Yesterday’s weak dollar headfake has ended and overnight the USD rallied, while Asian stocks dropped to the lowest level in 7 weeks and crude oil fell as speculation returned that the Federal Reserve will raise interest rates as early as next month. The pound jumped and European stocks gained thanks to a weaker EUR.

Philadelphia Fed President Patrick Harker said on Monday that a hike in June is appropriate unless data weakens, while St. Louis Fed President James Bullard said holding rates too low for too long could cause financial instability. “The market seems to be taking a cautious stance ahead of the Fed Chair Janet Yellen’s speech later this week,” said Jung Sung-yoon, a foreign exchange analyst at Hyundai Futures.

“A rise in the dollar would be a big help for European stocks” Heinz-Gerd Sonnenschein, a strategist at Deutsche Postbank told Bloomberg. “People are testing whether the market has found a bottom, and there’s plenty of money sitting on the sidelines. We’ve had pretty calm, sideways trading this month even with another Fed rate hike looking more likely.” What Sonnenschein probably did not have in mind is such a drastic rise in the dollar that every other currency has to plunge, leading to the January EM puke which in turn sent all stocks, including European, reeling.

Others were less optimistic: Yang Hai, analyst at Kaiyuan Securities, said trading will likely remain dull for a while as economic sluggishness discourages investor participation. “The current economic environment doesn’t justify a sustainable rebound. In addition, regulators are reducing leverage in the asset management industry so money is not flowing in.”

In any event, the USD touched its strongest level in eight weeks against the euro, sending all 19 Stoxx 600 sectors higher with basic resources, banks outperforming and tech, financial services underperforming. Australia’s dollar and the Malaysia’s ringgit were among the biggest losers, as the prospect of higher interest rates boosted demand for the greenback. The stronger dollar also weighed on commodities, as gold headed for its longest losing streak since November and Brent crude oil declined for a fifth day. Sterling was boosted by a poll showing support for staying in the European Union is solidifying, while the Turkish lira gained after a cabinet reshuffle.

According to Bloomberg, Fed Funds futures are indicating for the first time since March a better-than-even chance that the U.S. central bank will raise interest rates by its July meeting. The speculation is driving a dollar rally that’s reminiscent of early January, when a global equities selloff wiped out about $7 trillion of market value following a December rate hike by the Fed. Unlike back then, oil and China’s yuan are showing signs of stability. Federal Reserve Bank of Philadelphia President Patrick Harker said he could see two to three rate hikes in 2016.

“Markets remain fragile as talks of a U.S. interest- rate hike in June puts some fear on whether global growth will remain resilient,” said Niv Dagan, Melbourne-based executive director at Peak Asset Management LLC. Williams and Bullard “both struck hawkish tones. The timing of future Fed rate hikes in the face of a sluggish economy is a major focus among stock investors who have benefited from historically low borrowing costs since the 2008 financial crisis.”

The Stoxx Europe 600 Index added 0.9 percent, led by miners and banks. S&P 500 futures gained 0.2 percent, signaling that the main index will recover after falling 0.2 percent Monday. The MSCI Emerging Markets Index of stocks dropped 0.6 percent. The measure is down 1.2 percent this year and trades at 11.2 times its projected 12-month earnings, data compiled by Bloomberg show. The Borsa Istanbul 100 Index jumped 1.9 percent.

Market Wrap

• S&P 500 futures up 0.3% to 2052
• Stoxx 600 up 0.9% to 341
• FTSE 100 up 0.5% to 6168
• DAX up 0.6% to 9899
• S&P GSCI Index down 0.4% to 363.5
• MSCI Asia Pacific down 0.9% to 125
• Nikkei 225 down 0.9% to 16499
• Hang Seng up 0.1% to 19830
• Shanghai Composite down 0.8% to 2822
• S&P/ASX 200 down 0.4% to 5296
• US 10-yr yield unchanged at 1.84%
• German 10Yr yield down 1bp to 0.17%
• Italian 10Yr yield down 3bps to 1.45%
• Spanish 10Yr yield down 2bps to 1.56%
• Dollar Index up 0.19% to 95.41
• WTI Crude futures down 0.5% to $47.86
• Brent Futures down 0.7% to $48.03
• Gold spot down 0.4% to $1,244
• Silver spot down 0.6% to $16.29

