In an otherwise quiet overnight session, which among other things saw Germany sell 10Y Bunds with a zero coupon and a negative yield (-0.05%) for the first time ever (despite being uncovered with just €4.038BN sold below the €5.00BN target) anyone hoping for a confirmation that China will be able to prop up the world economy once more, was left disappointed when earlier this morning China reported June exports and imports that once again dropped substantially in dollar terms as soft demand at home and abroad continued to weigh on the world’s largest trading nation.

The details: exports in USD terms fell 4.8% from a year earlier, in line with expectations, while imports dropped 8.4%, worse than the -6.2% expected, resulting in a $48.11 billion trade surplus driven by economic contraction.

Needless to say, and as we will shortly show, the numbers are once again not to be trusted as a result of clear fabrication in HK “trade” data which continues to soar and remains China’s favorite way of smuggling out capital.

What was surprising is that Chinese trade continues to stagnate even as the yuan continued its not so stealth devaluation, posting a fifth straight drop last week, the longest losing streak this year, signaling policy makers are more tolerant of further weakening. With tepid global demand and businesses proving reluctant to invest, the government has been stepping up spending to keep its growth target of at least 6.5% this year in sight.

“It’s still very weak trade,” said Iris Pang, senior economist for Greater China at Natixis SA in Hong Kong. “I don’t think there will be a significant improvement and I expect heavier and speedier fiscal stimulus in the second half.”

“With little support from global demand, China will be constrained to retain an easing bias in domestic policy,” Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a note. “Yuan weakness has bolstered competitiveness and prevented a sharper slide in overseas sales. In the immediate future, though, the central bank may be forced to lean against excess depreciation pressure. The risk of Brexit aftershocks add to the gloom on the export outlook.”

It is bound to get worse: exports face downward pressure in the third quarter, a customs administration official said at a briefing in Beijing. Trade will remain sluggish, though may continue to stabilize in the second half, the official said, adding that exporters face increasing labor costs while other countries are competing with cheaper wages.

In short: more global bad news, which means more stimulus in some capacity, which means good news for stocks.

Indeed, China wasn’t the only bad news out there to prop up stocks: so did Japan, which continues its helicopter money jawboning, with constantly conflicting messages. A few hours after the Sankei reported that the Japanese government is “mulling” helicopter money, Japan’s Suga denied that the government was in fact considering this. However, by this morning the narrative had changed twice more and now we have “stores” that the BOJ should consider more easing in the form of QE according to an Abe advisor, while Bloomberg reported that Japan will consider JPY10 trillion in fiscal stimulus. lower than the JPY 30 trillion originally reported.

Said otherwise, trial balloon after trial balloon to gauge the market reaction.

Elsewhere, it was more of the same, with stocks everywhere now having rebounded from their pre-Brexit levels (in addition to the US trading at all time highs of course) on more central bank easing expectations:

“Risk assets are rallying, driven by renewed hopes of monetary and fiscal stimulus,” said James Woods, a strategist at Rivkin Securities in Sydney. “The rally looks sustainable, especially if the BOE cuts rates this Thursday. Abe will definitely add some kind of fiscal stimulus to boost the Japanese economy.”

As Bloomberg puts it, wherever you look in global financial markets, signs are emerging that the fallout from Britain’s vote to leave the European Union is under control. Global stocks are rising for a fifth day, having recovered almost $4 trillion in value lost in the days following the U.K.’s June 23 referendum, and emerging-market valuations are near their highest in more than a year. Copper is rising, boosted by signs policy makers are prepared to act to limit the fallout, while acquisitions have resumed and corporate bond sales are showing signs of picking up. The yen and government bonds, while climbing on Wednesday, have given back much of the gains they made since the Brexit vote.

