The chaotic plungefest in precious metals following Friday’s payrolls print is starting to unwind as today’s dismal productivity sparks gold and silver buying as Fed tightening expectations tumble…

Renewed dollar weakness…

Is sending commodities higher…

S&P500 index futures were unchanged (up less than 0.1%) following another modest, low-volume levitation in European, Asian shares in a mostly eventless overnight session; oil comes off following gaining overnight with WTI trading just around $43.

Government bonds advanced around the world, now that rate locks from the deluge of corporate issuance appear to have been priced in, spurred by central banks’ commitments to boost growth and a dimming outlook for inflation as commodities declined. The pound fell for a fifth day as the Bank of England resumes debt purchases to combat the fallout from Britain’s Brexit vote.

Speaking of inflation, overnight China reported its July CPI, which printed at 1.8% Y/Y, in line with expectations, and just lower than the 1.9% in June, despite concerns that severe summer flooding, which has disrupted public infrastructure and agricultural production, would increase inflationary pressures. Food prices continued to moderate, rising 3.3 percent in July compared with a 4.6 percent gain in June. Prices of pork rose only 16.1% versus a 30.1% increase in June as demand for the Chinese staple meat continued to cool from peaks hit earlier this year. Non-food inflation, however, rose 1.4 percent, compared with June’s 1.2 percent gain.

CPI inflation moderated while PPI inflation was higher in July

Meanwhile, China’s producer prices contracted for the 53rd month in a row at 1.7% on a year-on-year basis in July, modestly better than the -2.0% expected, and up from last month’s -2.6% drop.  Analysts expect producer price inflation to turn positive this year for the first time in more than four years, but the recovery at the factory gate is unlikely to lead to a rebound in private investment, which has fallen to record low growth rates.

While low inflation means Beijing has room to loosen monetary policy if needed, policymakers appear to have disparate views over how much stimulus is needed to stoke economic growth, if any, and what form it should take. Strengthening producer prices mean there is likely less need to ease in the short-term, analysts say. China’s central bank has not adjusted interest rates since October 2015. According to newswires overnight, China is not likely to inject liquidity into the market on a mass scale as policy makers have promised a neutral monetary environment for supply-side reforms.

The subdued inflationary print was seen as favorable for bonds: “Investors are more interested in government bonds as the slowing economy has reduced risk appetite and as default risks were exposed in the corporate debt market,” said Liu Dongliang, senior analyst at China Merchants Bank Co. in Shenzhen. “The bull market will continue for the rest of the year, as supporting factors will continue to exist and as the market may still expect the central bank to ease monetary policy to support growth.” Sure enough, China 10-year government bond yield falls to the lowest level since 2009, as investors prefer safety of sovereign bonds after a second Chinese shipbuilder defaults on bond payment.

There was more action in Europe, where yields on benchmark 10-year debt touched all-time lows in the U.K and Spain and matched the least in seven years in China. They also dropped in India, following a central bank meeting where the RBI kept rates unchanged. Sterling slipped to a four-week low after BOE policy maker Ian McCafferty said more easing is likely to be required, while copper reached its weakest level since July 12. European stocks rose on better-than-estimated results.

According to Janu Chan, senior economist at St. George Bank in Sydney, “We could see some short-term weakness in the pound. It was an extensive stimulus program that the BOE announced. The economy has been hit in the short-term, and could face a minor recession.” As the chart below shows, he is right: the pound sank 0.4 percent to $1.2990,adding to a five-day loss of 2.7 percent.

As Bloomberg puts it, bonds are in demand and volatility in financial markets is sliding as central banks boost quantitative easing and cut interest rates to spur inflation. The BOE resumed gilt purchases on Monday, India’s central bank Governor Raghuram Rajan said its policy stance remains accommodative and analysts forecast the Reserve Bank of New Zealand will lower its benchmark rate later this week. Supportive monetary policy has also pushed Band of America Merrill Lynch’s Market Risk index to the lowest level since early January.

The Stoxx Europe 600 Index added 0.3%. The benchmark has climbed more than 2% since the fresh stimulus measures were announced by the Bank of England. Munich Re rose 3.7 percent after the world’s second-biggest reinsurer reported quarterly net income that was more than double the average analyst projection. Altice rallied 14 percent after its profit increased amid gains in the U.S. and Portugal.  Wm Morrison Supermarkets Plc boosted a gauge of retailers, adding 2.2 percent after extending an agreement with Ocado Group Plc that will enable its online grocery business gain national coverage.  S&P 500 futures were little changed.

