The return from summer holidays has started in much the same way as we left off August, with another subdued session that has seen European stocks little changed, Asian shares advance and S&P futures are modestly in the green amid a flurry of M&A. The US dollar weakened, with the Bloomberg Dollar Index down 0.2% for the 2nd day in a row as prospects for a U.S. interest-rate hike this month remained subdued.

Among the main overnight news, Bayer AG sweetened its takeover bid for Monsanto Co. for the second time, saying it would be prepared to pay $127.50 a share for the U.S. seed giant provided a negotiated deal can be reached. Monsanto ended last week at $107.44 in New York. Saudi, Russia pledge oil cooperation without agreeing freeze; Fresenius SE buys Spanish hospital group for $6.42 billion. In eco data, German factory order data (July +0.2%, vs exp.0.5%, Last -0.3%) today offered the latest in a recent trend of disappointing data from euro zone and BRC data cast a shadow on U.K. economy. “After a sharp fall in July, business surveys have rebounded in the U.K. in August, suggesting that although the economy should slow in 2H, it is unlikely to experience a sharp recession such as we forecast in June,” Credit Suisse analysts write in note

The final Eurozone Q2 GDP print of 0.3%, came in line with expectations, however the bulk of gains (green in chart below) came from trade as a result of the recent decline in the Euro. The ECB may have trouble maintaining the recent rate of declines when it meets on Thursday, September 8, when the best announcement the market may hope for is for Draghi to extend the ECB’s bond buying into 2017.

With “bad news again good news”, the MSCI Emerging Markets Index climbed to the highest in more than a year as prospects for a U.S. interest-rate hike this month remained subdued and investors awaited this week’s European Central Bank policy meeting. Currencies from South Africa and Australia were the biggest winners as the dollar weakened against most of its 16 major peers. Brent crude slipped toward $47 a barrel and copper advanced.

Emerging-market assets have gained ground since American payrolls data on Friday damped speculation the U.S. would raise rates in September (if one excludes Goldman’s stark warning of an imminent 25 bps rate hike in two weeks), and there’s little sign of angst in financial markets. While investors look toward service sector on Tuesday and comments by Fed Bank of San Francisco President John Williams for insight on tightening U.S. monetary policy, central banks across much of Asia and Europe are in the midst of easing cycles.

“Monetary policy is going to remain easy around the world and that will continue to be supportive of risk assets,” James Woods, a strategist at Rivkin Securities in Sydney, told Bloomberg. “The non-farm payrolls last week indicate there’s no rush for the Fed to raise rates.”

The MSCI Emerging Markets Index rose 0.9% in early trading, extending this year’s gain to 15 percent. That compares with a 4.6% year-to-date advance for the MSCI World Index of developed countries. The Bank of America Merrill Lynch GFSI Market Risk Index, a measure of future price swings implied by options trading on global equities, interest rates, currencies and commodities, fell to the lowest level since the start of the year.

The Stoxx Europe 600 Index was little changed near this year’s high, with trading volumes 34 percent less than the 30-day average. Germany’s benchmark DAX Index added 0.4 percent and is close to erasing its annual decline. Fresenius SE rose 3.2 percent after the healthcare provider said it will pay $6.42 billion for Spain’s largest private hospital company, IDC Salud Holding S.L.U. Ingenico Group SA, dragged technology companies to the worst performance on the Stoxx 600, slumping 13 percent after the electronic payments processor lowered its annual profit margin and revenue growth forecasts.

Futures on the S&P 500 Index added 0.1 percent to 2180, after the cash index rose 0.4% on Friday. The overnight M&A flurry saw, in addition to the repeat attempt by Bayer to buy Monsanto, the announcement that Danaher would buy Cepheid for $53/share, while Enbridge announced it would buy Sepctra Energy in a stock for stock deal.

Following yesterday’s crude oil fireworks, which sent the energy complex soaring on dashed expectations of an imminent oil supply freeze by Russia and Saudi Arabia, WTI had dipped back under $45, as the market continues to digest yday’s Russia-Saudi cooperation agreement, as nations including Venezuela offering support. 

