US equity futures reversed initial gains following Wednesday's surprise reversal that helped US stocks close green, and were trading marginally lower as global bonds resumed their selloff, sending 10Y yields to a new 16-year peak as soaring Brent oil prices hit $97 overnight before reversing as the US Dollar dipped. At 7:45am ET, S&P futures traded down 0.1% and Nasdaq 100 futures were down -0.3%. As 10-year yields rose 4bps to 4.65% the yield curve flattened and the 2s10s was inverted by less than 50bp for first time since May. 1Y breakeven had its largest move since late July as oil surged on constrained supply. Commodities are mixed with metals and natgas leading with USD lower pre-mkt. Today’s macro focus is on GDP, Consumption, Jobless Claims, Pending Home Sales, Kansas Fed, and updates on economic revisions. We also get four Fed speakers, including Powell at 4pm. Financial conditions have tightened since the Fed meeting and mortgage rates are at multi-decade highs. Keep an eye on the 4200 level as we reach expiration on Friday and the JPM collar is rolled.
In premarket trading, Peloton rose 13% after the maker of the trademark exercise bikes agreed to a deal with Lululemon to tap its online workouts and team up on apparel. Micron Technology Inc. tumbled 5% as its mixed outlook for the November quarter weighed on investor sentiment. Analysts see near-term challenges but recovery in the longer term. Here are some other notable premarket movers:
- Gritstone gained 39% after the biotechnology company said it will receive as much as $433 million from the US government to conduct a trial of its next-generation Covid-19 vaccine.
- Workday shares fall 9.9% after the software company forecast annual subscription revenue growth of 17% to 19% over the next three years, which analysts say missed expectations.
Hawkish commentary from central banks has dashed hopes for a pivot toward lower rates any time soon, making September the worst month for global stocks in a year and the weakest for global bonds since February. Fund managers at T. Rowe Price are shorting 10- and 30-year Treasuries on a bet yields will keep rising as they catch up with the Federal Reserve’s rapid interest-rate hikes. And indeed, traders are pushing yields higher on speculation that US policymakers will keep policy tight as oil prices approach $100 and spark a new round of inflation. The benchmark 10-year yield rose four basis points to 4.647%.
"Markets are waking up to central banks are going to have to stay higher for longer in this world shaped by supply,” Wei Li, global chief investment strategist at BlackRock Investment Institute, said in an interview with Bloomberg TV. It's not just supply however: with oil soaring, the commodity inflation that many had left for dead, is back with a bang and overnight WTI briefly surpassed $95 for the first time in more than a year after the "tank bottoms" in Cushing stockpiles underscored a widening global deficit.
European stocks are on course for a sixth day of declines with the Stoxx 600 down 0.3% as gains in energy shares boosted by surging oil prices are countered by weakness in rate-sensitive sectors such as technology and real estate. AMS-Osram slumps after the Swiss chipmaker announced a rights issue and 888, the owner of the William Hill gambling chain, falls after cutting its earnings outlook on a spate of bettor-friendly sports results. Here are the biggest European movers:
- Colruyt shares surge as much as 13% to the highest level in nearly two years on Thursday after the Belgian supermarket operator predicted a sharp increase in profitability. Degroof Petercam hailed the firm’s “major guidance uplift”.
- Babcock shares rise as much as 11%, the most since July, after the defense outsourcing co. released a trading update that Jefferies sees as “helpful” and de-risking the FY23 outlook.
- Deliveroo shares climb as much as 10%, the most in 11 months, after the food delivery company said it plans to return up to £250 million to shareholders via a tender offer between 115p-135p per share.
- Allegro shares gain as much as 9.1% after the company’s CFO warned that robust 3Q guidance from Poland’s biggest e-commerce platform could be a one-off.
- Europe’s Stoxx 600 energy index is the best-performing subsector in the benchmark on Thursday, as oil was propelled closer to the $100-a-barrel mark after stockpiles at a major US storage hub dropped to critical levels.
