Following last Friday’s shocking weak US GDP print, Asian stocks jumped to an 11 month high on reduced prospects of a near-term rate hike, while the region also digested mostly encouraging in conflicting Chinese PMI data. European bank stocks initially rose following the release of the 2016 stress test then declined, tempering gains in global equity indexes, amid investor skepticism over the usefulness of stress-test results and weaker oil prices. Shares and currencies in emerging markets rallied to the highest in about a year, while miners and industrial metals jumped.

Declines in European banks put a dent in global equities, which rallied in July to their best month since March on prospects central banks will add to stimulus or refrain from reducing it. Traders peeled back bets on a U.S. rate hike this year after data Friday showed annualized gross domestic product rose 1.2 percent last quarter, less than half the 2.5 percent projected by economists. The Bank of Japan added to its easing last week and economists forecast policy makers in Australia and England will cut their benchmark interest rates from record lows this week.

As Bloomberg reports, lenders in peripheral nations weighed heaviest on an index of lenders, which sank as much as 1.9 percent after opening higher. The MSCI Emerging Markets Index jumped to the highest since last August and the equivalent currency index to the highest since July 2015, with Malaysia’s ringgit and South Korea’s won gaining the most. Zinc headed for the highest close in a year. The pound weakened against all of its 16 major counterparts.

Best summarizing trader mood as we start off another week, and month, was Saxo’s Peter Garnry who told Bloomberg that “Investors are skeptical about everything these days. The problem with the stress tests is that they were too soft, only assuming a mild to moderate recession. This means that the data doesn’t tell us much, and it’s not too surprising that most banks passed.”

The Stoxx Europe 600 Index fell 0.4% as of 11:33 a.m. in London, erasing earlier gains of as much as 0.6 percent. European equities had their biggest monthly advance since October last month, with lenders jumping the most in more than a year. Yet July was marked by record outflows from European stock funds and thin volume, indicating a lack of conviction in the rally. Spain’s Banco Santander SA fell 2.9%, Banco Bilbao Vizcaya Argentaria SA lost 4%, and UniCredit SpA sank more than 7%. Banks had initially risen at the open after stress tests showed most of them would keep an adequate level of capital in a crisis. BHP Billiton Ltd. and Rio Tinto Group led miners to the biggest gain of the 19 industry groups on the Stoxx 600 as commodity prices advanced.

Futures on the S&P 500 were little changed after the benchmark index capped its longest streak of monthly gains since 2014. The MSCI Emerging Markets Index jumped 1.2 percent, the most in three weeks on a closing basis. Equity benchmarks in Taiwan, Turkey and the Philippines advance more than 1 percent while Indonesian stocks rallied 2.8 percent, rebounding from the steepest drop in five months on Friday. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong climbed 1.9 percent, the most since July 11. A private manufacturing index unexpectedly rose to the highest since February 2015, while the reading on the official government’s gauge slipped.

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WTI continued to disconnect from overall risk, falling back toward $41, extending its biggest monthly decline in year as U.S. producers increased drilling, crude and fuel stockpiles remained bloated. Brent near $43. “The hope for a clear rebalancing may have to wait a couple more months, since oil’s drain is clogged in the meantime,” Barclays says in report. “Demand growth remains lackluster and has not made significant inroads into the inventory overhang.”

“There is a clear downward momentum to the market at the moment,” says Michael McCarthy, a chief strategist at CMC Markets in Sydney. “There are concerns about the oversupply situation continuing.  Clearly $40 a barrel is a key point for West Texas and I’d expect to see support there given the bounces we’ve seen previously at that level.”

Drillers boosted active rigs for 5th week, longest run of gains since August. Hedge funds expanded WTI short positions in futures, options combined, by most in data back to 2006

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The 10-year Treasury note yield climbed three basis points to 1.48 percent, Bloomberg Bond Trader data show. Fed Bank of New York President William Dudley said investors are underestimating how many times policy makers in the world’s largest economy will raise interest rates. “The movement in investor expectations towards a flatter path for U.S. short-term interest rates seems broadly appropriate,” Dudley said in remarks prepared for a speech Monday at a conference in Bali. However, “it is premature to rule out further monetary policy tightening this year,” he said. The yield on Japan’s 10-year bonds climbed five basis points to minus 0.145 percent, after jumping eight basis points at the end of last week.

