Global markets started the second trading day of 2019 the same way they did the first one: sharply lower, only instead of more economic gloom out of China, today’s bearish catalyst was only the second revenue warning out of Apple in nearly two decades which has sent AAPL stock tumbling 9% this morning, coupled with a subsequent flash crash in a variety of currency pairs, including the JPY, AUD and TRY, which sparked a selloff in risk assets in what has continued to be a painfully illiquid market, as investors scrambled for safety in safe havens such as bonds and gold even as concerns about slowing global and profit growth persisted while the US government shutdown entered its 13th day and no resolution was in sight.

While S&P futures were down 1.6%, Nasdaq futures led the drop for U.S. futures, dipping as much as 2.9% after Apple shocked investors by slashing its revenue guidance citing an “unforeseen” slowdown in China – which Tim Cook somehow discovered only after the quarter ended – and fewer upgrades to its flagship mobile device.

Apple was down 9% in pre-market trading. Technology shares led the Stoxx Europe 600 Index lower while equities in Asia also declined. Treasuries declined along with most European bonds.

“For the moment, investors have reacted by going into non-risky assets,” said Philippe Waechter, chief economist at Ostrum Asset Management, in Paris. “No one wants to take any risk because none of the uncertainties we are facing have been lifted, whether it’s Brexit, this trade war, or growth. Investors are putting their heads in the sand and waiting.”

“That Tim Cook and his company mentioned China as the reason behind the downturn in the company’s outlook seemed to hit exactly the pressure point traders and investors were already alarmed over,” Greg McKenna, markets strategist at McKenna Macro. “That is, the China and global slowdown which seems to have been confirmed by Wednesday’s global manufacturing PMI data.”

Asian stocks Asia-Pac were mixed following the slide in US equity future, with the ASX 200 (+1.4%) lifted by energy names and gold miners amid yesterday’s spike higher in oil and the Apple-triggered bid in the yellow metal, meanwhile Nikkei 225 was closed again due to a public holiday. Elsewhere, Hang Seng (-0.3%) and Shanghai Comp. (unch) swung between gains and losses with the former weighed on by tech names as Apple suppliers ACC Technologies and Sunny Optical slumped over 5% after Apple’s guidance cut while investors braced for Beijing to roll out fresh support measures for the cooling Chinese economy.

“Chinese authorities have got the luxury of having control not just of the fiscal parts of the government tool case, but also the monetary parts … and I suspect the Chinese authorities will use that,” said Jim McCafferty, head of equity research, Asia ex-Japan, at Nomura.

China’s central bank said late on Wednesday it was adjusting policy to benefit more small firms that are having trouble obtaining financing, in its latest move to ease strains on the private sector, a key job creator. While more fiscal and monetary policy support had been expected in coming months on top of modest measures last year, some analysts wonder if more forceful stimulus will be needed to stabilize the world’s second-largest economy.

Major European bourses were firmly in negative territory by midmorning, with Frankfurt’s DAX with its exposure to Chinese trade and tech-heavy constituents, was the biggest faller and down as much as 1.2% while Paris’ CAC40 dropped 1.1 percent and London eased 0.4 percent. Chipmakers who supply parts to Apple were the worst hit, sending technology stocks to their lowest since February 2017.

The shocking Apple news sparked a violent, multi-currency flash crash in holiday-thinned FX markets as growing concerns about the health of the global economy, particularly in China, sent investors scurrying into the safe-haven of the Japanese yen, which surged through levels not seen in years.

In the liquidity dead zone between 5 and 6pm ET, it took just seven minutes for the yen to surge through levels against Aussie dollar that have held through almost a decade. While some pointed to risk aversion triggered by the Apple guidance cut others said Japanese retail investors were behind the trades. Whatever the cause, the moves were exacerbated by algorithmic programs and thin liquidity with Japan on holiday.

As the yen jumped, the Australian dollar slumped to the lowest in almost 10 years as algorithmic programs amplified sharp gyrations amid thin liquidity during a Japanese holiday; the Turkish lira and British pound also tumbled however all pairs have recouped much of their losses since.

The dollar was last 1 percent weaker against the yen at 107.57, having earlier fallen as low as 104.96, its lowest level since March 2018. The Australian dollar at one point hit levels against the Japanese yen not seen since 2011. The euro was up 0.3 percent, buying $1.1375, and the dollar index which tracks the U.S. currency against a basket of major rivals, was 0.3 percent weaker at 96.52.

