Date: July 13, 2018
U.S. Stock Futures Drift as Traders Weigh Earnings: Markets Wrap
U.S. equity-index futures struggled for traction as investors focused on second-quarter earnings, and as China’s record trade surplus with America served as a reminder that protectionist tensions aren’t going away. The pound fell as the Brexit quagmire deepened. Futures on the S&P 500, Dow Jones and Nasdaq fluctuated between gains and losses after JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. posted mostly positive results. The Stoxx Europe 600 Index advanced, with trading volume more than 25 percent lower than the 30-day average and commodity producers underperforming. Stocks in Asia posted a first weekly advance in five as benchmarks in Japan, Hong Kong and South Korea gained. The dollar strengthened and Treasuries edged higher, while European bonds rallied, the euro declined and the yuan fell. The pound headed lower after President Donald Trump warned U.K. Prime Minister Theresa May that her Brexit proposal — already facing an uphill battle for European Union approval — could “kill” any future U.S. trade deal. Investors will feel some relief as earnings season gets underway in earnest, allowing attention to pivot away from trade relations. The latter seemed to ease somewhat, with officials in Beijing appearing to moderate their responses to Trump’s tariff threats amid a slowing economy, falling stock market and weakening currency. Still, China’s monthly trade surplus with the U.S. rose to a record in June and exports to the nation also soared, underlining the cause of the escalating trade war.
Trade Tensions Turn Into Mood Killer for Investors in Euro Area
Investors’ confidence in the euro area and Germany took another knock as the escalation of trade tensions between the U.S. and many of the world’s major economies cast a cloud over improving data. The ZEW Center for European Economic Research said its measure of investor expectations for Germany fell to minus 24.7 in July from minus 16.1 in June, recording a fifth straight decline. A gauge for the euro area also plunged. Both are at levels not seen since 2012, when the region was mired in a crippling debt crisis. The downbeat assessment comes after more recent economic data from Germany suggested Europe’s largest economy is beginning to stabilize, with factory orders, industrial output, and service-sector activity all improving. However, there’s no ignoring the threats, particularly the ramping up in protectionism that took another major step last week, when U.S. tariffs on $34 billion of Chinese imports came into force and China immediately retaliated. Positive news have been “greatly overshadowed by the anticipated negative effects on foreign trade,” ZEW President Achim Wambach said in a statement. European Central Bank President Mario Draghi reiterated on Monday that most of the risks to the euro-area outlook originate outside the region, highlighting in particular the rise in protectionism. Warnings have also come from the Federal Reserve and the Bank of England. The International Monetary Fund has said that risks to Germany’s economic outlook are tilted to the downside, after growth last year reached the fastest pace since 2011. German automakers are particularly vulnerable to a surge in inward-looking policies. Executives from Volkswagen AG, Daimler AG and BMW AG have lobbied the Trump administration to refrain from slapping import tariffs on European cars, a step they argue would cause irreparable damage to business.
China Sovereign Fund Prepares Request to Invest at Home
China’s $941 billion sovereign wealth fund wants permission to invest in domestic stocks and bonds for the first time, people with knowledge of the matter said, as it tries to end restrictions on its mandate following government moves to open up financial markets. China Investment Corp. has laid the groundwork for an application to the central government to let it invest in domestic capital markets, the people said, declining to be named as the deliberations are confidential. It isn’t clear whether CIC has submitted the request or whether authorities would grant approval, they said. European stocks pared gains before rebounding and futures on the S&P 500 Index erased an advance after the news. Letting CIC invest at home would add a deep-pocketed buyer at a time when China’s equity and bond markets are under pressure from a trade war, a slowing economy and rising defaults. At a public forum last month, CIC’s head of asset allocation Fan Hua said she saw “very good opportunities” in A shares and yuan-denominated bonds should the fund be allowed to invest. The valuations of domestic shares are “very attractive” after recent declines as compared to other markets globally, Fan told a forum in Beijing on June 29. Many Chinese companies still enjoy robust profitability even as the economy slows, she said. CIC has been primarily restricted to investing overseas since it was set up in 2007 with money from China’s swelling foreign-exchange reserves. The fund is turning its eye on domestic securities as Chinese stocks have gained inclusion in MSCI Inc.’s indexes for the first time, widening their appeal to overseas investors. The government has also taken a series of steps to widen foreign investors’ access.
$45 Billion Wiped Out Mostly From Asia Bonds, BondEvalue Says
Rising Treasury yields, trade-war concerns and Chinese defaults have wiped out $45 billion since the start of the year in the market value of dollar notes sold by Asian and international borrowers, according to Singapore-based BondEvalue. “High net-worth investors not only saw great losses in their leveraged positions, but also faced difficulties in selling off bonds to cut their losses,” said the firm, which provides bond services to private banks, in a note released earlier this week. Recent defaults on dollar securities by Chinese high-yield borrowers such as China Energy Reserve & Chemicals Group Co. and Hsin Chong Group Holdings Ltd. have “rattled investors,” the firm said. Global trade wars have also loomed over Asia’s debt markets, with yield premiums on junk dollar notes near the highest in over two years, according to a Bloomberg Barclays index. The Chinese government’s crackdown on excess debt has led to a “severe liquidity crunch” especially for high-yield borrowers, according to BondEvalue. One casualty was Wintime Energy Co., which defaulted on its onshore debt last week. Amid volatile markets, liquidity has waned. Investors have been exposed to widening bid-ask spreads for 73 percent of the securities that BondEvalue assessed between Jan. 10 and June 29, it said. A “staggering” 96.4 percent of the bonds within its coverage have fallen in value during the first half of 2018, the firm said. Outflows from emerging-market notes have also caused spreads to widen significantly, according to BondEvalue. The firm assessed a list of over 1,600 notes, predominantly Asia dollar securities. It also included bonds that are typically sold to private banking investors, including international sovereign and perpetuals issued by global banks, according to its BondEvalue founder Rahul Banerjee.