month between presidents Trump and Xi Jinping fail to ease the trade war, three people familiar with the matter said
  • China is considering atax cut to revive its flagging automotive market, according to people familiar with the matter, lending support to a key industry that’s been damaged by a trade war with the U.S.
  • Yuan exchange rate is unlikely to weaken past the level of 7 per dollar as China’s international balance of payments remains sound and monetary authorities are determined to stabilize market, Economic Information Daily says
  • President Trump’s job approval rating plunged 4 percentage points last week amid a wave of violence, the latest troubling signal for Republican chances in upcoming midterm elections
  • China will increase stock market liquidity and cut trading barriers, China Securities Regulatory Commission says in Weibo statement in response to market concerns
  • The European Union won’t allow a no-deal Brexit to cut off access to London’s crucial financial infrastructure, which would threaten trillions of dollars of derivatives contracts, according to the bloc’s financial-services policy chief
  • The recent rally in Treasuries has seen derivatives traders bid up the price of related call options, potentially fueled by demand for hedges. The difference in implied volatilities between these bullish bets and bearish put options on the benchmark notes is now back at levels which have tended to see a sell-off in bonds
  • The VIX surged above its European equivalent in mid-October and has stayed above it on most days since — an occurrence that before this year almost never lasted more than a day
  • Italy’s growth was unchanged in the three months through September on a quarterly basis, down from 0.2 percent in the second quarter. The median estimate in a Bloomberg survey of 31 analysts called for expansion of 0.2 percent

Asian equity markets were mostly higher as the region aggressively shrugged-off the weak lead from Wall Street, where stocks extended on losses due to renewed tariff concerns and in which the major US indices were momentarily all in correction territory. ASX 200 (+1.3%) and Nikkei 225 (+1.5%) both pared opening losses as a rebound in tech and resilience in Australia’s top-weighted financial sector led the advances, while the Japanese benchmark and its exporters cheered the favourable currency moves. Elsewhere, Shanghai Comp. (+1.3%) and Hang Seng (-0.1%) both initially lagged following recent reports that suggested US is planning to announce further tariffs on China if talks between US President Trump and Chinese President Xi fail, while the upcoming deluge of blue-chip earnings and continued liquidity drain by the PBoC added to the cautious tone. However, Chinese markets gradually recovered amid continued supportive intentions by China’s authorities and optimism by US President Trump who was said to predict a great deal with China on trade. Finally, 10yr JGBs were softer amid the improved risk tone but with losses stemmed by the BoJ’s presence in the market for JPY 880bln in JGBs, while the central bank also kicks off its latest 2-day policy meeting.

Top Asian News

  • Analysts Still Love This Chinese Supplier to Nike
  • China Evergrande to Sell Dollar Debt as Bond Prices Plunge
  • Noble Group Flags Another Loss as Restructuring Costs Mount
  • Kazakhstan Drops 20-Year Dollar Addiction With First Euro Bond
  • Bond Buyers Scorched as Sri Lanka’s Promise Turns to Crisis

Major European bourses are mixed with the SMI (+0.3%) out in front despite being weighed on heavily by Geberit (-9.0%) following their earnings; and the Dax (-0.7%) lagging with Lufthansa (-7%) dragging it down. Sectors began in the green, but have since fallen to being largely in the red with industrials lagging (-0.8%), although energy is still the outperforming sector (+1.1%). In terms of individual equities Ocado (+7.0%) is higher following a master services agreement with Kroger, while BP (+4.0%) rose after reporting earnings higher than their previous, notably revenue is up by USD 20bln. Elsewhere, Jyske Bank (-10.0%) are at the bottom of the Stoxx 600 after reporting a miss on earnings.

Top European News

  • Italian Economy Stalled in Third Quarter in Populist Setback
  • Hammond Spends His U.K. Budget Windfall Buying Votes for May
  • Reckitt Benckiser Formula Glitch Hits Kapoor’s Turnaround Effort
  • BP Profit Smashes Estimates on Eve of Giant Shale Oil Deal
  • Genmab Soars After ‘Impressive’ Results With Cancer Treatment

