After yesterday’s afternoon surge in US stocks, facilitated by the “uncertain” Fed’s FOMC Minutes, today the rest of global market are playing catch up with European stocks rebounding from one week lows, snapping the longest losing streak in three weeks, as well as Asia where most stock markets climbed, led by gains among energy producers as crude prices advanced, while a stronger yen weighed on Japanese shares.

The Stoxx Europe 600 Index rose for the first time this week and emerging markets gained amid a subdued outlook for higher U.S. rates after Federal Reserve minutes showed officials were losing confidence in the economy’s ability to withstand a hike. Crude approached $48 a barrel, while gold neared a two-year high. The pound rebounded from a 31-year low.

Since bad news has again become great news for stocks, yesterday the S&P closed at 2,100 after Fed officials admitted concerns that job creation was faltering as they kept rates unchanged the week before the U.K.’s referendum. Tomorrow’s payrolls figures will be key to perceptions of where the Fed stands on its original plan to potentially raise rates twice this year.

“Markets are looking to nonfarm payrolls tomorrow as the first solid data point following the last Fed meeting to give guidance,” Daniel Murray, head of research at EFG London told Bloomberg. “There is that balancing act for the Fed in that they are quite right to be vigilant and observant of the U.K.’s position, but at the same time the direct impact on the U.S. economy is probably going to be quite small.” (Harvey:  this is nonsense)

But while there is hope that tomorrow’s job number will provide some much needed direction, for now the key market moving catalysts are the constantly changing development in Italy’s banking system, as well as the falling dominoes in the UK. As a result, while US stocks remain largely unmoved, the scramble into safe havens around the globe continues as shown in the chart below.

To be sure, the relentless volatility in markets, if only outside the US, is starting to get to traders and PMs: “The market can sway so violently either way these days,” said Teis Knuthsen, chief investment officer at Saxo Bank A/S’s private-banking unit in Hellerup, Denmark. “You need to base the rally on something. What we need the most from policy makers is some sort of signal that we can handle European banks and that we will begin to address the U.K. situation. I’m more positive about the second half of the year, but I’m also hedging my bets. Like everyone else, I’m also buying gold.”

As of this moment, at least, the optimistic settlement has won out, and Europe’s Stoxx 600 (which mysteriously “broke” during yesterday’s selloff) climbed 1.5% in early trading, with all its industry groups up, after posting its longest losing streak in three weeks. Banks, which sank to their lowest prices since 2011, climbed 1.6 percent as a group.

Danone jumped 7% after agreeing to buy WhiteWave Foods Co., a U.S. maker of soy milk and plant-based foods, for about $10 billion. Associated British Foods Plc rallied 7.5% after raising its annual profit forecast, saying a weaker pound will boost the value of profits earned outside its home market. Marks & Spencer Group Plc fell 1.2 percent after reporting a deterioration in clothing sales.

The MSCI Emerging Markets Index gained for the first time in three days, rising 1 percent. Samsung Electronics Co. contributed the most to the advance, climbing 2 percent, after reporting its biggest operating profit in more than two years, bolstered by demand for its Galaxy S7 smartphones. Benchmarks rose more than 1 percent in Hong Kong, Russia, Poland and South Korea.

S&P 500 futures were little changed following a 0.5 percent advance in the U.S. benchmark on Wednesday.

In the all important government bond market, there were no new record low yields overnight, as the scramble into government paper moderated. German bonds fell, after 10-year yields touched the lowest level on record on Wednesday. The yield on similar-maturity Spanish bonds added four basis points to 1.21 percent while that on Italian 10-year bonds added three basis points to 1.28 percent. Japan’s two-year bond yield dropped one basis point to an all-time low of minus 0.345 percent. The nation’s 10-year rate was minus 0.28 percent, near the record of minus 0.285 percent reached on Wednesday.

The yield on U.S. Treasuries due in a decade increased one basis point to 1.38 percent, after sinking to an unprecedented 1.32 percent in the last session. Billionaire bond investor Bill Gross said Wednesday that sovereign bonds are “too risky” with yields in many developed markets near all-time lows.

