Following yesterday’s muted action which saw the S&P500 close unchanged, it has been more of the same listless trading overnight, with US equity index futures little changed as the Nikkei fell on the back of a stronger Yen, while government bonds rose and European stocks reversed early gains following the BOE’s explanation in the aftermath of yesterday’s failed bond monetization operation that the bank will “incorporate the shortfall into the second half of its 6 month program.” WTI dropped for a second day after API data showed U.S. oil inventories resumed expansion, while Saudi Arabia told OPECthat it pumped a record 10.67 million barrels of oil a day, an increase that as Bloomberg puts it, “will do nothing to endear OPEC’s leading exporter to other members seeking output limits to shore up prices.”

The dollar weakened against all its major peers, dragging the Bloomberg Dollar Spot Index down for a second day. Metals were also boosted by the dollar’s retreat, with palladium, tin and zinc rising to the highest in a year. U.K. government bonds extended gains after the Bank of England indicated it will stick with its current quantitative-easing plans. European stocks were little changed and most Asian shares fell.

A reason for the dollar weakness was yesterday’s disappointing economic productivity data which showed an unprecedented, third consecutive quarterly drop. As DB’s Jim Reid said, “with productivity so low not only does it not bode well for growth but the risk is that companies eventually reduce their demand for labour. They could invest in capital instead but waiting for that has proved elusive in recent years. So in spite of the recent payroll boost we still think the US looks late cycle and think profits will continue to be subdued and that employment will edge weaker over the coming months.“

So as the light dimmed in one of the few bright spots in the world economy, the United States, demand for bonds firmed – a factor highlighted by the Bank of England’s failure on Tuesday to prise enough debt from investors to meet its bond-buying target under plans to stimulate Britain’s economy. With sub-par global growth and inflation keeping the onus on looser central bank policy, New Zealand, one of the 55 monetary authorities to ease policy since the start of 2015, was broadly expected to cut rates further on Thursday.

Others piled on: “low U.S. productivity growth could suggest the third- quarter growth can’t be fantastic. That in turn would mean the Fed will not need to raise rates,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.

As a result, “Central banks look increasingly accommodative and no one seems to be going against that trend … which supports all asset prices,” said Anton Heese, head of European rates strategy at Morgan Stanley in London. “The growth prospects for the U.S. economy are probably weaker than many anticipate.”

So in light of continued slow economic growth how did markets response? Well, the MSCI’s world stock index covering 46 markets advanced to its highest level seen in a year at 419.77, trumping a level hit on Tuesday. MSCI’s broadest index of Asia-Pacific shares excluding Japan rose 0.3 percent to the highest level since August 2015.

With little to do in developed countries, investors have shifted their attention to emerging-market assets where demand is surging, supported by loose DM central bank policy and after the Fed turned more “dovish,” said Owi Ruivivar, managing director in Singapore who helps oversee about $1 trillion for the Wall Street firm. A gauge of emerging-market currencies climbed to the highest level since July 2015.

European stocks reversed earlier gains to fall for first day in six with Norwegian, Finnish, German bourses underperforming, following some notable weak earnings.  The Stoxx Europe 600 Index fell 0.1 percent, after reaching its highest close since Britain’s June vote to leave the European Union. The number of shares changing hands was 34 percent lower than the 30-day average. Germany’s DAX Index slipped 0.1 percent after entering a bull market. 13 out of 19 Stoxx 600 sectors fall with utilities, oil & gas underperforming and insurance, banks outperforming. 55% of Stoxx 600 members decline, 42% gain.

Among the more prominent European moves, EON SE dragged European utility companies to the worst performance of the Stoxx 600’s 19 industry groups, sliding 5.5% as it posted a first-half loss because of charges linked to the listing of its Uniper unit.  Prudential Plc rose 1.9 percent after reporting first-half profit that beat analyst estimates, boosted by higher earnings at its Asia and U.S. units. Danish biotech company Novozymes A/S sank 9.2 percent as it reported profit that missed estimates and cut its sales outlook. Brenntag AG dropped 2.1 percent after the profit forecast of the world’s largest distributor of chemicals missed some analyst projections.

S&P 500 futures rose 0.1% after U.S. equities closed little changed near a record high on Tuesday.