In FX, the Greenback remains relatively evenly split vs G10 counterparts, with its Dollar peers still outperforming and preventing the index from staging a more concerted attempt to test recent peaks ahead of the ytd high and psychological 97.000 marker. However, the DXY is nudging closer at 96.847 vs 96.860 and 96.984 respectively as other majors succumb to more downside pressure. AUD/NZD/CAD – As noted above, the non-US Dollars are bucking the overall trend again, and deriving support from another resilient performance across Asia-Pacific bourses overnight given Wall Street’s retreat from early recovery highs. The Aud in particular may also be gleaning encouragement from US President Trump’s talk about a decent trade agreement with China and latest Yuan stabilisation talk from a PBoC advisor that appears to be keeping the Cny and Cnh just off 7.0000 vs the Usd. However, Aud/Usd is still struggling to climb above 0.7100, while the Kiwi looks equally toppy over 0.6550 and the Loonie seems unable to breach resistance at 1.3100. JPY/GBP/EUR/CHF – All victims of the general Buck bid into month end, and their own downfalls to an extent, as Usd/Jpy climbs through recent highs and closer to 113.00, with a 50% Fib at 112.97 just ahead of the big figure. Cable has failed to maintain recovery gains above 1.2800 and is now only just holding above 1.2750, with tech support seen down at 1.2724, while Eur/Usd has retreated further from 1.1400 to 1.1350 amidst a stagflationary mix of Eurozone data and surveys. The Franc has extended losses beyond parity and hardly helped by a disappointing Kof indicator.

Commodities are mostly lower with WTI and Brent in close proximity to USD 67/bbl and USD 77/bbl respectively, on speculation that an escalating trade war between the world’s two largest economies will dampen global growth at a time when US crude inventories are growing. Meanwhile, IEA’s Chief Birol said he sees the oil market tightening next month, while adding that oil demand faces downward pressure in 2019. Traders will be keeping an eye on the weekly API crude inventories released later today for a sign of rising inventories. Elsewhere, gold is softer as the yellow metal mirrors dollar action, while copper and Shanghai rebar steel dipped as market sentiment was dampened by the prospects of a fresh round of US tariffs on USD 257bln of Chinese goods.

Earnings are busy today, with Facebook, Mastercard, Coca-Cola, General Electric, Pfizer, Sony, eBay, BP and BNP Paribas all releasing their earnings. On the data front, we get the advance Q3 GDP release for the Euro Area, France, and Italy along with preliminary October CPI for Germany and Spain, and October confidence indicators for the Euro Area and Italy. In the US, we get October Conf. board consumer confidence and expectations survey. Late night, we get Japan’s preliminary September industrial production.

US Event Calendar

  • 9am: S&P CoreLogic CS 20-City MoM SA, est. 0.1%, prior 0.09%; YoY NSA, est. 5.8%, prior 5.92%
  • 9am: S&P CoreLogic CS US HPI YoY NSA, prior 6.0%
  • 10am: Conf. Board Consumer Confidence, est. 135.9, prior 138.4; Present Situation, prior 173.1; Expectations, prior 115.3

DB’s Jim Reid concludes the overnight wrap

A bullish morning European session peaked at the US open yesterday with the S&P 500 soon +1.81% shortly after the start. However this was the high-water mark with the index eventually closing -0.66% after dipping as low as -1.95% 15 minutes before the close. A wild ride and one led by tech with the NASDAQ losing -2.02%. Amazon led losses, falling -6.33%. The internet retailer is now down -24.55% from its peak and has shed $242bn worth of market capitalisation, equivalent to the 17th largest S&P 500 company and more than the market cap of Verizon or Procter and Gamble. Also more than the largest pure continental European company. A stunning fall of late. The NY FANG index closed down -3.24% having been -5.58% just over 15 minutes from the close. The DOW traded in an 918 point range, (which is actually only the 11th widest of the year), and like the S&P 500 touched “correction” territory, dipping -10% off its peak before ending -0.99% lower and escaping that definition on a closing basis.

While a global tech tax in the UK budget weighed on global tech stocks a little, markets were seemingly more pressured by the news that the US is readying tariffs on the remainder of China imports. According to reports (Bloomberg), the administration is preparing a product list to encompass up to $257bn of imports, which would be released later this year and implemented in Q1 2019. Apparently, the tariffs will be deployed in the event that next month’s meeting between Presidents Trump and Xi does not go well. As a result the defensive rotation continued, with the real estate and utilities sectors gaining +1.56% and +1.35%, respectively.

As discussed above though, Asia has rebounded ahead of a day that gives us Italian Q3 GDP (and elsewhere in Europe), flash German inflation and Facebook’s earnings as the highlights. The Nikkei (+1.84%), Hang Seng (+0.47%), Shanghai Comp (+0.72%) and Kospi (+1.50%) all up along with most Asian markets. Futures on the S&P 500 (+0.67%) are also pointing to a positive start. Sentiment is being aided by US President Trump’s late night rhetoric on trade as in an interview with Fox News he stated that “I think we will make a great deal with China, and it has to be great because they’ve drained our country” even as he cautioned that he doesn’t think China is “ready” yet. This was enough though to ease the concerns related to escalations in the trade war. Elsewhere, the Chinese yuan reached levels of 6.9689 against US dollar, the lowest level since June 2008 and is now closing in on touching the key level of 7. A reminder that DB is targeting 7.40 next year.