Top Global News

• Snapchat Said to Raise Funds at ~$20b Valuation: TechCrunch: Snapchat’s new fundraising round is about $200m; follow-on to $175m Series F round led by Fidelity
• Cryan Says Deutsche Bank ‘Disappointed’ as Moody’s Cuts Rating: Unsecured debt rating lowered to Baa2, two levels above junk. ‘They face some pretty challenging headwinds,’ analyst says
• Viacom CEO Dauman Sues to Block Removal From Redstone Trust: Complaint says Redstone’s daughter Shari is manipulating him. Move to replace them upends decades of planning, suit says
• Worst-Performing U.S. Notes Go On Sale Under Threat of Fed Hike: Two-year notes stagnate in 2016 as 30-year bonds surge 8.9%. Odds of Fed rate increase this year rise to 76%, futures show
• Facebook Changing Guidelines for Trending Topics After Probe: Will no longer require stories to appear on sites considered news leaders, including the New York Times and Buzzfeed, as that requirement could lead to bias
• Tudor Cuts Fees on Biggest Fund to Keep Investors on Board: Firm’s charges are among the hedge fund industry’s highest. Macro hedge fund declined 2.6% this year as of May 13
• Brexit Drama Scares Off Biggest Nordic Private Equity Fund EQT: EQT’s von Koch says Europe’s potential is underestimated
• Morgan Stanley’s Gorman Says ‘Stay Tuned’ for Better Returns: Markets becoming more normal after tough quarter

Looking at Regional Markets, Asia traded lower across the board following the poor close on Wall Street in which Fed rate hike concerns and light trade dampened risk-appetite. Nikkei 225 (-0.9%) and ASX 200 (-0.4%) were pressured from the open with energy and basic materials weighed after oil fell below USD 48/bbl and iron ore prices continued to slump. Chinese bourses have conformed to the negative picture with the Hang Seng (+0.1%) and Shanghai Comp (-0.8%) impacted by the commodity weakness in which Dalian iron ore futures fell around 4% in early trade. Finally, 10yr JGBs traded higher amid risk-averse sentiment, while today’s enhanced liquidity auction for 10yr, 20yr, and 30yr JGBs was better received with b/c increasing to 4.03 from 3.67.

Top Asian News

• Singapore Orders BSI Bank to Shut Down Amid 1MDB Probe: BSI’s Group CEO Stefano Coduri resigns
  
• Google, Temasek See S.E. Asia Web Economy Reaching $200 Billion: Region attracts a fraction of VC funding received by India
  
• Yuan Watchers See Decline Without Disorder as PBOC Learns Lesson: Top forecaster sees use of intervention, fixing to steady rate
  
• Xiaomi Said to Plan First Drone at $610 in Challenge to DJI: Drone with 4K video said to be priced at ~4,000 yuan
  
• Sony’s Profit Forecast Misses Estimates on Earthquake Damage: Sees net income down 46% to 80b yen for current fiscal year vs 196.4b yen analyst est.
  
• Billionaire Jindal Family’s JSW Seeks More Distressed Assets: Group targets power, steel, iron ore and coal mine deals
  

In Europe, choppy price action has once again been at the fore of early European trade, with equities paring early losses to trade back in positive territory (Euro Stoxx 50: +0.8%). Italian banks are among the best performers on the continent today as they continue their recent volatile trend, in what has otherwise been a relatively quiet morning thus far in terms of stock specific newsflow. In terms of fixed income, Bunds have spent the morning in a particularly tight range (28 ticks), having opened higher after risk-off sentiment during Asian hours. Ultimately prices have failed to react to the upside in equities with any move to the downside potentially capped by the notable lack of supply from the Eurozone this week.

Top European News

• Greek Debt Relief 2.0 Is Coming as IMF Rips Euro-Area Proposal
• Plummeting Lira Threatens Plan to Spur Growth With Rate Cuts
• Italy Top Female CEO Targets Growth of De Benedetti Empire
• Monsanto Trading Below Bayer Offer Shows Regulatory Anxiety

In FX, the Bloomberg Dollar Spot Index, a gauge of dollar strength against 10 major peers, rose 0.2% in early trade. It advanced 0.4% to $1.1181 per euro, after being as strong as $1.1169. The Aussie dropped 0.8% after Reserve Bank of Australia Governor Glenn Stevens said inflation is too low. The ringgit slid 0.9 percent as the drop in oil prices dimmed prospects for Malaysia, Asia’s only major net exporter of crude. The MSCI Emerging Markets Currency Index dropped 0.2 percent. Sterling jumped 0.9 percent versus the euro and was 0.7 percent stronger at $1.4580, its first advance versus the greenback in three days. An ORB survey for the Daily Telegraph newspaper found older voters, previously found to back leaving the EU, are switching sides. The yuan was the most resilient of 31 major currencies, gaining 0.02 percent versus the dollar and trimming this year’s loss to 0.9 percent. China’s central bank scrapped a market-based mechanism for managing the currency on Jan. 4, returning to a system whereby the exchange rate is based on what suits authorities the best, the Wall Street Journal reported, citing unidentified people close to the People’s Bank of China.

