Global Stocks Slide As Traders Await Fed's Rate Cut; Pound Crash Accelerates

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One day before the Fed's 25bps rate cut, traders are suddenly getting cold feet and global stocks are a (shallow) sea of red, with US equity futures and European markets all sliding, weighed down by corporate results and economic data while awaiting news from the resumption of U.S.-China trade talks even as Trump launches another anti-China tirade on twitter.

Meanwhile, Europe’s markets suffered a stormy start as the pound followed its worst day of the year with another 0.5% swoon against all the major currencies. A blizzard of fiery talk on Monday that included the new UK Prime Minister Boris Johnson calling his predecessor’s Brexit plans dead and its new foreign minister labeling the European Union “stubborn” kept the slide intact. Sterling fell as far as $1.2120, which was its lowest against the dollar since March 2017, and to 91.85 pence per euro, the weakest since September 2017.

Options markets were pointing to more pain too. Three-month implied volatility, a contract that expires just before the Oct. 31 Brexit deadline, jumped to over 11 vols, the highest since before March 29, the original date for Britain to leave the European Union.

“The pound is in a very precarious state, it is as simple as that,” said TD Securities’ European head of currency strategy Ned Rumpeltin. “We are now in a different regime,” he said, referring to Johnson’s explicit agenda of taking Britain out of the EU, whether or not transitional trading agreements are in place.

US equity futures, down -0.3% and below yesterday's lows, were hit following a plunge in the stock of Beyond Meat which used its surprise outlook boost to surprise markets with a 3.25 million share offering, while traders looked for earnings reports due from industry leaders including Procter & Gamble, Pfizer and Mastercard. Disappointing forecasts from Reckitt Benckiser and Bayer weighed on the Stoxx Europe 600 Index, while grim forecasts from German chemicals and drugs giant Bayer and airline Lufthansa soured sentiment, although the weakness of the pound kept London's blue-chip index just about out of the red. The EuroStoxx 50 dropped -0.9%, pushing lower through the European morning as disappointing earnings weighed on European stocks. The U.K.’s FTSE 100 index outperformed as the pound plunged and strong earnings boosted shares of BP.

With concerns about global growth still bubbling among investors, a GfK survey also showed German consumer morale worsening for the third month in a row heading into August as trade disputes bit in Europe’s biggest exporter.

“Most markets are down this morning,” said Simona Gambarini, a markets economist at Capital Economics. “The S&P closed lower yesterday. We have a few data releases regarding the eurozone that could push equity prices down but I think everyone is waiting for the Fed meeting.”

Earlier, stocks were higher across Asia, rising in Japan, South Korea and China, and closed at a record in Australia, while Hong Kong stocks also rose despite continuing protests in the city. Investors awaited headlines from U.S.-China trade talks and the Federal Reserve’s rate decision later this week. The region’s benchmark MSCI Asia Pacific Index gained 0.3%, led by Indonesia and Japan stocks. The Jakarta Stock Price Index jumped as much as 1.2% after the central bank said there is room for accommodative policy in future. Japan's Nikkei rose 0.4%, showing limited reaction to the Bank of Japan's widely anticipated decision to stand pat on monetary policy. Shanghai rose 0.3% and Hong Kong's Hang Seng edged up 0.2%.  Elsewhere, Hong Kong’s Hang Seng Index rebounded on a rally in Chinese insurance companies. India’s Sensex Index fell 0.2% in its second day of decline.

As expected, the BOJ did nothing, but added that it would ease policy again “without hesitation” if the economy loses momentum for achieving the central bank’s 2% inflation target. Specifically, Kuroda kept all monetary policy settings unchanged as expected with NIRP held at -0.1% and 10yr JGB yield target at around 0% with the decision made by vote of 7-2 in which Kataoka and Harada dissented again. BoJ also maintained its forward guidance on keeping rates at extremely low rates at least through to Spring 2020 and added that it will ease without hesitation if momentum to reaching the price goal is lost, while it reduced FY19/20 Real GDP forecast to 0.7% from 0.8% and cut FY19/20 Core CPI forecast to 1.0% from 1.1%.

Also drawing some attention were U.S.-China trade negotiations which begin in Shanghai on Tuesday, although expectations for progress during the two-day meeting are low with the markets hoping the two sides can at least detail commitments for “goodwill” gestures.

In rates, Irish government bond yield spreads over Germany hit their widest levels in over a month at 24 basis points, on worries about the damage a no-deal Brexit would do to Ireland’s economy. Other euro zone government bond yields were holding near recent lows ahead of the Federal Reserve meeting which is expected to deliver a 25 basis point rate cut on Wednesday and potentially signal more on the way. Germany’s 10-year government bond yield was hovering near the minus 0.40% mark. In the US, Treasury yields edged lower and the dollar touched its highest in almost two months.

In FX, as noted above, the slump in the pound dominated the overnight trading session as the currency headed for its biggest four-day drop since 2016. Besides the pound's slow motion crash, the Euro drifted and core euro-zone bonds were steady as the latest data added to the gloomy outlook for the region’s economy. The yen gained as the Bank of Japan left interest rates unchanged. Oil extended gains after rising the most in three weeks on Monday.

In commodities, crude oil extended the previous day’s gains, with the Fed’s expected easing fueling optimism that it would boost the economy and fuel demand in the world’s biggest oil consumer. U.S. crude futures were up 0.65% at $57.24 per barrel and Brent crude added 0.6% to $64.09. Gold was down 0.1% at $1,425 per ounce.

Expected data include personal income and spending, and Conference Board Consumer Confidence. Altria, Conoco, Mastercard, Merck & Co., Amgen, Apple, and Mondelez are among companies reporting earnings.