After a muted end to August, September started off on the strong foot overnight following a surprising beat in China’s official manufacturing PMI print, which rose above 50 to the highest level in almost two years. That, together with a record rebound in the UK PMI, bolstered investor confidence, fueling gains in stocks and industrial metals. The dollar advanced against most of its peers while bonds retreated before Friday’s payrolls report.

In Asia, Chinese shares in Hong Kong climbed to a two-week high after China’s official factory gauge unexpectedly rose to the highest since 2014 even as China’s head state planner Xu Shaoshi said that China is facing “great difficulties remain in meeting goals for investment and trade,” with the economy expected to be under continued pressure in the second half of the year. Also troubling was the latest Uwin real estate news according to which the Tier 1 city bubble shows no signs of abating after Shanghai’s new home sales rose to 30.1% to 1.71m square meters in August, with the average new home price rising 12.6% in August from the previous month to 42,204 yuan per square meter, suggesting China will have to crack down further on what even it admits is a housing bubble.  For now, however, markets focused on the positive as miners rebounded in Europe and S&P 500 futures signaled a two-day drop in U.S. stocks will end. Lead, tin and zinc reached the highest levels in more than a year.

“The PMI data were positive for China’s risky assets,” Tim Condon, head of Asian research at ING in Singapore, told Bloomberg. Even so, investors are “cautious about a September rate hike and tomorrow’s payrolls report could push the Fed to follow through.”

Even more impressive than China’s “economic rebound” was the surge in the UK, where instead of a post-Brexit collapse, U.K. factory activity soared by a record in August, and reached a 10-month high as the weaker pound helped manufacturing bounce back from a post-Brexit slump. IHS Markit said its Purchasing Managers Index, which dropped below the key 50 level in July, jumped by a record to 53.3. That was far better than economists had forecast; the median estimate in a Bloomberg survey was for a reading of 49.

New orders rose, with sterling’s recent drop “by far the main factor” for the improvement in exports, Markit said. “Companies reported that work that had been postponed during July had now been restarted, as manufacturers and their clients started to regain a sense of returning to business as usual,” said Rob Dobson, senior economist at Markit. As a result, the pound rallied more than 0.8% after the blistern PMI data, in Britain bounced
back from a post-Brexit slump, while the dollar strengthened for a
seventh day against the yen in the longest winning streak since March.

As Bloomberg summarizes the overnight data deluge, “signs that China’s economic slowdown is abating may bolster demand for riskier assets, while a rebound in U.K. factory activity helped ease concern that Britain’s vote to leave European Union will strangle growth. U.S. payrolls data due Friday may provide clues as to whether that policy tightening will come at this month’s Federal Reserve meeting after a private jobs report Wednesday showed steady growth in the labor market.

In Europe, the Stoxx Europe 600 Index added 0.6 percent in early trading, pushing European stocks to near 3-week high, with trading volumes 27 percent higher than the 30-day average. The final European August manufacturing PMI data of 51.7, which was fractionally weaker than the flash print of 51.8, was released overnight, broken down as follows:

• U.K. Aug. Manufacturing PMI 53.3 vs 48.3 in July; Est. 49
• Italy Aug. Manufacturing PMI 49.8 vs 51.2 in July; Est. 51.2
• Norway August Manufacturing PMI Falls to 50.8
• Denmark Aug. Manufacturing PMI Falls to 53.3 vs 62 in July
• Swedish Manufacturing PMI Falls to 50.7 in Aug. vs Est. 54.0
• Spain Aug. Manufacturing PMI 51 vs 51 in July; Est. 50.9
• Czech Rep. Aug. PMI 50.1 vs 49.3 in July; Est. 50.9
• Swiss Aug. Manufacturing PMI Rises to 51.0; Est. 50.6
• France Aug. Manufacturing PMI 48.3 vs Flash Reading 48.5
• Greece Aug. Manufacturing PMI 50.4 vs 48.7 in July

Among the notable movers, european bank stocks headed for their best 3-days gain in almost a month. Metals stocks were likewise bid with Glencore Plc and Rio Tinto Group rising at least 1.3 percent, while Banco Santander and BNP Paribas climbed more than 2 percent. Pernod Ricard SA advanced 2.3 percent after forecasting profit growth for the current fiscal year. Elekta AB gained 2.9 percent after the Swedish maker of medical devices posted better-than-expected quarterly earnings.

