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China Stocks Tumble Most In Six Months; US Futures Lower As Key Risk Events Loom

If over the weekend we got some terrible economic news out of China, then overnight it was turn for a major disappointment in capital flows, when Chinese Foreign Direct Investment in August crashed by 14%, far below the 0.8% increase expected, attracting just $7.2 billion in FDI, and the lowest in four years. This once again sparked fears of a Chinese hard landing and sent the Shanghai Composite tumbling 1.82%, the biggest drop in six months, after it had been up some 0.2% before the data release. The slump in FDI to -14.0% vs. Exp. +0.8% was a direct result of the anti-trust clampdown on multi-national corporations operating in China after scandals have engulfed the likes of GlaxoSmithKline in recent months.

In addition to China, there was the German ZEW Survey, which while beating expectations of a 5.0 print, dropped from 8.6 to 6.9 in August, the lowest since 2012. In fact, the gauge has decreased every month since December when it reached a seven-year high. And while there is not much other news today ahead of the blitz assault of data later in the week, including the Fed tomorrow, the TLTRO announcement on Thursday and the Scottish referendum results and the BABA IPO on Friday, we are stunned futures aren't as usual, soaring as all the data that was available came out with the algos' favorite flavor: bad.

As noted yesterday it wasn't just China: Asian equities suffered their longest losing streak in 12 years now that fears of a hiking Fed are finally starting to manifest themselves in equity outflows. The weakness in China, coupled with caution ahead of tomorrow’s FOMC policy statement has weakened emerging markets, with emerging markets on track for the ninth consecutive daily decline – the longest losing streak since September 2001. Asian stocks fall  with the Kospi outperforming and the Shanghai Composite underperforming. MSCI Asia Pacific down 0.5% to 144.3. Nikkei 225 down 0.2%, Hang Seng down 0.9%, Kospi up 0.3%, Shanghai Composite down 1.8%, ASX down 0.5%, Sensex down 1.2%. 0 out of 10 sectors rise with staples, industrials outperforming and financials, energy underperforming.

European equities trade lower, with a poor showing from Chinese equities weighing on sentiment from the open. Furthermore, poor earnings updates from UK retailer ASOS (-10.5%) and travel firm Thomas Cook (-5.2%) coupled with Air France’s (-3.6%) warning that they may not break even this year led to losses of approx. 0.75% across the board. 21% of Stoxx 600 members gain, 77.3% decline. Eurostoxx 50 -0.3%, FTSE 100 -0.4%, CAC 40 -0.4%, DAX -0.2%, IBEX -0.4%, FTSEMIB -0.2%, SMI +0%.

In terms of today we have a fairly light calendar in the US ahead of Yellen’s press conference tomorrow. US PPI will be the only data of note. Data watchers will likely be focusing on Europe today with the German ZEW and UK CPI/PPI reports being the notable releases.

Market Wrap

All Stoxx 600 sectors fall. The U.K. and French markets are the worst-performing larger bourses, the Swiss the best. The euro is little changed against the dollar. German 10yr bond yields fall; Greek yields increase. German investor confidence decreases to weakest since 2012. Commodities little changed, with natural gas, zinc underperforming and corn outperforming. U.S. PPI due later.

  • S&P 500 futures down 0.1% to 1975
  • Stoxx 600 down 0.5% to 342.4
  • US 10Yr yield down 3bps to 2.56%
  • German 10Yr yield down 2bps to 1.05%
  • MSCI Asia Pacific down 0.5% to 144.3
  • Gold spot up 0.4% to $1238.6/oz