Perhaps most notably, Turkey’s lira rebounded, climbing 0.6% after Mehmet Simsek, seen by many as the last pillar of stability in the Turkish government, was named deputy prime minister in a cabinet announced by prime-minister designate Binali Yildirim. The former Merrill Lynch strategist is credited by investors for maintaining fiscal discipline and acting as a buffer to President Recep Tayyip Erdogan’s push against orthodox monetary policy.

In commodities, Crude declined as Canadian oil-sands producers prepared to restart operations and cooler weather helped contain wildfires. Brent crude futures decreased 0.6 percent, after declining 1.9 percent over the previous four sessions. Inventories slid by 2 million barrels last week, according to a Bloomberg survey before Energy Information Administration data Wednesday. Supplies are near the highest in eight decades. West Texas Intermediate slid 0.4 percent to $47.89 a barrel Zinc in London dropped 1.4 percent to $1,815 a metric ton, the lowest in six weeks, while nickel rose 0.2 percent as Chinese import data signaled a diverging demand picture for the two metals. Copper rose 0.9 percent. Gold fell for a fifth day, with bullion for immediate delivery slipping 0.4 percent to $1,244.01 an ounce.

Bulletin Headline Summary From Bloomberg and RanSquawk

• European equities have once again pared opening losses amid no direct fundamental catalysts to instigate price action and alongside a steady energy market
• GBP continues to remain at the forefront of investor sentiment with the latest ORB/Telegraph poll further emphasising the lead of the ‘remain’ campaign
• Looking ahead, highlights include US New Home Sales and API Inventories
• Treasuries little changed in overnight trading; GBP/USD rallies as BOE’s Carney speaks before Parliament, says BOE has an obligation to assess risks related to Brexit; Treasury to sell $26b 2Y notes, WI 0.92%; last sold at 0.842% vs 0.840% WI yield at bidding deadline, first 2Y auction to tail since May 2014.
• “My personal view is that the next rate move is more likely to be up than down in a Remain vote,” BOE Governor Mark Carney said at a hearing before U.K. lawmakers in London
• Charlene Chu, a banking analyst who made her name warning of the risks from China’s credit binge, said a bailout in the trillions of dollars is needed to tackle the bad-debt burden dragging down the nation’s economy
• Responding to a credit-rating cut by Moody’s Investors Service, Deutsche Bank AG Chief Executive Officer John Cryan said his bank has never had more capital and could easily repay its debt many times over
• HSBC Holdings Plc, the U.K.’s biggest lender, is selling the riskiest type of bank debt about a month before a referendum that could lead to the country leaving the European Union
• The world’s biggest banks have shed about one in three bond traders since 2011 as rules that make some businesses less profitable dovetail with volatile markets that are spooking investors
• A surge in investment propelled German economic growth to its fastest pace in two years in the first quarter as mild winter weather encouraged construction

DB’s Jim Reid concludes the overnight wrap

Over in markets, a new week seemed to bring with it a bit of a pause for breath for investors for the most part yesterday. Indeed low volumes and choppy moves characterised much of the afternoon session in the US where the S&P 500 (-0.21%) eventually ended with a small loss. That said volumes were 16% below the average while the high to low range (of 0.41%) was the second smallest daily range of the year. Bourses in Europe were down a little more (Stoxx 600 -0.39%) not helped by a near 6% slide for Bayer after the terms of it $62bn mega offer for Monsanto was disclosed.

The economic data and specifically the release of the PMI’s yesterday didn’t lend much of a supporting hand to improving sentiment. In the US the flash manufacturing PMI for May was down a disappointing 0.3pts to 50.5 (vs. 51.0 expected) which is the lowest reading since September 2009 and backs up those soft regional readings of late. The details weren’t much better with output (49.1 from 50.3) falling below 50 to the lowest since August 2009, while new orders is at the lowest this year.

