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Futures Slide As Overnight Bad News Is Actually Bad News

Oh where to start.

First it was the Treasury department announcing its first major escalation in the crackdown against tax inversions, which has sent European healthcare stocks lower over concerns there will be nobody left to "merge" with them. Then it was the US announcing that the coalition of nations favorably inclined toward a Qatar gas pipeline crossing Syria had commenced bombing the sovereign nation without Assad's approval, a violation of sovereignty which we are positive the UN will get right on top of, then it was the HSBC China PMI number confirming it is a complete joke, after it beat expectations just in time for Rubber prices to join iron at fresh record lows (some rebound there). A somewhat more realistic number came out of Europe's PMI which not only missed across the board, with the manufacturing PMI sliding to 50.5 (from 50.7) the lowest since August 2014, but the German number dropping again from 51.4 to 50.3, (below the Estimate 51.2) leading to more triple-dip concerns. It wasn't just Europe's manufacturing: while there was no Tesco openly fabricating data, today’s session has also seen negative sentiment stemming from further profit warnings, this time from Raiffeisen Bank (-10.9%) and Tate & Lyle (-16.3%) which have both crashed as two themes, Russia and the tapped out consumer, once again rear their ugly head. Finally, Israel decided to do its own thing and took down a Syrian fighter jet which it said was acting "in a threatening manner" whatever that means. Clearly Israel wants a piece of the Syrian action, now that the US itself is leading the bombing campaign.

In short, a bevy of bad to worse news that any other day would have sent the futures soaring on hopes of even more stimulus, although with the US talking of hiking rates, China pouring cold water over expectations of more easing and Europe unsure what it is doing, today's plethora of negative news is actually, gasp, bad news!

Most north Asian equity markets are trading lower overnight. Bourses in Korea and Taiwan are down -0.4% and -0.3% respectively. Asian credit markets are also feeling slightly softer this morning, perhaps taking the weaker lead from the US session yesterday. Indeed the S&P 500 (-0.80%) saw its fourth sub-2000 crossing since it first reached the milestone about a month ago. The disappointing US existing home sales (5.05M v 5.20M expected) and Chicago Fed Nat Activity (-0.21 v +0.33 expected) probably didn’t help but in reality the market weakness was fairly broad based largely driven by Consumer Discretionary (-1.45%), Energy (-1.36%) and Industrials (-1.10%). Asian stocks trade mixed with Shenzhen Composite, ASX 200 outperforming and Sensex, Nikkei underperforming. MSCI Asia Pacific up 0.2% to 143.6. Nikkei 225 down 0.7%, Hang Seng down 0.5%, Kospi down 0.5%, Shanghai Composite up 0.9%, ASX up 1%, Sensex down 1.6%. 6 out of 10 sectors rise with telecom, health care outperforming and information technology, energy underperforming.

European stocks, U.S. equity index futures fall after Euro area PMI for Aug. missed ests., while bond yields for German, Spanish, U.K. debt fall. Copper rises with positive Chinese PMI data, while oil gains as OPEC discusses output cut. European health care stocks among largest underperformers as U.S. plans tighter rules on tax inversion M&A. Richmond Fed Manufacturing Index, FHFA House Price Index due later in U.S. 0 out of 19 Stoxx 600 sectors rise; basic resources, chemicals outperform, autos, retail underperform. 6.3% of Stoxx 600 members gain, 93.7% decline. Eurostoxx 50 -1.1%, FTSE 100 -1.2%, CAC 40 -1.5%, DAX -0.9%, IBEX -1%, FTSEMIB -0.8%, SMI -0.4%.

Aside from the Chinese PMI data, which is so fabricated it is hardly even worth talking about, here is what Goldman had to say about Europe's PMIs:

The Euro area Composite PMI fell from 52.5 to 52.3 in September, slightly below Consensus expectations but marginally above our forecast (Cons: 52.5, GS: 52.2). The Composite PMI declined on the back of a loss in momentum recorded both in the manufacturing and the service sectors. Germany registered a small increase in the Composite PMI while the French PMI posted a small decline.


1. The Manufacturing PMI fell marginally from 50.7 to 50.5 in September, its lowest reading since August 2013. The Service PMI registered a 0.3pt decline and now it stands at 52.8 (Chart 1). The Consensus expectations were for a smaller decline in both the Service and the Manufacturing surveys


2. The breakdown of the aggregate indexes is almost unchanged since the last month. Forward looking indicators in the Services PMI showed some improvements, with the largest increase in 'Business Expectations' (up by 1pt). On the other hand, indicators that try to gauge sentiment about future activity in the manufacturing sector were weaker than the previous month.


