"Investors are worried about rising U.S. government bond yields, emerging-market economies, and Italy’s political situation"

Gerald Celente - New Trade Deal, No Big Deal. This will Make or Break the Markets 

Global Stocks Slide, Asian Techs Hammered As Rate Rout Continues

Zero Hedge,

5 October, 2018

Taders were greeted with another sea of red from overnight equity markets, and even as Thursday's vicious rout slowed ahead of today's all important jobs report, Asian tech stocks were hammered following Bloomberg's report that Beijing had hacked American computer networks using a microchip built by its spies.

"Stocks are firmly in the red as investors are worried about rising U.S. government bond yields, emerging-market economies, and Italy’s political situation," said David Madden, market analyst at CMC Markets. To that he can also now add the tech rout amid Asian stocks following yesterday's Bloomberg spying report.

Markets remain on edge about the sharp jump in US and global interest rates, although after the surge earlier this week US 10Y Treasury yields have remained relatively flat for the second consecutive day. Benchmark U.S. Treasury yields were at a seven-year top and on their way to their biggest weekly yield rise since February while European yields were adding to their biggest rise in months as well.

And with talk of plenty more U.S. interest rate hikes growing louder, it put all the more focus on the U.S. jobs data later. Eaton Vance portfolio manager Justin Bourgette said though there was too much hype around the payrolls figures, whichever way you approach it, the U.S. labor market is currently super strong. The latest Bloomberg consensus sees 185,000 new jobs and average hourly earnings increasing 0.3 percent in September after leaping 0.4 percent in August.

“Whatever the Fed’s concept of the neutral interest rate is, it must be rising,” Bourgette said. “And it is going to be trial and error to some degree (on how high rates go), because you just don’t know where the choking point is.”

Looking at today's jobs report, DB's Jim Reid said it best:

Given the rout in markets that started with Treasuries on Wednesday and has since reverberated throughout risk assets over the last 24 hours you’d be hard-pressed to find a more conveniently timed payrolls Friday than today. Indeed, with 10y Treasury yields up nearly 13bps from Friday’s close to 3.191% as of this morning, the S&P 500 (-0.82%) and NASDAQ (-1.81%) falling by the most since June 25th yesterday with FANG stocks (-2.89%) at the heart of it, the VIX (+2.61pts to 14.22) at one stage surging past 15 again yesterday, EM currencies lower across the board and EM equities (-2.38%) down by the most since  February yesterday, the stakes have certainly been raised.

The sell-off in Treasuries led to contagion in Europe, where Germany’s 30-year security is poised for its biggest one-week yield increase since April and the 10Y Bund yield rose to 5 month highs, while Italian bonds slipped, as GDP forecasts failed to convince investors the country will be able to meet fiscal targets.

An interesting observation by Bloomberg, is that unlike in the US where higher yields have traditionally helped bank stocks, in Europe there has been a notable and concerning decoupling between the 10Y Bund yield and bank stocks. If not even a steepening in the yield curve can help Europe's bank stocks, then Mario Draghi may be fresh out of luck.

Stocks in Europe followed Asia into the red rounding out a tough week in which a rout in technology shares roiled Asian equity markets while the stronger dollar, which slammed emerging markets, resumed rising ahead of the September payrolls report.

Europe's Stoxx 600 index fell, led lower by miners as metal prices fell, while tech and banking shares also slipped. Lingering worries about Italy’s finances and an overoptimistic budget proposal pushed Milan down 0.9% making it the worst performer among major European markets on Friday. Deutsche Bank said the government’s budget plan, including growth of 1.5%, 1.6%, and 1.4% over the next three years, “is much more optimistic than forecasts from DB’s economists, the Bank of Italy, the ECB, the IMF, or the private sector consensus.”

London’s FTSE, Frankfurt’s DAX and the CAC in Paris were off 0.6-0.8% and Wall Street futures were modestly weaker. Danske Bank A/S headed for the biggest drop in seven years after Denmark’s regulator said it should hold more capital to prepare for potential fines.