Back to yesterday and behind the scenes it was an interesting day for a bigger picture theme we’ve been following carefully over the last couple of years – namely global fiscal loosening. Since 2016 we’ve felt that we’re structurally moving away from maximum loose monetary policy and tight fiscal policy to tighter monetary and looser fiscal policy. This should mean higher yields and inflation. The move is partly because of populism, and partly due to the realisation of the counterproductive elements to negative rates/yields and extreme easing. The fiscal stimulus in the US has been the biggest evidence of this so far, but slowly and surely we’re seeing more and more major economies following in various forms. The Italian budget follows the same path, as does the recent tax change package in China, albeit more to prop up growth rather than from populism. Yesterday, we saw further subtle moves in this direction around the globe as we saw suggestions of a fresh tax cut on autos from China, a UK budget with some signs that austerity is being slowly reversed, and the start of the changing of the political guard in Germany that might lead to speculation about looser domestic policy further down the road.

The German story is still the most tenuous as the alternatives to Mrs. Merkel could still be even more fiscally prudent, but there was certainly chatter yesterday that with the global anti-establishment political trend continuing to hit Germany as well, the pressure might be to win over voters in the future. In the near term see here for our DB experts take on Merkel’s announcement that she won’t run again for the CDU’s party-leadership at the Dec. party convention and will end her political career in 2021 at the end of her current term assuming she can make it there. They analyse the top contenders to replace Merkel: Party Secretary Kramp-Karrenbauer, Health Minister Jens Spahn, and former Party Whip Friedrich Merz. The CDU has lost voters to both its left flank (i.e. to the Greens) and its right flank (i.e. to Alternatives for Germany), so it is not immediately clear which direction the party will move. Kramp-Karrenbauer is likely to be the safest and least disruptive successor, while Spahn and Merz are somewhat more conservative. The note also looks at the problems for the SPD.

In China, the wires (e.g. Bloomberg) circulated stories that the country’s top regulator is considering a cut in the tax on auto sales from 10% to 5%. Such a tax cut could boost the sector in China, which has been flagging lately amid trade headwinds and slowing macro momentum. Auto sales declined yoy in September, and they are now up only +0.6% yoy over the first 9 months of the year. The auto sector has expanded every year since the 1990s, so such a contraction would likely worry policymakers in Beijing. Auto stocks across the world rallied in response, with the automobiles and parts indexes of the STOXX 600 and S&P
500 gaining +2.95% and +2.61% respectively.

In the UK, Chancellor Philip Hammond announced an end to austerity in the UK, though deficit forecasts were actually revised lower. Growth projections were higher, and several new spending initiatives were moved forward. The budget will include a 2.8bn pound income tax cut for individuals in 2019-2020, earlier than expected, and another 1.3bn pounds of spending on infrastructure, education, and contingency spending in the event of a no-deal Brexit outcome. The budget also included the aforementioned new digital services tax on tech companies, which will apply based on the companies’ amount of revenue, not profit. The UK is still hoping they’ll be a global agreement on this before this comes in in 2020 but the plan is to implement it unilaterally if not.

Before the US sell-off, European bourses had traded higher, boosted by the news of fiscal easing in China as well some excitement over the news that Prime Minister Merkel will not run again as party leader which as discussed was hoped by some to be a gateway to more stimulative policies whether wishful thinking or not. The DAX gained +1.20% and the STOXX 600 advanced +0.90%. German bund yields rose +2.5bps, while peripheral spreads tightened. Italy outperformed, with 10-year spreads to bunds trading -13.4bps narrower in the first day of trading since S&P opted to not lower the country’s credit rating. All eyes will be Italy’s GDP print later today as the next major landmark.

Now looking at data releases from yesterday. In the US, September core PCE came at +0.2% mom with the unrounded reading at +0.153% mom (vs. +0.1% mom expected), keeping the annual inflation rate in line with consensus at 2.0% mom. September real consumer spending came in line with consensus at +0.3% mom while the previous month’s read was revised upwards to +0.4% mom from +0.2% mom. September personal income came in at +0.2% mom (vs. +0.4% mom expected), while the previous month’s read was revised upwards to +0.4% mom from +0.3% mom.

In Europe, UK’s September net consumer credit stood at +£0.8bn (vs. +£1.2bn expected) while mortgage approvals came in at 65.3k (vs. 64.7k expected) with net lending secured on dwellings standing at +£3.9bn (vs. +£2.9bn expected). The UK’s September M4 money supply came at -0.3% mom while the previous month’s read got revised down to +0.1% mom from +0.2% mom.

Earnings are busy today, with Facebook, Mastercard, Coca-Cola, General Electric, Pfizer, Sony, eBay, BP and BNP Paribas all releasing their earnings. On the data front, we get the advance Q3 GDP release for the Euro Area, France, and Italy along with preliminary October CPI for Germany and Spain, and October confidence indicators for the Euro Area and Italy. In the US, we get October Conf. board consumer confidence and expectations survey. Late night, we get Japan’s preliminary September industrial production.

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