3. In addition to Euro area aggregate, Flash PMIs were released for Germany and France. The German Composite PMI edged up from 53.7 to 54.0, while the French Composite PMI printed 49.1 in September, 0.4pt below the previous month's reading. The gap between the surveys in the two countries thus widened by 0.5pt in September, but remains below 6, the average gap recorded since January 2013 (Chart 2). In contrast with the aggregate figure, the Manufacturing PMI eased in Germany, but it was stronger in France.


4. September is the last month of the third quarter of the year, but Eurostat will publish its preliminary estimate of Euro area Q3 GDP growth only on 14 November. We can, nevertheless, extract some information about growth in activity in the current quarter from the release of September Flash PMIs. Based on historical correlations, a reading of 52.3 is associated with +0.2%qoq GDP growth. Our CAI points to similar growth in September (+0.9% annl.). For Q3 as whole, the average Composite PMI is 52.8, indicative of growth of around +0.3%qoq.

In the US we look forward to the release of the Richmond Fed manufacturing index for September and the FHFA house price index for July.

European equities fall for second day, their largest drop since Aug. 8, as Euro-area manufacturing, services PMIs both fall to lowest levels of 2014.
Euro rises vs. USD. Asian stocks trade mixed after China PMI beat estimates. Oil, gold rise with copper and cotton. U.S.
equity index futures down, as are yields on U.S., German 10-year sovereign debt. Richmond Fed Manufacturing Index, FHFA House Price Index  due later in U.S.

Market Wrap

  • S&P 500 futures down 0.3% to 1981
  • Stoxx 600 down 1% to 343.1
  • US 10Yr yield down 1bps to 2.55%
  • German 10Yr yield down 0bps to 1.01%
  • MSCI Asia Pacific up 0.2% to 143.6
  • Gold spot up 0.8% to $1225.5/oz

Bulletin Headline Summary from Bloomberg and RanSquawk

  • Plans by the US treasury to limit US Co.’s ability to carry out beneficial tax inversion deals and further European profit warnings send European equities lower.
  • Softer equities have provided fixed income products with a boost as the German 10yr yield breaks back below 1.00%, while JPY and spot gold benefit from the safe-haven bid.
  • Looking ahead, attention turns towards any comments from Fed's Kocherlakota and ECB's Costa and the USD 29bln 2yr Note auction from the US Treasury at 1800BST/1200CDT.
  • Treasuries gain amid weak euro- area data, U.S. airstrikes in Syria before week’s auctions commence with $29b 2Y notes.
  • 2Ys to be sold today yield 0.595% in WI trading; stopout at that level would be highest since April 2011
  • Markit’s gauges of euro-area manufacturing and services slowed in September to their weakest pace this year, adding to signs the economy is faltering
  • German manufacturing PMI fell to 50.3 in September from  51.4 in August as new orders fell
  • HSBC/Markit’s preliminary China PMI increased to 50.5 in September, marching the highest reading in a Bloomberg survey and up from August’s 50.2
  • Prime Minister Cameron intends to press ahead with plans to give more powers rapidly to the Scottish Parliament and will tell voters the opposition Labour Party is to blame if it fails to agree to constitutional changes for England at the same time
  • As bond-trading volumes have shrunk, so have the number of jobs, leaving even some of the most senior traders and salesmen moving from firm to firm
  • The structure of the U.S. bond market is “broken,” BlackRock said, “and the extent of the breakage is masked by the current environment of low interest rates and low volatility”
  • U.S. Treasury Secretary Jacob Lew’s crackdown on inversions heightened the tension between the administration and companies considering obtaining a foreign  address to lower their tax bills
  • Lew and Obama made clear that they were prepared to use rule-making authority to try stop some deals, even at the risk of a backlash from the companies and from Republicans
  • The U.S. and its Arab allies launched a barrage of airstrikes against Islamic State positions in Syria in an operation the Pentagon said was “ongoing”
  • Israel shot down a Syrian fighter jet after it infiltrated Israeli air space, the Israeli army said today
  • Sovereign yields lower. Asian stocks mixed, European stocks fall, U.S. equity-index futures decline. WTI crude, gold and copper fall

US Data Docket

  • 9:00am: FHFA House Price Index, July, est. 0.5% (prior 0.4%)
  • 9:45am: Markit US Manufacturing PMI, Sept., est. 58 (prior 57.9)
  • 10:00am: Richmond Fed Manufacturing Index, Sept., est. 10 (prior 12)

Central Banks

  • 9:00am: Fed’s Bullard speaks in St. Louis
  • 9:20am: Fed’s Powell speaks in St. Louis
  • 9:30am: Fed’s George speaks in St. Louis
  • 2:00pm: Fed’s Kocherlakota speaks in Marquette, Mich.
  • 9:15pm: Fed’s George speaks in Cheyenne, Wyo.
  • POMO: 11:00am: Fed to purchase $1.6b-$1.9b notes in 2019-2020