Spanish bonds climbed for a third day, pushing the nation’s 10-year yield down four basis points to 0.97 percent. The yield on similar-maturity Italian bonds slide three basis points to 1.13 percent, while that on German bunds was little changed at minus 0.06 percent. Japan’s 30-year bonds rose for the first time in two weeks, pushing their yield down by 2 1/2 basis points to 0.50 percent. An auction of the tenor achieved a higher-than-estimated price on Tuesday and the bid-to-cover ratio rose from the previous sale. 10Y U.S. Treasuries were little changed from Friday, with the yield at 1.61 percent. The rate on the two-year notes, which tend to be more sensitive to the monetary policy outlook, increased by one basis point to 0.80 percent.

Market Snapshot

• S&P 500 futures up 0.1% to 2180
• Stoxx 600 up less than 0.1% to 351
• FTSE 100 down 0.3% to 6862
• DAX up 0.3% to 10701
• German 10Yr yield down 1bp to -0.06%
• Italian 10Yr yield down 2bps to 1.14%
• Spanish 10Yr yield down 3bps to 0.98%
• S&P GSCI Index up 0.2% to 348
• MSCI Asia Pacific up 0.7% to 141
• Nikkei 225 up 0.3% to 17082
• Hang Seng up 0.6% to 23788
• Shanghai Composite up 0.6% to 3091
• S&P/ASX 200 down 0.3% to 5414
• U.S. 10-yr yield up less than 1bp to 1.61%
• Dollar Index down 0.2% to 95.65
• WTI Crude futures up 0.8% to $44.78
• Brent Futures down 1.1% to $47.09
• Gold spot up less than 0.1% to $1,329
• Silver spot up 0.1% to $19.53

Global Headline News

• Bayer Sweetens Monsanto Bid Again as Monsanto Mulls Alternatives: sweetened takeover bid for Monsanto a second time and said the two are in advanced talks as Bayer seeks to become the world’s largest producer of seeds and pesticides
• Obama Trade Setbacks Undercut Gains in Southeast Asian Ties: Obama arrived late Monday in Laos amid doubts on whether the Trans-Pacific Partnership will even get through Congress
• Saudi, Russia Pledge Oil Cooperation Without Agreeing Freeze: world’s top two crude-oil producers pledged to cooperate to stabilize global markets, while failing to announce any specific measures
• Fresenius to Acquire Spanish Hospital Network for $6.42b: cash-and-stock deal acquires company from CVC Capital Partners
• GM Settles Next Federal Ignition-Switch Cases Set for Trial: GM settled the final two bellwether cases over ignition switch flaws scheduled for trial in federal court in New York, averting one set to begin next week
• GE to Hold Investor Call Tuesday About a New Growth Investment: more information will be posted closer to the event on website
• Volkswagen Said to Near Deal to Take 19.9% Stake in Navistar: WSJ
• Sony’s ‘Don’t Breathe’ Tops Labor Day Weekend Box Office

Looking at regional markets, we start in Asia where stocks traded mixed with US markets shut for Labor Day. Nikkei 225 (+0.3%) was modestly higher with a softer JPY supporting the index, while ASX 200 (-0.3%) was negative as participants anticipated the RBA to remain unchanged at today’s policy meeting. Shanghai Comp (+0.6%) and Hang Seng ( +0.5%) were subdued amid a lack of newsflow, while the PBoC also kept its liquidity injections to a near-minimum. 10-yr JGBs were subdued amid gains in Japanese stocks, although prices saw mild support following the 30yr auction in which b/c, average price and tail-in price all improved from the prior month. Japanese PM Abe Adviser Hamada stated the BoJ should wait for the Fed before taking next steps as the BoJ risks having efforts overshadowed if it expands easing in September and Fed maintains rates a few hours later. Hamada added that a Fed hike would have more impact on weakening JPY than anything the BoJ does alone and that there is still an opportunity to expand easing in November and December.  RBA kept the Cash Rate Target unchanged at 1.50% as expected . RBA stated that recent data suggests overall growth continues despite a fall in business investment, adding that inflation is still quite low and is expected to remain low for quite some time.