Earlier, benchmark stock indexes fell across Asia, led by tech stocks with the MSCI AC Asia Pacific Infotech Index dropping to the lowest since July 2017. Taiwan’s Taiex index fell 1.9% in Taipei for its lowest close since May. The broader MSCI Asia Pacific Index headed for its worst week since March.

Tech stocks led declines after Bloomberg reported that China infiltrated U.S. companies with hardware hacks. The story came the same day Vice President Mike Pence criticized China across economic, commercial and diplomatic fronts in a keynote speech. As a result, Chinese PC maker Lenovo Group plunged as much as 23% in Hong Kong, its biggest loss in almost a decade before paring some of its decline by the close on Friday. In a statement, Lenovo said Super Micro Computer Inc., the company at the center of the hacking chip investigation, is “not a supplier to Lenovo in any capacity” and the company will take steps to protect the ongoing integrity of its supply chain, however that was not enough for traders who sold first and asked questions later.

In a note to clients, JPMorgan recommended shorting Lenovo with a six-month time horizon given the company’s PC and server sales to the U.S. “Whilst Lenovo isn’t directly implicated in the expose, it is hard not to see U.S. slow down their procurement of servers near term,” the note said and added that investors may also consider shorting Taiwanese computer companies including Quanta Computer, Inventec, Wiwynn and Wistron Corp which gets about 20% of its enterprise server business from Super Micro.

Other semiconductor names were similarly crushed: ZTE, a Chinese communications-gear maker that’s been hit by American sanctions, fell 11% in Hong Kong, the most since June. Walsin Technology, the top emerging-market stock through the first half of the year before becoming the worst since mid-July, dropped 9.9% in Taiwan. Taiwan lens maker Largan Precision, an Apple supplier, fell 7.3%. Realtek Semiconductor was down 8.3% to a July low.

“Electronics produced in China may be viewed unsafe due to this news, and tech shares are falling in general because of that,” Ray K W Kwok, an analyst at CGS-CIMB Securities Hong Kong Ltd., said of the Bloomberg story.

Losses in Asia followed Thursday declines in the U.S. where the Nasdaq saw its worst one-day drop since June, as Amazon and Apple - companies named as being affected by the China hack - dropped at least 1.8%.  The tech rout has added to the pain suffered by Asian stocks which have so far taken the brunt of the US-China trade war.

The tech rout was the latest blow for global stocks in a week that saw 10-year U.S. Treasury yields climb to to seven-year highs, reducing demand for riskier assets. Fed Chair Jerome Powell stoked the rates surge when he said the central bank could eventually boost its benchmark "past the neutral level", after data that underscored the strength of the U.S. economy. Investors’ focus is now squarely on Friday’s monthly U.S. payrolls report for further clues on the policy outlook.

The painful combination of rising oil prices, higher interest rates and a climbing dollar have also been rocking emerging markets which tend to be vulnerable to all three. MSCI’s 24-country emerging market equity index was down 0.7 percent and headed for its worst week since February and plenty of currencies were carrying heavy losses too. The slump in Chinese tech stocks, Indian refiners and South African blue chips led to the fifth loss in six days for emerging-market equities, sending them toward the worst week in eight months.

Earlier on Friday, India’s rupee feel to a new record low and bonds rallied after the country’s central bank unexpectedly kept its policy rate unchanged. The country’s Sensex benchmark stock index slumped 2.3%, the most since February, taking its slide from an August high to 12%, falling for a third straight session, dragged down by energy firms one day after the government announced a cut in fuel prices.

In the latest Brexit news, former UK Foreign Minister Boris Johnson welcomed EU Council President Tusk's offer of a Canada type deal, he added it shows there is a "superb" way forward. Separately, EU Diplomatic Sources says that a divorce deal on Brexit is "very close" with Britain according to Reuters. However, Irish Foreign Minister Coveney says it is "hard to know" if the backstop proposal would work.