S&P 500 Index futures rose 0.2%, indicating equities will bounce back from Wednesday 0.2 percent decline. Salesforce.com Inc. slid 6.8 percent in early New York trading after forecasting fiscal third-quarter revenue that may fall short of some analysts’ estimates.

Crude oil erased earlier gains to trade little changed around $44.60 a barrel as a strengthening dollar provided hampered demand a day after West Texas Intermediate tumbled 3.6% on Wednesday when the DOE reported that U.S. inventories increased by 2.28 million barrels last week, keeping supplies at the highest seasonal level in almost three decades. An oversupply paired with soft demand battered European gas contracts, with gas for immediate delivery in the U.K. plunging as much as 18 percent to the lowest price in about seven years. With the OPEC informal talks later this month, which catalyzed another record squeeze in oil, it now appears a virtual certainty that nothing of note will take place, especially after Russia said overnight an oil output freeze is not needed with price around $50, adding it would consider resuming discussions if prices fall. The only near-term question that can affect oil pricing is what the impact of Hermine will be on the East Coast supply glut.

* * *

Market Snapshot

• S&P 500 futures up 0.2% to 2175
• Stoxx 600 up 0.9% to 347
• FTSE 100 up 0.2% to 6794
• DAX up 0.6% to 10658
• German 10Yr yield up 2bps to -0.05%
• Italian 10Yr yield up less than 1bp to 1.15%
• Spanish 10Yr yield up less than 1bp to 1.02%
• S&P GSCI Index up less than 0.1% to 348.4
• MSCI Asia Pacific up less than 0.1% to 138
• Nikkei 225 up 0.2% to 16927
• Hang Seng up 0.8% to 23162
• Shanghai Composite down 0.7% to 3063
• S&P/ASX 200 down 0.3% to 5416
• US 10-yr yield up 2bps to 1.6%
• Dollar Index down 0.02% to 96.0
• WTI Crude futures up 0.1% to $44.76
• Brent Futures down less than 0.1% to $46.88
• Gold spot down 0.2% to $1,306
• Silver spot up less than 0.1% to $18.66

Top Global News

• Salesforce Revenue Forecast Falls Short on Cloud Competition: 3Q sales may be held back by steeper competition in cloud-based software & services.
• Trump Affirms Nativist Immigration Vision in Speech: “We will build a great wall,” Trump said in Phoenix; “and Mexico will pay for the wall. One hundred percent. They don’t know it yet, but they’re going to pay for it.”
• Musk Talked Merger With SolarCity CEO Before Sale of Stock: Musk, SCTY’s CEO Rive discussed deal sometime before Tesla’s board was briefed on the idea on Feb. 29: filing.
• Gross Calls for Two Fed Hikes at Double the Pace Seen by Market: “I would say c’mon, let’s raise interest rates by 25 basis points in September, and c’mon, six to nine months from now let’s do it again,” Bill Gross told Bloomberg Television.
• Yellen Speech Contained Clue to Reading the Aug. Jobs Report: While focus was on Yellen’s statement that case for rate raising “has strengthened in recent months,” she followed with new language that Fed’s decisions depend on extent to which data “continues to confirm” outlook.
• AllianceBernstein Agrees to Buy RASL to Expand Alternatives: Co. agreed to buy money manager with $3 billion in assets.
• TPG Capital Said to Target More Than $4b in New Asia Fund: Firm plans to start raising money for the new fund later this year.
• Amazon Taps $1b Focus Group by Streaming Shows on Twitch: AMZN streamed 2 original TV-show pilots produced by its own studios on the gaming website.
• Investors Real Estate Trust to Sell 27 Properties for $236m Cash: Entered 6 separate sales agreements with several affiliates of Edgewood Senior Living.
• Lew Says Inappropriate for Europe to Re-Write Tax Law on Apple: Says AAPL consitutes U.S. tax base on U.S. income.
• Apple CEO Confident of Victory in Tax Fight as Irish Dither
• American Delays Target to Integrate US Airways Flight Attendants: American can’t reap all potential cost savings from merger until carriers’ flight systems integrated.
• Charter Communications to Replace EMC in S&P 500: Kraft Heinz will replace EMC in S&P 100.
• Another Uber Settlement Rejected, This Time Over Riders’ Fee: Judge proposed $28.5m payout wasn’t enough for customers vs Uber’s $459m in revenue from fee.

