Just days after Goldman warned that the Goldilocks rally is over, a selloff swept across world markets with global stocks set for their biggest weekly drop since December, after a plunge in Chinese stocks set the tone for global markets on Friday, with equities in Europe sliding alongside U.S. futures amid growing concerns about the state of US-China trade negotiations and global growth following yesterday’s ECB shocking GDP downgrade. The yen climbed with gold as investors once again scrambled to buy safe havens.

Traders will be closely watching the February U.S. jobs report on Friday (exp. 170K) for more clues on the state of the world’s biggest economy after ECB President Mario Draghi delivered fresh stimulus as he downgraded the outlook for the euro area. The move came during a week that saw China cut its goal for economic expansion, the Bank of Canada dial back its expectations for policy tightening and the Organisation for Economic Co-operation and Development lower its global outlook.

Until then, Europe’s Stoxx 600 Index sank the most in a month, with carmakers and miners leading declines, as global growth concerns continue to dominate market sentiment following yesterday’s ECB TLTRO announcement, pushing back of rate guidance and lowering of growth & inflation forecasts. Sectors are broadly in the red, led by the aforementioned Chinese trade data and fears of another global recession. Significantly underperforming its peers at the bottom of the Stoxx 600 are GVC Holdings (-17.0%) after the company CEO sold 2.1MM worth of shares alongside the Chairman selling 900k shares; with both sales at the price of GBP 6.66/shr. Not helping fears about an imminent European recession, German factory orders fell more than expected in January.

Shares from Sydney to Hong Kong fell, with China’s market slumping the most since October and suffering one of its worst days in years as traders interpreted a rare sell rating from the nation’s largest brokerage as a sign the government wants to curb gains.

Hang Seng (-1.9%) and Shanghai Comp. (-4.4%) slumped with underperformance seen in the mainland in which the CSI 300 slipped by the most so far this year. 10yr JGBs tracked the gains in T-notes amid declining yields in the aftermath of the dovish ECB, while the widespread risk averse tone and BoJ presence in the market in the short-end also contributed to the support for government bonds.

Weak Chinese trade data added to the negativity, with exports plunging over 20%, while imports from the US crashing the most on record.

Stocks in emerging markets dropped the most in almost three months, and their currencies weakened on the back of China’s slump.

“All these different variables are beginning to come together to paint a more dismal outlook for global growth,” Lindsey Piegza, chief economist at Stifel Nicolaus & Co., told Bloomberg TV from Minneapolis. “We saw the ECB wake up to the acknowledgment of a weaker growth and inflation profile in Europe, but this is sending a broad-based signal that contagion may be coming to the U.S.”

In Fx, the dollar weakened modestly after seven days of gains; the euro steadied after tumbling to its lowest level since 2017 on Thursday after the European Central Bank slashed growth forecasts, while the Swedish krona touched its lowest level since 2002 versus the dollar. The yen was among the biggest gainers in the major currencies amid rising concern about global growth and signs that China is trying to slow the country’s equity rally. The pound was steady after the European Union was said to make a new offer to the U.K. in an attempt to break the Brexit impasse.

Treasuries advanced ahead of U.S. payrolls data. Core European bonds continued higher, as volumes in European bonds were more than double recent averages. German 10Y bund yield dropped to just 6bps, and rapidly approaching a negative yield last seen in late 2016.

Elsewhere, Brent (-1.7%) and WTI (-1.6%) prices are extending on their losses, as global growth concerns weigh on risk tone; both WTI and Brent are trading at the bottom of the sessions range, with WTI prices dropping under USD 56.00/bbl to the downside exacerbating the price decline; with session lows of around USD 55.80/bbl. Looking ahead we have the Baker Hughes Rig count, a decline in the crude rig count would be the third consecutive week of oil rigs decline; and as such may provide some reprieve to Brent and WTI prices.  Gold (+0.6%) is shining as the yellow metal benefits from the global growth concerns which are dominating markets.

Economic data include housing starts and the February jobs report. Vail Resorts, Allogene Therapeutics and Big Lots are due to report earnings.