So as stocks went nowhere, bonds were bid and yields on 10- and 30-year U.K. bonds fell to record lows – as expected – after the central bank made no changes to its gilt-purchase plan after its first uncovered QE operation since beginning the program in 2009.  Fixed-income markets are rallying on speculation central banks will continue to keep interest rates low. Japan’s 10-year bond yield fell two basis points to minus 0.11 percent, Germany’s declined one basis point to minus 0.09 percent and that on similar-maturity Treasuries dropped by one basis point to 1.54 percent. The rate on New Zealand’s notes fell five basis points ahead of Thursday’s monetary policy review. Emerging-market bonds rose, with the yield on South Africa’s 10-year security dropping 11 basis points to 8.42 percent, and Turkey’s rate sliding three basis points to 9.58 percent. China sold five-year debt at a 2.43 percent yield, less than the median forecast of 2.51 percent in a Bloomberg survey.

The cost of insuring corporate debt against default rose for the first time in five days. The Markit iTraxx Europe Index of credit-default swaps on investment-grade companies climbed one basis point to 66 basis points. It remains near the lowest in a year. The Markit iTraxx Europe Crossover Index of swaps tied to sub-investment grade corporate debt rose three basis points to 308 basis points.

Investors will look to earnings from companies including Ralph Lauren Corp. for indications of the health of corporate America. Stocks have benefited from better-than-forecast earnings this season, particularly among technology companies. With about 90 percent of S&P 500 members having posted results, 78 percent have beaten profit predictions and 55 percent have topped sales projections. The only data of note out of the US is the June JOLTS survey, where number of job openings is expected to hold steady on the month (5.5mn expected; 5.5mn previous).

Market Snapshot

• S&P 500 futures up 0.1% to 2180
• Stoxx 600 down less than 0.1% to 345
• FTSE 100 down less than 0.1% to 6851
• DAX down 0.2% to 10669
• German 10Yr yield down 2bps to -0.09%
• Italian 10Yr yield down 2bps to 1.1%
• Spanish 10Yr yield down 2bps to 0.98%
• S&P GSCI Index down less than 0.1% to 345
• MSCI Asia Pacific up 0.3% to 139
• Nikkei 225 down 0.2% to 16735
• Hang Seng up 0.1% to 22492
• Shanghai Composite down 0.2% to 3019
• S&P/ASX 200 down 0.2% to 5544
• US 10-yr yield down less than 1bp to 1.54%
• Dollar Index down 0.59% to 95.61
• WTI Crude futures down 1.1% to $42.31
• Brent Futures down 0.8% to $44.63
• Gold spot up 0.9% to $1,353
• Silver spot up 2.3% to $20.31

Top Global Headlines

• Disney Reshapes TV With $1b Streaming Deal, ESPN Online: Co. said it will pay $1b for a 1/3 stake in BAMTech, a technology, streaming business formed by MLB, and launch new web-based ESPN service this year.
• Abbott Says Alere Denies Key Access; Not Sure Deal Will Close: Co. provided detailed list of issues that have materialized since purchase agreement was signed on Jan. 30: SEC filing.
• SolarCity Growth Slows Even More as Musk Details Energy Vision: Co. developing rooftop product that incorporates solar technology, storage system that uses Tesla batteries at customers’ homes to provide power-management services to utilities.
• SunPower Plunges After Solar Manufacturer Scraps Profit Goal: Co. scrapped a target to at least break even this year, in part because of challenging conditions in its power-plant business.
• Gold at ‘Rich Level’ to Struggle as Fed May Hike 3 Times: Gold may have met its match after stellar start to 2016 as probable trio of rate hikes from Fed through end-2017 means there’s little room for further rally.
• SunEdison Gets $144m Bid for Some Assets From NRG Renew: Bankrupt renewable energy co. agrees to sell solar, wind projects in Utah, California, Maine, Hawaii, Texas at auction where NRG would make opening bid.
• Green Plains May Spend $275m to Get Into Food Business: Distiller signed non-binding agreement to pay $225m-$275m for a “complementary” part of a food ingredients co.
• Viacom Outlook Cut by Moody’s Due to Poor Performance, Divs.: Co. was spared an immediate downgrade of its Baa2 rating during the ongoing dispute over control.
• Saudi Said to Pump Record Oil Output to Meet Summer Usage: pumped record 10.67mbbl/d in July to meet a summer surge in domestic demand.
• ‘Peppa Pig’ Owner Entertainment One Rejects Takeover Offer: Canadian co., owner of popular preschool cartoon character “Peppa Pig,” said in statement that the bidder may come back.
• NBC Says Olympics Audience Is Bolstered by Counting Web Viewers; 31.5m people tuned in on TV, online to watch Olympics on Monday night, about as those who watched only on TV 4 years ago.
• BlackRock Targeted by Gay Activists for Investing in Firearms: Gays Against Guns to target BlackRock to kick off campaign pressuring investors to cut ties with firearms industry.
• Clinton Up 6 on Trump in Two-Way Race in Bloomberg National Poll
• House Speaker Ryan Defeats Political Unknown in Primary

