In a mixed session, which has seen Asian stocks ex-Japan broadly higher, the European Stoxx 600 index dropped as much as 0.6% after data Markit PMI data signalled euro-area economy grew in July at its slowest pace in six months while carmakers extended declines on continued concern about antitrust collusion in the industry.  Germany’s DAX Index was hardest-hit euro-area benchmark, down as much as 0.8%. Autos continued to be the worst-performing sector on the Stoxx Europe 600 after EU and German regulators said they are studying possible collusion among German automakers. Der Spiegel magazine reported on Friday that BMW, Daimler and Volkswagen may have cooperated for decades on technology. 

Concerns have risen that with the Euro trading near its strongest level in 2 years and appreciating 11% against the USD YTD, it may weigh on exporters’ earnings; 1.20 on the EURUSD is being seen a key barrier beyond which European earnings will suffer.  As a result, the euro headed for its first decline in three days as data showed the region’s economy cooling at the start of a week packed with earnings results and a Federal Reserve rate decision. Stocks were dragged down for a second day by carmakers amid a collusion probe.

The common currency halted the advance that saw it hit a two-year high after a composite Purchasing Managers’ Index fell in July to a six-month low. Automakers extended a slump as European Union and German authorities said they are studying possible collusion among German producers. Crude fluctuated as an OPEC committee gathers to discuss the progress of supply cuts. Bonds were mixed.

Europe’s PMI was closely scrutinized after both German and Eurozone manufacturing missed expectations:

• Flash Eurozone PMI Composite Output Index at 55.8 (56.3 in June), below the 56.2 expected and 6-month low.
• Flash Eurozone Services PMI Activity Index at 55.4 (55.4 in June), below the 55.6 expected. Growth unchanged.
• Flash Eurozone Manufacturing PMI Output Index at 56.9 (58.7 in June). 6-month low.
• Flash Eurozone Manufacturing PMI(3) at 56.8 (57.4 in June). 3-month low.

Meanwhile, in a week heavy on political and monetary events, with several key Trump-related hearings later in the week, as well as the Fed’s July decision on deck, earnings from industry bellwethers from Amazon.com Inc. to GlaxoSmithKline Plc are set to provide the latest tests for a bull market that’s propelled the value of global equities to $78 trillion. According to Bloomberg, euro-area manufacturing figures indicate that gross domestic product is expanding at a 0.6 percent quarterly pace, compared with 0.7 percent in the second three months of the year, adding further doubts about the sustainability of the stock rally at a time when the strong euro is weighing on exporters.

In Asia, the MSCI Asia Pacific Index edged higher after rallying over the past two weeks to the highest level in more than 10 years. Japan’s Topix index slid 0.5 percent, after dropping as much as 1 percent earlier in the day. Australia’s S&P/ASX 200 Index lost 0.6 percent.  The Shanghai Composite Index advanced 0.4 percent while Hong Kong’s Hang Seng was 0.5 percent higher. India’s Sensex climbed 0.6 percent to a record. The Australian dollar rose 0.6 percent, trading above 79 U.S. cents ahead of a speech by Reserve Bank of Australia Governor Philip Lowe on Wednesday.

The Dollar slumped to a five-week low against the yen on concern a widening probe into possible ties between Russia and U.S. President Donald Trump’s election campaign may derail his growth agenda. Lower U.S. Treasury yields and oil prices spur leveraged selling in the greenback ahead of Jared Kushner’s closed-door meeting with the Senate Intelligence Committee on Monday, according to an Asia-based foreign-exchange trader quoted by Bloomberg. As noted over the weekend, hedge funds and other large speculators were the most bearish on the dollar in more than four years as the Federal Reserve meets this week

As noted earlier, the Polish zloty jumped the most against the euro since May after Poland’s President Andrzey Duda said he’d veto part of an overhaul of the judiciary that’s brought tens of thousands of protesters into the streets across the eastern European nation

In rates, the German government bond yields edged lower after euro zone PMI data also came in below forecasts. The 10-year yield – the benchmark for euro zone borrowing costs – fell to 0.49 percent, down 0.4 basis points and its lowest in more than a week. Yields fell on Friday as the strong euro led investors to question the timing of when the ECB would begin to withdraw its stimulus.