Elsewhere, Brent crude futures gained 0.5 percent to $85.03 barrel, and U.S. crude rose 0.7 percent to $74.88 barrel. That kept both just under 4-year highs. They have also risen an staggering 15-20 percent since mid-August. “Iranian exports could fall below 1 million barrels per day in November,” U.S. bank Jefferies said, referring to looming U.S. sanctions on Tehran. The investment bank said there was enough oil to meet demand, but “global spare capacity is dwindling to the lowest level that we can document ... meaning any further supply disruptions would be difficult for the market to manage - and could lead to spiking crude oil prices”.

Today's expected data include trade balance, non-farm payrolls, and unemployment. No major companies are reporting earnings.

Market Snapshot

• S&P 500 futures down 0.1% to 2,904.50
• STOXX Europe 600 down 0.6% to 377.50
• MXAP down 0.6% to 159.80
• MXAPJ down 0.7% to 501.90
• Nikkei down 0.8% to 23,783.72
• Topix down 0.5% to 1,792.65
• Hang Seng Index down 0.2% to 26,572.57
• Shanghai Composite up 1.1% to 2,821.35
• Sensex down 1.1% to 34,781.80
• Australia S&P/ASX 200 up 0.2% to 6,185.49
• Kospi down 0.3% to 2,267.52
• German 10Y yield rose 2.7 bps to 0.558%
• Euro down 0.2% to $1.1494
• Italian 10Y yield rose 1.5 bps to 2.959%
• Spanish 10Y yield rose 0.9 bps to 1.572%
• Brent futures up 0.3% to $84.81/bbl
• Gold spot little changed at $1,199.98
• U.S. Dollar Index up 0.1% to 95.88

Top Overnight News from Bloomberg

• The U.S. Senate is closing in on sending Brett Kavanaugh to the Supreme Court, which would seal a conservative majority and close a bitterly fought confirmation process that hinged on allegations of sexual misconduct. The Senate on Friday morning will take a procedural vote that will determine if he has enough support for approval
• European Central Bank President Mario Draghi met with Italian President Sergio Mattarella on Wednesday and may have discussed the country’s budget and bond spreads in the context of the winding down of the ECB’s QE program, La Stampa reported
• Britain’s International Trade Secretary said he will back an imperfect Brexit deal with the EU, on the basis it can be revised and improved after the U.K. has left the bloc
• India’s central bank kept interest rates unchanged in a surprise decision, opting to assess the impact of previous increases and contain the fallout of defaults from a systemically important lender. Indian bonds rallied
• Oil dropped from the highest price in almost four year amid signs of a growing crude surplus in the world’s biggest economy. An additional 1.7 million barrels of oil were stowed in tanks at a key U.S. pipeline hub in Oklahoma in the five days to Oct. 2, data provider Genscape Inc. was said to have reported
• The controversial budget plans of Italy’s populist government are hanging on an economic premise that looks too optimistic. It sees growth of 1.5 percent in 2019, followed 1.6 percent and 1.4 percent in subsequent years. By comparison, the median in Bloomberg’s latest survey is for expansion of no more 1.2 percent
• The Trump administration warned that too much of the U.S. defense industry is dependent on China or vulnerable to hacking directed by Beijing, part of a mounting campaign to pressure the Chinese government
• Japan’s base pay and household spending both rose by the most in years in August, adding to signs that consumers are beginning to feel the nation’s economic recovery
• For investors in the curve-steepener trade, the updraft in Treasury yields of the past 48 hours is more than just a welcome reprieve -- it also signals a long-awaited regime shift

Asia-Pac stocks are traded mixed following a negative lead from Wall St. where tech names led the sell-off amid US-China trade concerns and as the US 10-year yield hit the highest since 2011. ASX 200 (+0.2%) bucked the trend and recuperated initial losses as financial and precious metal names supported the index, while Nikkei 225 (-0.8%) was subdued due to a recovery in the currency and weakness in tech names. Elsewhere, Hang Seng (-0.2%) struggled after opening in bear-market territory as a result of US headwinds and weakness in the energy sector, while tech names also sold off following reports that U.S. tech companies’ systems had been infiltrated by malicious chips inserted by Chinese intelligence agents. Meanwhile, mainland China remained closed due to the Golden Week holiday.