“Calm is returning to global markets on speculation central bank action will be sufficient to restrict any Brexit contagion. Economists predict the Bank of England will cut interest rates Thursday, while Japanese Prime Minister Shinzo Abe has ordered more fiscal stimulus. Traders are pricing in less than 35 percent odds of the Federal Reserve raising rates this year, even though Fed Bank of St. Louis President James Bullard says he expects near-zero impact on the U.S. The mark on the U.K. is more enduring, with sterling about 11 percent weaker versus the dollar since the vote.”

Some remain surprised by how aggressive and pervasive central bank intervention has been: 36 South Capital Advisors, a London-based volatility hedge fund, was surprised at how rapidly markets settled, according to Chief Investment Officer Richard Haworth. “This is the strangest environment I’ve seen in 30 years,” Haworth said. “I had a sneaking suspicion that Brexit could have been the butterfly’s wing that created a hurricane down the line. But maybe, maybe not.”

As a result of the above, “markets” have been more of the same, with Asia and Europe both higher, and US equity futures modestly in the green: The MSCI All-Country World Index rose 0.2 percent at 10:38 a.m. London time, leaving them 0.4 percent stronger than the close on the day before the results of Britain’s referendum were released.  The Stoxx Europe 600 Index added 0.3 percent, rising for a fifth day in the longest winning streak since the Brexit vote. The gauge is within 10 points of erasing its losses after the June 23 referendum. S&P 500 futures were up 0.1%, after the benchmark ended the last session at a record high. The VIX has been cut in half halved since June 24, when the shock Brexit vote caused the wildest swings since August 2011. A similar gauge of European stock volatility fell on Tuesday to the lowest level since May.

Treasuries rose, sending the yield on notes due in a decade two basis points lower to 1.49 percent. The rate, which sank to an unprecedented 1.32 percent a week ago, surged 15 basis points over the past two sessions as demand at auctions of three- and 10-year weakened to levels last seen in 2009.  Deutsche Bahn AG this week became the first non-financial company to sell negative-yielding bonds in euros. The German state-owned railroad sold 350 million euros of five-year debt to yield minus 0.006 percent on Tuesday, according to data compiled by Bloomberg. Deutsche Bahn AG this week became the first non-financial company to sell negative-yielding bonds in euros. The German state-owned railroad sold 350 million euros of five-year debt to yield minus 0.006 percent on Tuesday, according to data compiled by Bloomberg.

All of this will end in tears according to Jeff Gundlach, who during a webcast yesterday said that “there’s something of a mass psychosis going on related to the so-called starvation for yield. Call me old-fashioned, but I don’t like investments where if you’re right you don’t make any money.”

Market Summary

• S&P 500 futures up 0.1% to 2148
• Stoxx 600 up 0.1% to 337
• FTSE 100 down less than 0.1% to 6675
• DAX down 0.2% to 9943
• German 10Yr yield up 5bps to -0.04%
• Italian 10Yr yield down less than 1bp to 1.22%
• Spanish 10Yr yield down 2bps to 1.16%
• S&P GSCI Index down 0.6% to 363.3
• MSCI Asia Pacific up 0.9% to 133
• Nikkei 225 up 0.8% to 16231
• Hang Seng up 0.5% to 21322
• Shanghai Composite up 0.4% to 3061
• S&P/ASX 200 up 0.7% to 5389
• US 10-yr yield down 3bps to 1.48%
• Dollar Index up 0.08% to 96.52
• WTI Crude futures down 1.5% to $46.10
• Brent Futures down 1.8% to $47.60
• Gold spot up 0.6% to $1,341
• Silver spot up 0.9% to $20.37

Top Global News

• Disney Gets $267 Million From City to Build $450-a-Night Hotel: Park operator currently has 3 hotels in Anaheim, California
• Fiat Chrysler Offers $1,500 to Find Vehicles’ Cyber Soft Spots: Program with Bugcrowd pays rewards to good-guy hackers
• Canada Vitamin Maker Jamieson Labs Said to Scrap $1 Billion Sale: Sale had attracted interest from By-health, Shanghai Pharma
• Musk Energy Plan Delivers Slow Payoff in Tesla, SolarCity Merger: Pairing solar and storage the key to $2.86b Tesla bid
• IEA Sees Record Middle East Oil Supply While U.S. Output Slumps: Record inventories remain ‘threat to stability’ of prices
• Exxon Said to Top Oil Search’s Bid for InterOil: Reuters: Offer comprises Exxon stk, contingent value right
• McDonald’s Said Struggling to Get Strong Bidders for China: FT: Co. has had to turn down “a lot” of the unqualified bidders