- Bpost shares rise as much as 7.2% after KBC Securities upgrades the Belgian postal company, giving the stock its first buy rating in more than four months, saying visibility is now much improved.
- Billerud shares gain as much as 4.7% to a more than four-month high after SEB upgrades the Swedish paper and packaging firm to buy on improved risk/reward following significant share price underperformance.
- AMS-Osram shares tumble as much as 23%, falling to the lowest since 2011, after the Swiss chipmaker announced what Vontobel described as a “significantly larger than feared” rights offering.
- 888 shares slump as much as 18% after the online betting firm trimmed its full-year Ebitda outlook in an update which Goodbody describes as “disappointing.”
Earlier in the session, Asian stocks fell as continued concerns over China’s property market coupled with fear of inflation stoked by oil’s rally toward $100 inhibited risk taking. The MSCI Asia Pacific Index declined 0.8%, with Toyota and Tencent among the biggest drags. Hong Kong stocks fell after Evergrande’s shares were suspended from trading, further weakening sentiment on China’s real estate sector ahead of upcoming holidays. “Suspension of trading in China Evergrande’s shares and its chairman placed under police surveillance further reinforces the odds of liquidation, while a bailout from authorities remains unlikely,” Yeap Jun Rong, market strategist at IG Asia, wrote in a note. Yeap sees low appetite for risk-taking in Asia in light of the latest developments in China’s property market.
- Hang Seng and Shanghai Comp diverged amid headwinds in the property sector after the suspension of shares in Evergrande and some of its units, while the mainland was kept afloat after the PBoC’s liquidity injections ahead of the holiday closures and following China’s latest support pledges.
- Japan's Nikkei 225 underperformed after it slipped beneath the 32,000 level and amid mass ex-dividend day in Japan concerning over 1,400 companies. The Topix dropped amid rising interest rates and as more than 1,000 stocks traded without rights to the next dividend. Markets were closed for holidays in South Korea, Indonesia and Malaysia.
- Australia's ASX 200 pared initial gains as strength in the commodity-related sectors was offset by the upside in yields and weakness in consumer stocks after retail sales missed forecasts.
In FX, the Bloomberg Dollar Spot Index is down 0.3%,ending its longest run of gains in a year. The yen rose for the first day in five as repeated verbal warnings by Japanese authorities over the currency’s weakness spurred intervention speculation. USD/JPY fell 0.3% to 149.28, retreating from Wednesday’s 11-month high of 149.71. EUR/USD up 0.3% to 1.0537; German CPI data in focus later Thursday. GBP/USD snapped six-day decline, climbed 0.5% to 1.22 amid higher gilt yields
In rates, treasuries are once again cheaper by up to 4bp across long-end of the curve as Wednesday’s bear-steepening move is extended into early US session. US 5-, 10- and 30-year yields reached new multiyear highs; 10-year TSY yields are more than 3bp cheaper on the day near 4.65%. The 2s10s curve inverted by less than 50bp for first time since May. European government bonds are on the back foot as investors fret over the prospect of higher-for-longer interest rates. Gilts are faring worse than their German counterparts, with bunds falling less amid German state inflation numbers that point to a slowdown in the national reading later on Thursday. UK 10-year yields are up 11bps while the German equivalent adds 7bps.
The treasury auction cycle concludes with $37b 7-year note; Wednesday’ 5-year note auction stopped 1.2bp through, indicating strong demand. WI 7-year yield at ~4.70% is almost 50bp cheaper than August’s, which stopped 2.1bp through, and higher than all previous 7Y stops since sales of the tenor began in 2009. Dollar IG issuance slate includes a couple of deals with more expected; four companies priced deals on Wednesday, bringing weekly volume to $18.4b vs $15b-$20b projection. US session includes jobless claims, GDP and 7-year note auction. Fed Chair Powell is scheduled to host a town hall event with educators speak at 4pm New York time.