On the US calendar the highlight is the ADP employment print ahead of tomorrow’s payrolls. Expectations for the ADP print are 160k although it’s worth highlighting that last month’s 173k reading severely overstated the May payrolls report. We’ll also get the latest initial jobless claims reading today. Away from the data we’re also due to hear comments from the ECB’s Lautenschlaeger and Constancio today.

Reports Thursday on June private payrolls from the ADP Research Institute and weekly jobless claims are the last employment data before the government monthly jobs report on Friday. American employers probably added 180,000 workers to payrolls in June, following an unexpectedly small increase of 38,000 in May, the least in almost six years, economists said before Friday’s report.

Market Snapshot

• S&P 500 futures unchanged at 2094
• Stoxx 600 up 1.5% to 324
• FTSE 100 up 1.5% to 6562
• DAX up 0.9% to 9462
• S&P GSCI Index up 0.9% to 369.4
• MSCI Asia Pacific up 0.3% to 129
• Nikkei 225 down 0.7% to 15276
• Hang Seng up 1% to 20707
• Shanghai Composite down less than 0.1% to 3017
• S&P/ASX 200 up 0.6% to 5228
• US 10-yr yield up 1bp to 1.38%
• German 10Yr yield up less than 1bp to -0.17%
• Italian 10Yr yield up 2bps to 1.27%
• Spanish 10Yr yield up 3bps to 1.2%
• Dollar Index up 0.02% to 96.07
• WTI Crude futures up 1.2% to $47.99
• Brent Futures up 1.2% to $49.38
• Gold spot up 0.2% to $1,367
• Silver spot down less than 0.1% to $20.09

Top Global News

• Danone to Buy U.S. Soy-Milk Maker WhiteWave for $10 Billion: WhiteWave is one of the fastest-growing U.S. food companies. French yogurt maker expects $300 million of synergies by 2020
• Avast to Buy AVG for $1.3 Billion, Adding Security Software: Company seeks to tap into growing Internet of Things market. Deal pays 33% premium to AVG’s closing price in New York
• Dimon Warns of Job Losses as Post-Brexit Property Pain Spreads: ‘A few thousand’ could be moved from U.K. if passporting lost. JPMorgan CEO sees possibility of reversing Brexit decision
• McDonald’s Said to Narrow Bidders for $2 Billion China Franchise: Fast-food chain invites Cinda, Sanyuan to make binding offers. GreenTree Hospitality, Sanpower also among shortlisted bidders
• Gross Calls Sovereign Bonds Too Risky With U.S. Yields Near Lows: Yield on World Sovereign Bond Index falls to less than 1%. Demand for debt is waning following plunge in yield, CIBC says

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Looking at regional markets, as usual we start in Asia where stocks saw an improvement in risk appetite to trade relatively mixed following the gains in the US as an energy rebound underpinned sentiment although Nikkei 225 (-0.7%) lagged as JPY remained firm. ASX 200 (+0.6%) was boosted by the resurgence seen in energy in which WTI crude futures tested the USD 48/bbl level after the largest drawdown in API crude inventories since August 2015, while KOSPI (+1.1%) was led higher by the strong earnings guidance from Samsung. Chinese markets were mixed with the Hang Seng (-1.0%) lower and the Shanghai Comp (flat) unchanged despite the PBoC keeping its liquidity injections to a minimum and looks set for a significant net weekly drain, while increasing China NPLs also adds to the caution. 10-year JGBs traded higher amid the risk averse sentiment seen in Japan as yields continue to probe fresh record lows, while today’s enhanced liquidity auction saw a better than prior b/c.

Top Asian News

• Australia Dealt AAA Blow as S&P Cuts Outlook on Fiscal Gridlock: S&P gives one-in-three chance of downgrade within two years
• Samsung Profit Tops Estimates as S7 Keeps Winning Customers: Marketing costs seen under control amid slowing sales growth
• Top China Hedge Fund Seeks Help to Short Besieged Builder Vanke: Ze Quan manager borrowing Vanke shares in social media post
• Mizuho to Bolster Small-Business Coverage With 200 More Bankers: Bank is chasing fees by advising SMEs on investing, growth
• Temasek Assets Drop for First Time in Seven Years on China Rout: Singapore state firm boosts telecom, media, tech holdings
• Yuan Tumbling Again Leaves Investors Unperturbed in Win for PBOC: Options market sanguine as PBOC seen improving communication