Bulletin Headline Summary from RanSquawk

• European equities trade lower amid disappointing PMI readings and downside in auto names
• Quiet start to the week for FX markets with participants eyeing this week’s FOMC meeting
• Looking ahead, highlights include Eurozone and US PMIs, US Existing Home Sales

Market Snapshot

• S&P 500 futures down 0.1% to 2,466.50
• STOXX Europe 600 down 0.3% to 379.14
• MXAP up 0.03% to 159.58
• MXAPJ up 0.3% to 526.46
• Nikkei down 0.6% to 19,975.67
• Topix down 0.5% to 1,621.57
• Hang Seng Index up 0.5% to 26,846.83
• Shanghai Composite up 0.4% to 3,250.60
• Sensex up 0.7% to 32,251.51
• Australia S&P/ASX 200 down 0.6% to 5,688.07
• Kospi up 0.06% to 2,451.53
• German 10Y yield fell 0.9 bps to 0.497%
• Euro down 0.2% to 1.1644 per US$
• Brent Futures up 0.3% to $48.19/bbl
• Italian 10Y yield fell 4.1 bps to 1.78%
• Spanish 10Y yield rose 0.6 bps to 1.457%
• Brent Futures up 0.3% to $48.19/bbl
• Gold spot up 0.1% to $1,256.03
• U.S. Dollar Index up 0.1% to 93.93

Top Overnight News

• The Fed will unveil the timing of its balance sheet unwind in September and wait until December to raise interest rates again, according to a Bloomberg survey of 41 economists
• U.K. Trade Secretary Liam Fox will meet his U.S. counterpart in Washington on Monday as Britain seeks a trans-Atlantic trade deal as soon as possible after leaving the EU
• The world is leaning less on its biggest economy to sustain the global recovery, according to the International Monetary Fund. Beneath the global growth figures, the drivers of the recovery are shifting, with the world relying less than expected on the U.S. and U.K. and more on China, Japan, the euro zone and Canada, according to the Washington- based fund
• The Polish zloty jumped the most against the euro since May after Poland’s President Andrzey Duda said he’d veto part of an overhaul of the judiciary that’s brought tens of thousands of protesters into the streets across the eastern European nation
• U.K.’s Fox in U.S. to Argue for Quick Post- Brexit Trade Deal
• White House Team Differs on Trump Support for Russia Sanctions
• Euro Area Economy Grows at Slowest Pace in Six Months
• OPEC Signals No Big Changes to Supply Deal at Meeting in Russia
• Fed Seen Making September Balance-Sheet Announcement: Survey
• America First No More as IMF Sees U.S. Fading as Growth Engine
• BMW Denies Diesel Cheating as EU, Germany Probe Auto Cartel
• Asda Is Said to Hold No Takeover Interest for B&M: Telegraph
• J&J Picks HIV Vaccine Candidate for Further Testing This Year
• Glaxo’s ViiV, J&J HIV Injection Shown as Effective as Oral Dose
• Blackstone Buys Clarion Events; No Terms
• Ireland to Hire Custodian to Manage Cash From Apple Tax Case
• Monsanto Cites Illegal Off-Label Products in Dicamba Findings
• Diebold Nixdorf Dragged Down by Peer’s Disappointing 3Q Forecast
• HCA in Pact to Buy Hospital From Community Health; No Terms
• Polish President Duda to Veto Part of Judiciary Legislation
• Deutsche Bank, JPMorgan Agree to Settle Yen-Libor Lawsuits

Asian stocks traded mixed after quiet weekend news flow and with participants awaiting the upcoming FOMC meeting on Wednesday. ASX 200 (-0.7%) traded negative as energy and financial sectors weighed on the index, whilst Nikkei 225 (-0.6%) also suffered in the red amid a strong JPY. Shanghai Comp. (+0.4%) and Hang Seng (+0.4%) were higher following the PBoes firm liquidity injection of CNY 350b1n, in addition to some Hong Kong banks reducing deposit rates to less than 4% after declines in the CNH HIBOR. Finally, 10yr JGBs were flat with brief pressure seen after the BoJ Rinban announcement, in which it reduced buying of 5yr-10yr JGBs to JPY 470bn from JPY 500bn. PBoC injected CNY 200b1n via 7-day reverse repos and CNY 150bln in 28-day reverse repos. PBoC set CNY mid-point at 6.7410, Prev. 6.7415.