In rates, Germany’s 10-year bond yield was most recently at 0.185% after hitting a session low of 0.148 percent, while the US 10Y Treasury yield was modestly higher, rising from 2.62%, the lowest since the start of 2018, to 2.6362%. U.S. crude oil fell 0.9% to $46.12 a barrel, and Brent crude was down 0.2% at $54.82. Slowing global growth is expected to coincide with an increase in crude supply, depressing prices. Gold was higher as the dollar weakened, with spot gold trading up 0.2 percent at $1,289.4 per ounce.

Expected data include jobless claims, while automakers report U.S. sales for December. Simply Good Foods, UniFirst due to report earnings

Market Snapshot

• S&P 500 futures down 1.4% to 2,475.50
• STOXX Europe 600 down 0.4% to 335.73
• MXAP up 0.2% to 145.56
• MXAPJ down 0.5% to 465.89
• Nikkei down 0.3% to 20,014.77
• Topix down 0.5% to 1,494.09
• Hang Seng Index down 0.3% to 25,064.36
• Shanghai Composite down 0.04% to 2,464.36
• Sensex down 0.9% to 35,561.57
• Australia S&P/ASX 200 up 1.4% to 5,633.41
• Kospi down 0.8% to 1,993.70
• German 10Y yield rose 1.0 bps to 0.175%
• Euro up 0.3% to $1.1377
• Italian 10Y yield fell 4.9 bps to 2.335%
• Spanish 10Y yield rose 1.5 bps to 1.416%
• Brent Futures down 0.7% to $54.54/bbl
• Gold spot up 0.3% to $1,288.08
• U.S. Dollar Index down 0.3% to 96.52

Top Overnight News from Bloomberg

• President Donald Trump has gained little leverage with Democrats two weeks into the partial government shutdown of his own making, with fewer possible escape routes and a more treacherous path ahead as the GOP relinquishes control of the House.
• The odds of a U.S.-China trade deal are rising because both sides have a clearer sense of each other’s goals and intentions, a former Chinese trade official said ahead of negotiations in Beijing next week.
• It took seven minutes for the yen to surge through levels against Aussie dollar that have held through almost a decade. While some pointed to risk aversion triggered by Apple Inc. cutting its sales outlook, others said Japanese retail investors were behind the trades. Whatever the cause, the moves were exacerbated by algorithmic programs and thin liquidity with Japan on holiday
• Congressional leaders were unable to strike a deal to end a partial shutdown of the federal government at a meeting with Donald Trump on Wednesday, and the president invited them to return to the White House on Friday for further negotiations
• U.S. government officials are publicly withholding judgment on China’s efforts to ease trade tensions ahead of talks next week, raising the prospect that Beijing’s latest economic-reform announcements won’t go far enough to satisfy President Trump’s demands
• In a sign of the urgency felt by the cartel amid tumbling crude prices, leading member Saudi Arabia throttled back production, according to a Bloomberg survey of officials, analysts and ship-tracking data. The group’s pact to curb output only formally started this week
• Fewer Japanese businesses are optimistic about economic growth compared with a year ago amid concerns over global trade tensions, Brexit and a sales tax increase, according to a Sankei newspaper survey of 121 leading companies
• There’s a lack of catalysts on the horizon at the start of 2019 to reverse the slide in Treasury yields as global economic growth wanes and investors shift toward the view that further Federal Reserve tightening would be a mistake

Asia-Pac equities were mixed following the slide in US equity futures after tech-giant Apple fell in excess of 8% after-market following a cut to its Q1 2019 revenue guidance to USD 84.0bln, from previous guidance in the range of USD 89.0-93.0bln. ASX 200 (+1.4%) was lifted by the energy names and gold miners amid yesterday’s spike higher in oil and the Apple-triggered bid in the yellow metal, meanwhile Nikkei 225 was closed again due to a public holiday. Elsewhere, Hang Seng (-0.3%) and Shanghai Comp. (unch) swung between gains and losses with the former weighed on by tech names as Apple suppliers ACC Technologies and Sunny Optical slumped over 5% after Apple’s guidance cut. Meanwhile the Mainland was underpinned by financial names after reports that the PBoC may lower the RRR for banks that lend to small businesses. Of note: China CICC Research stated that the PBoC’s RRR criteria easing could release up to CNY 400bln in liquidity.

