There has been little notable market moves overnight, with the record rally in the S&P500 set to continue and European stocks climbing as German IFO business confidence proved more resilient than economists predicted in the month after Britain voted to leave the European Union, falling less than expected from 108.7 to 108.3, above the 107.5 consensus, with expectations printing at 102.2 above the 101.2 expected. Bonds fell with gold as the dollar gained before central bank meetings in the U.S. and Japan this week.

With Asia closing largely unchanged, and both the Nikkei and Shanghai Composite moving less than 0.1%, the Stoxx Europe 600 Index rose for the first time in three days after the business sentiment reading signaled Europe’s largest economy remained robust for now even after Brexit.  The U.S. dollar strengthened against most major counterparts, pushing gold to its first back-to-back weekly drop since May on expectations the Fed’s July statement may take a turn for the hawkish. Turkish markets rallied the most worldwide after the prime minister said the government planned to set up a fund to support the economy following the failed coup.

As the chart below shows, with the S&P500 set to open at new all time highs, if modestly so, the big rebound has been in global equity values, which have gained some $8 trillion since the February lows.

Meanwhile, the disconnect between global equities and crude continues. Oil traded near the lowest close in over 2 months, as U.S. producers increased drilling for 4th week even as mkt contends with abundant supplies and a record glut of gasoline.  WTI dipped below $44 with Breant trading below its 100 DMA.

U.S. oil drillers boosted number of active rigs by 14 to 371 for longest run of gains since August, Baker Hughes Inc. said Friday. U.S. crude production has halted slide, increasing for 2nd week through July 15: EIA. Hedge funds, other money managers added most bets in a year on lower WTI prices: CFTC. “Fears about the fragile state of the global economy as well as the oversupplied nature of the oil market are the reasons behind last week’s dismal performance” for prices, Tamas Varga, an analyst at PVM Oil Associates Ltd. in London, said in a report. “The global crude oil glut seems to have turned into a product glut.”

In addition to the busiest week of Q2 earnings season, with 197 of the S&P 500 companies set to report, eyes will turn to central banks where the Fed will keep rates on hold this week with the chance of hinting at a September rate hike, economists predict the Bank of Japan’s most likely stimulus will be to increase in purchases of exchange-traded funds. The European Central Bank last week said it would be ready, willing and able to act if needed after studying more data on the impact of Brexit.

“Equity markets may hold up this week ahead of the BOJ and Fed meetings on hopes that these central banks may sound dovish,” Vasu Menon of Oversea-Chinese Banking in Singapore told Bloomberg. “The hope of future action from policy makers offers more support in the short term even though valuations may not be compelling”

“You haven’t seen markets fall off a cliff” in the weeks after Brexit, added Ben Kumar at Seven Investment Management. “You don’t have uncertain currency fluctuations, you don’t have uncertain monetary policy, you’re still getting clear messages from the ECB.”

The Stoxx 600 climbed 0.6 percent at 10:14 a.m. in London, with trading volumes 45 percent less than the 30-day average. Ryanair Holdings Plc rose 5.7 percent after maintaining its annual profit forecast. Ericsson AB climbed 4.5 percent after its chief executive officer stepped down. Julius Baer Group Ltd. rose 3.1 percent after adding new client money.

S&P 500 futures were unchanged. Yahoo! Inc. rose in premarket trading on news Verizon will announce plans to buy the company’s core assets for about $4.8 billion on Monday. Kimberly-Clark Corp., the consumer-products giant that owns Kleenex and Huggies, will report quarterly earnings before the open.

The Borsa Istanbul 100 Index added 2.8 percent after Turkish Prime Minister Binali Yildirim ruled out early elections and said the government plans a multi-billion dollar infrastructure fund to keep growth on track.

Market Snapshot

• S&P 500 futures up less than 0.1% to 2168
• Stoxx 600 up 0.7% to 343
• FTSE 100 up 0.1% to 6739
• DAX up 0.9% to 10242
• German 10Yr yield up 2bps to -0.01%
• Italian 10Yr yield up 2bps to 1.25%
• Spanish 10Yr yield up less than 1bp to 1.12%
• S&P GSCI Index down 0.2% to 348.3
• MSCI Asia Pacific up 0.1% to 134
• Nikkei 225 down less than 0.1% to 16620
• Hang Seng up 0.1% to 21993
• Shanghai Composite up less than 0.1% to 3016
• S&P/ASX 200 up 0.6% to 5534
• US 10-yr yield up 2bps to 1.59%
• Dollar Index down 0.16% to 97.31
• WTI Crude futures down 0.8% to $43.85
• Brent Futures down 0.7% to $45.35
• Gold spot down 0.5% to $1,316
• Silver spot down 0.8% to $19.47