This morning’s top news stories include: Dudley Says He Won’t Rule Out More Fed Tightening This Year; Carney Nears Rate Cut After BOE Detour on Road to Stimulus; Steady Euro-Area Factory Output Masks Worries in Periphery; Uber China to Merge With Didi to Create $35 Billion Company; China Factory Gauges Splinter for July, While Services Advance.

Market Snapshot

• S&P 500 futures up 0.2% to 2173
• Stoxx 600 down 0.1% to 342
• FTSE 100 up 0.1% to 6734
• DAX up 0.5% to 10392
• German 10Yr yield up 1bp to -0.11%
• Italian 10Yr yield up less than 1bp to 1.17%
• Spanish 10Yr yield up less than 1bp to 1.03%
• S&P GSCI Index down 0.6% to 337.5
• MSCI Asia Pacific up 0.8% to 138
• US 10-yr yield up 2bps to 1.48%
• Dollar Index up 0.17% to 95.7
• WTI Crude futures down 1% to $41.18
• Brent Futures down 1% to $43.09
• Gold spot down 0.1% to $1,349
• Silver spot up 0.9% to $20.51

Global Headline News

• Apple Stock Drop Fails to Deter Magellan From Technology Spree
• Didi Chuxing to Buy Uber China; Uber China Said to Merge With Didi to Create $35 Billion Company
• China Factory Gauges Splinter for July, While Services Advance
• Carney Nears Rate Cut After BOE Detour on Road to Stimulus
• Dudley Says He Won’t Rule Out More Fed Tightening This Year
• Steady Euro-Area Factory Output Masks Worries in Periphery
• Global Earnings Tumble as Companies Dig Deeper for Cost Savings
• Backlash Grows Over Trump’s Comments on Dead Muslim Soldier’s Parents

Looking at regional markets, Asia began the month mostly positive as weak Q2 US GDP figures further reduced prospects of a near-term rate hike, while the region also digested mostly encouraging Chinese PMI data. Nikkei 225 (+0.4%) shrugged off losses of over 1% as JPY pared some of the strength seen from the post-BoJ and US GDP disappointment. ASX 200 (+0.5%) ascended past 5,600 to print fresh YTD highs, as the commodities complex led the advances. Chinese markets were mixed which reflected the divergence in PMI numbers with Hang Seng (+1.1%) outperforming after Chinese Caixin Manufacturing PMI printed its first expansion in 17 months and Non-Manufacturing printed a 7-month high, while Shanghai Comp (-1.4%) failed to take heed as Official Manufacturing PMI, which reflects larger companies including SOEs, recorded its first contraction in 5 months.

Key Asian Data:

• Chinese Official Manufacturing PMI (Jul) M/M 49.9 vs. Exp. 50.0 (Prey. 50.0); 1st contraction in 5 months. – Non-Manufacturing PMI (Jul) 53.9 (Prey. 53.7); 7-month high. (Newswires)
• Chinese Caixin Manufacturing PMI (Jul) 50.6 vs. Exp. 48.8 (Prey. 48.6); 1st expansion in 17 months. (Newswires)
• Japan July Nikkei PMI Mfg 49.3 no est. (prior 49.0)
• Taiwan July Nikkei PMI Mfg 51.0 no est. (prior 50.5)
• Indonesia July Nikkei PMI Mfg 48.4 no est. (prior 51.9)
• India July Nikkei PMI Mfg 51.8 no est. (prior 51.7)
• Thailand July CPI y/y 0.10% est. 0.50%
• Indonesia July CPI y/y 3.21% est. 3.37%