* * *

Looking at regional markets, we start in Asia, where overnight we saw a somewhat muted affair in terms of newsflow, however equities extended on advances following on from record high closes in the Dow Jones and S&P 500. Nikkei 225 (+0.8%) pulled off best levels in the wake of comments from Japan’s Suga refuting press reports that the Japanese government is considering helicopter money.ASX 200 (+0.7%) was buoyed by the gains in energy names amid the 4.5% seen in WTI Crude futures yesterday. Hang Seng (+0.5%) and Shanghai Comp (+0.4%) traded modestly in the green with participants awaiting the delayed Chinese trade balance data. 10yr JGBs trade are a touch softer amid the heightened risk appetite seen across Japanese stocks. BoJ should conduct further easing this month by purchasing more bonds, not by reducing negative rates, according to PM Abe Adviser. Sources suggest Japan is said to consider JPY 10trl in its fiscal stimulus measures. Japan’s Chief Cabinet Secretary Suga refuted earlier press reports that the Japanese government is considering helicopter money.  China Premier Li stated that China can achieve 6.5% GDP growth target this for 2016, adding that growth was sound in Q2.

Top Asian News

• Japan Cuts GDP, CPI Forecasts For This Year: Real GDP to grow 1.2% in FY2017
• Yen Rallies, Halting 2-Day Drop, on Suga Helicopter Money Denial: Currency rises against 15 of its 16 major counterparts
• Offshore Yuan Rises as Borrowing Costs Surge Amid Reduced Supply: PBOC may be defending level of 6.7 against dollar, OCBC says
• Top Rupee Forecaster Sees Record Low by Yearend on Brexit Clouds: Currency will drop to 69.50 per dollar, Kotak Mahindra says
• Malaysia Unexpectedly Cuts Rate to Shield Growth as Risks Mount: Central bank lowers overnight policy rate by 25bps to 3%
• Ex-BSI Asia CEO Sues Bank Over Bonus Amid Prosecutors’ Scrutiny: Brunner says bank has no legal basis to freeze deferred bonus
• U.S. Presses China to Be Responsible Power After Sea Ruling: American military will keep up operations in region

In Europe, equities have traded in a choppy fashion after gapping down at the open. Currently the major European bourses are trading in the red, with the worst performer being the FTSE MIB, with financials the 2nd worst performer across Europe. Another sector to take a hit this morning is UK housing as Barratt Developments made some downbeat comments following the release of their quarterly results this morning. In fixed income markets prices pushed higher as risk seems to be pulling off after a few days worth of equity gains. This came in spite of a raft of supply from Germany, Italy and Portugal which typically can actually weigh on prices. In terms of how the auctions went, the Bund auction was the focus for European participants after the Buba issuing the bond with a negative yield for the first time and drawing a soft b/c of 1.2.

Top European News

• Steinhoff Agrees to Buy U.K.’s Poundland for $794 Million: Offer follows 2 failed attempts to buy retailers this year
• Airbus A380 Cut May Mark Beginning of End for Superjumbo: Co. will slash deliveries to just 12 a year from 2018
• Burberry Sales Beat Estimates on Recent Boost in U.K. Demand: Fashion label also lowers outlook for wholesale revenues
• ICAP’s Sales From Electronic Markets Drop Despite Brexit Spike: EBS average daily volume declines 15% to $83b
• Theresa May’s First Job as U.K. Leader Is Naming Brexit Czar: Specialist negotiators already being hired to handle talks
• Norway’s Largest Bank Beats Retreat From Oil as Losses Mount: DNB to increase focus on retail customers, small businesses