Top Asian News

• China Banks That Funded HNA’s Growth Are Said to Halt New Loans
• Mystery Bond Trader Nets $10 Million on Treasury Strangle Gamble
• Singapore Startup Takes Bitcoin Into Real World With Visa
• India Starts Antidumping Investigation on Imported Solar Cells
• No Relief for Lanka Rupee Sliding at Fastest Pace Since 2006
• Exporters Lead Japanese Stock Decline as Yen Holds Gains

Broadly a negative start for European equities with weakness stemming from Automakers and Airliners. Germany automakers, BMW, Daimler and Volkswagen softer this morning following reports that the European Union confirmed a probe into alleged price-fixing, while airliners have been dragged lower by Ryanair following the release of their financial results. Elsewhere, lower crude prices, coupled with weaker than expected Eurozone PMI readings has also added to the risk off tone. Credit markets have been supported by safe-haven flow, while peripheral bonds are slightly tighter to bunds this morning. Spanish debt supported from Fitch revising its outlook on Spain to positive, while month-end extensions are aiding OATs, Bonos and BTPs.

Top European News

• Saudi Energy Minister: Build-Up in Global Inventories Reversing
• Polish Zloty Jumps Most Since May as President Scraps Court Bill
• Telecom Italia Shares Rise as Board Meets to Approve CEO Exit
• Czech Top Judges Say Polish Judicial Reforms Undermine Democracy
• IMF Cuts U.K. Forecast After Disappointing First- Quarter Growth

In currenices, it has been a very quiet start to the week with the greenback a fraction firmer, however the bias remains to the downside amid the ongoing US political uncertainty. DXY saw a break below 94.00, hitting a low of 93.82 in Asia, slight attention will be placed on the FOMC decision, as participants look for clarity on the timeline of balance sheet normalisation. Antipodeans (AUD, NZD) were the notable mover overnight with much of the price action seen through the cross as AUD/NZD moved within a whisker of 1.07. RBA speak last week failed to temper the AUD rise with the currency consolidating above 0.7950 and hovering around 2Y highs. Focus will be on RBA. Governor Lowe on Wednesday who may also look to curb the recent surge. EUR sagging this morning having touched lasts week post ECB peak at 1.1684, while softer PMI releases from France and Germany have also added to the EUR easing. EUR slightly south of 1.1650 with bids noted just ahead of Friday’s low at 1.1619.

In commodities, crude prices were softer this morning with both WTI and Brent down initially, amid the OPEC/Non-OPEC monitoring committee meeting the Saudi Energy Minister has stated that there has been no discussion over deeper cuts, however there has been talks over Nigeria and Libya production caps, given their recent increase in output. Gold rangebound after prices briefly touched a 4-week high on the back of a politically. Subsequently the energy complex rebounded however, after the Saudi energy minister made some solemn promises, in which he saw Saudis capping exports at 6.6mmb/d, saying that Nigeria would cut if it reaches output of 1.8mmb/d, and sees a deep cut in Saudi August production.

Looking at today’s busy session, we get the July manufacturing, services and composite flash PMIs for Germany, Eurozone (both of which declined and missed expectations) and the US later this morning. Existing home sales data in the US will also be released.

US Event Calendar

• 9:45am: Markit US Manufacturing PMI, est. 52.2, prior 52; Services PMI, est. 54, prior 54.2; Composite PMI, prior 53
• 10am: Existing Home Sales, est. 5.57m, prior 5.62m; Existing Home Sales MoM, est. -0.89%, prior 1.1%

DB’s Jim Reid concludes the overnight wrap

After a long hot first half to the summer, Saturday was cold in Surrey with torrential downpours that lasted most of the day. Probably the one person in the UK doing cartwheels of celebration at this turn in the weather was my wife who has just about had it with being doubly pregnant in summer. The cartwheels are figurative of course as she is struggling with everything physical at the moment. Help is at hand though and today marks the start of what I’ve resigned myself to be the start of a 25 year (minimum) financial noose around my neck. We have hired a nanny who starts today. Just as her job is done, three sets of school fees will then filter through, followed by University fees, help with deposits on their first homes and then finally their weddings where at that point I’ll pass them on to be someone else’s financial responsibility. If I succeed I’ll tell you about it in the EMR sometime in 2042 via telepathic hologram or whatever medium this gets published via at that point. I’ll be interested to hear from the elder readers at what age their offspring became financially independent!