Top Global News

• Verizon Said to Announce $4.8b Deal to Buy Yahoo Today: deal said to include real estate, exclude intellectual property
• Clinton-Kaine Ticket Debuts With Rejection of Trump U.S. Vision in First Rally in Miami
• Nintendo Plunges After Saying Pokemon Go’s Impact Limited: shares down after co. said that financial impact from worldwide hit Pokemon Go will be limited
• German July Ifo Confidence Falls Less Than Expected After Brexit Vote: Ifo business climate index falls to 108.3 vs 108.7
• LVMH Sells Donna Karan to G-III Apparel for $650m: DKNY to join Calvin Klein, Vince Camuto brands at G-III
• Tesla, SolarCity Said to Be Close to Merger Agreement, Reuters says: cos. are in the final stages of carrying out due diligence and could agree on terms of a deal in “coming days”
• Jaguar in Talks With Ford, BMW Over Battery Plant, Times Says: cos. held talks over building factory for electric-car batteries
• Hershey Trust Reaches Tentative Deal to Reform Its Governance: scrutiny of trust grew last month after Mondelez deal spurned
• GM Re-Evaluates Planned $1b Investment in India: Reuters
• ‘Star Trek’ Lifts Off With Sales of $59.6m for Paramount: movie opened as the No. 1 film in North America this weekend

* * *

Looking at regional markets, we start in Asia where equity markets mostly took the impetus from last week’s 4th consecutive weekly gain in US stocks, although Chinese markets slightly lagged on weak earnings and debt woes. ASX 200 (+0.6%) and Nikkei 225 (+0.3%) traded modestly higher following another record close in the S&P 500 on Friday with JPY weakness also uplifting Japanese exporter sentiment. However, Nintendo shares severely underperformed and fell nearly 20% in early Japanese trade after the Co. dismissed Pokemon Go’s potential impact on its earnings. Elsewhere, China markets are mixed with the Shanghai Comp. (+0.24%) initially negative amid debt concerns and comments from Chinese Finance Minister Lou who vowed prudence in dealing with the issue, although the index then recovered following a firm liquidity injection, while the Hang Seng (-0.2%) was weighed following reports of several profit warnings including Citic, which saw a potential 50% decline in interim results. Finally, 10yr JGBs traded higher despite positive sentiment in Japan, with the BoJ in the market for over JPY 1.2trl of government debt.

Top Asian News

• Kuroda Has Forecasters Convinced He’ll Add Stimulus This Week: 78% of economists forecast BOJ will expand program on July 29
• Nintendo Plunges After Saying Pokemon Go’s Impact Is Limited: Shares slump as much as ~18%
• China Bank to Transform $1.6 Billion of Bad Debt Into Securities: Agricultural Bank to sell securities backed by sour loans
• Billionaire’s Selldown Adds to Puzzle on What’s Up at Minsheng: Pig-feed billionaire Liu Yonghao trimmed his stake
• Singapore Says Current Monetary Policy Stance Is Appropriate: Headline inflation may turn positive later this year, MAS says

Equites trade in the green this morning albeit modestly so, following on from a relatively positive session in Asia amid increased appetite for risk. Fixed income has been hit this morning with bund futures down as much as 10 ticks so far, notable outperformance has been observed in the front end, with the yield curve steepening. The German IFO data came in better than expected this morning to much surprise, given that the survey was conducted post Brexit and as such expectations had positioned themselves for a slightly weaker figure. Other than that we have seen some interesting equity specific news with William Hill up 8.8% on the news that they may be acquired by 888 holdings and Rank Group in a joint venture.

Top European News

• Philips Profit Beats Estimates as CEO Extends Cost Savings: CEO van Houten sees earnings improvement in 2H 2016
• 888 Holdings, Rank Group Mulling Bid for Bookmaker William Hill: William Hill says it will listen to any proposal from bidders; street wrap here
• Ericsson Ousts Vestberg as CEO After Turnaround Plans Stall: CFO Frykhammar to take over until replacement found; street wrap here
• Ryanair Clings to Profit Target as It Navigates Brexit Turmoil: UK vote, terror wave pose ‘significant’ downside risks
• Julius Baer Profit Advances as Wealthy Clients Trade More: clients are ‘back in the market’ after Brexit vote, CEO says

In FX, the German IFO was the only notable data release this morning, and in the wake of the Brexit vote, the market was anticipating some weakness in the numbers but were met with beats in expectation on all fronts. The EUR was unmoved on the release, but has edged higher against the USD since, though remains comfortably below 1.1000 as yet. GBP has also gained modestly against the greenback, resisting a move below 1.3100 to keep the EUR/GBP rate well contained in the mid .8300’s for now. USD/JPY attempted a return below 106.00 after rejecting 107.00 early on, but has found buyers here with a more positive FOMC and possible BoJ action eyed later in the week. CAD remains pressured alongside Oil prices, where front month WTI has moved under $44.00 again. 1.3200 a key level to watch for here, but decent offers seen ahead of this. AUD and NZD trade tight; downside momentum fading in both cases, despite the fresh calls for rate cuts in August — more so in NZ as alluded to in their impromptu economic review last week.