Meanwhile in Europe we saw the Euro area composite nudge down from 53.0 in April to 52.9 in the flash May reading which went against the consensus estimate for a rise to 53.2. The weakness came from the manufacturing sector where the PMI edged down to 51.5 (vs. 51.9 expected) from 51.7, while the services reading was unchanged at 53.1 (vs. 53.2 expected). Regionally however, the data pointed at some potential warning signs for the periphery. The composite readings for Germany (+1.1pts to 54.7; 53.9 expected) and France (+0.9pts to 51.1; 50.4 expected) actually rose more than expected and as a result, our European economists noted yesterday that this implies a contraction of 1.7pts on average in the composite PMI of Italy, Spain and Ireland. Overall yesterday’s data was in line with our colleague’s projected temporary slowdown in Euro area GDP growth to +0.3% qoq in Q2.

Switching our focus over to the latest in Asia where a weak last 24 hours for commodity markets, as well as the relatively soft price action in the US last night has seen most markets in Asia dip lower this morning. Losses are being led out of China where the Shanghai Comp is currently -0.90%, while elsewhere the Nikkei (-0.67%), Hang Seng (-0.14%), Kospi (-0.63%) and ASX (-0.16%) are all in the red. WTI has fallen below $48/bbl this morning ahead of the US inventory data today, while a near 7% fall for iron ore yesterday followed by further declines in the futures market this morning to the lowest level since early March appears to be weighing on miners.

Moving on. There was a bit more Fedspeak for us to note yesterday, although none of which particularly moved the dial giving it largely replicated much of what we’ve heard in the last week or so. Speaking after the US close, the Philadelphia Fed President Harker, usually of a hawkish leaning (and a non-voter this year), said that while he would not commit to a definitive path of how the Fed’s policy should evolve, did highlight that ‘I can easily see the possibility of two or three rate hikes over the remainder of the year’ while also suggesting that should the data come in as expected, then he would also see a June increase as appropriate. Prior to this we’d heard similar comments from San Francisco Fed President Williams, also a slightly more hawkish non-voter this year, who said that two to three rate increases this year are still about right. This echoes comments Williams made last month so was nothing new. The other comments yesterday came from St Louis Fed President Bullard who tends to be slightly more hawkish than that of his aforementioned colleagues (and is a voter this year), who said that he does not see the upcoming risk of Brexit as affecting the Fed’s decision making progress. The USD was actually a touch weaker yesterday (Dollar index -0.11%) although 2y Treasury yields have crept up above 0.900% again (from 0.878% on Friday) and the probability of a hike in June is now back at 32% from 28%, while July is up at 54% from 48%.

Away from this, with a month to go to June 23rd, The House View team have published a special report on the Brexit referendum. They look at the latest polls and bookmaker odds and explore the implications for either scenario. The negotiation period under an out vote is likely to take longer than the two years envisaged in the EU Treaty: it took three years for Greenland in the 1980s. During the negotiations the EU would have to strike a balance between preserving links with the UK and avoiding dissolution, a process that will be made more difficult given the different agendas, exposures and sensitivities to the UK of the other 27 EU countries. The report also looks at the potential macro and markets impacts of the different outcomes.

Staying with the political theme, over in Austria a super tight Presidential vote eventually concluded with the announcement that Van der Bellen will be the next President after taking 50.3% of the vote. Of significance was that he defeated Freedom Party candidate Norben Hofer who took 49.7% of the vote, meaning the first election of a far right-wing populist head of state since WWII was avoided. The close result laid out the huge division in the nation over issues such as the migration crisis as well as the domestic issues facing the Austrian economy presently.

Looking at today’s calendar, this morning the early focus is on Germany where shortly after we go to print the final revisions to Q1 GDP will be due out (no change from the +0.7% qoq reading expected) along with the associated growth components. Shortly after that we’ll get various confidence indicators out of France followed then by the April public sector net borrowing data for the UK. Later this morning we’ll also get the May ZEW survey report for Germany where some modest improvement in both the current situation (+1.3pts to 49.0 expected) and expectations (+0.8pts to 12.0 expected) components are expected. This afternoon we’ll get some data out of China with the Conference Board’s leading index, while across the pond this afternoon the Richmond Fed manufacturing index is due out (expected to deteriorate) as well as April new home sales data. Away from the data there’s no Fedspeak due although it’ll be worth keeping an eye on comments from the BoE’s Carney this afternoon when he is due to appear before the Treasury Committee (along with Broadbent, Weale and Vlieghe) to answer questions on the 2016 May Inflation Report. The ECB’s Praet is also due to speak today while Euro area finance ministers will be meeting in Brussels today with all things Greece on the agenda.