Global Stocks Tumble On Poor Econ Data From China To Europe

It’s a sea of red to end the week as world stocks and US futures tumbled on Friday after weak economic data from China to Europe raised global recession fears and left investors nervous over the impact of a still-unresolved Sino-U.S. trade dispute even as China announced it would roll back retaliatory auto tariffs by 3 months; Treasuries and the dollar jumped amid a renewed flight to safety.

Growth concerns came back into focus after European Central Bank President Mario Draghi said economic risks were moving to the downside, while in China retail sales and industrial production figures for November fell significantly short of estimates. The lackluster readings from Europe on car sales and manufacturing simply added to the gloom.

The MSCI All-Country World Index was down half a percent, with all major markets deep in the red. Europe’s Stoxx 600 Index headed for a weekly loss, dragged lower by automakers after regional sales slumped in November for the third month in a row.

Euro zone business ended the year on a weak note, expanding at the slowest pace in over four years as new order growth all but dried up, hurt by trade tensions and the Yellow Vests” movement. The France PMI survey showed French business activity plunged unexpectedly into contraction this month, retreating at the fastest pace in over four years with the slowdown largely blamed on the recent violent anti-government protests.

Elsewhere, Germany’s private sector expansion slowed to a four-year low, suggesting growth in Europe’s largest economy may be weak in the final quarter as Mfg PMI declined from 51.8 to 51.5 (exp. 52.0) while the Services PMI dropped from 53.3 to 52.2, also missing expectations for a rebound to 53.4.

Adding to the ECB’s gloomy outlook, the Bundesbank lowered German growth projections, warning of downside risks: the German central bank today revelaed its updated growth projections, which cut back the GDP forecast to just 1.5% this year from 2.0% expected previously, hardly a surprise after the -0.2% q/q contraction in Q3. The forecast for 2019 was cut to 1.6% from 1.9% and for 2020 and 2021 the Bundesbank expects rowth of 1.6% and 1.5% respectively.

Stock markets in Europe opened sharply lower, with Germany’s DAX index falling 1.5% while the pan-European STOXX 600 index was down 0.9%, paring some losses as European automakers saw their losses cut in half on the China tariff news.

The data out of Europe added to weak readings from China, where November retail sales grew at the weakest pace since 2003 and industrial output rose the least in nearly three years, underlining risks to the world’s second-largest economy as Beijing works to defuse a trade dispute with the United States.

A Chinese statistics bureau spokesman said the November data showed downward pressure on the economy is increasing.

The data “means that the worst is yet to come and policymakers will be very worried, particularly with consumption growth falling off a cliff,” said Sue Trinh, head of Asia FX strategy at RBC Capital Markets in Hong Kong. “So I expect further support measures including rate cuts will come in coming weeks, although these data would indicate measures to date aren’t really working.”

The Chinese yuan weakened 0.4% to 6.9063 per dollar in offshore trade following the data.

As a result, equities slumped across Asia, with shares in Hong Kong and Japan leading the retreat. MSCI’s index of Asia-Pacific shares ex Japan fell 1.5%. Japan’s Nikkei, also dragged down by the country’s weak tankan sentiment index, dropped 2.0%. China’s benchmark Shanghai Composite and the blue-chip CSI 300 closed down 1.5 percent and 1.7 percent, respectively, and Hong Kong’s Hang Seng was off 1.5 percent.

“The data this morning out of France really hasn’t helped the mood. You look at China data, you look at the flash PMIs out of France and Germany and they’ve really sort of reinforced concerns that the global economy is slowing down,” said CMC Markets chief markets analyst Michael Hewson. “Ultimately, I think it rather questions the wisdom of the ECB ending its asset purchase program at the end of this month. You’ve got Mario Draghi basically tightening into a downturn.”

Over in the US, S&P 500 futures also pointed to a drop at the open, though both declines were tempered somewhat on news that China will temporarily remove a retaliatory duty on U.S.-imported automobiles.

“Although hopes of progress in U.S.-China talks and cheap valuations are supporting the market for now, we have lots of potential pitfalls,” said Mizuho’s Nobuhiko Kuramochi. “If U.S. shares fall below their triple bottoms hit recently, that would be a very weak technical sign.”

In the currency market, the euro was down 0.7 percent after the weak PMIs, last changing hands at $1.1288. The Bloomberg Dollar Spot Index headed for its best week in four months, rising to 1,215 and just shy of 2018 highs. Antipodean currencies led losses in the Group-of-10 basket.

Sterling’s rally fizzled as signs that the British parliament was headed towards a deadlock over Brexit prompted traders to take profits from its gains made after Prime Minister Theresa May had survived a no-confidence vote.