Top Asian News

• Didi Chuxing to Buy Uber China

• Fosun Plans Asset Sales in Reversal of $15 Billion M&A Spree
• MUFG Profit Falls More Than Expected as Negative Rates Bite
• China Said to Mull Mergers to Create Two State Steel Giants
• BOJ Confusion on Nomura Floor Shows Conundrum for Stock Traders
• Sakakibara Says Yen Will Slowly Appreciate to 100 per Dollar
• Japan Tobacco Net Forecast, Undermined by Yen, Misses Estimates
• Macau July Gaming Beats Estimates as Resorts Draw Tourists
• Japan Pension Whale’s $52 Billion Loss Tied to Passive Ways
• India IPO Returns Beat U.S. as Funds Chase High-Growth Companies
• Hong Kong Move to Bar Pro-Independence Candidates Jolts Election

European equities initially kick off the week on the front foot underpinned by the results of the EU stress test in which bank are seen to be at a better position and more resilient. The biggest gainer of the morning has been Monte Paschi (+5.8%) whereby the banks board agreed to unload NPLs and raise EUR 5bIn worth of capital. However, since the open, European bourses have pared their opening gains (Eurostoxx flat) with sentiment by the plethora of soft Mfg. PMI figures. While from an equity perspective UniCredit (-6%) has seen an 8% turnaround, with attention being given to comments from Credit Suisse stating that the Italian bank needs recapitalisation of EUR 4-9bIn while their CETI ratio had only just reached the 7% benchmark. In credit markets, the initial upside in equities saw fixed income assets gap lower with Bunds firmly below 168.00, however Italian credit has outperformed this morning in the wake of reports that 11th hour rescue deal for Monte Paschi staved off the immediate prospect of a government bailout.

European PMI Data:

• Euro-zone Final Manufacturing PMI Revised to 52.0 vs Preliminary 51.9
• Germany Final Manufacturing PMI Revised to 53.8 vs 53.7
• France Final Manufacturing PMI Unrevised at 48.6
• Netherlands Manufacturing PMI Rises to 53.2 vs 52.0
• Spain Manufacturing PMI Drops to 51.0 vs 52.2
• Italy Manufacturing PMI Drops to 51.2 vs 53.5
• UK Manufacturing PMI Drops to 48.2 vs 49.1

Top European News

• European Stocks Advance as Banks Rise After Stress-Test Results
• Lufthansa Extends Pilot Union Negotiations Deadline Until Aug. 5
• Vodafone Uses Voiceless Africa Plans to Get Tech-Savvy Youth
• U.K. Business Lending Forecast to Shrink Until 2019, EY Says
• Air Liquide Engineering Drop Leads to First-Half Profit Miss

In FX, sterling fell 0.5 percent to $1.3170 as a report showed U.K. manufacturing shrank more than initially forecast in July. The pound has fallen more than 11 percent against the dollar since Britain voted on June 23 to leave the European Union and posted its third consecutive monthly drop against the greenback last month. Hedge funds and other large speculators are the most bearish on the pound in almost 25 years amid speculation the Bank of England will cut interest rates for the first time in more than seven years this week. The yen retreated 0.2 percent to 102.28 per dollar after soaring 4 percent last week. BOJ Governor Haruhiko Kuroda’s decision to aim low at last week’s meeting raises the stakes for Prime Minister Shinzo Abe to deliver on a pledge for “bold” fiscal stimulus on Tuesday, when the government is due to announce details of a more than 28 trillion yen spending package. Former Japanese vice finance minister Eisuke Sakakibara said in an interview with Bloomberg Television that Abe’s fiscal stimulus package is unlikely to halt the rally that is taking the yen toward 100 per dollar. The won increased 1.1 percent, touching its strongest level since June 2015, while the ringgit gained 1.2 percent, after weakening 1 percent last month.