Top Asian News

• Abe’s Adviser Hamada Says BOJ Should Wait for Fed Before Acting: More stimulus in Japan could be ineffective if Fed holds rates
• Libor Surge Reverberates All the Way to China’s Currency Market: Higher borrowing rate encouraging firms to repay dollar debt
• Singapore Stepping Up Misconduct Probes: Central Bank Chief: Financial institutions must promote vigilance, Ravi Menon says
• Australia Keeps Key Rate at Record Low in Stevens Swansong: All economists surveyed forecast no change in policy Tuesday
• Barclays Said to Be Cutting Singapore Technology Positions: Bank confirms some Singapore IT jobs moving to India
• Obama Cancels Meeting With Philippine President After Outburst: Duterte said he would curse Obama if he raised drug war issue
• Rakuten to Be Added to Nikkei 225, Replacing Nippon Soda

In Europe equities have followed on from the trend set yesterday, with equities trading in a tentative fashion as they await the return of the US after their long Labor Day weekend. Indices remain flat on the session, with energy names the notable outperformers following the vague agreement seen yesterday between Russia and Saudi Arabia, while Deutsche Telekom are among the worst performers after the spokesman denied reports on possible restructuring measures and stated there is no new job cutting programme. Fixed income markets also trade in a tight range, with little in terms of macro newsflow to guide price action. The main highlight was the UK 10yr auction which led to a small downtick in 10yr Gilts with the auction seeing a lower b/c than previous. Elsewhere, focus is beginning to mount on what potential action the ECB could take on Thursday with regards to its bond-buying programme.

Top European News

• Switzerland’s Economy Grows at Fastest Pace Since 2014: GDP expands 0.6%, economist estimate 0.4%
• German Factory Orders Undershoot Forecast as Momentum Cools: orders gain 0.2% on month vs estimated 0.5% increase
• ChemChina Extends Public Tender Offers for Syngenta Until Nov. 8
• Airbus Wins $6.5b Orders From Vietnamese Carriers: state airline, affiliate to buy 10 A350s and 10 A320s
• British Airways Computer Outage Hits Flights Across Network: passengers say staff are issuing handwritten boarding passes
• Aegon Seeks New CFO as Button Departs to Move Back to U.S.: Button leaves insurer after 3 years in top finance job

In FX, the Bloomberg Dollar Spot Index lost 0.2 percent for the second day in a row. The yen reversed earlier losses to trade 0.1 percent firmer versus the greenback. The Bank of Japan should refrain from stepping up monetary stimulus until after the Fed decides on interest rates, according to Koichi Hamada, an economic adviser to Prime Minister Shinzo Abe. South Africa’s rand climbed 1.1 percent, the most among major currencies. The Aussie appreciated 0.9 percent, the second-best performance. The Reserve Bank of Australia kept its benchmark interest rate at 1.5 percent in Governor Glenn Stevens’s final meeting, a decision forecast by all 26 economists in a Bloomberg survey.  South Korea’s won and Taiwan’s dollar were both near two-week highs, with the latter advancing 0.3 percent. India’s rupee climbed to a four-month high, trading for the first time since Urjit Patel took over as governor of the central bank. “Asian currencies will be especially sensitive to comments from various Fed speakers this week,” said Khoon Goh, head of regional research at Australia & New Zealand Banking Group Ltd. in Singapore. “Any talk of September still being live should see Asian currencies give up some of their recent gains.”

In commodities, oil fell after a cooperation agreement signed on Monday by Russia and Saudi Arabia didn’t yield specific measures to reduce a global oversupply.  Brent crude dropped 0.6 percent to $47.36 a barrel in London. The contract jumped as much as 5.5 percent on Monday as news broke Saudi Arabia and Russia would make a “significant” joint-statement on the oil market at the G20 summit in China. It later pared those gains as the two nations stopped short of announcing a freeze in output. A freeze proposal was derailed in April over Saudi Arabia’s insistence that Iran participate. OPEC Secretary General Mohammed Barkindo will meet Iran’s Oil Minister Bijan Namdar Zanganeh in Tehran on Tuesday. Gold held a three-day advance as prospects for a U.S. interest-rate increase this month receded. Bullion for immediate delivery rose 0.4 percent to $1,331.86 an ounce, while silver gained 0.3 percent and platinum rose 0.8 percent. Aluminum advanced 0.4 percent and copper increased by 0.3 percent.

Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities enter the North American crossover in a relatively tentative fashion as participants await the US’ return to market
• A tight morning for FX trade, with some USD weakness developing, but failing to gather any momentum
• Looking ahead, highlights include German Factory Orders, EU GDP, US Composite and Services PMIs and US ISM Non-Manufacturing PMI
• Treasuries little changed in overnight trading as world equity markets rally along with WTI crude and precious metals, Australia’s central bank left rate at record low 1.50%, U.S. dollar index drops.
• “Monetary policy is going to remain easy around the world and that will continue to be supportive of risk assets,” said James Woods, a strategist at Rivkin Securities in Sydney. “The non-farm payrolls last week indicate there’s no rush for the Fed to raise rates”
• A surge in the U.S. borrowing benchmark to a seven-year high is making it more expensive for Chinese companies to service $585 billion of dollar debt, encouraging firms to pay back their overseas loans and adding to pressure for the yuan to weaken
• The ECB might need to change the rules of the game if it wants to keep playing in the bond market. President Draghi’s 1.7 trillion-euro ($1.9 trillion) asset-purchase program is scheduled to end in just six months, but euro-area inflation is still weak
• The Basel Committee should freeze plans to overhaul capital rules to avoid a “drastic” reduction in lending by European banks, Credit Agricole SA Chief Executive Officer Philippe Brassac said
• It’s a sign the world is getting used to negative interest rates when what once seemed bizarre starts looking like the norm. Consider Switzerland, where more and more companies are taking out insurance policies to protect cash hoards from theft or damage
• German factory orders increased less than forecast in July as domestic weakness damped a surge in investment-goods demand from the euro area. Orders, adjusted for seasonal swings and inflation, rose 0.2% from June, when they fell a revised 0.3%
• Swiss economic momentum accelerated in the second quarter, exceeding that of the euro area and hitting its fastest pace since 2014. GDP rose 0.6% in the three months through June, after gaining a revised 0.3% in the prior quarter
• While Bank of Japan Governor Haruhiko Kuroda has indicated an openness to new ideas, at least one measure — buying foreign bonds — appears to be off the table as the central bank explores its options for monetary stimulus
• The Bank of Japan should wait until after the U.S. Federal Reserve decides on interest rates before acting itself, said Koichi Hamada, an economic adviser to Prime Minister Shinzo Abe
• Bayer AG sweetened its takeover bid for Monsanto Co. to $56 billion, raising its offer for a second time in its pursuit to become the world’s largest producer of seeds and pesticides

DB’s Jim Reid concludes the overnight wrap

With Wall Street on holidays yesterday, it won’t come as a great surprise to hear that markets were pretty dull yesterday. The Stoxx 600 (+0.05%) ended the day a shade higher although in the process had the second lowest high-to-low intraday range (0.35%) this year. That said it was still the third successive daily gain for the index and takes it to within a whisker of the highs made back in April. Sovereign bond markets provided little excitement although it was commodity markets and specifically the moves for Oil which turned some heads. Early in the day Brent surged over 5% as headlines hit the wires suggesting that Saudi Arabia and Russia had held a productive meeting and had agreed to stabilize the Oil market. As the details got leaked however it turned out that it was clear the talks were little more than just political jawboning once again and we were no closer to any action. Brent pared gains as a result and finished +1.71% at the close.

Away from this there was more good news to come out of the latest UK economic data. Following on from that huge and much better than expected rebound in the manufacturing sector, yesterday’s services PMI reading in August rose a bumper 5.5pts to 52.9 and well ahead of the consensus 50.0 forecast. The magnitude of the rebound was in fact the biggest since the survey began two decades ago. As a result the composite printed at 53.6 for August and a full 6pts ahead of July. That composite reading is in fact the highest since March. Sterling initially rallied half a percent or so post the report but finished unchanged by the end of play.