The European Union has said the agreed Brexit deal is not open for renegotiation even though its leaders on Thursday gave May assurances that they would seek to agree a new pact with Britain by 2021 so that the contentious Irish “backstop” is never triggered.

In overnight Trump-related news, Federal prosecutors are investigating whether US President Trump’s inaugural committee misspent some of the record amount of funds it raised, while there were later comments from White House Press Secretary Sanders that President Trump had limited engagement with the inauguration committee. President Trump is also said to be considering Kushner for Chief of Staff, while there were separate reports that US President Trump is said to have met with Chris Christie to discuss Chief of Staff position. Axios reported that US President Trump sees Chris Christie as a top contender to replace John Kelly as Chief of Staff

Oil prices gave up some of their Thursday’s gains following inventory declines in the United States and expectations that the global oil market could have a deficit sooner than they had previously thought. U.S. crude futures edged down 0.5% to $52.32 per barrel and Brent crude slipped 0.6 percent to $61.09, after both gained more than 2.5 percent on Thursday. Gold (-0.3%) is set for is biggest weekly fall in five weeks due to a firmer USD as traders focus on next week’s tabled Fed rate hike. Looking at base metals, copper is on track for a third consecutive weekly drop with downside exacerbated by the downbeat Chinese industrial production translating into weaker demand as the red metal faces a 15% yearly decline.

Expected data include retail sales, industrial production, and PMIs. No major companies are reporting earnings

Market Snapshot

• S&P 500 futures down 0.9% to 2,626.25
• STOXX Europe 600 down 1.4% to 344.61
• MXAP down 1.4% to 149.12
• MXAPJ down 1.5% to 481.32
• Nikkei down 2% to 21,374.83
• Topix down 1.5% to 1,592.16
• Hang Seng Index down 1.6% to 26,094.79
• Shanghai Composite down 1.5% to 2,593.74
• Sensex up 0.03% to 35,940.82
• Australia S&P/ASX 200 down 1.1% to 5,602.00
• Kospi down 1.3% to 2,069.38
• German 10Y yield fell 3.4 bps to 0.251%
• Euro down 0.6% to $1.1292
• Italian 10Y yield fell 4.3 bps to 2.594%
• Spanish 10Y yield fell 0.8 bps to 1.416%
• Brent futures little changed at $61.42/bbl
• Gold spot down 0.2% to $1,239.08
• U.S. Dollar Index up 0.5% to 97.53

Top Overnight News

• European leaders rebuffed Theresa May’s pleas to help her sell the Brexit agreement to a skeptical U.K. Parliament, toughening their stance as they stepped up planning for a chaotic no-deal divorce
• The euro-area economy is closing out 2018 on a gloomy note, with a measure of activity unexpectedly dropping to its lowest in just over four years
• China’s economy slowed again in November as retail sales and industrial production weakened, creating a challenging backdrop for policy makers who gather next week to set the tone for the year at their annual Economic Work Conference in Beijing
• As Japanese government bond yields slide, some Bank of Japan officials see no problem with them dropping to zero or even below, according to people familiar with the matter
• In Washington and Beijing, the idea that China is willing to water down its plans for high-tech industrial dominance to appease President Donald Trump is already meeting with skepticism

Asian equity markets were negative across the board as sentiment in the region soured following the lacklustre lead from Wall St and as region digested disappointing data from China. ASX 200 (-1.1%) and Nikkei 225 (-2.0%) both declined from the open with Australia led lower by tech, telecoms and the largest weighted financials sector, while the Japanese benchmark was subdued amid a firmer JPY and mixed Tankan data despite the headline Large Manufacturers Index and Large All Industry Capex topping estimates. Elsewhere, Hang Seng (-1.6%) and Shanghai Comp. (-1.5%) were also pressured after Chinese Industrial Production and Retail Sales data both fell short of estimates, with underperformance seen in Hong Kong as this year’s run of lacklustre stock market debuts continued in the domestic exchange. Finally, 10yr JGBs were higher as they tracked gains in T-notes and with prices underpinned by safe-haven demand which saw 10yr JGBs print the highest since November 2016.