In FX, the yen strengthened 0.1 percent to 104.60 per dollar, after sliding more than 4 percent over the last two days. Abe has ordered his economy minister to compile stimulus measures this month, while the Sankei newspaper reported government officials are considering “helicopter money” as a policy option. Chief Cabinet Secretary Yoshihide Suga said such a policy, which involves the central bank directly financing government spending, was not being looked at. The pound rose 0.2 percent to $1.3270, headed for its longest winning streak in two months, before Theresa May takes over as prime minister later Wednesday, ending a period of political instability that has lasted since the EU vote. The result of the referendum pushed sterling to its worst day on record and sent the pound to the lowest level since 1985 last week, before it recovered some of that ground as it became clear a new leader would take power earlier than previously thought. The yuan was little changed at 6.6959 per dollar in offshore trading amid speculation China’s central bank is limiting the supply of the currency in Hong Kong to deter bets on depreciation, as it did in January to halt the yuan’s slide to a five-year low. The currency’s overnight interbank rate in Hong Kong more than doubled to 4.83 percent, the highest since February. “It feels like the People’s Bank of China is quite serious about defending the 6.7 level,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. “This reminds me of what happened in January.”

In Commodities, crude oil fell 1.3% to $46.20 a barrel, after jumping 4.6% on Tuesday, when API showed the nation’s stockpiles increased by 2.2 million barrels last week. Government figures on Wednesday are forecast to show supplies slid.  Copper climbed 1.5 percent in London, building on a 3.9 percent advance over the last three trading days, on speculation central-bank stimulus measures will buoy demand for materials. Iron ore rose to the highest level since April on the Dalian Commodity Exchange as steel rebar traded near a 10-week high in Shanghai. Nickel fell 1.7 percent, retreating from an eight-month high. Cotton jumped as much as 5 percent to a two-year high in China after the U.S. Department of Agriculture cut its projections for world output and stockpiles by more than analysts forecast.

Bulletin Headline Summary

• European equities enter the North American crossover relatively mixed as participants taking a breather from recent gains and Chinese trade data failing to instigate price action
• The latest source reports suggest Japan are looking at a JPY 10trl fiscal package while PM Abe Adviser Hamada has put pressure on the BoJ to purchase more bonds
• Looking ahead highlights include BoC Rate Decision and DOE U.S. Crude Oil Inventories

• Treasuries higher in overnight trading along with global equities, which have erased Brexit losses due to hopes of yet more central bank largess; auctions conclude with $12b 30Y bonds, WI 2.20%, last sold at 2.475% in June, lowest 30Y auction stop since record low 2.43% in Jan. 2015.
• After weeks of political turmoil, a semblance of stability is returning to U.K. politics, and the pound is headed for its longest winning streak in two months before Theresa May takes over as prime minister
• Japan’s cabinet office cut its forecasts for growth and inflation as Prime Minister Abe orders his ministers to compile a fiscal spending package that one adviser said should be as large as 20 trillion yen ($192 billion)
• Japan’s biggest bank, Bank of Tokyo-Mitsubishi UFJ Ltd., is quitting its role as one of the 22 primary dealers that underwrite auctions of the nation’s bonds, the first financial institution to withdraw since the central bank’s introduction of negative interest rates
• Longer-maturity debt from Mexico to Russia has become one of the most popular post-Brexit trades on bets a split European Union will cause global growth to stagnate and thwart central-bank rate increases. It’s also leaving investors more vulnerable than ever before
• “There’s something of a mass psychosis going on related to the so-called starvation for yield,” Jeffrey Gundlach, CEO of DoubleLine Capital, said Tuesday. “I don’t like investments where if you’re right you don’t make any money”; Germany sold EU4.78b 10Y bunds at a negative yield for the first time
• Spanish banks surged after an aide to the EU’s top court said they may avoid having to refund billions of euros to customers who paid too much interest on home loans before a 2013 ruling on so-called mortgage floors
• Crude oil will rise to a range of $50 to $60 a barrel until at least 2018 as demand increases and markets absorb an oversupply that’s led to lower prices over the last two years, according to the acting oil minister of OPEC member Kuwait
• Oil fell after the biggest gain in three months as U.S. industry data showed the nation’s crude stockpiles increased, adding to concerns about oversupply