Whether or not these PMI’s represent a correction of the overreaction in July post-Brexit still remains to be seen. However, it’s clear that there is still a challenging path ahead for UK PM Theresa May in negotiating the optimal Brexit path, as some of the comments from the G20 summit have shown. Both US President Obama and Japan PM Abe were among the world’s political leaders to urge May not to put up walls between the UK and Europe. According to the FT Abe was said to have underscored concerns in a 15-page memo, setting out threats to Japanese companies in Britain if the terms of exit are set too tough. Italy’s economic development minister, Carlo Calenda, also warned that the more the UK is ‘going to regulate and limit the presence of EU citizens in the UK, the more we are going to limit the presence of UK goods into Europe’. The comments also came as David Davis – the Conservative MP and Secretary of State for Exiting the EU – faced mounting criticism in parliament yesterday over the lack of details of how the UK will negotiate with its neighbours in Europe and refusal to clarify the government’s position on a number of associated issues. So while the data has been decent post Brexit, uncertainty levels are still high and there’s still a long way to go in this chapter.

This morning in Asia it’s been a relatively mixed but quiet start. Looking across markets the Nikkei (+0.22%) and Topix (+0.48%) have continued to build on yesterday’s gains while the Hang Seng (+0.19%) and Kospi (+0.07%) are also in positive territory, however the Shanghai Comp (-0.09%) and ASX (-0.23%) have seen modest declines. In FX markets the Yen (-0.14%) has given up some of yesterday’s gains while the AUD (+0.54%) rallied ahead of the RBA deciding to leave rates unchanged as we go to print which is in line with all forecasts. Meanwhile, following on from Kuroda’s comments that we highlighted yesterday, our Japan economists are now attaching an 80% probability that the BoJ will maintain its current policy stance without change at the BoJ meeting on September 20-21. They had previously pegged this at a 60% probability. They also note that in their view the Governor’s insistence that there are no limits on expanding in quantity terms effective rules out a more flexible approach in the Bank’s JGB purchasing operations from the view viewpoint of purchase limitation. Moreover, they note that Kuroda argued that the financial intermediary function of banks has not suffered from the squeeze on their earnings under NIRP. As such, he would appear to believe that more flexible JGB purchasing to help bank earnings is unnecessary at this stage. That said, our colleagues think that the possibility of this option has retreated for this month’s meeting only. It will remain an option if the erosion in bank earnings were to begin to clearly weaken their intermediary function.

Moving on. Last week saw the lowest amount of weekly ECB CSPP buying to date (€1.164bn) averaging €233mn daily against the €336mn daily average since the program started in early June. However remember that Monday was a Bank Holiday in the UK – where virtually all bonds are traded – and that this was also the last week in August. Now the summer is over it’ll be interesting to see the purchases over the next few weeks, especially in primary. So far only 6.5% has been purchased as a new issue. At some point it will likely get more difficult to buy secondary so if they want to maintain a high level of purchases they’ll probably need to adjust their primary/secondary ratios.

To that point, yesterday was actually a reasonably busy day in European primary markets despite the US holiday. Just under €5bn priced based on Bloomberg’s numbers which made it the busiest day in the short month so far. The most interesting new issues yesterday came from Aviva and Paragon who became the first financials to issue Tier 2 bonds in Sterling this year.

Wrapping up the remainder of the PMI’s yesterday. While the news was positive in the UK the final Euro area services PMI was a little less so after being revised down 0.3pts to 52.8. That largely came about following a 1.6pt downward revision to Germany (to 51.7) which more than offset a small upward revision to France (+0.3pts to 52.3) and better than expected readings in Spain (56.0 vs. 54.2 expected) and Italy (52.3 vs. 51.8 expected). All in all the final composite PMI for the Euro area was revised down from the flash reading of 53.3 to 52.9, which is slightly below the 53.2 in July. Our European economists note that the PMI’s still point to a moderate Euro area GDP recovery of +0.3% to +0.4% qoq. As well as the PMI’s, the latest Sentix investor confidence reading for September rose 1.4pts to 5.6 (vs. 5.0 expected), while Euro area retail sales were up +1.1% mom in July (vs. +0.5% expected).