Top Asian News

• Hong Kong Stocks Signal Pain for World’s Priciest Properties
• IMF Says Pakistan Policies Not Enough to Stabilize Economy

European equities are down again, with traders mindful of Italian updates, the current yield environment, US-China trade tensions and the upcoming US job report. Comments from EU sources that a divorce deal for Britain is close has lifted the GBP and pressured the FTSE 100 into negative territory. The IT sector is underperforming amidst the technology supply line infiltration, and comments from Trump that he thinks China is not ready to make a deal creating additional strain on US-China relations. INTU Properties are up by over 28% following murmurs of privatisation led by a consortium including their deputy chairman. Danske Bank are at the bottom of the Stoxx 600 following yesterday’s share buyback discontinuation and being downgraded today to Neutral at Credit Suisse.

Top European News

• Ryanair Calls Off Talks With German Cabin Crew Union
• Rallye Repays Bondholders as Questions Loom About New Loan
• Brexit Financial-Market Threat Leads EU Watchdogs to Step Up
• U.K. Inflation Hawks May Be Missing the Big Picture on Brexit

In FX, GBP extended gains above the 1.3000 mark, and briefly through some stops at the next psychological level around 1.3050 on the back of more constructive Brexit news in the form of EU diplomatic sources suggesting a UK divorce agreement is ‘very close’. Eur/Gbp breached its 200 DMA circa 0.8840 in response and tested bids below 0.8820 before the Pound broadly ran out of steam. JPY was the other relative G10 outperformer, albeit marginal in the pre-NFP amble, as the headline pair remains hemmed in either side of 114.00, but some way above decent support and option expiry interest at the 113.50 strike where 1.1 bn runs off at the NY cut. EUR/CAD - Also softer vs the Greenback, with the single currency unable to sustain momentum on advances beyond 1.1500 and technically weak while under 1.1550 and a 1.1546 Fib, while the Loonie remains contained within a 1.2915-40 range vs its US counterpart awaiting Canadian jobs data due at the same time as NFP. EM - Some consolidation after widespread depreciation vs the Dollar for the most part this week, but not for the Inr that hit fresh all time lows following the RBI’s decision to stand pat on rates against consensus for a 25 bp hike, although it did switch policy stance to ‘calibrated’ tightening from neutral. Elsewhere, more intervention from the Indonesian Central Bank, while the Real may see some upside ahead of Sunday’s Brazilian election after the latest poll put Bolsonaro a bit further ahead of his main rival.

In commodities, the oil market is uneventful heading into the weekend with trade tentative ahead of the US labour market data later in the day, and the fossil fuel essentially flat for the day. The crude complex is set for its fourth consecutive weekly gain, as supply-driven gains have pushed the commodity to 4 year highs this week. The latest plats survey revealed OPEC compliance stands at 110% in September for members with quotas, alongside stating that Saudi output rose by 100k BPD, and that they have exceeded their targeted 1mln BPD increase. In metals markets, gold is also essentially unchanged as traders hold off ahead of a US jobs report that could tempt the Fed to implement a tighter monetary policy should signs of wage growth be seen.  Aluminium is also steady, with the construction material set for its biggest weekly rise since April as supply concerns have lifted prices.