In commodities, the Bloomberg Commodity Index fell 0.3%, dragged down by metals. Copper declined as much as 0.8 percent, falling to the lowest in four weeks, while zinc retreated from a one-year high. Gold slipped 0.1 percent to $1,333.74 an ounce.  Crude was little changed at $43.06 a barrel in New York, after jumping 2.9 percent in the last session as the Organization of Petroleum Exporting Countries predicted the current bear market in the commodity would be short-lived.

Meanwhile in bonds, despite recent concerns about an inflationary spike, things are largely back to (ab)normal: “There is so much demand for U.S. Treasuries that it is difficult for the Fed to raise longer-term rates substantially,” Philip Marey, a strategist at Rabobank International in Utrecht, Netherlands, said, referring to the Federal Reserve. Quantitative easing from central banks elsewhere means “there will be increased scarcity of safe assets, including U.S. Treasuries. This will limit the upside potential in yields.”

The yield on Treasuries due in a decade, the global benchmark, declined two basis points to 1.58 percent at 10:48 a.m. London time. While it jumped nine basis points on Friday after better-than-expected U.S. jobs data, it’s still below the year-to-date average of 1.77 percent.

U.K. 10-year gilt yields dropped to a record low of 0.59 percent and Spain’s reached 0.97 percent, having fallen below 1 percent for the first time on Monday. Indian bonds advanced and the rupee weakened after Rajan left benchmark interest rates unchanged at his final review. The yield on sovereign notes due January 2026 dropped six basis points, the most since July 28, to 7.12 percent, prices from the RBI’s trading system show.

Investors will look Tuesday to data on wholesale inventories for June for indications of the strength of the world’s biggest economy and the likely trajectory of interest rates. Earnings will also be in focus, with Walt Disney Inc. among companies reporting.

Market Snapshot

• S&P 500 futures up less than 0.1% to 2176
• Stoxx 600 up 0.3% to 342
• FTSE 100 up 0.3% to 6832
• DAX up 0.5% to 10489
• German 10Yr yield down less than 1bp to -0.07%
• Italian 10Yr yield down less than 1bp to 1.12%
• Spanish 10Yr yield down 1bp to 0.98%
• S&P GSCI Index down less than 0.1% to 346.8
• MSCI Asia Pacific up 0.6% to 138
• Nikkei 225 up 0.7% to 16765
• Hang Seng down 0.1% to 22466
• Shanghai Composite up 0.7% to 3026
• S&P/ASX 200 up 0.3% to 5553
• US 10-yr yield down 2bps to 1.57%
• Dollar Index down 0.05% to 96.35
• WTI Crude futures down 0.2% to $42.92
• Brent Futures down 0.3% to $45.24
• Gold spot down less than 0.1% to $1,334
• Silver spot down 0.2% to $19.70

Top Global Headlines

• Randstad to Acquire U.S. Jobs Site Monster for $429m: Randstad will pay $3.40/share in cash for Monster, cos. said in statement Tues.; implies 23% premium to last close.
• Genesys Said in Talks to Acquire Interactive Intelligence: Genesys, which received $900m investment last month from PE firm Hellman & Friedman, is looking to use recent cash infusion to expand its business.
• Amazon Japan Office Said to Be Searched by Fair Trade Agency: Japanese antitrust agency looking into whether AMZN sought deals with sellers that gave it more favorable conditions over other e-commerce companies.
• Twitter Seeks to Sublease Part of San Francisco Headquarters: Co. offering about 1/4 of the space at its S.F. headquarters complex for sublease, adding to growing amount of excess offices available as technology industry cools.
• Alibaba Offers to Help Global Tech Companies Navigate China: New AliLaunch program makes use of co.’s cloud platform, can help clients with JVs, marketing; it’s biggest customer so far is SAP, which will sell its Hana data-software and services on Alibaba’s cloud.
• U.S. Bond Retreat Confounds Analysts as Fed Rate Bets Revive: Yield on benchmark 10-year U.S. sovereign debt is above median of year-end ests. compiled by Bloomberg for first time.

* * *

Looking at regional markets, Asia initially traded relatively mixed in the wake of the subdued lead from the US where stocks slightly pulled back from last week’s record highs, amid light news flow and summer-quietened trade. However, price action then staged a turnaround heading into the European session to conform with the tone set by Europe. Nikkei 225 (+0.7%) was higher as it continued to benefit from JPY weakness, while ASX 200 (+0.3%) was led by financials with ANZ shares gaining as much as 3% amid earnings. Chinese markets were mixed with choppy trade seen in Shanghai Comp (+0.7%) and the Hang Seng (-0.1%) following inflation data which suggested weak demand with CPI at a 6-month low and PPI contracted for a 53rd consecutive month. 10yr JGBs traded higher on a rebound from recent losses, while today’s 30yr auction saw mixed results, in which the b/c increased and tail in price narrowed, but the lowest accepted price and average price fell from last month.