Top Asian News

• First China, Now Apple: Bad Start for Asia Stocks Gets Worse
• China Easing Expected as $625 Billion ‘Liquidity Hole’ Looms
• Witching Hour for Currencies Strikes Again as Yen Breaks Loose
• China’s Huolinhe Says Local Govt Approves 6GW Wind Power Project

Major European equities are predominantly in the red [Euro Stoxx 50 -1.1%] with the SMI (+0.1%) outperforming its pears after returning from a market holiday. SMI index heavyweight UBS (+0.5%) are in the green following comments from their Chairman that now is not the right time for a merger; additionally, he expects to remain in office until 2022. The technology sector (-2.8%) is the underperforming sector with the likes of Dialog Semiconductor (-9.0%), STMicroelectronics (-9.4%), ASML (-5.1%) and Infineon (-5.4%) at the bottom of the Stoxx 600 following Apple cutting their Q1 revenue guidance. Other notable stories include Next (+5.2%) in the green after reporting their expected full year price sales growth of +3.2%, which is in line with September’s guidance and thus avoids a profit warning for the Co. Adecco (-4.8%) are down after being downgraded at Credit Suisse. In addition, luxury names are in the red with the likes of Burberry (-4.8%) and Kering (-4.5%) weighed on by growth concerns in China exacerbated by the aforementioned Apple guidance cut.

Top European News

• Ryanair Passenger Growth Slowest Since 2015 After Strike Turmoil
• U.K. Retailers Jump as Next’s Update Comforts Bruised Sector
• Spain Leads European Sovereigns With First Bond Sale of 2019
• European Luxury Stocks Decline on China Slowdown Concern

In FX, price action remains a key focus for investor sentiment amid the wild swings seen during Asia-Pac hours. To recap events, FX markets were rattled amid a surge in the JPY which saw the currency gain circa 8% vs. the AUD and 10% vs. TRY with analysts attributing the move to a multitude of factors including thin markets (Japan away from market again), Apple-inspired risk aversion (following revenue guidance cut) and Japanese retail investors liquidating offside positions.

• In terms of price action at the time, AUD/JPY plummeted from around 75.50 to a low print of 70.50, tripping several stops along the way. Shortly after the stops were taken-out, AUD/JPY pared back a bulk of the move and now trades in close proximity to the 75.00 handle. Elsewhere, at the time, USD/JPY slid sharply below 109.00 to briefly breach 105.00 before recovering to the mid 107.00’s (note, given the velocity of the moves, various platforms have registered differing moves). AUD/USD declined further below 0.7000 to touch levels last seen a decade ago with a session low of 0.6743 before eventually recouping a 0.6900 handle.
• Aussie and Yen crosses reacted in tandem with the sharp swing, the Pound was hit as GBP/JPY fell through 137.00 to levels just shy of 131.50 and as such, Cable lost the 1.2600 handle and briefly clipped 1.2450 to reach 21-month lows before reclaiming 1.2550 with Lloyds noting pivotal resistance between 1.2590-1.2615 and suggesting that a move through this level would allow for “a stronger recovery in the range under 1.2810-50”. From a fundamental perspective, Brexit-related commentary has begun to pick-up as Mrs May returns to work ahead of Parliament reconvening on the 7th; latest reports suggest that the UK PM has been urged to delay the meaningful vote on her Brexit deal for a second time as government whips failed to persuade enough MPs to back it over the Christmas break.
• EUR has been slightly more resilient than some of its peers despite a blip lower in EUR/JPY which led EUR/USD to a session low of 1.1310 with the multi-bloc currency thereafter able to benefit from touted short-covering and a broadly softer USD (DXY currently trades just above 96.50 with losses of circa 0.2%). As such, EUR/USD now trades just above of 1.1350 after running out of steam at 1.1384.

In commodities, Brent (unch.) and WTI (-0.2%) prices remain anchored as concerns over global growth and an oversupplied market continue to prevail; ahead of today’s rescheduled API’s (with EIA’s tomorrow). Saudi Arabia are expected to cut February heavy crude prices for crude sold to Asia because of weaker fuel oil margins; as according to a Reuters survey. Elsewhere, Libya’s NOC have said that the Sharara oil field was breached on Tuesday and output will be cut by 8.5k after operations restart for the main system. Gold (+0.2%) is in the green due to safe haven demand from the Apple-stemmed growth fears; with the yellow metal passing 6-month highs earlier in the session, although prices are around USD 4/oz off of the USD 1292/oz session highs. Elsewhere, copper prices are down succumbing to the negative risk sentiment.