In commodities, heading into the North American cross, oil prices have seen muted price thus far with crude futures trending lower throughout much of the morning, in turn WTI has slipped below the USD 44.00 level. Elsewhere, gold has been pressured amid the positive risk sentiment, while copper prices were flat with the red metal failing any significant recovery from Friday’s slump.

Bulletin Headline Summary From RanSquawk and Bloomberg

• Modest gains in European equities with the DAX further bolstered by firm post Brexit IFO survey data.
• Major FX pairs trading in ranges amid a lack of tier 1 data to instigate significant price action.
• The economic calendar is somewhat light today with highlights including the US Dallas Fed Manufacturing Index and a US 2-Yr Note Auction.

US Event Calendar

• 9:45am July Dallas Fed Mfg Activity, est. -10.0 (prior -18.3)

DB’s Jim Reid concludes the overnight wrap

By the end of this week we might know a bit more about how the Italian bank problems will be resolved and also how close the Japanese are to helicopter money. We have the ECB stress test results on Friday (released at 9pm BST) and there’s some speculation that we’ll hear at this point (or perhaps before) as to how the authorities are planning to deal with Monte Paschi. However a more comprehensive package for the sector may have to wait until after the constitutional referendum held sometime between October and YE. There are also quite a few European banks reporting this week so plenty of news flow in financials over the next few days.

As for the stress test there are no pass or fail marks but the intention is that the outcomes of the results will be used as a crucial input into the Supervisory Review and Evaluation Process (SREP) in 2016. The tests are due to cover 51 banks and 70% of the EU banking sector, which is down from 123 banks in the 2014 tests – supposedly the smaller sample of banks is to ‘ensure greater comparability’ according to the EBA. The list does however include 5 Italian Banks, one of which is Monte Paschi. In terms of what to expect, the 2014 tests contained 12,000 data points and it’s expected that we should see a similar level of granularity in Friday’s report including capital positions, risk exposures and sovereign-debt holdings. The tests will also consist of two scenarios, that being baseline and adverse scenarios covering the three years through 2018 using given assumptions. With the pass/fail format scrapped and with no capital hurdles set, CET1 ratios will likely be the first point of contact for a quick judgment on how the results look.

The other big event this week is of course the BoJ meeting outcome on Friday morning. Our Japan economists expect a cut in the interest rate on its policy-rate balance from -10bps to -20bps and an increase in its purchasing of EFT’s and J-REITSs (to an annual rate of ¥6tn and ¥180bn, respectively). They do however see little chance of an increase in JGB purchasing pace. Rather, they think that the bank could make its JGB purchasing operations more flexible (e.g. annual ¥70-90tn) and indicate no more acceleration of JGB purchasing. Our colleagues also expect BoJ Governor Kuroda to be questioned about helicopter money in his post meeting press conference, but expect him to deny that the bank is even considering the option and so disappointing those expecting an imminent launch of a radical helicopter money scheme. In terms of the wider market expectations, consensus is for the policy rate to be cut to -30bps and monetary base held at ¥80. According to Bloomberg, 32/41 economists surveyed expect some form of further monetary policy easing with an increase in ETF purchases seemingly looking the most likely.

It’ll also be important to keep a close eye on any further details this week around the scale of the much talked about fiscal stimulus package. Last week press reports suggested that this package could be worth over ¥20tn, although our Japan economists also argue that the government has an incentive to make its stimulus package appear as large as possible and that the government has demonstrated a range of methods over the last 25 years to inflate the value of supplementary budgets. We should get the contents of the second supplementary budget for FY16 sometime this week or next.

Staying with Japan, trade data released this morning showed exports as declining once again in June, marking the ninth straight month of negative export growth and helping to support the case for BoJ stimulus. Shipments fell -7.4% yoy, albeit less than the -11.3% expected while imports slid -18.8% leading to an increase in the trade surplus. The Yen was close to 0.5% weaker following the data, but has pared a bit of that move since. The Nikkei and Topix were also up half a percent or so post the data but are now back to flat, while bourses elsewhere are mixed. The Hang Seng (-0.07%) and Kospi (-0.09%) are just about in the red, while the Shanghai Comp (+0.45%) and ASX (+0.54%) are firmer.