Top Asian News

• Rajan Holds India Rates in Final Move as Inflation Quickens: Decision was predicted by 27 of 29 economists in survey
• Bank of Japan Limits Foreign Profits on Negative-Yielding Bonds: BOJ boosts dollar funding facility to ease domestic costs
• China’s Factory Deflation Narrows in Further Stabilization Sign: July PPI -1.7% y/y vs June -2.6%
• Hong Kong Property Stocks Are Hottest Since Eve of 1997 Collapse: Gains outstrip Hang Seng Index despite supply, rate concerns
• China Auto Sales Rising Most in 17 Months Spurs Inventory Relief: Passenger-vehicle sales rose 23% to 1.6m units in July
• ANZ Rises to 7-Month High as Bank Reports Capital, Asset Growth: 9-mo. cash profit drops 3% to A$5.2b

European stocks trade in the green this morning amid quiet newsflow with basic material names outperforming in the wake of Iron ore reaching 2 year highs. The Dax cash trades up around 0.5% with data flow continuing to remain light at the start of the week and as such traders will be looking towards the end of the week whereby markets will see the release of the latest US PPI, retail sales and Uni. Of Michigan data. Markets may be particularly sensitive to these releases given that markets are 50/50 over whether the Fed will hike rates this year and therefore may use the releases as an opportunity to establish a bias on this front. In terms of fixed income markets the Spanish and UK 10 years have hit fresh record low yields with participants overlooking political deadlock in Spain and markets continuing to digest the latest stimulus efforts by the BoE. Furthermore, mounting stimulus expectations for the ECB have also helped to lift peripheral paper and Spanish paper remains preferable to that of Italy amid the concerns surrounding the Italian banking sector.

Top European News

• Brexit Red Lines Drafted by EU-27 as U.K. Plans Its Strategy: U.K. PM Theresa May faces daunting array of demands from EU nations when time comes to negotiate Britain’s future relationship with bloc, analysis shows.
• U.K. Regulator’s Bank ‘Shake Up’ With Cap Fails to Create Stir: CMA recommended banks set their own limits on overdraft charges, with grace period for customers to avoid them, rather than have overdraft fees “centrally regulated,” agency said in a statement.
• Munich Re Profit Beats Estimates on Currency, Investments: 2Q profit beat analysts’ expectations as gains from currencies, investments cushioned higher claims from natural disasters, also restructuring charges at its Ergo primary- insurance unit.
• Drahi’s Altice Boosts Profit as U.S. Purchases Bring Growth: Earnings were “strong,” and co.’s projection for growth is “reassuring,” says Goldman analyst Andrew Lee.
• Italy Bank Bad Loans at EU197.9b in June: Bank of Italy: Banks’ gross bad loans rose 1.1% in June from yr earlier

In FX, the pound sank 0.4 percent to $1.2990, contributing to a five-day loss of 2.7 percent. As well as cutting interest rates for the first time since 2009, the Bank of England on Aug. 4 exceeded economists’ expectations with an announcement that it would increase its gilt-purchase program by 60 billion pounds to 435 billion pounds, starting this week. “We could see some short-term weakness in the pound,” said Janu Chan, a senior economist at St. George Bank Ltd. in Sydney. “It was an extensive stimulus program that the BOE announced. The economy has been hit in the short-term, and could face a minor recession.” Taiwan’s dollar gained as much as 0.4 percent to its strongest level in a year after trade data released Monday showed exports increased in July for the first time in 18 months. Global funds boosted their holdings of the island’s shares by about $400 million in the first two trading sessions of this week, according to data compiled by Bloomberg

In commodities, the Bloomberg Commodity Index, which measures returns on raw materials, fell 0.3 percent, dragged down by metals. Copper declined as much as 0.8 percent, falling to the lowest in four weeks, while zinc retreated from a one-year high. Gold slipped 0.1 percent to $1,333.74 an ounce. Crude was little changed at $43.06 a barrel in New York, after jumping 2.9 percent in the last session as the Organization of Petroleum Exporting Countries predicted the current bear market in the commodity would be short-lived. The group said Monday its members will hold informal talks next month and that there are “constant deliberations” over stabilizing the market. “Nobody seriously thinks that OPEC will come up with anything that will tighten supply,” said Michael McCarthy, chief strategist at CMC Markets in Sydney. “Having bounced off the support near $40, and without any further supply coming online, we’re moving toward the middle of the trading range of about $44 to $45.”