The European morning has seen upside in equities after the significant losses seen earlier in the week. Financials lead the way higher after the heavy losses seen yesterday , with Deutsche Bank trading higher by 1.6%, however still down over 4% over the past 2 days. Elsewhere on a sector breakdown defensive names lag Europe suggesting that this morning has seen a modest return of risk sentiment ahead of the North American cross over despite pulling off best levels in recent trade. The upside in equities filtered through to fixed income markets with Bunds trading in the red and modestly above 167.50 ahead of auctions from France and Spain, with the periphery soft ahead of the latter auction (relatively well-received) , allied with the ongoing political uncertainty. Separately, the long end of the German curve underperforms after the upside seen yesterday.

Top European News

• ‘Panic’ Brexit Withdrawals Halt Four More U.K. Property Funds:
  Henderson, Columbia Threadneedle and Canada Life suspend funds. Aberdeen
  marks down value of U.K. property fund by 17%
• U.K. Industrial Output on Course for Positive Second Quarter: Production falls 0.5% in May, less than economists predicted. U.K. economy has yet to feel the impact of Brexit vote
• German Industrial Output Unexpectedly Drops in Sign of Slowdown: Production declined 1.3% in May vs. estimated 0.1% gain. U.K. decision to leave the EU could curb German growth
• Italy-EU Bank Talks Said Stuck Over Investor Burden Sharing: Government seeking to use precautionary recapitalizations. Italy could inject as much as 5 billion euros in Monte Paschi
• Marks & Spencer Sales Slump Worsens, Adding to CEO Challenge: General-merchandise sales decline is steepest in eight years. New CEO Rowe cut prices on about 1,000 items in the quarter

In FX, the yen strengthened 0.4 percent to 100.95 per dollar, taking its post-Brexit rally to more than 5 percent. Bank of Japan Governor Haruhiko Kuroda said in a speech to his bank’s branch managers Thursday that the country’s consumer-price index is likely to remain slightly negative for the time being. He also said he is monitoring risks and will add stimulus should it be required. The pound rose 0.5 percent, rising above $1.300 briefly, after touching $1.2798 a day earlier. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, fell for a second day, declining 0.2 percent following a 0.2 percent drop on Wednesday. Futures put the probability of the Fed raising interest rates by December at 12 percent, down from 50 percent at the time of the U.K.’s June 23 referendum. The Fed minutes “play into our core view that the Fed will now delay a further rate hike until December, at the earliest,” Kymberly Martin, a markets strategist in Wellington at Bank of New Zealand Ltd., said in an e-mail to clients. “The market is certainly pricing in ‘gradual’ rate hikes.” The MSCI Emerging Markets Currency Index advanced 0.4 percent, headed for its first increase in four days. South Korea’s won jumped 1 percent, and South Africa’s rand gained 0.4 percent. China’s yuan strengthened 0.16 percent, after sliding to the lowest level since November 2010 on Wednesday. New Zealand’s dollar strengthened 1.1 percent after central bank Deputy Governor Grant Spencer said further interest-rate cuts could pose a risk to financial stability

In commodities, oil extended gains as API data showed the nation’s crude stockpiles dropped by 6.7 million barrels last week, the biggest drop in years. The U.S. Energy Department will release its own inventory data at 4 p.m. New York time Thursday. West Texas Intermediate rose 1.1 percent to $47.96 a barrel and Brent gained 1.1 percent to $49.34. Gold rose 0.2 percent to $1,366.55 an ounce, extending gains from the highest closing price in three months. The price of bullion is 1.8 percent short of a two year high. Corn, which entered a bear market on Tuesday, rose for the first time in seven days. The price climbed 0.6 percent to $3.43 a bushel in Chicago.