Market Snapshot

• S&P 500 futures down 0.5% to 2,742.00
• STOXX Europe 600 down 0.4% to 372.29
• MXAP down 1.4% to 156.20
• MXAPJ down 1.5% to 514.96
• Nikkei down 2% to 21,025.56
• Topix down 1.8% to 1,572.44
• Hang Seng Index down 1.9% to 28,228.42
• Shanghai Composite down 4.4% to 2,969.86
• Sensex down 0.1% to 36,679.26
• Australia S&P/ASX 200 down 1% to 6,203.76
• Kospi down 1.3% to 2,137.44
• German 10Y yield fell 1.4 bps to 0.053%
• Euro up 0.2% to $1.1210
• Brent Futures down 1.1% to $65.56/bbl
• Italian 10Y yield fell 11.9 bps to 2.116%
• Spanish 10Y yield rose 1.6 bps to 1.06%
• Brent Futures down 1.7% to $65.19/bbl
• Gold spot up 0.7% to $1,294.58
• U.S. Dollar Index down 0.2% to 97.45

Top Overnight News from Bloomberg

• Chinese stocks tumbled the most in nearly five months as traders took a rare sell rating from the nation’s largest brokerage as a sign that the government wants to slow down the rally
• The U.S. leaned on German Chancellor Angela Merkel last month to conduct a naval maneuver in Russia’s backyard aimed at provoking President Vladimir Putin, according to three people familiar
• Some European Central Bank policy makers consider the institution’s downgraded growth forecast for 2019 to still be too optimistic, according to people with knowledge of the matter
• China’s exports slumped in February as seasonal factory shutdowns and continued uncertainty from the trade war combined to drag on shipments, adding to concerns over a weakening global economy. Meanwhile, a report showed German factory orders fell more than expected in January
• Italian Deputy Premier Matteo Salvini threatened to pull the plug on the populist coalition as a fight over a proposed high-speed rail line to France risked spiraling out of control
• Finnish Prime Minister Juha Sipila stepped down just weeks before an election after failing to push through parliament plans to overhaul health services and social care in the face of an aging population

Asian equity markets were negative across board on spill-over selling from their global peers after the ECB’s latest policy announcement, while sentiment further deteriorated on disappointing Chinese trade data. ASX 200 (-1.0%) and Nikkei 225 (-2.1%) were lower with the top-weighted financials sector front-running the broad-based declines in Australia, while Japanese sentiment was dragged by a stronger currency with Kawasaki Kisen the worst hit after it widened its FY net loss guidance by fivefold to JPY 100bln. Hang Seng (-1.9%) and Shanghai Comp. (-4.4%) slumped with underperformance seen in the mainland in which the CSI 300 slipped by the most so far this year of more than 3% in early trade, as concern regarding global growth took its toll and with selling exacerbated after Chinese trade data showed the steepest decline in exports for 3 years. Finally, 10yr JGBs tracked the gains in T-notes amid declining yields in the aftermath of the dovish ECB, while the widespread risk averse tone and BoJ presence in the market in the short-end also contributed to the support for government bonds.

Top Asian News

• Foreigners Exit China Stocks at Fastest Pace This Year: Chart
• China’s NPC to Push Forward Property Tax Legislation in 2019
• Alibaba, Ant Are Said to Form Oversight Group to Tighten Control
• China Property Developers Post Sudden Sharp Losses Before Close

Major European indicies are in negative territory [Euro Stoxx 50 -0.6%] as global growth concerns continue to dominate market sentiment; following yesterday’s ECB TLTRO announcement, pushing back of rate guidance and lowering of growth & inflation forecasts. Overnight the Shanghai Composite (-4.4%) was at its worst level in 5 months; also exacerbated by poor Chinese trade data. Sectors are broadly in the red, with the automobile sector lagging on the aforementioned Chinese trade data and growth concerns. Significantly underperforming its peers at the bottom of the Stoxx 600 are GVC Holdings (-17.0%) after the Co’s CEO sold 2.1mln worth of shares alongside the Chairman selling 900k shares; with both sales at the price of GBP 6.66/shr. Elsewhere, and towards the top of the Stoxx 600 are Azimut (+2.1%) benefiting from being upgraded at Kepler Cheuvreux. Elsewhere, following the Norwegian government stating the sovereign wealth fund should cut energy stocks from the investment benchmark, there was an immediate negative reaction in energy names including Total (+0.6%), BP (-1.5%) and Shell (-1.9%).