Bulletin Headline Summary

• European equities enter the North American crossover modestly higher amid light newsflow with the FTSE 100 remaining at post-Brexit highs
• GBP remains out of favour with GBP/USD below 1.300 amid dovish comments from BoE’s McCafferty and disappointing UK data releases
• Looking ahead, highlights include API Crude Oil Inventories and a US 3yr Auction
• Treasuries rallied in overnight trading along with global equities as commodities slide and U.K. and Spanish 10Y yields hit all-time lows; week’s auctions begin with $24b 3Y notes, WI 0.855%; sold at 0.765% in July, lowest 3Y auction stop since 0.715% in Feb. 2014.
• Oil dropped from the highest close in two weeks amid doubts that informal talks between OPEC members next month will lead to any action to tighten supplies. Futures slid as much as 1.2% in New York after rising 2.9% Monday
• U.K. industrial production barely grew in June as the economy lost momentum before the Brexit referendum. Output rose 0.1% following a 0.6% drop in May, the Office for National Statistics said in London
• Bank of England policy maker Ian McCafferty said that officials will likely ease policy again if the economy develops in line with the central bank’s forecasts — though they should take a gradual approach
• European bankers exploited pledges by G20 and European Union finance ministers to avoid boosting capital requirements as they campaigned against the plans during earnings calls in past weeks
• Presiding over his final interest-rate review, Rajan’s announcement of more open-market debt purchases revived a rally that had been losing steam in recent days after benchmark 10-year notes capped their best month since 2013 in July
• Chinese bonds advanced, with the 10-year yield dropping to match the lowest levels since 2009, as foreign inflows increase and investors seek safety from a rising number of corporate failures
• Hong Kong real estate shares haven’t been this hot since the city’s last housing bubble burst almost two decades ago. The industry’s benchmark equity gauge has surged 37% from this year’s low in January

DB’s Jim Reid concludes the overnight wrap

With limited data to respond to yesterday, price action across global equity markets was largely muted. The STOXX (+0.04%) and the S&P500 (-0.09%) were both essentially flat on the day. In Europe banks (+1.4%) and insurance (+1.5%) sectors were two of the top three performing sectors of the day, while basic resources (+1.7%) was the top performer. Oil climbed around +2.5% with some looking to an announcement yesterday that OPEC would have an informal side meeting next month at the International Energy Forum in Algeria with hopes of a renewed push for a production freeze. These things often come to nothing and tend to be discussed after a decent fall in the price but it created some attention.

Oil has given up some of its gains in Asia (-0.8%) but equity market are all fairly quiet with the Nikkei +0.35%, Hang Seng -0.19% and Shanghai Comp +0.29%. The main data has been Chinese inflation with the PPI falling less than expected at -1.7% (-2% forecast) which is actually the highest for nearly 2 years. This number was stuck near -6% in Q4 last year. CPI came in inline with estimates at 1.8%.

Back to yesterday and credit markets over in Europe saw decent performance as iTraxx Main and Crossover tightened by -2bps and -8bps respectively over the course of the day. US credit markets failed to see similar moves as CDX IG and HY were largely unchanged on the day. The latest ECB CSPP numbers (as of Aug 5th) saw purchases holding up impressively in this holiday season with the €1.764bn higher than the previous two weeks and not far off the average weekly number seen since the program started.

The other end of the risk spectrum also saw little action. German 10Y yields held steady on the day, while US 10Y yields edged marginally lower by -1bps after rising significantly on Friday. 10Y Gilt yields saw bigger moves as they fell by -6bps as markets continued to digest BoE’s aggressive policy package unveiled last week. Over in currency markets, the pound (-0.26%) continued to slide for the fourth straight day while the dollar index rose marginally by +0.27%. Gold was unchanged on the day.

In terms of data it won’t surprise you to learn that it was quiet. Over in Europe we saw German industrial production numbers for June rebound back into positive territory and come in marginally above expectations (+0.8% mom vs. +0.7% expected; -0.9% previous). However the bounce only served to reverse the decline seen in May as the demand for capital goods rebounded. It will be more interesting to watch next month’s number to see how production responds to the Brexit vote. Other data points out of Europe included French business sentiment data for July which ticked up marginally to beat expectations at 98 (vs. 97 expected; 97 previous) while the Sentix Eurozone investor confidence indicator for August rose to 4.2 (vs. 3.0 expected; 1.7 previous). There were no material data releases out of the US yesterday.

Turning over to today’s calendar now. In Europe we’ll get the UK industrial (+0.1% expected; -0.5% previous) and manufacturing (-0.2% expected; -0.5% previous) production numbers for June, with data expected to demonstrate little improvement with most of the data pre-Brexit. We’ll also see UK and German trade balance data for June, with the UK trade deficit expected to widen (-£2.55bn expected; -2.263bn previous) while the German trade surplus is expected to increase to EUR23.0bn (21.0bn previous).