In commodities, Crude oil retreated 1.1 percent to $41.15 a barrel in New York, after slumping 14 percent in July. U.S. producers increased drilling for a fifth week amid a glut of crude and fuel supplies that are at the highest seasonal level in at least two decades. Most metals advanced, with nickel rising 1.2 percent and zinc climbing 1.3 percent on the London Metal Exchange after China’s official factory gauge unexpectedly fell below the dividing line between improvement and deterioration, leaving room for stimulus. China is considering a sweeping overhaul of its steel industry that would consolidate major steel producers into two giants, with one located in the north and the other in the south, according to people familiar with the plan. Iron ore futures on the Dalian Commodity Exchange climbed to a three-month high after gaining 7.6 percent last week.

On today’s calendar, the early focus is on the final revisions to the July manufacturing PMI’s, which came in mostly in line if a little weaker than expected for peripheral nations. The UK number post Brexit will also be closely watched given the dive in the flash number: it showed an even steeper decline into contraction and pushed sterling the session lows. We’ll also get the manufacturing PMI in the US which is then closely followed by the ISM manufacturing for July, along with construction spending data.

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Bulletin Headline Summary from RanSquawk and Bloomberg

• European
  equities enter the North American crossover higher (albeit off best
  levels) in the wake of the latest ECB Stress test results and upbeat
  data from China
• ECB stress test results showed an
  improvement in the resilience of banks although the likes of Barclays,
  RBS and Banca Monte dei Paschi di Siena’s fared poorly
• Looking ahead, highlights include US Manufacturing PMI, ISM Manufacturing and US Construction Spending
• Treasuries lower in overnight trading, global equities mixed as emerging markets rally on reduced forecasts for Fed rate hikes.
• Federal Reserve Bank of Dallas President Robert Kaplan said a rate increase at the next policy meeting in September is still possible even after a report last week showed second- quarter growth was a sluggish 1.2%
• Investors are underestimating how many times the U.S. central bank will raise interest rates this year and next, but they are probably right about the pace being slower than previously thought, said Federal Reserve’s William Dudley
• The key takeaway from the 2016 EU bank stress tests will be the message that regulators are relatively comfortable with bank solvency
• European bank stocks declined, tempering gains in global equity indexes, amid investor skepticism over the usefulness of stress-test results and weaker oil prices
• Corporate earnings are heading for a fifth straight quarter of declines, dragged down mostly by energy companies’ struggles with low oil prices and a tepid global economy that threatens to throttle sales growth in many industries
• After shocking traders by leaving the key rate on hold last month, BOE Governor Mark Carney and the Monetary Policy Committee signaled that loosening would probably come this month
• U.K. manufacturing shrank more than initially forecast in July, suffering its biggest drop in more than three years. A Purchasing Managers’ Index slumped to 48.2, below the one- off flash reading of 49.1, Markit Economics said Monday in London
• A rule to prevent a run on the money-market industry will take effect this October and force funds to abandon a fixed $1-a-share price and float their NAV, causing a big shift into money-market funds that buy only government debt
• Friday was a big day for Japan’s $1.3 trillion Government Pension Investment Fund which posted its worst annual loss since the financial crisis and disclosed individual equity holdings for the first time
• Saudi Aramco lowered the pricing terms for Arab Light crude sold to Asia by the most in 10 months, signaling Saudi Arabia has no plans to back down while OPEC rival Iran tries to regain market share amid a global oversupply
• Money managers increased bets on falling crude by the most ever as stockpiles climbed to the highest seasonal levels in at least two decades, nudging prices toward a bear market

DB’s Jim Reid concludes the overnight wrap

Although the dog days of summer are upon us, if you’d gone on holidays at 5pm Friday night only to return a week later you would have missed the results of the Euro bank stress tests, the announced proposed recap of Monte Paschi, this week’s PMIs (including the most up to date post Brexit sentiment gauge of business confidence in the UK), confirmation of the latest Japanese fiscal package tomorrow, a likely first interest rate cut in the UK since March 2009 on Thursday (and to the lowest in the bank’s 322 year history), and last but not least a crucial (ok we always seem to say that) US payroll report on Friday which after two volatile months will give us a better guide to the trend. You may even miss the opening ceremony of the Olympics in Rio if you’re delayed on your return. I can’t believe it’s 4 years since the London Olympics enthralled us here. Then again I can’t believe it was 50 years ago this past weekend that England won their only football World Cup. I wonder if it will ever happen in my lifetime? Please don’t answer!!