Looking at regional markets, Asian stocks began the month mixed following the energy-triggered losses in the US and as the region also digested a slew of Tier-1 data. ASX 200 (-0.3%) initially underperformed after WTI crude futures declined below USD 45/bbl post-DoE build, while Retail Sales and Q2 Capex data also missed expectations. Nikkei 225 (+0.2%) traded choppy amid a pull-back in USD/JPY, with the index edging out again as 103.00 held. China conformed to the indecisiveness after mixed PMI data with the Hang Seng (+0.8%) & Shanghai Comp (-0.7%) swinging between gains and losses after the Official Manufacturing PMI beat expectations, while Non-Manufacturing PMI was lower than prior and the Caixin Manufacturing figure missed estimates to print at the 50.0 benchmark level. 10yr JGBs tracked the losses in T-Notes amid the choppy trade in Japanese stocks, while today’s 10yr JGB auction provided some brief support with the b/c, lowest accepted price and tail in price all better than prior.

Top Asian News

• China’s Factory Gauge Unexpectedly Rises to Highest Since 2014: Large enterprises improve, small firms drop
• China Wealth-Management Products Rise to Record $3.9t: Banks sold 84t yuan of WMPs in six months to June
• WeChat Chats Fuel China Money Exodus Into Hong Kong Policies
• Rule tightening doesn’t dampen Chinese desire to get money out
• Bank of Japan Has an 8.7 Trillion Yen Gap in Balance Sheet: BOJ wrote down 874 billion yen in losses last fiscal year
• Duterte’s Stock Rally Withers as Foreign Funds Pull Cash Out: Country had worst performance in Southeast Asia during August
• Uniqlo Makes Biggest Southeast Asia Bet as CEO Looks Abroad: Yanai wants regional expansion to make up for stagnant Japan
• Singapore Has First Pregnant Woman Testing Positive for Zika: Sales of mosquito repellents and patches soar in city- state
• China’s Hard Line on Hong Kong Democracy Faces Election Test: Result to shape city’s response to growing political divide

In Europe, September has kicked off with a risk-on tone, with equities spending the European morning in the green (+0.4%) and financials leading the way higher. Italian banks have reaped the gains from the upside in financials and lead the way higher this morning, while Deutsche Bank (+2.7%) are also among the best performers, after falling into focus yesterday amid reports of their potential merger with Commerzbank. However, the FTSE 100 underperforms relative to its counterparts following the strong UK Mfg. PMI release (53.3 vs. Exp. 49) which subsequently saw GBP rally by a point to weigh on exporting names. While the figure would also suggest that there is less urgency for further measures by the Bank of England. This also filtered into Gilts which is firmly in the red, while European paper have also been under pressure amid supply from France, Spain and the UK DMO.

Top European News

• Deutsche Bank Climbs on Report Cryan Is Weighing Fresh Revamp: Rises on report that DB analyzed sale of all or part of its asset management business.
• Merkel Facing Defeat by Anti-Immigration Party in Home State: Alternative for Germany running neck-and-neck with Merkel’s Christian Democratic Union in Mecklenburg-Western Pomerania ahead of this Sunday’s vote.
• U.K. Factories Rebound From Brexit Shock as Pound Boosts Exports: IHS Markit PMI, which dropped below 50 in July, jumped by a record to 53.3.
• May Spells Out Immigration Limits as the First Brexit Red Line: U.K. PM wants to end free movement of people coming to U.K. from EU; suggests she’s willing to leave the bloc’s single market to do so.
• U.K. Banks Attacked for Elitism as May Targets Social Inequality
• Pernod Ricard to Cut Costs as Distiller’s Top 2 Brands Suffer: Co. reorganizing China business to add dedicated salesforce for premium brands; trying to speed decision- making in U.S. through new structure.