US Event Calendar

• 8:15am: ADP Employment Change, est. 180,000, prior 179,000
• 8:30am: Initial Jobless Claims, est. 220,000, prior 216,000; Continuing Claims, est. 1.69m, prior 1.7m
• 10am: Construction spending data postponed by govt shutdown
• 10am: ISM Manufacturing, est. 57.5, prior 59.3
• Wards Total Vehicle Sales, est. 17.2m, prior 17.4m

DB’s Jim Reid concludes the overnight wrap

Happy New Year to you all and welcome to 2019. With the over-indulging now hopefully all done and the batteries as close to recharged as possible, now is probably as good a time as ever to have one final look back at what was a remarkable year for markets in 2018. Indeed an hour or so before this we published our standalone performance review for December, Q4 and 2018. It includes our update of what has proven to easily be the most requested chart we’ve ever produced – which hopefully isn’t a representation of the many other charts we’ve done – the percentage of assets which delivered a negative total return in dollar and local currency terms. Without giving too much away, only 7 of the 70 assets in our sample posted a positive total return in dollar terms so the first pub quiz question of the year is to correctly guess which assets those were. Answers are in the performance review.

Before you mull over that, and for those that have been away, it’s worth recapping what markets have done over the holiday period which has been anything but a sleepy couple of weeks. The good news is that we’re returning to US equity markets which are broadly speaking higher than where they finished on December 21st. Indeed the S&P 500, NASDAQ and DOW are up +3.87%, +5.26% and +4.01% since then, respectively. The underlying tone has been a lot more fragile however with the point to point moves also masking a few eventful sessions. We had the biggest Christmas Eve decline (-2.71%) for the S&P 500 ever, then the biggest one-day gain (+4.96%) for the S&P 500 since 2009 on Boxing Day and one of the biggest intraday reversals for the S&P 500 one day later on December 27th when the S&P 500 turned a -2.84% decline into a +0.86% gain over the final 90 minutes of trading.

After US markets had closed last night, we got another injection of volatility, as Apple took the rare move of lowering its revenue guidance, citing weakness in “greater China.” Shares dropped as much as -8.50% in after-hours trading with the announcement implying the first holiday quarter slowdown since 2011, but the real drama came in FX markets, where the yen strengthened as much as +3.70% to 104.87 – a full 4 points from the New York close of 108.88 – in a matter of minutes. Simultaneously, the Australian dollar and Turkish lira weakened as much as -3.50% and -8.89% respectively.The moves have partially retraced, in the case of the Yen it’s now trading at 107.09, however still resemble a flash crash. There was some suggestion that the moves were linked to the Apple news, triggering a wave of risk aversion, while a Japanese holiday likely also compounded the issue.

So it would be a stretch to say that there’s much conviction at the moment with moves in markets over the last couple weeks hardly healthy and it goes to show what thin liquidity conditions and year-end rebalancing can do when markets are as fragile as they’ve been in years. The VIX peaked at 36.07 on a closing basis during that run however has since fallen to 23.22 as of last night’s close.

Here in Europe, it feels like equity markets better fit the underlying fragility with the STOXX 600 only up +0.16% including a -0.13% fall yesterday which wasn’t as bad as first feared, partly helped by WTI oil jumping +4.52% from the lows (and as much as +7.73% at one stage). The S&P 500 bounced up to close +0.13% for context, after being down -1.57% at the open. Cash HY spreads are also +15bps and +10bps wider in the US and Europe respectively (+5bps and +6bps yesterday) and so picking up where we left. Meanwhile bonds had been a bit quieter by comparison, however that was until the last couple of sessions. Indeed the big story yesterday was 10y Bund yields hitting a low of 0.145% intraday, before closing at 0.162% and -7.3bps lower on the day. Still, that’s the lowest closing yield since April 2017 and the biggest one-day decline for Bund yields since last May. And to think that we’re now officially in the period of zero net QE purchases by the ECB. Treasuries also hit 2.621% (-6.4bps) yesterday and the lowest since last January, having fallen -16.4bps over the holiday period. The curve flattened -4.3bps yesterday but is close to flat from where we last reported pre-Christmas at 15bps. Amazingly we are now pricing in 2bps of cuts by the Fed in 2019.