* * *

Looking at regional markets, we start in Asia which traded mixed following the flat close on Wall St. and weakness in energy, in which NatGas declined nearly 5%. Nikkei 225 (-0.2%) was initially negative as a firmer JPY dampened exporter sentiment but then recovered on short covering ahead of tomorrow’s market closure. ASX 200 (-0.2%) was pressured by energy losses with financials also subdued after Big-4 Commonwealth Bank missed on its earnings, despite posting a record FY net. Shanghai Comp (-0.2%) traded with mild losses, while Hang Seng (+0.1%) outperformed on earnings releases. 10yr JGBs saw minor gains as they tracked T-notes higher amid the indecisiveness seen in the region, while the BoJ were in the market for JPY 1.14trl of government debt.

Top Asian News

• RBA’s Stevens Urges Budget Fix, Says Monetary Policy Not Enough: Australian central bank governor says inflation target has flexibility to allow undershooting
• Hong Kong Exchange Profit Falls on Lower Securities Trading: Timing of less critical projects deferred to control costs
• CBA Profit Growth Slowest Since 2009, Bad-Debt Charges Climb: Bad-debt provisions jump on exposure to commodities sectors
• DBS Head Fails to Ease Analyst Discomfort on Energy Exposure: Credit Suisse, CIMB downgrade ratings on Singaporean bank
• India Said to Clarify Apple’s Path to Opening Own Retail Stores: Officials say company can now reapply to open retail outlets
• Nomura ‘Lost Control’ in Firing Salesman Over $40 Million Loss: Nomura disciplinary process had “multiple defects,” judge says

European equities are trading within a tight range this morning (Euro Stoxx: 0%), with once again not too much in the way of fundamental news flow to drive prices in what has been a week thus far void of tier 1 data releases. In terms of notable movers, earnings have dictated play so far this morning, with DAX heavyweight E.ON among the worst performers (-5.7%) after their pre-market release. On a sector specific basis, material names outperform as upside in the commodities complex remains favourable for the sector while utilities underperform amid E.ON’s aforementioned earnings. Fixed income newsflow has been dictated so far by the fallout of yesterday’s BoE purchases, whereby they failed to hit their target. Gilt yields hit fresh record lows this morning after the central bank announced that they will add yesterday’s shortfall to the second half of their 6-month program and therefore will not write off yesterday’s disappointing operation. Bunds this morning continue to trade above 167.50, with markets having recently digested EUR 5bIn of the Buba’s 0.0% Bund auction which drew a modest b/c of 1.4 but above the previous of 1.2.

Top European News

• Brexit Bites Back as Peugeot Joins Dell in Lifting Prices: British consumers starting to bear costs of Brexit, with cos. raising prices of everything from cars to carpets to counter weaker pound.
• Prudential Rallies After Asia Drives 1H Profit Beat: Co. delivered good progress “in a period of heightened macro- economic, geo-political and investment market uncertainty and volatility,” CEO Mike Wells said.
• EON Posts Loss After Writing Off Billions on Plants, Storage: Impairments, contingency losses for its hydrocarbon-based power stations, natural gas storage assets led to net loss of EU3b.
• Novozymes Shares Plunge as Danish Enzyme Maker Cuts Outlook: World’s biggest supplier of enzymes used in everything from detergent to biofuel plunged as much as 9.8%.
• Eurostar U.K. Union Plans Seven Days of Strikes Over Schedules: A 4-day walkout will begin in early hours of Friday, last through midnight on Monday, union said in statement.
• Fired Deutsche Bank Manager Says Superiors OKed Deal Lists: Former Deutsche Bank executive who’s suing bank for unfair dismissal arguing that payments to Chinese JV which got him fired were based on approvals by other top managers in Asia.
• BOE to Include Shortfall From Uncovered Auction in 2H of Plan: Details of these purchases to be announced on Nov. 3.
• Italian Banks Reel; Monti Has No Regrets for Avoiding Bailout: Immediate problem is EU360b of bad debt on Italian banks’ books.
• Spain Yield Gap Tightest in More Than a Year on ECB Stimulus: Spread between Spain’s 2-, 30-yeargovt bonds narrowed to least since April 2015.