Top European News

• Hunt Warns EU Could ‘Poison’ Relations for Years: Brexit Update
• Italian Monthly Industrial Output Surges Above Expectations
• GVC Falls Most Since 2010 on CEO, Chairman Share Disposals
• ‘Outright Short’ Iliad, ‘Value Trap’ Vodafone Drop on Exane Cuts

In FX, the dollar index and Greenback overall have succumbed to a bout of broad profit-taking and consolidation along with the aforementioned stronger demand for the Yen, as attention turns towards the looming NFP report and at least partly away from Thursday’s dovish ECB policy moves. The DXY has duly backed off from a new 2019 peak at 97.711 to straddle the 97.500 level as G10 (and EM) counterparts claw back some lost ground.

• JPY – The traditional and enduring safe haven currency is outperforming amidst heightened risk off sentiment, as worrying Chinese trade data and an unexpected decline in German manufacturing orders exacerbate global growth concerns. Usd/Jpy has subsequently retreated further from 112.00+ highs to just under 111.00, and through key technical support in the shape of the 200 DMA at 111.39.
• NZD/AUD – Although risk aversion has been stoked by the factors noted above, short-covering and cross-positioning have protected the Antipodean Dollars from further depreciation and fall-out. In fact, the Kiwi has rebounded firmly enough from recent lows to vie with the Jpy at the top of the major league as its Aussie peer remains depressed following recent worrying data that has prompted yet another bank to predict 2 RBA rate cuts this year. Nzd/Usd is back up over 0.6775 and Aud/Nzd slips below 1.0350, as Aud/Usd languishes between 0.7028-04 with a hefty 1.5 bn option expiry at the 0.7000 strike exerting another gravitational pull.
• EUR/CHF – Some respite for the single currency and Franc, with Eur/Usd pivoting 1.1200 after testing a key chart support at 1.1187 on follow-through selling in wake of the ECB’s decision to offer more TLTROs and delay rate hikes. However, the headline pair looks hemmed in by option expiries at 1.1220-25 (1.6 bn) and 1.1250 (2.6 bn), and with nothing significant on the downside in terms of technical levels until 1.1110-33, aside from another expiry at 1.1150 (1 bn). Meanwhile, Usd/Chf is in a tight band around 1.0100 and now eyeing NFP for the next directional lead.
• GBP/CAD – Marginal underperformers, with Cable looking increasingly bearish after losing grip of 1.3100 and hopes of a Brexit breakthrough appearing more and more forlorn as the latest EU offer on the backstop is not deemed sufficient to appease the majority of UK MPs that rejected the WA at the 1st time of asking. The Loonie has stabilised somewhat after its midweek collapse on a more cautious and uncertain BoC, but remains on the backfoot vs its US rival around 1.3450 ahead of jobs data from both sides of the NA divide.
• SEK/NOK – The Scandi crowns are both weaker vs the Eur and Usd, with the former ruffled by comments from Riskbank’s Floden expressing surprise at the Sek’s recent decline and the fact that the ECB’s policy actions in March will be taken into account when the Swedish Central Bank meet at the end of next month. A rebound in household spending and upward revisions to back data has nudged Eur/Sek off the highs, but the pair remains above 10.6000, while a deeper retreat in oil prices is undermining the Nok, as Norway’s SWF pulls the plug on energy stocks in its benchmark portfolio. Eur/Nok currently around 9.8500.

In commodities, Brent (-1.7%) and WTI (-1.6%) prices are continuing to extend upon their losses, as global growth concerns weigh on risk tone; both WTI and Brent are trading at the bottom of the sessions range, with WTI prices dropping under USD 56.00/bbl to the downside exacerbating the price decline; with session lows of around USD 55.80/bbl. Looking ahead we have the Baker Hughes Rig count, a decline in the crude rig count would be the third consecutive week of oil rigs decline; and as such may provide some reprieve to Brent and WTI prices. Gold (+0.6%) is shining as the yellow metal benefits from the global growth concerns which are dominating markets. With gold at the top of it’s USD 10/oz range, trading around USD 1294.60/oz. Conversely, copper prices are down afflicted by the poor Chinese trade data exacerbating growth concerns in the worlds largest importer of the metals.