DB’s Jim Reid concludes the overnight wrap

It’s been another decent 24 hours for markets as the concoction of abating Brexit concerns, elevated central bank stimulus expectations and Friday’s reassuring payrolls number proves to be a winning formula for now. Throw in some supportive comments yesterday from German Chancellor Merkel about the Italian banking sector and it was another day of positive price action for risk assets. We’ll touch on those comments shortly, but in terms of the moves in Europe the Stoxx 600 (+1.06%) marked the fourth consecutive session that it has finished the day with at least a 1% gain. The DAX (+1.33%) was also stronger while the FTSE MIB (+2.83%) rallied with some big gains for Italian Banks. Indeed the Euro Stoxx Banks index rallied +5.38% for its biggest one-day gain since April as Italian Banks finished anywhere from 6-13% higher. It was a similar story in credit with iTraxx senior and sub financials indices tightening 8bps and 20bps respectively on the day. The positive sentiment continued on Wall Street where a number of milestones were made. The S&P 500 (+0.70%) and Dow (+0.66%) both made new all-time highs while the Nasdaq (+0.69%) moved back into positive territory for the year. All of these moves came in the face of a big rebound for Oil (+4.56%), a softer USD for the most part and Treasury and Bund yields finishing up 7-8bps. The one outlier to yesterday was the FTSE 100 (-0.03%) which ended little changed although that largely came about due to the near 2% rally for the Pound.

So with global equities largely either passing or approaching pre-Brexit levels again we thought it would be a good time to take stock and update our performance review charts to look at total return performance for various asset classes in the period from the 23rd June (referendum day) to closing levels last night. As our charts show in the PDF, the clear winner in the wake of the vote has been Silver (+17%) which has notably outperformed Gold (+6%) with the bulk of that move coming in the first week post the vote. If we look at equity market performance, interestingly it’s EM equities which have outperformed, notwithstanding some volatility. The Shanghai Comp (+7% local, +5% USD terms), Bovespa (+5% and +7%) and MSCI EM index (+3% and +3%) all sit near the top of our leaderboard. The S&P 500 (+2%) has also turned around while unsurprisingly its European equities which occupy the lower places. The Stoxx 600 (-3% and -6%) has not quite got back to pre-referendum levels while the resurgence of fears over Italian banks has the FTSE MIB (-7% and -10%) and Stoxx 600 Banks (-14% and -16%) hovering near the bottom.

Looking at the performance of UK assets, with Sterling -11% since the vote, the FTSE 100 (+5%) is actually one of our top performers in local currency terms, however this translates to a -6% return in USD terms. It’s a similar story for Gilts (+6% and -6%) too. Meanwhile the notable theme to come from credit markets is the outperformance of US versus EUR. Indeed US indices are up 1-3% during the time with IG Non-Fin and HY sitting atop, while EUR indices sit anywhere from 0-2%. Again however, this translates into losses of 1-3% in USD terms and those returns largely reflect what we’ve seen for European government bond markets. If we look at where current CDS indices are, iTraxx Main is roughly 4bps tighter and iTraxx Crossover is more or less back to where it started. The iTraxx Senior Fins index is still 3bps wider although it has pared a move wider of as much as 43bps at one stage. Finally CDX IG is now 5bps tighter. As mentioned above, the graphs are in the PDF today.