In commodities, WTI crude futures are down slightly after touching a YTD high of $95/bbl during Asian trading hours, the highest level in over a year.
Looking to the day ahead, it’s fairly busy on the data side, with the US September Kansas City Fed manufacturing activity, August pending home sales and initial jobless claims. In Europe, we have the Eurozone September services, industrial and economic confidence, the German September CPI, the Italian September manufacturing confidence, economic sentiment and consumer confidence, and the August PPI. We will also be hearing from the Fed’s Powell, Cook and Goolsbee, as well as the ECB’s Holzmann. Lastly, we will have company earnings from Nike, Accenture, and Blackberry.
Market Snapshot
- S&P 500 futures little changed at 4,312.00
- MXAP down 0.9% to 156.51
- MXAPJ down 0.6% to 486.36
- Nikkei down 1.5% to 31,872.52
- Topix down 1.4% to 2,345.51
- Hang Seng Index down 1.4% to 17,373.03
- Shanghai Composite up 0.1% to 3,110.48
- Sensex down 0.8% to 65,580.52
- Australia S&P/ASX 200 little changed at 7,024.76
- Kospi little changed at 2,465.07
- STOXX Europe 600 down 0.4% to 445.12
- German 10Y yield little changed at 2.89%
- Euro up 0.1% to $1.0518
- Brent Futures down 0.1% to $96.43/bbl
- Gold spot down 0.0% to $1,874.88
- U.S. Dollar Index down 0.11% to 106.55
Top Overnight News
- China appointed Lan Fo’an as the Communist Party chief at the Ministry of Finance, a move that will pave the way for him to become finance minister at a time when the government is seeking to bolster the economy. BBG
- OpenAI is in advanced talks with former Apple designer Sir Jony Ive and SoftBank’s Masayoshi Son to launch a venture to build the “iPhone of artificial intelligence”, fueled by more than $1bn in funding from the Japanese conglomerate. FT
- France is exploring ways to cap national electricity prices without falling foul of EU subsidy rules, including a possible windfall levy to deliver President Emmanuel Macron’s pledge to “take back control” of prices. FT
- Spain’s CPI for Sept came in at +3.2% Y/Y on the headline, up from +2.4% in Aug but below the Street’s +3.3% forecast (while core was +5.8%, down from +6.1% in Aug and below the Street’s +6% forecast). BBG
- Saudi Arabia and Russia have raked in billions of dollars in extra oil revenues in recent months, despite pumping fewer barrels, after their production cuts sent crude prices soaring. The cutbacks were a risky strategy, both financially and politically. But they appear to be paying off for the two most important members of the Organization of the Petroleum Exporting Countries and its Russia-led allies, or the OPEC+ cartel. WSJ
- WTI briefly hit $95, the highest in more than a year, after a drop in Cushing stockpiles to critical levels highlighted a widening global deficit. The jump heightened inflation concerns and raised expectations rates will stay higher for a protracted period. BBG
- There are few signs of a late deal to avert US government shutdown — with Kevin McCarthy making big demands of President Biden and bringing little leverage to the clash. McCarthy counts the long-term spending cuts he extracted from Biden last spring as one of his proudest achievements and is now looking for more concessions. BBG
- The second GOP presidential debate was full of arguments, one-liners and strained attempts for attention, but none of the candidates articulated a clear case why they should be the front-runner instead of Donald Trump. WSJ
- Trading in the shares of China Evergrande Group and two of its publicly listed units was suspended on Thursday, after reports that the beleaguered property developer’s founder and chairman had been placed under police surveillance. WSJ
- All eyes on S&P 500 200dma of 4195. If level is tested and doesn’t provide support history suggests S&P 500 forward 1-/3-/6-/12-month returns are significantly below-average following a break in its 200dma.