Moving on and forgetting the fact that I’ve now committed to a path with no return, the highlight this week are today’s flash PMI numbers and the FOMC meeting this Wednesday, although the latter will likely be a relatively mundane affair with the action perhaps being saved for a September balance sheet announcement. Nevertheless we’ll preview our expectations just before the week ahead at the end. One also has to keep an eye on all things Washington related following Friday’s announcement of Press Secretary Sean Spicer’s resignation. Mr Trump now has new people at the helm of both his legal and communications teams after resignations towards the end of last week. Late on Friday Congressional negotiators agreed to advance a bill punishing Russia for its involvement in the 2016 election and also restricting Presidential powers to remove sanctions on Russia. It will now go to a vote and if it passes Mr Trump could be in a difficult situation as he has publicly stated he wants improved relations with Russia but clearly if Congress has voted for the bill he’d be seen as siding with Mr Putin if he didn’t respond positively when it reached his desk. These matters are obviously important for many reasons not least as Mr Trump does need Congress on his side if he has hopes of rescuing his legislative agenda.

Elsewhere, today sees senior White House advisor Jared Kushner interviewed by the Senate Intelligence committee, with Donald Trump Jnr. and ex-Trump campaign Chairman Paul Manafort before Senate committees on Wednesday. As the week starts in Asia, the Nikkei (-0.9%) and the Kospi (-0.1%) have softened, but the Hang Seng is up 0.4% to be at the highest level since July 2015. The three key Chinese bourses ranged from -0.1% to +0.2%. Overnight the IMF have released their latest vow on the global economy and their chief economist is increasingly confident that “the recovery in global growth is on a firmer footing….there is now no question mark over the world economy’s gain in momentum,”. Headline global growth of 3.5% in 2017 and 3.6% in 2018 is the same as April, but the projections now capture downward revision to US and UK, offset with improvements in China, Europe and Japan. Compositionally, US has been cut by 0.2% and 0.4% respectively, to 2.1% growth in both 17 and 18. UK has been cut to 1.7% (-0.3%) for 17, while Europe is expected to grow by 1.9% in 17 and 1.7% in 18.

Despite a general lack of data on Friday, Global markets saw a broader risk off move. US and European equities were down with the DAX, STOXX 600 and S&P 500 falling -1.66%, -1.32% and -0.04% respectively. In Europe we saw losses across all sectors with Automobiles (-2.7%) being the worst hit while banks were also down -1.1%. In fact the DAX is now at 3 month lows, probably not helped by the 2-year high in the Euro. Indeed the dollar index fell by -0.5% on Friday to end the week down -1.4%, while the Euro continued to strengthen as it gained +0.3% on Friday (vs the Dollar) to end the week up +1.7% as a whole (+2.5% vs  Sterling). The S&P 500 did rally into the close after hitting its lows (around -0.4% for the day) around the time Europe went home. Energy (-0.88%) was the big laggard in the US after Oil fell -2.45% partly on news that OPEC supply this month is expected to be at its highest levels since December. This more than offset earlier week gains closing -1.7% on the week. Tech stocks were just in the red and ended a 10-day positive run. Precious metals also benefited from the risk off moves with Gold and Silver both ticking up by just over +0.5% respectively.

Credit Markets somewhat mirrored the risk off moves in equities. In Europe iTraxx Main was about -1bp tighter on the day but Crossover widened around +1bps. Risk off moves were more visible in the US where CDX IG was flat on the day but CDX HY widened by +3bps. Staying with credit, this morning we have published a Credit Bite where we highlight the resilience of the EUR HY market to the moves in government bond yields following Draghi’s Sintra speech. We do note however that there has been some weakness in the technicals that are worth keeping an eye on. If you haven’t received the report please contact Nick Burns.