Asian equity markets traded mixed as today’s HSBC Chinese Manufacturing PMI (50.5 vs. Exp. 50.0 (Prev. 50.2) beat expectations and avoided contraction territory although some key components continued to decline. The headline reading allayed fears of a full-blown slowdown of growth in China however the employment sub index fell to its lowest level since Feb’09, while the HSBC Chinese Chief Economist added they continue to expect more monetary easing from the PBoC in order to steady the recovery. The Shanghai Comp held onto its gains (+0.87%). However, source comments after the Asian close said there are no plans to add dramatic stimulus as the Chinese economy slows. Japanese markets were closed due to the Equinox holiday.


Bund futures benefited from the initial equity weakness, pushing the German 10yr yield below 1% for the first time since early September, with the squeeze higher in Bunds exacerbated by plans to limit Germany's bond issuance in the coming quarter by EUR 4bln and lacklustre Eurozone PMIs. As such, both T-notes are taking their cue from Bunds, as Gold also benefits from its safe haven status. Furthermore, the GR/GE spread is wider by around 18bps after yesterday’s source reports that Greece has asked EU authorities to postpone their Sept. visit from Troika. Finally, caution has also been spurred following reports the US military and partner nations have carried out striking ISIS in Syria and news that the Israeli army have shot down a Syrian warplane near its border.

Pan Euro Agg month-end extensions +0.08yrs (Prev. +0.03yrs), 12-month average +0.07yrs (IFR)


European and US index futures fell from cash open with the likes of Shire (-5.9%), Smith & Nephew (-3.1%) and AstraZeneca (-5.2%) all succumbing to reports that the US Treasury unveiled plans to limit US companies' ability to benefit from tax inversion purchases of foreign companies. Today’s session has also seen negative sentiment stemming from further profit warnings, this time from Raiffeisen Bank (-10.9%) and Tate & Lyle (-16.3%) who are both trading sharply lower.


Mixed German and French advanced PMI numbers failed to dent the EUR, as sharp demand for EUR/GBP buoys the currency after the US Treasury's plans to limit international tax inversion purchases, limit future M&A flow and weaken GBP. The JPY has been the primary beneficiary, with weak US yields sending the USD lower leading USD/JPY to pull away from the six-year high printed on Friday at 109.46 and weakening the USD-index. Elsewhere, AUD was initially the main beneficiary from the Chinese data, breaching 0.8900 to the upside where there is a large option expiry (844mln) rolling off at today’s 10am (1500BST) NY cut.


The move lower in global equities has provided spot gold with a safe-haven bid, with the precious complex firmly in the green after failing to find any sustained reaction following the Chinese manufacturing PMI number. Palladium outperforms the precious metals complex after failing to make a sustained break below its 200DMA with analysts at UBS also noting the banks' US clients prefer palladium over platinum. In the energy complex, both Brent and WTI crude futures trade with modest gains heading into the North American open following the overnight Chinese-inspired gains, while failing to see any further upside during the European session ahead of today’s API report.

* * *

DB's Jim Reid concludes the overnight recap

Today is Markit flash PMI day with the September readings for China, Europe and the US the highlights. With Chinese and European data weak of late and with the US relatively strong, today's numbers are going to further influence the market's expectations for monetary policy changes over the coming months especially with central banks seemingly on the turn across the globe, even if they may be turning in different directions. It seems we're leaving behind the blanket liquidity world which has given us low volatility over the past two years. As we discuss in a new credit strategy note published earlier this morning, even if markets continue to be positive over the coming months we think volatility is bound to pick up post Fed QE and possibly pre-ECB QE. Before we touch on this in more detail the Chinese data is already out which is slightly better than expected at the headline level.

Indeed the HSBC China Manufacturing PMI flash reading for September came in at 50.5. This was ahead of consensus of 50.0 and the August reading of 50.2. The underlying details of the report were a bit more mixed though. Both new orders (+1ppts to 52.3) and output (unchanged at 51.8) stayed in expansionary territory but the shine was somewhat offset by declines in input prices (-2.7ppts to 46.2), output prices (-2.5ppts to 46.4) and employment (-0.5ppt to 46.9). In terms of market the AUD is rallying strongly overnight with the currency now at a intraday high of 0.891. Chinese equities are also trading firmer after yesterday’s sell-off though with the HSCEI and Shanghai Composite up +0.3% and +0.6%, respectively. Appetite for Chinese risk assets were also supported by news that major Chinese banks may ease mortgage lending in order to support the housing market. Local media 21st Century Business reported that the criteria for first home buyers’ loans may be eased and existing home owners who have paid outstanding mortgages may be considered available for first home status. Chinese interbank money market condition continues to east. The 7-day interbank repo rate fell 13bps overnight to 3.09%, which is over 200bps off the recent highs in July.