Looking at the day ahead, it’s all about the February employment report in the US while January housing starts and building permits is also due out. Away from that the ECB’s Nowotny is speaking at a conference in Prague this morning, and we should also note that the Fed’s Powell is due to speak tonight at 10pm at the Stanford Institute on monetary policy normalization – so that should be worth a watch.

US Event Calendar

• 8:30am: Housing Starts, est. 1.2m, prior 1.08m; Housing Starts MoM, est. 10.86%, prior -11.2%
  • Building Permits, est. 1.29m, prior 1.33m; Building Permits MoM, est. -2.94%, prior 0.3%
• 8:30am: Change in Nonfarm Payrolls, est. 180,000, prior 304,000
  • Unemployment Rate, est. 3.9%, prior 4.0%
  • Average Hourly Earnings MoM, est. 0.3%, prior 0.1%; Average Hourly Earnings YoY, est. 3.3%, prior 3.2%
  • Labor Force Participation Rate, est. 63.2%, prior 63.2%; Underemployment Rate, prior 8.1%
• 10pm: Powell Discusses Monetary Policy Normalization and Review

DB’s Jim Reid concludes the overnight wrap

The ECB meeting didn’t really impact our spread forecasts as the trade dispute resolution (or the lack of one) will likely be the make or break on those. However what it did do was confuse us greatly and it won’t go down as the most coherent mix of policy and guidance from the ECB. Initially the surprise of an early announcement of TLTRO 3 was greeted positively. However as soon as the ECB provided their revised growth and inflation numbers the market turned to suggesting that the policy response was nowhere near substantial enough if that was there view. So giving with one hand and then taking with two others. To be honest there was lots of other moving parts to the meeting (Draghi’s tone for one) and also with the market reaction but let’s try to decipher it. Warning! We may fail!

So surprisingly we got the TLTRO3 announcement now rather than a strong hint of it however important question marks still remain about the specific details. The guidance on rates was pushed back as well, but it was about as conservative as possible since it only technically extended the earliest potential date for a hike by three months and still way before the market thinks is likely. However the press conference and Q&A was undoubtedly dovish. Inflation forecasts were slashed, growth was revised down albeit not overly significantly, but Draghi did reiterate the maintenance of growth risks to the downside. Finally banks didn’t get any help from the tone on answers about the impact of negative rates. Mark Wall has a full write-up here and we’ll go into a bit more detail after we round up the market reaction.

Indeed it was European Banks and Bunds which really moved on during the day with the former closing down -3.32% for the biggest one-day loss since 20 December. The high-to-low range was also -4.53% which was the biggest since September last year. They initially rallied on the new TLTRO before dropping back on the unfavourable details and the poorer macro forecasts. Bunds closed down -6.3bps at 0.0643% – a level they haven’t closed at since October 2016 – with the bulk of the move coming in the press conference after the inflation forecasts were released. In the morning, they’d flirted with 0.14%, less than a week after breaking through 0.20% for the first time in four weeks. The Bund curve is also now negative out to nine and a half years again. It’s hard to feel this is a healthy development. OATs were down -9.0bps and the most since April 2017. BTPs rallied -12.1bps, which was -18.1bp off their highs. As for other equity markets, the STOXX 600 dropped -0.43% with the FTSE MIB reversing -1.49% from the highs to close down -0.74%. Italian Banks also closed -2.61% and were down -3.82% from the highs.

Credit also suffered however it wasn’t quite as dramatic. The iTraxx Main index closed +1.4bps wider but was as much as -1.4bps tighter during the start of the Q&A and prior to the economic forecasts release. Senior Financials went from -3.1bps tighter to +0.3bps wider. Cash HY spreads were +4bps and +7bps wider in Europe and the US, respectively. Meanwhile in FX the euro followed rates and ended the session down -0.72% at 1.1193, reaching its lowest closing level since October 2016.