Talking of yields, bonds continued their recovery on Friday as we saw yields on  US Treasuries (2Y -1bp; 10Y -2bps) and German Bunds (2Y: unch; 10Y -2bps) fall across most maturity points. Yields on Gilts (10Y -3bps), OATs (10Y -2bps) and BTPs (10Y -4bps) also dropped on the day. After a week where the ECB and Draghi were seen as relatively dovish on the pace of tightening (if not deviating from the message that tightening was coming), Bunds fell 9bps but Italian and Spanish bonds fell 22bps and 20bps respectively.

Taking a look back at Friday’s calendar, it was an uneventful end to the week in terms of macro data. In Europe the only data of note was UK public sector net borrowing data for June where the deficit overshot expectations at 6.3bn (vs. 4.2bn expected; 6.0bn previous). Across the pond there was no data of note in the US, but Canada saw June inflation come in just marginally below expectations (+1.0% YoY vs. +1.1% expected; +1.3% previous).

Before we detail the full week ahead, let’s preview the FOMC this Wednesday. Our US economics team published a note on Friday updating their view on the Fed and detailing their expectations for the July FOMC statement. They note that the Fed is unlikely to take any action in a policy firming direction at the meeting this week, partly because inflation has continued to surprise to the downside as of late. They do expect the FOMC statement to particularly focus on how the Fed will handle the dichotomy between a resumption of moderate growth and continuing improvement in the labor market on one hand and ongoing softness in inflation on the other. Given this dichotomy they modestly update their Fed view – they see the Fed pausing in Q1 2018 after another hike in December and then resuming at a pace of one hike per quarter thereafter, thus moving their Fed call in line with the median FOMC expectation of three rate hikes during 2018. On the topic of the timing of the initial taper of balance sheet reinvestment the team  believes that a July announcement and August tapering (while possible in principle) has a low probability given a) the recent softness in inflation; b) because Yellen did not take the opportunity at her Congressional testimony to more strongly signal a July announcement; and c) because market expectations are generally centred on a September announcement and October commencement. They note that these relatively strongly held market expectations should also allow the Committee to get by without giving any more specific guidance on timing even within this week’s statement.

To the rest of the week ahead now. Monday starts with the July manufacturing, services and composite flash PMIs for Germany, Eurozone and the US. Existing home sales data in the US will also be released. Onto Tuesday, Germany will have the IFO July index for business climate and expectations, while France will report confidence indicators for July. In the US on Tuesday data includes consumer confidence, FHFA house price index, S&P/Case-Shiller house price index and Richmond Fed manufacturing index. Turning to Wednesday, in the UK Q2 GDP is due, while the focus in the US will be the July FOMC rate decision. New home sales data will also be due. For Thursday, the morning session looks quiet with only Euro area M3 money supply data due. Across the pond the US will update its durable and capital goods orders for June as well as the initial jobless claims, advance goods trade balance, wholesale inventories and Kansas City Fed’s manufacturing index. Finally, on Friday, the early data is out of Japan where June CPI data is due, while in Europe we have Germany and France providing an update on CPI. Euro area confidence indicators are also due. It’s a bumper end to the week in the US with the advance Q2 GDP report, core PCE and the final University of Michigan consumer sentiment reading.

Onto other events. On Monday, the UK begins preliminary post-Brexit trade talks with the US, ECB’s Frank Smet’s will speak at Munich and OPEC and non- OPEC meet in Russia to discuss progress with production cuts. On Tuesday, the US secretary of Commerce will address the economic club of Washington. Onto Wednesday the Fed of Minneapolis President will be the first speaker post the FOMC decision. Finally, notable US companies due to report include: Alphabet, Amazon, AMD, AT&T, Twitter, Facebook, McDonalds, GM, Caterpillar, Ford, Boeing, Royal Dutch Shell, Chevron, Exxon, Merck and AbbVie. Closer to home, we also have CS, BNP Paribas and UBS due to report