US Event Calendar

• 8:30am: Trade Balance, est. $53.6b deficit, prior $50.1b deficit
• 8:30am: Change in Nonfarm Payrolls, est. 185,000, prior 201,000
  • Unemployment Rate, est. 3.8%, prior 3.9%
  • Average Hourly Earnings MoM, est. 0.3%, prior 0.4%
  • Average Hourly Earnings YoY, est. 2.8%, prior 2.9%
  • Average Weekly Hours All Employees, est. 34.5, prior 34.5
• 12:30pm: Fed’s Kaplan Speaks in Waco
• 12:40pm: Fed’s Bostic Speaks at Financial Literacy Conference
• 3pm: Consumer Credit, est. $15.0b, prior $16.6b

DB's Jim Reid concludes the overnight wrap

Given the rout in markets that started with Treasuries on Wednesday and has since reverberated throughout risk assets over the last 24 hours you’d be hard-pressed to find a more conveniently timed payrolls Friday than today. Indeed, with 10y Treasury yields up nearly 13bps from Friday’s close to 3.191% as of this morning, the S&P 500 (-0.82%) and NASDAQ (-1.81%) falling by the most since June 25th yesterday with FANG stocks (-2.89%) at the heart of it, the VIX (+2.61pts to 14.22) at one stage surging past 15 again yesterday, EM currencies lower across the board and EM equities (-2.38%) down by the most since  February yesterday, the stakes have certainly been raised.

Indeed, it’s definitely one of the more anticipated employment reports this year and the consensus for payrolls today is for a 185k reading for September which follows that stronger than expected 201k in August. Average hourly earnings are expected to print at +0.3% mom, however base effects are expected to result in a one-tenth of a percent fall for the yearly figure to +2.8% yoy. With this week’s ADP (230k vs. 184k expected) and the employment components of both the manufacturing (58.8) and non-manufacturing (62.4) ISMs hitting seven-month and all-time highs, respectively, too this week, it certainly feels like the risk is to the upside. Indeed, our US economists yesterday revised up their payrolls forecast to 225k in light of the data, which in their view should push the unemployment rate down to 3.8%. Our colleagues also expect a +0.3% mom/+2.8% yoy earnings print but note the risk to the annual rate is a fall of two-tenths due to the base effects from last year's September surge due to hurricane effects. However, earnings should rebound strongly in October as these base effects unwind.

Back in markets, one of the ironic takeaways from the moves yesterday was that Treasuries actually ended up little changed which seemed to partly be a function of the flight to quality bid in light of the moves for risk assets. Indeed, while the 10y did hit an intraday high of 3.231% early in the day - more than 18bps higher than the yield lows from Wednesday – it ended last night at 3.188% and +0.5bps on the day. 2y and 30y yields ended -0.4bps and +1.3bps respectively so it was at least a day of consolidation after breaking some key technical levels. Meanwhile, the DOW (-0.75%) and Russell 2000 (-1.46%) also joined the equity selloff along with the STOXX 600 (-1.08%) while the only sector which really benefited was Banks with the S&P 500 Banks index ending +0.80% and European Banks (+0.65%). EM FX (-0.58%) fell sharply for the second consecutive day while hard currency 10y yields in the likes of Brazil and Argentina finished +9.5bps and +36.9bps higher respectively. In Europe Bunds ended +5.6bps but in fairness were playing catch-up. Elsewhere in commodity markets WTI (-2.72%) and Brent (-1.98%) Oil tumbled yesterday while base metals were also hit hard (Aluminium -1.65%, Nickel -2.19%).

There’s no doubt that the Treasury move on Wednesday played its part in the selloff for risk assets especially with real yields also marching higher. However, the Bloomberg story which hit yesterday morning about China hacking 30 US companies including Amazon and Apple, and US Vice President Mike Pence saying that there “can be no doubt” that “China is meddling in America’s democracy” and specifically accusing the nation of a “whole-of-government approach” to sway US public opinion, also played just as big or had an even bigger impact on markets yesterday.