Top Asian News

• Some at BOJ Are Said to Be Fine With Yields Going to Zero
• Thailand’s Richest Man Said to Tap BofA, UBS for $1.5b AWC IPO
• SoftBank IPO Said to See 2-3 Times Demand From Big Investors
• Not Such a Happy Friday for Asia’s Beleaguered Stock Traders
• Japan Post Is in Talks to Buy Minority Stake in Aflac

European equities are poised to finish the week on the backfoot (Eurostoxx 50 -0.9%) following the weak lead from Asia as sentiment turned sour amid the release of disappointing Chinese industrial production and retail sales, highlighting weakness in the Chinese economy. As such, around 75% of the Stoxx 600 (-0.9%) are in the red, Switzerland’s SMI (-1.4%) marginally lags peers with all 20 stocks in negative territory. In terms of sectors, IT names underperform alongside auto names (seen as trade proxies due to heavy exports) as a result of the aforementioned Chinese retail sales signalling an impact from ongoing trade disputes. However, European auto names spiked higher following reports that China are to lift retaliatory tariffs on US autos for 3-months from January 1st next year (i.e. suspending the 40% tariff plan and sticking to 15%). In terms of individual movers GVC Holdings (+8.8%) shares rose to the top of the UK benchmark with Citi citing next week’s Parliament vote on FOBT stakes being “significantly positive” as shareholders will be paid out GBP 676mln if the legislation is not passed by 28th March 2019.

Top European News

• Sweden Moves Step Closer to New Election as Lofven Loses PM Vote
• How Ireland Outmaneuvered Britain on Brexit
• Italian Bonds Get No Favors From Draghi’s Reinvestment Plans
• European Car Sales Slump in November With No Sign of Rebound

In currencies, The Antipodean Dollars have derived some scant support from reports that China will freeze and backtrack on a proposed increase in US auto tariffs w/e January 1 next year, in line with recent speculation, but the Aussie and Kiwi remain on the backfoot and significantly weaker than their G10 counterparts following sub-forecast Chinese data overnight and RBNZ consultations about lifting high grade bank capital requirements by 100%. Aud/Usd is holding just off a fresh December low around 0.7155 after breaching 0.7200 and tech supports below the figure at 0.7186 (55 DMA) and 0.7163 (Fib), while Nzd/Usd has lost grip of 0.6800 as the Aud/Nzd cross pivots 1.0550.

• EUR/GBP: Also major underperformers, as the single currency extended post-ECB losses on the back of further declines in EZ PMIs (French readings especially dire as manufacturing, services and composite all tumbled into sub-50 contractionary territory) and through recent support just ahead of 1.1300 vs the Greenback to 1.1286 before finding some bids. Note, a decent 1 bn option expiry at the 1.1300 strike may provide some traction. Meanwhile, Brexit remains the big bane for Sterling and given the ongoing impasse between UK PM May and EU leaders on the back-stop, Cable has retreated sharply towards 1.2570 and chart-wise back below the 10 DMA circa 1.2660.
• JPY: As usual, demand for the safe-haven Yen is just keeping Usd/Jpy depressed within a tight 113.70-40 range, along with 1.4 bn expiries at 113.75.
• EM: An unexpected, though far from total surprise ¼ point CBR rate hike has underpinned the Rub against the grain of overall regional currency weakness on risk-off flows, with the Rouble comfortably above 66.5000 vs the Usd.

In commodities, WTI (-0.7%) and Brent (-0.9%) swings between gains and losses following an uneventful overnight session as prices consolidated after yesterday’s rally.  The complex saw some upside in recent trade after Libya’s NOC chairman was pessimistic about reopening its 300k BPD El-Sharara after an armed group halted production at the oilfield. Traders will be eyeing this evening’s Baker Hughes rig count as fresh catalyst. Note, WTI Jan’19 options expire today at 19.30GMT. Elsewhere, gold (-0.3%) is set for is biggest weekly fall in five weeks due to a firmer USD as traders focus on next week’s tabled Fed rate hike. Looking at base metals, copper is on track for a third consecutive weekly drop with downside exacerbated by the downbeat Chinese industrial production translating into weaker demand as the red metal faces a 15% yearly decline. Finally, Shanghai steel extended gains for a third day in a row after two major steelmaking cities (Tangshan and Xuzhou) demanded mills to curtail production amid worries that they will not meet pollution reduction targets this year. For context, Tangshan accounts for 10% of China’s total steel output while Xuzhou is in the number two steelmaking province.

US Event Calendar

• 8:30am: Retail Sales Advance MoM, est. 0.1%, prior 0.8%; Retail Sales Ex Auto MoM, est. 0.2%, prior 0.7%
  • Retail Sales Ex Auto and Gas, est. 0.4%, prior 0.3%; Retail Sales Control Group, est. 0.4%, prior 0.3%
• 9:15am: Industrial Production MoM, est. 0.3%, prior 0.1%; Manufacturing (SIC) Production, est. 0.3%, prior 0.3%
• 9:45am: Bloomberg Dec. United States Economic Survey
• Markit US Composite PMI, prior 54.7
  • Markit US Manufacturing PMI, est. 55, prior 55.3;
  • Markit US Services PMI, est. 54.6, prior 54.7
• 10am: Business Inventories, est. 0.6%, prior 0.3%

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