One interesting story over the weekend on Brexit was an article in the Guardian newspaper suggesting that EU leaders had discussed the option of giving the UK an emergency break on migration (i.e. freedom of movement) for up to 7 years in return for allowing single market access to stay. How realistic this is for both sides is open to debate. Hardliners in Europe and the UK would oppose such a compromise but it shows that the range of outcomes still remains wide for Brexit. In reality there’s a good chance that negotiations will be of limited substance before the Dutch, French and German elections next year.
Elsewhere, the rest of the newsflow from the weekend has been centred on snippets coming out of the G20 meeting in China. The IMF’s Lagarde concluded that ‘there was a consensus around the table that more needs to be done to share the benefits of growth and economic openness broadly within and among countries’. The group also reiterated their determination ‘to use all policy tools – monetary, fiscal and structural – individually and collectively to achieve our goal of strong, sustainable, balanced and inclusive growth’. There was also generally upbeat commentary around Italy and its banking sector, with Padoan and Visco in particular downplaying the systematic risk and saying that talks with the EU are still progressing well.

Away from the macro, earnings season is well underway now with a quarter of the S&P 500 having reported. Based on our US equity strategy teams’ data, 58% of companies have beat on EPS (vs. 18% who have missed and the remainder more or less in line) with an impressive weighted average beat of 5%. 36% of companies have beaten on sales (vs. 31% who have missed) with a weighted average beat of 1.3%. The big banks beat on good trading, decent loan growth, more cost cutting and less litigation expenses, while last week’s tech reporters also beat nicely on EPS and revenue. So it’s been a decent start to earnings season. That said we’re still seeing the familiar last minute analyst earnings cuts prior to reporting, albeit not quite to the same extent seen in Q1. The average cut to EPS forecasts has been around -3% during the calendar quarter, which compares to -4.2% historically. The average cut in Q1 was c.-9% where 2/3 of firms beat on EPS, although the weighted average beat was a smaller 2.1% (vs. 3% average historically). We’re also already seeing cuts to Q3 EPS forecasts. Our colleagues note that bottom-up consensus is $30.50 now, down from $30.85 on the 1st of June.

Moving along and before we look at this week’s calendar, in a quick recap of markets on Friday. Some slightly better than expected earnings reports in the US (General Electric and American Airlines) helped equity markets across the pond edge up into the close with the S&P 500 eventually finishing +0.46% and so capping a fourth successive (+0.64%) weekly gain since Brexit. A bounce in the July flash manufacturing PMI (+1.6pts to 52.9; 51.5 expected) helped the US Dollar quietly close up half a percent or so too.

The European session was all about the PMI’s where the focus was unsurprisingly on the UK. The data came in even weaker than expected. The composite weakened 4.7pts to 47.7 after expectations had been for a 49.0 reading. That was the lowest print since April 2009. The services print tumbled 4.9pts to 47.4 (vs. 48.8 expected) while the manufacturing print fell 3pts to 49.1 (vs. 48.7 expected). Sterling (-0.94%) weakened as a result of the data, while 10y Gilt yields were nearly 4bps lower at 0.795%. The FTSE 100 (+0.46%) was firmer with that weakness for the Pound.

While that UK data was clearly weaker in the aftermath of Brexit, the wider Euro area data was actually fairly resilient. The Euro area composite was down just 0.2pts in July to 52.9 (vs. 52.5 expected) while composite prints for Germany and France actually rose to 55.3 (+0.9pts) and 50.0 (+0.4pts) respectively. Our European economists noted that this implies a 1.5pt average point decline for readings in the periphery so all eyes on those when we get the full data early next week. Core European equity markets finished flattish following the data, with the Stoxx 600 ending -0.07%. Credit was modestly weaker (in particular financials) and sovereign bond yields were a touch lower (10y Bunds 1.4bps lower at -0.033%).

Switching now to this week’s calendar. We’re kicking things off in Germany this morning where we’ll get the July IFO survey, before the UK then releases the July CBI total orders data. It’s quiet in the US this afternoon with the only data being the Dallas Fed’s manufacturing survey.

Away from the data we’re due to hear from the Fed’s Williams and Kaplan on Friday, while corporate earnings will be the other big highlight this week. 197 S&P 500 companies are due to report (or 38% of the index market cap) with the notable names including Apple (Tuesday), Verizon (Tuesday), Facebook (Wednesday), Coca-Cola (Wednesday), Alphabet (Thursday), Exxon Mobil (Friday) and Chevron (Friday). We’ll also get reports from 203 Stoxx 600 companies (or 39% of market cap) including Shell, AB-Inbev, BP and Astra Zeneca, as well as a number of the banks.