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Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities have been granted some reprieve ahead of the US entrance to market as financial names recoup some of their recent losses
• The apparent modest return to risk has filtered through to FX markets with USD/JPY moving back above 101.00
• Looking ahead, highlights include US Challenger job cuts and ADP employment and DoE crude oil inventories
• Treasuries mostly lower in overnight trading while global equities, oil and gold higher; the pound rises to ~1.30 to the USD.
• U.K. property funds with about 18 billion pounds ($23.4 billion) of assets froze withdrawals as investors sought to dump real estate holdings in the aftermath of Britain’s vote to leave the European Union
• JPMorgan Chase CEO Jamie Dimon warned he may relocate “a few thousand” of his employees from the U.K. if the country’s divorce settlement with the European Union hurts banks
• U.K. business confidence sank to a 4 1/2-year low in the days after Britons voted to leave the European Union, adding to evidence that the decision is blighting growth
• Talks between Italy and the European Commission to recapitalize Banca Monte dei Paschi di Siena SpA and other banks are stuck on whether creditors should face losses if taxpayer funds are used
• China’s foreign-exchange reserves unexpectedly increased by $13 billion to $3.21 trillion in June as haven assets such as the Japanese yen appreciated amid the U.K.’s decision to leave the EU
• Brazil’s biggest banks have shrunk their derivatives positions by more than 1.3 trillion reais ($400 billion), backing off of bets that have hefty capital requirements as volatility increases and bad loans weaken their balance sheets
• The Federal Reserve is losing confidence in its need to tighten any time soon as officials face rising uncertainty about the outlook for growth at home and abroad
• German industrial production dropped 1.3% m/m in May, the most in 21 months, in a sign that the headwinds from a global economic slowdown and political uncertainty in Europe damped activity
• S&P Global Ratings cut the outlook on Australia’s AAA credit rating to negative from stable as it warned the prospect of fiscal-policy gridlock could thwart government attempts to rein in a budget deficit
• Global gold holdings topped 2,000 metric tons for the first time in three years as the Brexit fallout and speculation that U.S. interest rates won’t rise anytime soon sent investors hunting for a haven

DB’s Jim Reid concludes the overnight wrap

The tally of UK property funds suspending redemptions this week increased to 7 yesterday with Bloomberg suggesting that this covers more than £15bn of assets. The total size of the retail UK commercial property market is around £25bn according to the FT so more than 60% of it has been gated in 3 days this week. The news of the latest fund added to that list came late last night and it generated a few headlines as, alongside a 24 hour redemption freeze being put in place, the fund also announced that it will make a ‘dilution adjustment’ to the fund which lead to a 17% decline in the funds’ dealing price.

Property is an illiquid asset and this week shows what can happen to illiquid assets when the fundamentals/facts change. Given the illiquidity of many other financial markets these days due to post crisis regulations this is perhaps a glimpse of what the future might hold in the next recession for other assets. That’s a story for another day but it’s been another tricky 24 hours for UK property related assets, Sterling and European bank shares. Indeed despite holding in relatively well on Tuesday the FTSE 100 was down -1.25% yesterday which was only a slight outperformance relative to the performance of other European bourses. The Stoxx 600 was -1.67%, DAX -1.67% and FTSE MIB -2.26%. Lloyds, Aviva and RBS were all down over 6% to lead losses while Standard Life (-3.50%), L&G (-3.86%) and Prudential (-4.32%) all stood out too. Sterling (-0.70%) took its post-Brexit losses to nearly 14% and has held below 1.30 this morning (currently hovering around 1.2945). It’s worth highlighting that yesterday DB reaffirmed their longstanding $1.15 call for cable by year end (along with 0.90 versus the Euro) although they also highlight that these aggressive forecasts may even be still understating the level of weakness required in Sterling. Meanwhile the Euro Stoxx Banks index fell -2.38% and is now down over 6% alone this week and -24% versus pre-Brexit.

Yesterday also saw the release of the June FOMC minutes. With that meeting coming pre-Brexit it’s hard to take too much away from the text. Indeed the text suggested that officials were being prudent,  wanting to assess the consequences of the referendum for global financial conditions and the US economic outlook. The inflation outlook amongst officials appeared to be mixed with ‘most’ expecting to see ‘continued progress’ towards the target but others being ‘less confident’ due to ‘persistent disinflationary pressures’. One line which stuck out was the passage that ‘many participants commented that the level of the federal funds rate consistent with maintaining trend economic growth – the so called neutral rate – appeared to be lower currently or was likely to be lower in the longer run than they had estimated earlier’. The passage goes on to state that ‘many judged that it would likely remain low relative to historical standards, held down by factors such as slow productivity growth and demographic trends’.