Part of that Bund move was catch-up to the Treasury market, since Germany was closed on December 31st, however the wider risk-off move seemed to be attributed to the confirmation that China’s manufacturing sector has entered contraction territory.Indeed the December Caixin manufacturing PMI fell half a point to 49.7 (vs. 50.2 expected) and thus confirmed the official PMI sub-50 reading from a week before. In addition to China, we also saw sub-50 readings from Taiwan, Malaysia and South Korea and so clear evidence that the lack of resolution around the US-China trade issues have impacted the wider region once more. It’s worth adding that our China economists published their 2019 outlook yesterday which you can find here . Of most significance, they have downgraded their growth forecast for China to 6.1% in 2019 (from 6.3%) with a trough of 5.9% in Q2 before a significant change of policy stance around March/April boosts growth in the second half of the year.

This morning in Asia there’s only been limited follow through from the negative Apple news last night to regional bourses.The Hang Seng and Shanghai Comp for example are down -0.37% and -0.06% respectively while the Kospi is down -0.43%. Markets in Japan are closed while bourses in the likes of Malaysia, Thailand and Indonesia are actually up slightly. News that the PBoC is seeking to boost lending to small and micro-sized enterprises is perhaps helping. However it’s a very different picture for US futures with the S&P 500 currently down -1.48% and NASDAQ -2.43%.The Treasury market isn’t trading overnight with Japan closed. So it could be an interesting US open later.

As for the other newsflow since we’ve been away, the partial US government shutdown has entered its 13th day with President Trump digging his heels in over the border wall funding. The new Congress is due to be sworn in today so we’ll see if this helps resolve the disputes. This follows Trump inviting congressional leaders to the White House yesterday. The new Democratic majority will now take control of the House, but the real sticking point for a budget deal is the need for bipartisanship in the Senate, where the GOP will be 7 seats short of a filibuster-proof majority. Some economic data could be delayed if the shutdown continues, namely home sales, retail sales, and durable goods, though Friday’s jobs report will be unaffected. There has seemingly been better news on the trade front where President Trump reported “big progress” on talks with China President Xi Jingping a few days ago. Meanwhile in Italy, the 2019 budget was passed at the eleventh hour at the compromise deficit figure of 2.04% of GDP. As for the latest on Brexit, former UK Brexit Secretary David Davis wrote in the Telegraph yesterday that the UK PM May should delay the vote on her Brexit deal for a second time highlighting that it could lead to a better deal from the EU as the EU is worried about losing the £39bn “divorce payment” that would come with a Brexit deal.

As for the data away from China, we’ve had much softer-than-expected CPI figures in Europe, specifically for Germany (+1.7% yoy vs. +1.9% expected) and Spain (+1.2% yoy vs. +1.5% expected). In the US, Q3 GDP was revised down -0.1pp to 3.4% and the Kansas City and Richmond Fed manufacturing indexes both fell to multi-year lows.That will certainly heighten interest in the ISM manufacturing report due this afternoon. Yesterday’s manufacturing PMI was revised down 0.1pts to 53.8 although the employment and new orders components were the lowest since 2017. In Europe, the manufacturing PMI was confirmed at 51.4 for the Eurozone, mostly unrevised versus the flash, but with Italy’s reading +0.6pts higher at the expense of Spain’s, which fell -1.5pts. The UK print beat expectations at 54.2 versus 52.5, though the qualitative details indicated that the activity increase was due to stock-building ahead of Brexit uncertainties.

Apart from the ISM report, there will be a few other events to note through the rest of this week. Tomorrow, and as mentioned above, we’ve got the December employment report in the US while Fed Chair Powell is due to make an appearance at the AEA annual meeting alongside former Fed Chairs Bernanke and Yellen. Our US economists don’t expect the Chair to break any new ground on the policy front but he may take the opportunity to clarify the message from the December FOMC meeting, in a similar vein to the NY Fed’s Williams who specifically addressed the slight tweak in the forward guidance message.

As for today, this morning we’ll get the December CPI print in Turkey and November M3 money supply data for the Euro Area. Shortly after in the US we get the December ADP employment change report along with the latest claims reading, November construction spending and then the aforementioned December ISM manufacturing print. The latter is expected to fall -1.5pts to 57.8 at a headline level. Later this evening we’ll also get December vehicle sales numbers. Also, as mentioned earlier, today is also the day that the Democrats officially take control of the House with US Congress sworn in.