A more detailed look at global markets courtesy of Newsquawk
APAC stocks traded mixed following the indecisive performance in the US heading into month and quarter-end amid further upside in global yields and higher oil prices. ASX 200 pared initial gains as strength in the commodity-related sectors was offset by the upside in yields and weakness in consumer stocks after retail sales missed forecasts. Nikkei 225 underperformed after it slipped beneath the 32,000 level and amid mass ex-dividend day in Japan concerning over 1,400 companies. Hang Seng and Shanghai Comp diverged amid headwinds in the property sector after the suspension of shares in Evergrande and some of its units, while the mainland was kept afloat after the PBoC’s liquidity injections ahead of the holiday closures and following China’s latest support pledges.
Top Asian News
- PBoC set USD/CNY mid-point at 7.1798 vs exp. 7.3239 (prev. 7.1717)
- HKEX announced shares of Evergrande (3333 HK), Evergrande Property Services (6666 HK) and Evergrande New Energy Vehicle (708 HK) have been suspended.
- China's cyberspace regulator has issued draft rules on promoting draft riles on promoting and regulating the cross-border flow of data; companies providing more than 1mln people's personal information outside the country should safety assessment of data. Where data does not contain personal information or important data, there is no need to declare a security review assessment, according to Reuters.
- Chinese FX Regulator expects the current account surplus to remain basically stable in H2 and said the cross-border two-way investment is expected to further stabilise and improve. The scale of FX reserves will remain basically stable. Will actively fend off and resolve external shock risks. Will strive to maintain the stability of FX markets and balance of payments.
- Chinese Finance Ministry will exempt urban land use tax on land used for construction of affordable housing projects. Stamp duty for affordable housing management firms and buyers are exempted. Tax exemptions and cuts effective from October 1st, according to Reuters.
European bourses trade softer following a predominantly negative close yesterday as a lack of positive catalysts keeps sentiment suppressed. Sectors in Europe have a mostly negative tilt with Travel & Leisure at the bottom of the pile after feeling the pressure from higher energy prices. On the upside, Energy and Basic Resources outperform. US futures are trading modestly weaker, paring back gains seen in yesterday's session. The docket for today picks up, with US Core PCE Prices (Final), GDP (Final) and weekly IJC’s all due at the busy 13:30 BST / 08:30 ET slot.
Top European News
- France is exploring a windfall levy to take back control of energy prices, according to FT.
- European Commission VP says the exact scope of the probe into Chinese EV imports has not been decided yet, when asked if Tesla (TSLA) will be impacted by the probe, via CNBC.
FX
- The T-note managed to tread water for the most part within a 107-27/15+ range and perhaps with some leverage from blocked curve flatteners.
- Bunds and Gilts have been in freefall alongside Eurozone periphery debt. The 10 year German and UK benchmarks breached deeper chart and psychological supports on the way down to 127.60 and 93.43 respectively.
- Angst in BTPs was prompted by Italy’s budget and exacerbated by month-end supply, but the latest collapse elsewhere looks more momentum-based and technically driven given no obvious fresh fundamental catalyst.
- Italy sold EUR 8bln vs exp. EUR 7-8bln 4.10% 2029, 4.20% 2034 BTP Auction & EUR 1.5bln vs exp. 1-1.5bln 2026, 2030 CCTeu Auction.
Fixed Income
- The T-note managed to tread water for the most part within a 107-27/15+ range and perhaps with some leverage from blocked curve flatteners.
- Bunds and Gilts have been in freefall alongside Eurozone periphery debt. The 10 year German and UK benchmarks breached deeper chart and psychological supports on the way down to 127.60 and 93.43 respectively.
- Angst in BTPs was prompted by Italy’s budget and exacerbated by month-end supply, but the latest collapse elsewhere looks more momentum-based and technically driven given no obvious fresh fundamental catalyst.
- Italy sold EUR 8bln vs exp. EUR 7-8bln 4.10% 2029, 4.20% 2034 BTP Auction & EUR 1.5bln vs exp. 1-1.5bln 2026, 2030 CCTeu Auction.
Commodities
- France is exploring a windfall levy to take back control of energy prices, according to FT.