As our US economists highlighted, ‘uncertainty’ appears to be the new buzzword for the Fed having been mentioned 8x compared to 2x in the April minutes. A full rate hike is now not priced in until February 2019 but as we highlighted on Monday there is a tendency for this to get under and over priced so complacency could be a factor again even if we continue to think the Fed will struggle to hike again this cycle.

The outcome of tomorrow’s payrolls report is the next big event (notwithstanding Brexit-related headlines). Ahead of this yesterday’s ISM nonmanufacturing (+3.6pts to 56.5 vs. 53.3 expected) surprised to the upside after coming in at the highest level since November last year. In terms of the details the new orders component surged an impressive 5.7pts to 59.9 and business activity was up to 59.5 from 55.1. There was much focus on the employment component too ahead of payrolls which after tumbling to 49.7 in May recovered to 52.7 in June. DB’s Joe Lavorgna noted yesterday that this component is the most useful portion of the data given that it is related to the trend in private payrolls while the employment component of the manufacturing ISM (which rose +1.2pts to 50.4) is also a leading indicator of the trend in goods-producing hiring. He warns though that while the recent gains in both series are a modest positive, the overall trend in private payroll growth is likely to deteriorate further. Joe points out that the three-month average of the blended-ISM employment series was 51.4 (when you weight them by share of respective sectors), which points to only a modest expansion in private-sector hiring. In fact a linear regression of the three-month average gain of private payrolls on their weighted-ISM employment component points to an average gain of just 97k in the former. As of May, the three-month trailing average of private payroll gains was 107k. Therefore their weighed ISM employment model implies a slightly lower private payroll print in June than their current 150k projection.

Unlike the price action in Europe, markets in the US actually recovered from the early lows to finish up on the day. The S&P 500 closed +0.54% with healthcare names leading the charge while in credit markets CDX IG was nearly 3bps tighter. 10y Treasuries finished little changed around 1.368% although did mark a new record low of 1.318% early on during the day.

As we refresh our screens this morning it’s been a relatively mixed start in the Asian session. Bourses in Japan and China are both lower with the Nikkei and Shanghai Comp -0.23% and -0.16% respectively. A slightly firmer Yen (+0.4%) weighing on the former. Meanwhile the Hang Seng (+0.84%), Kospi (+1.08%) and ASX (+0.37%) are all in positive territory. Newsflow wise Australia’s sovereign credit rating outlook was cut to negative from stable at S&P which initially sent the Aussie Dollar down half a percent, but its since bounced back to unchanged.

Wrapping up the rest of the data in the US, the latest trade balance reading for May revealed some further widening in the deficit to $41.4bn from $37.4bn in April reflecting an increase in imports during the month. Meanwhile the services PMI was revised up slightly in the final June revision to 51.4 (from 51.3) while the composite was left as is at 51.2 which represents an increase of 0.3pts from May. The Atlanta Fed downgraded their Q2 GDP forecast to 2.4% from 2.6% yesterday following that trade report.

In Europe the only data of note came from Germany where factory orders disappointed in May (0.0% mom vs. +1.0% expected). The YoY rate is a lowly -0.2% and our colleagues noted that this latest data will likely lead to a more disappointing German IP report today than what is expected by the market (DB -1.0% mom, market +0.1%). In terms of Central Bank action the Riksbank left the repo rate unchanged as expected at -0.5% however they also suggested that there will be a longer delay until the rate begins to be raised again, suggesting that this might not begin until the second half of 2017.

Staying in Europe and just wrapping up yesterday’s newsflow, there was some interest in the latest political polls in Italy where the support for the Five Star movement appears to be rising at the expense of Renzi’s PD party. Indeed an Ipsos poll revealed that support for 5SM is 30.6% compared with 29.8% for the PD. The FT noted that similar polls run in January had the PD party leading 5SM by nearly 6%. A poll run by Demos on July 1st had 5SM at 32.3% versus 30.2% for PD.