In FX, the pound surged to $1.3264. IHS Markit said its PMI, which dropped below the key 50 level in July, jumped by a record to 53.3. That was far better than economists had forecast; the median estimate in a Bloomberg survey was for a reading of 49. New orders rose, with sterling’s recent drop “by far the main factor” for the improvement in exports, Markit said. The dollar climbed against 11 of its major counterpart, gaining 0.2 percent to $1.1137 per euro and 0.1 percent to 103.56 yen. Fed Vice Chairman Stanley Fischer indicated last week that a U.S. interest-rate hike is possible in September and said Tuesday that the central bank would base its decision on economic data, putting added focus on the payrolls report. Malaysia’s ringgit sank 0.7 percent after Wednesday’s drop in crude prices dimmed prospects for Asia’s only major net oil exporter. The Aussie strengthened 0.4 percent following the manufacturing figures for China, Australia’s biggest export market.

In commodities, zinc rose as much as 1.2 percent to $2,338.50 a metric ton on the London Metal Exchange, its highest since May 2015. Lead and tin both gained as much as 1.1 percent to highs not seen since last June and February, respectively. Copper climbed 0.4 percent. “Today’s PMI data is a good surprise,” said Wei Lai, an analyst with Cofco Futures Ltd. in Shanghai. “It will initiate strong expectations for demand in the autumn and metals will be supported at least over the coming two months.” Crude oil erased earlier gains to trade little changed at $44.76 a barrel as a strengthening dollar provided a potential obstacle to demand in countries other than the U.S. West Texas Intermediate tumbled 3.6 percent on Wednesday. U.S. inventories increased by 2.28 million barrels last week, keeping supplies at the highest seasonal level in almost three decades, official data show. An oversupply paired with soft demand battered European gas contracts, with gas for immediate delivery in the U.K. plunging as much as 18 percent to the lowest price in about seven years.

Bulletin Headline Summary from RanSquawk and Bloomberg

• FTSE 100 underperforms, while GBP rallies as UK Mfg. PMI surprisingly moves back into expansionary territory.
• Oil prices remain pressured with the latest commentary from Russia that a production freeze is not needed with prices at current levels.
• Looking ahead, highlights include US ISM Mfg PMI and comments from Fed’s Mester & ECB’s Nowotny.
• Treasuries dropped during overnight trading with rest of developed market sovereign bonds amid supply in France and Spain, and U.K. factory activity reached a 10-month high in August.
  China’s official factory gauge unexpectedly rose last month to the highest level in almost two years, suggesting the economy’s stabilization remains intact and that a weakening in July was flood-related and temporary
• The yuan advanced against a trade-weighted currency basket for the fifth day in a row, the longest run of gains in more than a month, on speculation China’s central bank is propping up the exchange rate before a Group of 20 meeting
• An overlooked line in Federal Reserve Chair Janet Yellen’s speech last week could hold the key to whether Friday’s U.S. jobs report clinches an interest-rate increase this month
• Bill Gross is recommending the Fed raise interest rates twice by as early as March. The market doesn’t expect that degree of monetary tightening even by the end of 2017
• Ken Griffin has become impossible to ignore in the once- lucrative world of credit derivatives, where a group of Wall Street dealers long maintained a stranglehold
• The most committed backers of Europe’s proposed financial transaction tax may not be the finance ministers who’ve been trying to thrash out an agreement for more than three years
• After German Finance Minister Wolfgang Schaeuble won praise from the crowd of middle-aged and retired party faithful for his role in the country’s reunification, the goodwill quickly evaporated as he defended Chancellor Angela Merkel’s open-door refugee policy
• Anyone who got caught in the real estate bust last decade in the U.S. or U.K. probably knows this already, but now the economic data is in: home ownership can be bad for you

DB’s Jim Reid concludes the overnight wrap

Over in markets the main story yesterday was the sharp leg lower for Oil following the latest US crude stockpile data. WTI tumbled -3.56% for its biggest daily decline since July 13th and in the process closed below $45/bbl for the first time in three weeks. The latest EIA report showed that crude stockpiles rose 2.3m barrels last week after analyst expectations were for a gain closer to 1.3m barrels. That sent energy stocks tumbling lower which more than offset another relatively decent day for financials. The end result was a -0.24% decline for the S&P 500 and the fifth time in the last six sessions that the index has closed in the red.