- European Commission VP says the exact scope of the probe into Chinese EV imports has not been decided yet, when asked if Tesla (TSLA) will be impacted by the probe, via CNBC.
Geopolitics
- PBoC set USD/CNY mid-point at 7.1798 vs exp. 7.3239 (prev. 7.1717)
- HKEX announced shares of Evergrande (3333 HK), Evergrande Property Services (6666 HK) and Evergrande New Energy Vehicle (708 HK) have been suspended.
- China's cyberspace regulator has issued draft rules on promoting draft riles on promoting and regulating the cross-border flow of data; companies providing more than 1mln people's personal information outside the country should safety assessment of data. Where data does not contain personal information or important data, there is no need to declare a security review assessment, according to Reuters.
- Chinese FX Regulator expects the current account surplus to remain basically stable in H2 and said the cross-border two-way investment is expected to further stabilise and improve. The scale of FX reserves will remain basically stable. Will actively fend off and resolve external shock risks. Will strive to maintain the stability of FX markets and balance of payments.
- Chinese Finance Ministry will exempt urban land use tax on land used for construction of affordable housing projects. Stamp duty for affordable housing management firms and buyers are exempted. Tax exemptions and cuts effective from October 1st, according to Reuters.
US Event Calendar
- 08:30: Sept. Initial Jobless Claims, est. 215,000, prior 201,000
- Sept. Continuing Claims, est. 1.68m, prior 1.66m
- 08:30: Revisions: GDP/National Economic Accounts
- 08:30: 2Q GDP Annualized QoQ, est. 2.2%, prior 2.1%
- 2Q Core PCE Price Index QoQ, est. 3.7%, prior 3.7%
- 2Q GDP Price Index, est. 2.0%, prior 2.0%
- 2Q Personal Consumption, est. 1.7%, prior 1.7%
- 10:00: Aug. Pending Home Sales (MoM), est. -1.0%, prior 0.9%
- Pending Home Sales YoY, est. -13.0%, prior -13.8%
- 11:00: Sept. Kansas City Fed Manf. Activity, est. -2, prior 0
DB's Jim Reid concludes the overnight wrap
The storm that’s been sweeping through New York while I've been here this week has stayed a bit longer in fixed income markets, with the 10yr Treasury yield (+7.2bps) climbing to a new cycle high of 4.61%. In part, that’s been driven by a fresh spike in oil prices, with Brent Crude currently at $97.41/bbl this morning for the first time since November. And as US rates turned higher, so too did the dollar index, which is also at its highest level since November as we go to press. Yet despite the latest sell-off in bond markets, US equities were relatively calm with the S&P 500 (+0.02%) regaining its composure after a mid-session sell-off, even as yields went from below 4.50% to above 4.60% in a few hours. That said, this respite might prove brief, as US futures are pointing lower again this morning, and there’ve been sharp losses for several Asian indices overnight. Meanwhile, there’s still no sign of the US House and Senate being able to agree on a funding extension ahead of a potential US government shutdown at the end of the week. Today we’ve got important US GDP benchmark revisions as well, which happen every 5 years and have the potential to rewrite history one way or the other, whilst informing economists of any change in recent data momentum. See Brett Ryan’s preview in his week ahead here.
Once again, the big story yesterday was that bond sell-off, which sent Bloomberg’s aggregate global bond index down to its lowest level of 2023 so far. But it wasn’t just the 10yr that lost ground, as 3 0yr Treasury yields also moved up +4.4bps to a new cycle high of their own at 4.72%, which is their highest level since 2011. We can see how that’s increasingly being passed through to the real economy as well, since the MBA’s weekly update of 30yr mortgage rates climbed another 10bps to 7.41%. That’s their highest level since December 2000, and one that’s likely to go higher still given the recent move in rates.