I’m also not sure it feels like nearly 2 years since we saw the last European bank stress tests. The results of the latest EBA tests were out late Friday night and showed only one bank out of the 51 covered with a negative fully loaded CET1 capital at YE 2018 under the adverse scenario. 49 out of 51 were above 6% on this measure.

The overall results will probably be seen as a bit of a relief as there were no nasty surprises. Most banks were in the region of where analysts had expected them with maybe a few micro surprises. However a couple of the macro issues with the test are that a) it didn’t model for a prolonged period of low or negative rates/yields or it didn’t model any Brexit type scenarios. One could argue that medium to long-term profitability issues are one of the main issues at the moment (over and above capital for now) and low/negative yields are causing big problems with this. It’ll be interesting to see whether equity investors are impressed with the relatively sanguine results when any short-term sighs of relief fade. European bank shares are down around 35% since the stress tests in 2014. The recent accelerated concerns over Italian banks came after Brexit flattened curves and were perceived to cement lower rates/yields for longer. This hasn’t changed and worries will persist but the results will probably mean that a wider Italian rescue may not be absolutely essential immediately. This means that we may not get anything before the constitutional referendum so this could linger on for a while without coming to a head. On credit a reminder that my team published a note last week on bank capital with a relative constructive view on bonds further down the capital structure. It’s likely that bank capital will respond well to these results which follows the recent trend of bank capital decoupling from bank equities.

The other big news on Friday was the US GDP report (Q2 1.2% vs 2.5% expected earlier last week) which was disappointing whichever way you look at it. The bulls might point to the decent household consumption numbers (4.2% vs 4.4% expected but improved from 1.6% in Q1) and the run down in inventories as cause for optimism but it’s worth looking at the YoY numbers to illustrate a lacklustre economy that at the moment is continuing to exhibit secular stagnation tendencies.

Real GDP was a lowly 1.2% over the past year and YoY nominal GDP fell to just 2.4%, the lowest since Q1 2010 (2.1%) a year that included a quarter from the post GFC recession. In this debt overloaded world, it’s always going to be tough to get very far with nominal GDP at these lowly levels – and this is the strongest major DM economy. As DB’s Joe LaVorgna pointed out on Friday this is also ominous for corporate profits. It’s also not great for employment prospects and we certainly think we’ve shifted into a new lower payroll regime. Joe expects 150k (consensus 175k) for this Friday which is in line with the 3-month average. The average monthly payroll in 2014 and 2015 was 251k and 229k respectively. Both employment and profits continue to look late cycle to us.

Over to Asia so far this morning and the highlight so far has been the latest PMIs from China. It’s quite difficult to decipher too much from it with the official July manufacturing number at 49.9 (vs 50 in June) and inline with consensus. However the equivalent from Caixin/Markit climbed 2 points from last month to 50.6 – the highest since February 2015. The official non-manufacturing release was 53.9 (53.7 last month). Markets are mixed with the Shanghai Comp -1.25% but with the Hang Seng +1.31%. The Nikkei has edged into positive territory (+0.3%) and the Yen is slightly weaker (-0.4%) having rallied 4% last week as the BoJ eased less than expected, thus passing the reins to Abe who we’ll hear from tomorrow.

European equities saw a small rebound on Friday following some positive surprises in Eurozone growth and inflation data. The STOXX 600 index ended the day up +0.71%, ending the week (month) marginally higher by +0.46% (+3.64%). However the market has still not managed to completely recoup its losses since the UK referendum, cumulatively down -1.28% since the day of the vote. US equities shrugged off the weak GDP numbers (probably focusing on its impact on the Fed) to also rise marginally by +0.16% on Friday but ending the week broadly flat.