In Europe the Stoxx 600 (-0.35%) edged lower in late trading for the same reason while in credit markets both CDX IG (+1.5bps) and Main (+1bp) finished wider. Brazil’s Ibovespa closed -1.15% following the confirmation of the impeachment of President Dilma Rousseff in the Senate by a 61 to 20 majority. Vice-President Michel Temer has now replaced Rousseff and will continue in office until January 2019, ending the long and exhausting process that started in December 2015. As our EM economists noted yesterday, the success of the Temer administration will depend on its ability to overcome the economic crisis which will require unpopular measures on fiscal policy, in particularly addressing two critical reforms in the spending cap and social security reform.

In actual fact it ended up being a relatively busy day for newsflow yesterday, certainly compared to the rest of August. Ahead of tomorrow’s payrolls report there was plenty of focus on the August ADP employment change print which came in pretty much in line with the market at 177k (vs. 175k expected). That follows a 15k upwardly revised July reading of 194k. The rest of the US data was a mixed bag. On the positive side pending home sales rose +1.3% mom in July (vs. +0.7% expected) although the June reading was revised down sharply. Meanwhile the Chicago PMI for August printed at a slightly disappointing 51.5 (vs. 54.0 expected), meaning it was down 4.3pts relative to July and at a three month low.

There was some more Fedspeak for us to digest also yesterday. The usually dovish Rosengren and Evans both spoke early in the morning. The former said that he believes that the Fed’s dual mandate ‘is likely to be achieved relatively soon’ and that ‘by slowly normalizing rates, we would hope to continue to support growth’. However Rosengren also expressed some concern about financial stability risks in the commercial real estate market. On the other hand Evans said the he see’s less reason to fear financial instability and that ‘lower policy rate expectations act as a restraint on how much long-term rates could rise following a surprise over the near-term policy path’.

Treasury yields edged slightly higher with the 10y up +1.4bps to 1.581% although still very much anchored in the 1.50-1.60% range which it’s been in for some time. Market implied probabilities for the next Fed hike didn’t change too much. September edged up to 36% from 34% the day prior, while December edged up to 60% from 59%.

European bond markets were also weaker and especially so in Spain where the 10y yield there ended up +6.3bps higher at 1.007%, the weakest day since June 24th. Yesterday’s move came after Spanish PM Rajoy lost a vote of confidence in Parliament by 180 votes to 170 in the 350-strong assembly. While Rajoy was backed by the liberals of Ciudadanos and a small party from the Canary Islands, the Socialists and anti-establishment Podemos group both voted against as expected. A second confidence vote is now expected to take place tomorrow, where a simple majority is required.

Switching to the latest in Asia this morning where bourses are kicking off the month of September on a bit of a mixed note. The Nikkei (+0.13%) and Hang Seng (+0.28%) have rebounded from early losses, however the Shanghai Comp (-0.24%), Kospi (-0.42%) and ASX (-0.25%) are in the red. There’s been some data to get through this morning too. In China the official manufacturing PMI for August rose 0.5pts to 50.4 and so exceeding expectations of 49.8. In fact that’s the highest reading since October 2014. There was a bit of contrast between this and the private Caixin survey however which showed that the manufacturing PMI fell 0.6pts to 50.0. Meanwhile the official non-manufacturing PMI fell 0.4pts in August but to a still relatively healthy 53.5. In Japan the Nikkei manufacturing print for August was revised down 0.1pts at the final reading to 49.5.

In terms of the remainder of the data yesterday, in Europe the August CPI report for the Euro area was a little disappointing after coming in below market at the headline (+0.2% yoy vs. +0.3% expected) and unchanged from July. The core also declined one-tenth unexpectedly to +0.8% yoy. Over in Germany unemployment held steady at 6.1% in August while retail sales data for July well exceeded expectations after rising +1.7% mom (vs. +0.5% expected). Consumer spending data in France was more disappointing however (-0.2% mom vs. +0.3% expected) while France’s CPI report for August revealed headline inflation growth of +0.3% mom (vs. +0.4% expected).