Overnight that risk off tone has continued into Asia however losses aren’t quite to the extent of those seen on Wall Street. The Nikkei (-0.71%), Hang Seng (-0.42%) and Kospi (-0.34%) are all in the red which puts those bourses down 1% to 4% this week alone. As a reminder, markets in China are still closed due to national holidays so it could be an interesting open on Monday given the moves this week. Meanwhile futures in the US are broadly flat along with bonds for the most part. Indeed, 10y JGBs are -0.6bps lower at 0.143% and 30y JGBs are -1.1bps lower at 0.934%. Notably there was no change to the BoJ’s outright bond purchase programme this morning and the moves also come following headlines yesterday on Reuters about the BoJ seen as “tolerating higher yields”.

In other news, yesterday there was some debate about an MNI article suggesting that the ECB might consider a “twist-like” operation of reinvestments of maturing debt next year. It’s worth noting that this isn’t the first time we’ve heard such a story  and the rationale is certainly nothing new insofar as the ECB may just consider potentially extending maturities with the same capital keys. There wasn’t a great deal of reaction in the market to the story with the euro up a fairly modest +0.31%.

Staying with Europe, Greek assets had another turbulent day yesterday with increasing concern about the country’s banks which feels all a bit déjà vu. Bloomberg ran a story yesterday suggesting that Greece was considering a proposal to help lenders offload bad loans into an SPV, which in turn would issue bonds backed by the state. After falling -8.78% on Wednesday Greek banks rallied back +8.31% yesterday however 5y and 10y Greek yields did rise +7.2bps and +8.8bps respectively.

On Italy, the news flow calmed a bit yesterday which was probably a relief given the volatility in markets elsewhere, though later in the evening we did get the government’s budget plans which include growth of 1.5%, 1.6%, and 1.4% over the next three years. This is much more optimistic than forecasts from DB’s economists, the Bank of Italy, the ECB, the IMF, or the private sector consensus Debt to GDP is also to be targeted at 130.0% in 2019, 128.1% in 2020 and 126.7% in 2021 while the deficit, as we already knew, was confirmed at 2.4% for next year, 2.1% in 2020 and 1.8% in 2021. It’ll be interesting to hear any comments from the European side today.

Elsewhere, yesterday’s data certainly had less of an impact on markets but it did support the consistent message of strong US growth. Initial jobless claims fell to 207,000 from 214,000, close to the 50-year low. August durable goods orders were revised 0.1pp lower to +4.4% mom, though upward revisions to July mostly offset this. August factory orders beat expectations by 0.2pp at +2.3% mom. For now, we maintain our third quarter GDP growth forecast at +3.3% saar.

Finally, while the day ahead will likely be dominated by the US employment report this afternoon, there are various other data releases to be aware of. This morning in Europe we’ve got August factory orders and PPI in Germany followed by the August trade balance reading for France. In the UK we’ll also get Q2 labour costs while in the US this evening we’ll get August consumer credit data. Away from that we’ve got central bank meetings due in India and Argentina while the ECB’s Luis de Guindos and Klaas Knot are due to speak, followed by  the Fed’s Robert Kaplan and Raphael Bostic this afternoon.

New Zealand dollar heading to GFC lows by end of the year, ANZ says

The New Zealand dollar has taken a dive against the greenback and will continue to fall to levels not seen since the global financial crisis, ANZ predicts.

ANZ senior macro strategist Phil Borkin said the kiwi fell to 64.80 US cents on Friday afternoon following better than expected economic indicators coming out of the United States.

Borkin said it was the first time the New Zealand dollar had threatened to fall below 64 US cents since 2015 - and the bank's view was that there were more falls to come.

In fact, ANZ was forecasting the dollar would go as low as 62 US cents by the end of the year, Borkin said.

The last time the New Zealand dollar hit such levels was around 2009 "when we were right in the depths of the financial crisis", Borkin said.

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