Away from China, most north Asian equity markets are trading lower overnight. Bourses in Korea and Taiwan are down -0.4% and -0.3% respectively. Asian credit markets are also feeling slightly softer this morning, perhaps taking the weaker lead from the US session yesterday. Indeed the S&P 500 (-0.80%) saw its fourth sub-2000 crossing since it first reached the milestone about a month ago. The disappointing US existing home sales (5.05M v 5.20M expected) and Chicago Fed Nat Activity (-0.21 v +0.33 expected) probably didn’t help but in reality the market weakness was fairly broad based largely driven by Consumer Discretionary (-1.45%), Energy (-1.36%) and Industrials (-1.10%).

It was a relatively quiet day for headlines so some attention was paid to the Fed’s Dudley when he spoke to Bloomberg. The NY Fed President was fairly balanced on his views on policy. On one hand noting that being at the zero lower bound interest rate is ‚not a particularly comfortable place to be? and that he’d like to raise interest rates at some time during his tenure. However on the other hand he also said that the move depends on the progress of economic recovery against Fed’s goals and that the Fed should be patient on rate hikes and said that he is not going to ‚raise interest rates for the sake of raising them?. Those comments along with generally a risk-off day in markets provided some support for Treasuries with the 10yr about 1bps lower at 2.56%.

On the increased volatility topic which we touched on in the opening para, this morning we published a credit strategy outlook update entitled " A 2-Steps Forward, 1-Step Back Market". Overall we remain constructive on credit but feel that we are entering a new phase of this cycle and one that will be considerably more volatile than the relatively smooth experience of the past two years. While fundamental factors continue to be supportive of default rates staying at historically low levels, the technical backdrop for credit and risk assets in general is arguably less supportive than it has been. With the Fed about to end asset purchases the plug will be somewhat pulled on the extreme liquidity to which markets have become accustomed and even with the ECB about to embark on private QE it is far from the scale of the Fed’s QE. Full European QE might be the big theme of 2015 but it may not be immediate or have as powerful an impact on markets as that seen from the Fed. This coupled with lower investor cash balances and continued high issuance will likely mean periods of higher volatility even if tighter spreads win out in the end while the cycle is ongoing. So we’re moving towards what might be described as a 2-step forward, 1-step back market. The document will be on your email around an hour before this one. Give us a shout if you didn't receive it.

Elsewhere, geopolitics could regain some market focus now that Scotland’s referendum is behind us. In the middle east, the US is said to have began its bombing on Islamic militants in Syria on Monday night which is seen to be a sharp escalation of the US military role in the region. According to the FT, the Pentagon said that the US and ‘partner nation forces’ (unnamed) were undertaking military action against members of the Isis. The attacks used a mix of fighter, bomber and Tomahawk Land attack missiles.

On the other side of the globe, the sharp sell-off in Brazil was a notable mover for EM yesterday. The BOVESPA fell 1.7%, local 10yr rates rose 28bps to 11.9%, whilst the 5yr CDS for Brazil sovereign also widened by 17bp to 159bp all on talks that the latest opinion polls could show a further increase in support for President Dilma Rousseff’s bid for re-election. We have more polls scheduled to be released over the week so let’s see if things take a different direction but in reality recent weakness in commodities is also not helping Brazil’s fundamentals.

Finally let's look at the day ahead. In Europe we have the important flash PMI September readings for the Euroarea, France and Germany. Market expectation is for general stability in the French reads with the manufacturing PMI expected to rise marginally to 47 (from 46.9), the services PMI to fall slightly to 50.1 (from 50.3) and the composite also expected to drop slightly to 49.4 (from 49.5). The German numbers are expected to marginally drop across the board with the manufacturing, services and composite forecast to come in at 51.2 (vs 51.4 previously), 54.6 (vs 54.9 previously) and 53.5 (vs 53.7 previously). The broader eurozone numbers are also expected to come in broadly in line with where they were a month ago with the manufacturing number expected in at 50.6 (vs 50.7 previously), the services number at 53 (vs 53.1 previously) and the composite at 52.5 (vs 52.5 previously). Across the Atlantic the US September PMI is expected to be relatively steady at 58 (vs 57.9 previously) but clearly at a completely different level to Europe.

Flash PMIs aside we can also look forward to the release of the Richmond Fed manufacturing index for September and the FHFA house price index for July (US). In the UK, we will get the latest public finance stats while Carney is also scheduled to deliver a speech at an Actuarial conference in Wales at 1.40pm UKT today.