In FX, the Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, fell 0.5 percent in early trade. The yen added 0.5 percent to 101.40 per dollar. New Zealand’s dollar strengthened 0.9 percent, while Australia’s currency advanced 0.6 percent. “The U.S. dollar is unlikely to rally significantly against the commodity-sensitive currencies,” said Elias Haddad, a senior currency strategist at Commonwealth Bank of Australia in Sydney. “Monetary policy settings around the world are going to be loose or looser going forward, and fiscal policy is expected to be more accommodative. That will support the global economic recovery and underpin commodity prices.” The MSCI Emerging Markets Currency Index rose 0.6 percent, extending its five-day gain to 1.7 percent. The gauge has climbed 10 percent from this year’s low set in January. The won led gains on Wednesday, appreciating 1.1 percent to the strongest since May 2015, followed by gains of at least 0.8 percent for Malaysia’s ringgit and Taiwan’s dollar.

In commodities, the Bloomberg Commodity Index, which measures returns on raw materials, climbed 0.3 percent as metals advanced on the weaker dollar. Gold rose 0.9 percent to $1,352.41 an ounce, while silver and platinum added at least 2.3 percent. Palladium, used in the pollution control systems of cars, jumped as much as 7.7 percent, the most since May 2010, after data showed Chinese vehicle sales accelerated by the most in 17 months. On the London Metal Exchange, copper for delivery in three months rose 0.9 percent to $4,824 a ton, while zinc, lead and tin rose at least 0.9 percent. Crude oil fell 1.1 percent to $42.30 a barrel in New York on signs of higher supply. It slid 0.6 percent on Tuesday as American Petroleum Institute data indicated U.S. stockpiles rose by 2.09 million barrels last week. Saudi Arabia pumped 10.67 million barrels of oil a day in July to satisfy the summer surge in domestic demand, according to two people with knowledge of the data.

Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities trade with little firm direction amid another quiet session and lack of tier 1 data releases across the continent
• In FX markets, USD has seen some selling pressure in recent trade as participants continue to raise concerns over US productivity ahead of Friday’s key US data releases
• Looking ahead, highlights include RBNZ Rate Decision and Press Conference, DOEs and the OPEC Monthly Report

• Treasuries higher in overnight trading while global equities mixed and gold surges as Germany auctions 10Y debt at record low yield of -0.09%; UST auctions continue with $23b 10Y notes, WI 1.535%; last sold at 1.516% in July, lowest auction stop since 1.459% in July 2012.
• The Bank of England’s plan is to keep calm and carry on buying. The central bank said Wednesday it will deal with a 52 million-pound shortfall ($60.8 million) in an operation on Tuesday at a later date
• Pimco’s Total Return Fund increased its stake in U.S. government debt to a 25-month high in July as a rally in Treasuries pushed yields to an all-time low and then fizzled
• China’s official bad-loan ratio held at 1.75% in the second quarter after almost three years of increases, suggesting some progress as President Xi Jinping’s officials try to defuse risks from the nation’s explosion in credit
• China’s central bank said it plans to push the yuan’s global use by seeking more cooperation with other countries and improving the infrastructure needed to support wider use of the currency
• Brazil’s Senate voted 59 to 21 to put suspended President Dilma Rousseff on an impeachment trial that could seal her downfall and strengthen her successor’s hand as early as this month
• Saudi Arabia told OPEC that it pumped a record 10.67 million barrels of oil a day in July to meet a summer surge in domestic demand, an increase that will do nothing to endear OPEC’s leading exporter to other members

DB’s Jim Reid concludes the overnight wrap

It remains a bit dull out there with no market double flips to get excited about but there were a few more things of interest yesterday with poor US productivity numbers and the BoE failing on only day 2 of their new QE program to buy all the securities they wanted.

On the former, both ourselves and our US economist Joe LaVorgna have been looking forward to yesterday’s productivity and ULCs numbers. Q2 nonfarm productivity estimates indicated a weaker than expected drop (-0.5% vs. +0.4% expected; -0.6% previous). It was the 3rd quarterly decline something we haven’t seen for 37 years. Joe once again noted that this slowdown in productivity growth will weigh on the US economy, with the year-over-year rate slipping to -0.4% which is the slowest rate since Q2 2013 (-0.6%). The Q2 estimates for unit labor costs came in marginally above expectations (+2.0% vs. +1.8% expected) but was largely offset by the previous quarter being revised down from a gain of +4.5% to a drop of -0.2%.