Bulletin Headline Summary from Bloomberg and RanSquawk

  • Fears of a Chinese hard landing resurface as very poor Foreign Direct Investment threatens an H2 recovery
  • Emerging markets on track for the longest daily losing streak in over a decade as traders focus on tomorrow’s FOMC policy statement
  • Markets look beyond today’s transitory data to the slew of risk events later this week, including Scotland’s referendum, BoE Minutes, the ECB’s first TLTRO and Alibaba’s IPO
  • Treasuries gain as Federal Reserve begins meeting in Washington, with statement due at 2pm tomorrow; policy makers may adopt more hawkish stance, remove “considerable time” language from statement, strategists say.
  • Yellen is likely to raise rates only gradually between 2015 and 2017 as inflation remains muted, according to a Bloomberg survey of economists
  • German investor confidence dropped to the weakest in 21 months amid rising political tension in Europe, with the ZEW index falling to 6.9 in September from 8.6 in August
  • Ukraine traded accusations with pro-Russian separatists over the biggest outbreak of hostilities since a truce was signed 11 days ago; the U.S. and other NATO members yesterday began military exercises in the country
  • Prime Minister David Cameron made a final plea to Scotland’s voters, urging them to step back from an illusory “dream” of risk-free independence and avoid the irreversible breakup that would come with a “yes” vote
  • Foreign direct investment into China, a gauge of external confidence, slumped to a four-year low amid antitrust probes into multinational companies that have spurred a letter of complaint from the U.S.
  • The International Organization of Securities Commissions will present criteria for marketable ABS to finance ministers from the Group of 20 nations this week, said Chairman Greg Medcraft; Iosco wants to help create standards that would encourage non-bank investors to buy
  • RBS dismissed most of its team overseeing debt capital markets in central and eastern Europe, Middle East and Africa amid a review of operations outside the U.K., according to two people with knowledge of the matter
  • The world’s biggest banks are overhauling how they trade currencies to regain the trust of customers and preempt regulators’ efforts to force changes on an industry tarnished by allegations of manipulation
  • The California Public Employees’ Retirement System plans to divest the entire $4b that it invested with hedge funds, saying they’re too expensive and complex
  • About 115,000 people who signed up for Obamacare and may not be legal residents of the U.S. will lose their insurance coverage at the end of the month, the government said.
  • Sovereign yields mostly lower. Asian stocks fall, European stocks, U.S. equity-index futures lower. WTI crude lower, copper little changed, gold higher

US Event Calendar

  • 8:30am: PPI Final Demand m/m, Aug., est. 0.0% (prior 0.1%)
    • PPI Ex Food and Energy m/m, Aug., est. 0.1% (prior 0.2%)
    • PPI Final Demand y/y, Aug., est. 1.8% (prior 1.7%)
    • PPI Ex Food and Energy y/y, Aug., est. 1.8% (prior 1.6%)
  • 4:00pm: Net Long-term TIC Flows, July, est $25b (prior - $18.7b)
    • Total Net TIC Flows, July (prior -$153.5b) Central Banks
  • 11:00am: POMO Fed to purchase $2b-$2.5b in 2021-2024 sector

ASIA

Chinese equities slumped overnight, with the Shanghai Composite falling at the fastest rate in six-months (-1.8%) on heavy volume as particularly poor Foreign Direct Investment numbers renewed concerns of a hard landing in the Chinese economy. The slump in FDI to -14.0% vs. Exp. +0.8% was a direct result of the anti-trust clampdown on multi-national corporations operating in China after scandals have engulfed the likes of GlaxoSmithKline in recent months. The weakness in China, coupled with caution ahead of tomorrow’s FOMC policy statement has weakened emerging markets, with emerging markets on track for the ninth consecutive daily decline – the longest losing streak since September 2001.

FIXED INCOME

Bund futures benefited from the open, as a soft start in European equities and residual concerns of Chinese growth pushed Germany’s 10yr yields below 1.05%. As was the case last week, Spanish bonds have underperformed as Catalan President Artur Mas continues to push for a referendum, heightening fears that Scotland’s independence campaign is inspiring other separatist movements to break-up historic political unions. A stronger-than-forecast German ZEW Survey (6.9 vs. Exp. 5.0) failed to dampen core fixed income, as a weak expectations component and further warnings on Russia took the shine off the headline.

EQUITIES

European equities trade lower, with a poor showing from Chinese equities weighing on sentiment from the open. Furthermore, poor earnings updates from UK retailer ASOS (-10.5%) and travel firm Thomas Cook (-5.2%) coupled with Air France’s (-3.6%) warning that they may not break even this year led to losses of approx. 0.75% across the board.

Looking ahead, Wall Street is primed for a lower open, with stock futures negative across the board. Large-cap stock Adobe are due to report earnings after-market.

FX

GBP fell throughout the morning, with a large option expiry (2.1bln) in EUR/GBP at 0.7975 failing to draw attention as Scottish independence fears prompted traders to continue to shy away from the currency. UK CPI confirmed expectations of falling inflation in the UK, however markets were primed for a lower than expected reading due to the ongoing price war between the UK’s supermarkets. As such, GBP/USD saw a minor relief rally at the lows of 1.6162 on the 1.5% vs. Exp. 1.5% release.

Commodity related currencies trade softer, with AUD approaching yesterday’s multi-month lows as Chinese growth concerns re-enter the fray after poor FDI data overnight. Later today, BoC’s Poloz speaks on the topic of free-floating currencies, which will be closely eyed for any CAD-sensitive comments.

COMMODITIES

WTI and Brent crude futures trade in minor negative territory, as expectations of a recovery in China’s H2 economic performance are dampened by the slump in FDI overnight. After-market today, the API inventories will be closely eyed ahead of tomorrow’s DoE Estimates. In the metals markets, spot gold trades slightly higher on mild short-covering as softer stocks lead traders to take profits. COMEX copper also trades stronger as the threat of strike action at Chile’s Escondida mine threatens South American output.