Staying with equities, our European Equity strategists have published their latest update this morning and the highlight is that the FTSE 250, filled with UK domestic stocks, is now impressively within a whisker of its pre-referendum level. In the report, they argue that the rebound (up 15% from the trough) is driven by three factors: (a) the strong performance of global risk assets (the FTSE 250 tends to outperform when cyclicals do well); (b) the stabilization in the GBP and (c) the hope that the UK macro fall-out from the referendum might be limited. With our FX strategists still very bearish on the GBP, they cautious on risk assets overall and with the post-referendum UK macro indicators looking atrocious across the board (PMIs, CBI business optimism, GfK consumer confidence), they see around 10% downside for FTSE 250 relative to the more export-focused FTSE 100 by year-end. For European equities they remain cautious with the YE target 4% below current levels. EmailSebastian.Raedler@db.com for the full report.

Back to Friday, credit outperformed in Europe. iTraxx IG and Crossover tightened by -2.7bps and -6.6bps respectively to end the week flat. Over in the US CDX IG (-0.4bps) and HY (-1.3bps) also tightened marginally but ended the week wider by +3.3bps and +15.6bps respectively. The recent drop in Oil into bear market territory is starting to impact US credit again.

At the other end of the risk spectrum, we saw US and German 10Y yields drop by -3bps and -2.9bps respectively on Friday, falling by -9.1bps and -8.9bps over the course of the week. Gold was up +0.9% and gained +1.7% on the week. The US dollar index declined by -1.1% on Friday as the probability of a rate hike by December was further reduced to 34.4% (from 44.9% on Thursday). The drop capped off a week of losses (-1.9%) that erased all prior gains on the month so far.

Looking more closely now at the other main data out on Friday. In Europe we saw Euro Area GDP growth momentum slow but still come in marginally above expectations (1.6% YoY vs. 1.5% expected; 1.7% previous). French Q2 GDP numbers disappointed (1.4% YoY vs. 1.6% expected) while Spain beat expectations but saw growth slow from the quarter before (3.2% YoY vs. 3.1% expected; 3.4% previous). We also saw initial July CPI estimates for the Eurozone clocking in marginally above consensus (0.2% vs. 0.1% expected; 0.1% previous). Preliminary inflation numbers for France came in as expected (0.4% YoY; 0.3% previous) while Spain (-0.6% YoY vs. -0.8% expected) and Italy (-0.1% YoY vs. -0.2% expected) beat estimates but remained in deflationary territory. We also saw retail sales in Germany fall in June (-0.1% mom vs. 0.1% expected; 0.7% previous) but surprise on the upside on an annual basis (2.7% YoY vs. 1.5% expected; 2.8% previous). We also saw the Eurozone unemployment rate for June hold steady at 10.1% as expected.

Taking a look over at the US outside of the disappointing GDP print survey data was somewhat more positive as we saw the Chicago PMI number (MNI Business Barometer) for July decline less than expected (55.8 vs. 54 expected; 56.8 previous) from its 17-month high in June. The U.Michigan Sentiment indicator for July clocked in marginally below expectations at 90.0 (vs. 90.2 expected) but improved from the previous month’s reading (89.5).

This morning in Europe the early focus is on the final revisions to those July manufacturing PMI’s, along with a first look at the data for the periphery. The UK number post Brexit will also be closely watched given the dive in the flash number. We’ll also get the manufacturing PMI in the US which is then closely followed by the ISM manufacturing for July, along with construction spending data.

Away from the data, the only central bank speak of note comes from Kaplan when he is due to speak on Tuesday and Thursday. Earnings will continue to be a huge focus and we’ve got 115 S&P 500 companies due to report (14% of the market cap) including Proctor & Gamble (Tuesday), Pfizer (Tuesday), AIG (Tuesday), Time Warner (Wednesday) and Kraft Heinz (Thursday). In Europe we’ll also get reports from 91 Euro Stoxx companies (16% of market cap) including HSBC, Siemens, Allianz, Rio Tinto and BMW.