With productivity so low not only does it not bode well for growth but the risk is that companies eventually reduce their demand for labour. They could invest in capital instead but waiting for that has proved elusive in recent years. So in spite of the recent payroll boost we still think the US looks late cycle and think profits will continue to be subdued and that employment will edge weaker over the coming months.

We’ll see more on employment today with the BLS releasing the JOLTS series. It’s only for June so it will probably be decent given the payrolls summer surge and doesn’t necessary say much for the future but given its one of Yellen’s favourite series it’s always closely watched. DB expect a rebound in the hiring rate, which was down three tenths from its post-recession peak (3.8%) in May. The quits rate is interesting as it has been a lead indicator of wage pressure in the past.

Global equity markets ticked up yesterday despite little in terms of positive economic data (more on Europe below). The STOXX 600 (+0.92%) ended the session in the green for the fifth consecutive day, while the DAX rallied by +2.5% on the day to nearly break even on a YTD basis. The FTSE shrugged off relatively weak industrial production and trade numbers to rise by +0.62% following some dovish comments by BoE policymaker Ian McCafferty suggesting that further rate cuts and additional QE may be required. This raised eyebrows as he was in favour of a hike at the start of the year and voted for one at every meeting since last August. Sterling fell for the 5th day and was back below $1.30 intraday for the first time for a month but closed just above and had climbed back a bit this morning to $1.307.

Government bond yields continued to drop, with German and US 10Y yields falling by -1bps and -4bps respectively. Gilts rallied as 10Y and 30Y yields fell by -3bps and -5bps to all time lows initially following soft data and BoE McCafferty’s comment discussed above. The BoE also struggled to buy as much long Gilts (over 15 years) as it had planned despite higher than market prices in its new QE program. Only £1.118bn was bought rather than the £1.17bn planned. Monday’s purchases were 3.63 times covered but were in the 3-7 year area. Today sees the 7-15 year part of the curve targeted. Yesterday’s struggle, albeit at the notoriously technical long end, is a worry for the BoE given that it was only the second day of their new program, especially as they are already talking about having the room to increase it if required. 30 year Gilts are currently at 1.38% and if we have more days like yesterday then they start to look ‘cheap’ against 30 year Bunds (0.419%) and OATs (0.912%) and that’s before we even talk about the Swiss equivalent at -0.1%.

Over in the US the S&P 500 (+0.04%) ticked up slightly. Price action was fairly subdued in credit markets with iTraxx Main largely unchanged on the day although Crossover tightened by -4bps. Over in the US CDX IG and HY were both flat on the day.

The Asian session is again quiet with the Nikkei +0.31%, the Hang Seng +0.41% and the Shanghai Comp -0.1%. There’s not been a lot of data with June Japanese machine orders the highlight coming in at +8.3% mom against +3.2% expected. July PPI was flat against -0.1% expected. The Yen is up around 0.6% against the Dollar.

Now for the remainder of the data yesterday. In the US the NFIB small business optimism reading barely budged in July, coming in a hair above expectations of no change (94.6 vs. 94.5 expected; 94.5 previous). Wholesale inventories grew more than expected in June (+0.3% vs. +0.0% expected) and we also saw May’s number being revised up to +0.2% as well (+0.1% before revision).

In Europe we saw some numbers that painted a gloomy picture of the UK economy in the period straddling the referendum. Industrial production barely grew in June (+0.1% mom vs. +0.1% expected; -0.6% previous) while manufacturing production declined for a second straight month and actually fell by more than expected (-0.3% vs. -0.2% expected; -0.6% previous). The trade balance number for June (-£5.084bn vs. -2.55bn expected) also indicated a sharply widening trade deficit despite a weaker pound. Away from the UK we also got the German trade balance number for June that saw the surplus increase more than expected (24.9bn vs. 23.0bn expected; 21.0bn previous).

It’s a quiet day ahead across the globe in terms of data releases today. In Europe the only notable data points are the June industrial (+0.1% mom expected; -0.5% previous) and manufacturing production (+0.2% mom expected; +0.0% previous) numbers from France, where growth is expected to be marginally positive. The only data of note out of the US is the previously discussed June JOLTS survey, where number of job openings is expected to hold steady on the month (5.5mn expected; 5.5mn previous).