* * *

DB's Jim Reid concludes the overnight recap

In the absence of any standout themes or developments the market seems to be cautiously positioned ahead of the two big events (FOMC meeting tomorrow and Scotland’s referendum on Thursday) this week. Indeed yesterday proved to be a somewhat uninspiring day for risk assets with equities, credit and commodities all finishing moderately weaker. Right on the heels of the weak Chinese data over the weekend, the disappointing US data flow and OECD’s growth estimates downgrades yesterday probably clearly didn’t help (more below). With all that we saw the S&P 500, NASDAQ, Stoxx600, CAC and the IBEX close -0.07%, -1.07%, -0.10% and -0.44%, respectively. IG credit spreads were around 1-2bp wider on both sides of the pond. The Dollar index was a touch lower but failed to put an end to the slide in commodities. The CRB index declined once more yesterday to close lower for its 8th consecutive day and is now nearly 10% off its recent highs in June. Brent touched an intraday low of US$97.04/bbl before recovering back up to around US$98/bbl.

On the data theme, the US Industrial Production (-0.1% v +0.3% expected) numbers were far from being impressive. The combination of this and the weak IP data from China perhaps renewed some growth concerns. On the positive side, the Empire Manufacturing headline came in strong (27.5 v 14.7 expected) but some underlying weakness in the inventories and employment sub-readings took some of the headline gloss away. On the OECD downgrades, US GDP growth forecasts were revised lower to 2.1% this year and 3.1% in 2015. This compares with its previous growth forecast of 2.6% and 3.5%, respectively back in May. Europe’s growth projections were also slashed to 0.8% this year and 1.1% next year – which was considerably lower against the 1.2% and 1.7% estimates the OECD had back few months ago.

Away from data, as UK’s PM David Cameron made his final effort to warn the stark consequences of a breakup in Scotland yesterday a Guardian/ICM poll showed that 63% of respondents in England and Wales believe that the UK should refuse to negotiate over a common currency area if Scotland becomes independent. Only 27% of those responded thinks the UK should negotiate a currency union. This is quite a contrast with Scotland where 62% believed that a currency union should be negotiated (The Guardian). The Sterling was a slightly weaker against the Dollar yesterday and is now trading around 1.6223 during the Asian session overnight.

Whilst we are still on the Scotland theme, earlier this morning we published a note entitled, "The Scottish Referendum: Taking Stock in Credit." In light of the recent poll tightening, in the note we look at how European cash credit has handled the situation and take stock of where it currently stands ahead of Thursday’s important vote. To give a quick overview its clear that UK paper in general, and subordinated paper in particular, in both the GBP and EUR iBoxx indices has measurably underperformed, with this underperformance most stark in UK non-fin sub paper. We go on to show the 20 UK GBP and EUR iBoxx index bonds that have widened the most during this period of Scottish uncertainty and conclude that if on Thursday Scotland votes “No” to independence, it is likely that the bonds we have highlighted will meaningfully outperform. If Scotland votes “Yes” the opposite will likely be true. Indeed if there is a Yes vote, rather than just being isolated to these names, we would expect a more widespread sell-off in risk and with it credit as global investors digest the wider implications of the result.

Back to markets, markets remained largely on the back foot overnight with most Asian equity benchmarks trading lower on the day. HK markets were shut for half a day on the back of the No.8 Typhoon signal but shall resume afternoon trading after the signal was lowered to No. 3 before mid-day. Away from HK, bourses in Japan and Australia are down around 0.3-0.4% as we type. Asian IG benchmark spreads were 1-2bp wider. The AUD has given back some of yesterday’s gains to trade back down to around 0.901 as we go to print.

As investors start to ready themselves for the big FOMC day tomorrow DB’s Peter Hooper has outlined his thoughts on what to expect from the Fed tomorrow. In sum, Peter thinks that the Committee will likely observe that enough progress is being made on the macro front to bring the asset purchase program to a conclusion at the end of October. Importantly, Peter expects the FOMC to drop calendar-based guidance (“considerable time”) from its statement, but to strive to do so in a way that does not advance market expectations of a mid-2015 lift-off date. The Committee should project a return to a near-neutral level of fed funds by year-end 2017 as their forecasts are extended. Finally, we can also expect an update of the Committee’s exit guidance along the lines outlined in the July minutes.

In terms of today we have a fairly light calendar in the US ahead of Yellen’s press conference tomorrow. US PPI will be the only data of note. Data watchers will likely be focusing on Europe today with the German ZEW and UK CPI/PPI reports being the notable releases.