Sentiment didn’t improve on Wall Street with the S&P 500 closing down -0.81% for its worst day in over a month. Banks stocks followed their European cousins to be down -0.95%, and the macro bellwether transports sector fell -0.96% for its tenth consecutive decline. That’s the longest streak for the transport index since February 2009. Seven down days in the last eight for the S&P 500 is something we haven’t seen since mid-late December last year. Meanwhile the DOW closed -0.78% and the NASDAQ -1.13%. Treasuries rallied -5.4bps and are down -11.4bps from the March 1st highs. EM FX felt the pinch with a broad index down -0.79%. The Argentine peso led losses, depreciating -4.07% versus the dollar to its weakest level ever.

Coming back to the ECB, with regards to the TLTRO3, the details of the refinancing operations that we did get appeared broadly in line with what was eventually expected to be implemented. It’s a 2-year maturity quarterly operation (compared to 4-year for TLTRO2) priced off the refi rate and with a cap as to how much banks can borrow (up to 30% of eligible loans) to prevent overreliance. Our economists rightly noted that the uncertainty is how big the first ‘T’ of TLTRO3 will be – the statement does say that it “will feature built-in incentives” but it is not clear yet what those will be, so we’ll have to wait for further details which Draghi suggested would come in “due course”. However, after the meeting, reports circulated that the ECB will favour a rate above the refi rate, which would obviously make the new loans much less attractive, as well as unconfirmed press reports that the final decision could be deferred until later this year instead of the April meeting. Given the lack of clarity from Draghi and the muddled message from anonymous sources after the meeting, it’s apparent that the Governing Council remains divided about how exactly to structure the new loans.

As for the new economic forecasts, markets reacted most to the news that 2019 inflation was being revised down to 1.2% from 1.6%, and 2020 and 2021 forecasts revised down two-tenths to 1.5% and 1.6% respectively. Growth is now expected to be 1.1% in 2019 compared to 1.7% previously (DB already at 0.9% from earlier in the year). The revisions further out were a lot more modest however, with 2020 growth down one-tenth to 1.6% and 2021 unchanged at 1.5%. So the inflation forecasts were notably dovish and Bunds dropped a couple of their collapsing basis points in tow after the forecasts were released. Five-year by five-year inflation swaps dipped -4.0 basis points to 1.47%, its fifth steepest drop since 2016. Headlines came out after the close suggesting some ECB officials were worried they hadn’t cut growth forecasts enough. So another confusing sign.

During the press conference Draghi’s language on growth appeared more dovish, saying that “weakening data points to sizeable moderation in growth” and “we are maintaining our growth assessment to the downside”. He also said that the ECB is “very open to act when needed” on more easing. As for the banks and negative rates question, Draghi avoided directly answering a question on tiering and that “mitigating measures for negative rates were not discussed”. He did suggest that there was a discussion about the need to examine the matter in detail but clearly it wasn’t what the market wanted to hear. Overall it would be hard to suggest that this was one of the most successful pieces of communication/policy responses from the ECB.

Asian markets are heading lower this morning with Chinese bourses leading the declines amidst weak February trade data – the Shanghai Comp (-3.14%), Shenzhen Comp (-1.90%) and CSI (-3.07%) are all down. Sentiment in China is also getting impacted by a rare sell rating from the nation’s largest brokerage which traders are taking as a sign that the government wants to slow down the rally (as per Bloomberg). Citic Securities Co. issued a sell rating on People’s Insurance Company (Group) of China Ltd., and advised clients to sell the shares, saying they are “significantly overvalued” and could decline more than 50% over the next year. The Nikkei (-1.96%), Hang Seng (-1.37%) and Kospi (-1.06%) are also down. Elsewhere, futures on the S&P 500 are down -0.19% and the Japanese yen is up +0.32% this morning. Overnight we saw China’s February trade data with exports falling -20.7% yoy (vs. -5.0% yoy expected) while imports fell -5.2% yoy (vs. -0.6% yoy expected) resulting in trade balance of $4.12bn (vs. $26.20bn expected). February numbers are impacted by Lunar New Year holidays as well as the impact of the trade war. So a fair amount of uncertainty in the data. China’s trade surplus with the US has declined in YtD 2019 in USD terms by -1.97% yoy to $42.02bn.