Changing tack now and switching over to the latest in Asia this morning, we find that bourses are continuing their strong performance this week. The Nikkei (+1.00%) and Topix (+1.32%) are again leading the way as investors continue to weigh the expectation of more BoJ stimulus, although the Yen has strengthened some 0.3% or so this morning after weakening over 4% in the past two sessions. Elsewhere the Hang Seng (+0.41%), Shanghai Comp (+0.35%), Kospi (+0.38%) and ASX (+0.42%) are also higher this morning. Markets are also eagerly awaiting the June trade data in China this morning which is expected to come out shortly after this hits your emails.

Moving on and touching on those Merkel comments we highlighted at the top. According to the German Chancellor ‘intensive talks’ are in progress between the Italian government and the European Commission over some sort of solution to Italy’s banking woes. Merkel also said that ‘I am very convinced that the questions that need to be decided there will be resolved in a good way’ and that ‘I don’t see any crisis-like development overall’. Italy Finance Minister Pier Carlo Padoan added that ‘the government is now engaged in finding precautionary solutions to support any eventual case of needed intervention’. Those upbeat comments contributed to a good day for Italian bank stocks with news of some successful stake sales at Unicredit also helping fuel sentiment.

That July 29th EU stress test results date continues to be a self-imposed deadline of sorts for Italy but expect headlines to rumble on in the mean time. An important event due to come before that though is the BoE policy meeting tomorrow where the overall majority of economists are calling for a 25bp cut. One story gaining some traction on this though is the chatter of possible corporate bond buying by the BoE. Indeed the FT ran a story yesterday suggesting that expectations of such a move is on the rise, amid other possible policy options. It’s hard to argue against the ECB CSPP being anything but a success thus far (performance wise) so such a consideration is inevitable, notwithstanding what would be an obviously smaller eligible universe to choose from. Stay tuned for more on this.

On this theme, both Bloomberg and Reuters reported yesterday that Deutsche Bahn has become the first non-financial company to issue debt with a negative yield. The railway operator sold €350m of five-year bonds with a zero coupon which were priced to yield -0.006% according to Bloomberg. Given Deutsche Bahn is 100% state-owned we’d hesitate to go as far as saying that this marks the first such time a true corporate has issued negative yielding bonds in Euros, but it’s a phenomenal statistic nonetheless and shows the power of ECB bond buying at government and corporate level.

Sticking with the central bank theme, over at the Fed yesterday we heard comments from a couple of officials. The first was St Louis Fed President Bullard who has clearly become one of the more dovish members of the committee. Bullard reiterated his view that the US economy is likely stuck in a low growth environment for the next two to three years and the ‘policy rate would likely remain essentially flat over the forecast horizon’. Bullard also said that he sees the impact of Brexit on the US economy as ‘close to zero’. Meanwhile, speaking late last night the Minneapolis Fed President Kashkari (also fairly dovish) said that ‘there’s not a huge urgency to raise rates because inflation is coming up low’.

Away from this there was a bit of economic data to sift through yesterday. Across the pond the NFIB small business optimism survey rose 0.7pts to 94.5 (vs. 93.9 expected) which is the best reading since December last year. The JOLTS report for May revealed a near 300k decline in job openings during the month to 5.5m (vs. 5.65m expected). Remember that this was the month that payrolls plummeted to 11k (after Friday’s revision) so it’s not entirely surprising. We highlight that the quits rate held steady at 2%. Meanwhile wholesale inventories rose a little less than expected in May (+0.1% mom vs. +0.2% expected) with trade sales (+0.5% mom) printing in-line. The Atlanta Fed revised down their Q2 GDP forecast by one-tenth to 2.3% on account of that data. Data-wise in Europe there was little to report with the only data being the final German CPI revisions where there was no change to the +0.1% mom.

Looking at the day ahead, this morning in Europe we’ve got final June CPI revisions in France, Italy and Spain. Also due out is the Euro area industrial production report where market expectation is for a -0.8% mom print. The UK is also set to release its credit conditions and bank liabilities surveys at 9.30am BST. Over in the US this afternoon we’ll get the import price index reading for June followed by the monthly budget statement and Fed’s beige book this evening. Fedspeak wise we’ve got Harker (11pm BST) due to speak this evening.