Real yields again drove much of the increase, with the 10yr real yield up +4.1bps to a post-GFC high of 2.26%. But we also saw a f resh rise in inflation breakevens, with the 30yr up +1.4bps to a 6-month high of 2.39%, not least as the upward march in oil prices regained steam. That came as Brent crude broke through the $95/bbl level all the way to $96.55/bbl, its highest level since November, after gaining +2.76% on the day, and this morning it’s since gone above $97/bbl. WTI crude saw an even more dramatic increase, up +3.64% in its largest rise since May, to close at a new one-year high of $93.68/bl, with further gains above $94/bbl this morning. The oil price spike occurred as the latest US weekly crude inventory data showed a -4.1% decline in oil stocks at the key hub in Cushing, Oklahoma to its lowest level since last summer.
This sovereign bond sell-off was evident in Europe too, where the 10yr bund yield (+3.5bps) closed at a new post-2011 high of 2.84%, along with the 10yr French OAT (+3.8bps) at 3.40%. Italian BTPs underperformed once again, however, with the spread of 10yr Italian yields over bunds widening to 195bps, its highest closing level since the banking stress in March. That spread widening came ahead of the Italian government unveiling its 2024 budget yesterday evening, which foresees a 4.3% deficit next year as a share of GDP. That’s largely in line with earlier reports and a touch above the level that our economists see as consistent with EU recommendations – see their note earlier this week.
For equities, there was a brief stabilisation yesterday that’s since turned more negative overnight again. For instance, the S&P 500 traded largely flat (+0.02%) while the NASDAQ saw a slight outperformance (+0.22%). The performance was varied across sectors, with energy stocks (+2.51%) seeing the strongest performance amidst to the surge in oil prices. Otherwise, industrials advanced (+0.76%) following stronger capital goods orders data (more on this below). Meanwhile, several of the more defensive sectors underperformed, including utilities (-1.93%) and consumer staples (-0.77%). Also notable is the near 10% decline of the consumer discretionary sector in the past two weeks (-0.38% yesterday), which comes as the latest weekly BEA card spending data saw the 4-week moving average fall to its lowest since early 2021. So a potential area of concern for the soft landing camp. Looking forward, futures on the S&P 500 have posted a modest -0.04% decline this morning.
Overnight in Asia, the major indices have mostly lost ground this morning, with a sharp decline for the Nikkei (-1.96%) and the Hang Seng (-1.04%) overnight. That currently leaves the Hang Seng on course for its lowest close so far of 2023, which comes as trading in Evergrande has been suspended in Hong Kong . Otherwise, there’ve been smaller declines for stocks in mainland China, with the CSI 300 down -0.28%, whilst the Shanghai Comp (+0.13%) has seen a modest increase.
Back in Europe, several data releases added to the downbeat tone yesterday. Among others, Germany’s Gfk consumer confidence index fell once again, from -25.5 to -26.5 (vs -26.0 expected). Similarly, the French INSEE household confidence survey for September fell from 85 to 83 (vs 84 expected). This was mostly driven by fears of unemployment and was the third month in a row that the indicator weakened. Alongside the other macro headwinds, this proved to be a challenging backdrop for European equity markets, with the STOXX 600 down by -0.18% to its lowest level in nearly six months .
Turning to the remaining data yesterday, US durable goods orders came in above expectations at +0.2% (vs -0.5% expected) and core capital goods orders surprised strongly to the upside at 0.9% (vs +0.1% expected). That suggests some upside for US Q3 GDP trackers, though a modest one when accounting for downward revisions for the previous month (-0.5pp for capital goods orders).
Looking to the day ahead, it’s fairly busy on the data side, with the US September Kansas City Fed manufacturing activity, August pending home sales and initial jobless claims. In Europe, we have the Eurozone September services, industrial and economic confidence, the German September CPI, the Italian September manufacturing confidence, economic sentiment and consumer confidence, and the August PPI. We will also be hearing from the Fed’s Powell, Cook and Goolsbee, as well as the ECB’s Holzmann. Lastly, we will have company earnings from Nike, Accenture, and Blackberry.