In other news, Bloomberg reported that the EU Trade Commissioner Cecilia Malmstrom and U.S. Trade Representative Robert Lighthizer had productive meetings on how to address Chinese industrial policies and reform the WTO while adding that the EU chief trade negotiator urged President Donald Trump to stop imposing tariffs on the bloc if he wants a partner to help the US pressure China to abide by rules governing the global economy. She said, “we have a problem: China is dumping the market, China is subsidizing their industry, this creates global distortions. We can agree on that. So what is the solution? Well, we think it is to cooperate on China,” while adding that the EU member states have made resolving the US duties on European steel and aluminium a precondition before any bilateral trade deal can be concluded.

Looking ahead there’s little rest for markets today with the February employment report due in the US this afternoon. Markets are expecting a +0.3% mom earnings reading which would be enough to push the annual rate up to +3.3% yoy and match the post-recession highs from the end of last year. Our US economists also expect a +0.3% mom/+3.3% yoy earnings reading while for payrolls the market is at 180k and our colleagues slightly above that at 195k. A reminder that January was 304k and December 222k so we’ve had two successive strong prints. Indeed our colleagues expect some payback in the data today especially given that it was a few sectors which contributed to January’s outsized gain. Elsewhere the unemployment rate is expected to nudge down to 3.9% and hours hold at 34.5.

Back to yesterday, where the Brexit newsflow continues to remain fairly worrying ahead of next week’s votes with Reuters quoting a UK government source as saying that there is nothing to suggest anything is going to change in talks with the EU this week with the latter not budging from its position. Cox has supposedly been told to rework his backstop proposals and return to Brussels today with talks likely to continue into the weekend again. News yesterday suggested that PM May would not travel to Brussels this weekend so it appears that there is a concerted effort to play down expectations for Tuesday’s vote from the UK government. Overnight Bloomberg reported that Mrs May is likely to say in a speech today that the outcome of the Brexit vote on 12th March is in the hands of the EU and will add that she still hopes to get legally binding changes from the EU ahead of the vote next week. The report also said that the EU has made a new offer in a bid to break the Brexit impasse, though it falls short of what the UK has demanded. Sterling is trading (+0.09%) up this morning. Expect a long and busy weekend of headlines.

On the trade war front, there were no major developments yesterday as the US and China continue to negotiate. There were some noteworthy comments from European Trade Commissioner Cecilia Malmstrom, who spoke at several events in DC. She emphasized that the US and EU need to work together and that the EU would be willing to discuss the automobiles in talks. She also met with USTR Lighthizer, who reportedly did not comment on the recent Commerce Department report on auto imports, which could result in a recommendation to raise tariffs on US imports from Europe. She said that she is “watching carefully” for the report’s conclusions, much like the rest of us.

Fed Governor Brainard spoke yesterday, and her views are often tracked as a bellwether for the center of the committee. She said that “modest downward revisions” to rate hike expectations would be consistent with the slight downward changes to the growth and inflation outlook. Our economists had thought that Brainard’s December rate forecast was for three hikes this year, so she may have moved to one hike but is unlikely to have moved to zero. That’s consistent with our economists’ projections for one more hike this year. That said, she did emphasize the “heightened downside risks” which could yet detail her outlook.

Turning to yesterday’s data, US jobless claims came in at 223,000, down from 226,000 in the prior week. That’s right in the middle of the last 1-2 year range and consistent with a resilient labour market. Continuing claims fell 50k to 1,755,000. Consumer credit grew slightly more than expected at $17.05bn in January, though the December figure was revised down slightly. Elsewhere, China’s FX reserves rose $2.3bn to $3.09trn in February, which is consistent with the view that the PBoC has not been intervening to weaken or strengthen the currency while trade talks are ongoing.

In terms of the day ahead, this morning in Europe we’ve got January factory orders data out of Germany and January industrial production in France and Italy. This afternoon it’s all about the February employment report in the US while January housing starts and building permits is also due out. Away from that the ECB’s Nowotny is speaking at a conference in Prague this morning, and we should also note that the Fed’s Powell is due to speak early tomorrow morning (3am GMT) at the Stanford Institute on monetary policy normalization – so that should be worth a watch.