Until the announcement moments ago by the EU that Apple have been ordered to pay up to €13 billion in illegal tax benefits, the quiet overnight market had been focused on the upcoming comments by Stanley Fischer, who is set to give a Bloomberg TV interview at 6:30am ET, where he was expected to expand on his recent hawkish comments. Heading into Fischer’s appearance, the dollar strengthened, global stocks rose, oil hovered around $47, while US index futures were largely flat and Treasuries fell.

Between Fischer and this Friday’s payrolls report, there is hope on Wall Street that the Fed’s rate hike expectations will be made more definitive. “Expectations for a Fed rate increase are still driving the markets, as players await Fischer’s comments,” said Yuji Saito, head of the foreign-exchange department at Credit Agricole SA in Tokyo. While yesterday Fischer’s Friday announcement was largely forgotten, the hawkish mood has returned today and the the Bloomberg Dollar Spot Index climbed to a three-week high ahead of Fischer, who last week suggested that interest rates may rise as soon as September.

“Views on the U.S. interest-rate hike have eased a little after a day’s passed, and it’s difficult to see a clear direction ahead of the U.S. jobs data,” said Seiichi Miura, a strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “There’s a profit-taking mood in the Japanese stock market after the surge yesterday. That said, there’s not enough of a reason to keep selling.”

Speculation the U.S. will raise interest rates this year surged over the past two weeks, boosting the dollar, as Fed officials including Chair Janet Yellen said the case for tightening policy is getting stronger. As Bloomberg notes, after a report on Monday showed consumer spending rose for a fourth month, investors will be looking at data on consumer confidence on Tuesday and monthly payrolls figures later in the week to judge if the economy is strong enough to support higher rates.

European stocks rose after banks, technology shares and automakers led the Stoxx Europe 600 Index up 0.5%. Banca Popolare dell’Emilia Romagna SC and UniCredit SpA advanced more than 2.8 percent, sending Italy’s FTSE MIB Index 1.6 percent higher for the biggest gain among western-European markets. The U.K.’s FTSE 100 Index was little changed, reopening after a holiday on Monday. Futures on S&P 500 Index were down 2 points, driven largely by the Apple tax announcement, after the index rallied the most in three weeks on Monday. Mondelez International Inc. climbed 3.2 percent in early New York trading after saying it’s walking away from takeover discussions with Hershey Co. two months after its $23 billion bid was rejected by the chocolate maker. Hershey sank 12 percent in late trading on Monday. The MSCI Emerging Markets Index advanced 0.5 percent, rebounding from a three-week low. Energy shares led gains, while benchmarks in Hong Kong and India climbed more than 1 percent.

The yield on U.S. government debt due in a decade increased by three basis points to 1.59 percent, after dropping seven basis points on Monday. The rate on two-year notes increased by one basis point to 0.82 percent. The Fed is “likely to tighten in September, at least as long as the jobs number comes in OK,” Michael Pond, head of global inflation market strategy at Barclays Capital Inc. in New York, said on Bloomberg Television. “Hawkish Fed rhetoric has certainly increased recently. It’ll take a decent number, like 200,000, for them to go.”

U.K. longer-dated bonds were supported before the Bank of England’s latest purchase operation as part of its expanded quantitative-easing program. Thirty-year gilt yields fell two basis points to 1.25 percent. “There are real doubts over how many sellers will turn up,” Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris, wrote in a client note.

Market Snapshot

• S&P 500 futures unchanged at 2179
• Stoxx 600 up 0.5% to 345
• FTSE 100 up less than 0.1% to 6844
• DAX up 1% to 10646
• German 10Yr yield up less than 1bp to -0.08%
• Italian 10Yr yield down less than 1bp to 1.12%
• Spanish 10Yr yield up less than 1bp to 0.94%
• S&P GSCI Index up 0.4% to 360.6
• MSCI Asia Pacific up 0.3% to 138
• Nikkei 225 down less than 0.1% to 16725
• Hang Seng up 0.9% to 23016
• Shanghai Composite up 0.2% to 3075
• S&P/ASX 200 up 0.2% to 5478
• US 10-yr yield up 2bps to 1.58%
• Dollar Index up 0.21% to 95.78
• WTI Crude futures up 0.8% to $47.37
• Brent Futures up 0.7% to $49.62
• Gold spot down 0.2% to $1,321
• Silver spot down 0.7% to $18.76

Top Global Headlines

• Hershey’s Failed Deal Reinforces Image as a Company Not for Sale: Mondelez walks away after takeover attempt is rejected, Hershey said to demand that price talks begin at $125 a share
• United Hires American’s No. 2 in Boost to Succession Planning: Kirby jumps after 20 years of teaming with American CEO Parker
• Apple’s Day of Reckoning Comes With Billion-Euro Tax Risk: EU is expected to conclude Tuesday that Ireland provided Apple with illegal aid through a favorable tax arrangement
• Apple Said to Prepare IPad Upgrades and Refreshed Mac Lineup: Deeper stylus integration, faster displays planned for iPads
• Google and Amazon Vie for Big Inroad Into Wall Street Data Trove: Tech firms are bidding to help SEC with data storage in clouds
• VW Diesel Owners Quick to Pick Buyback Over Emissions Fix: Almost half of plaintiffs register within month of settlement
• Mylan Fails to Stop Firestorm Over EpiPen Price Increases: Drugmaker will introduce lower-cost generic version of shot
• Alphabet’s Legal Chief Departs Uber Board Amid Conflicts: David Drummond has left the board amid competition between Alphabet’s Google and Uber over self-driving cars, other areas
• Colorado Drillers Dodge $10 Billion-a-Year Threat to Output: Oil and natural gas explorers have escaped a vote in Colorado that would have limited drilling
• Caesars Wins Short Delay to Billion-Dollar Bondholder Lawsuits: Won a temporary halt to lawsuits that could force it into bankruptcy
• Aeropostale Lender Sycamore Joins Bidding for Bankrupt Retailer: Chain borrowed $150m from private equity firm in 2014
• KKR Said to Buy Calabrio for $200m: WSJ: Agrees to pay $200m in all-equity deal; may be announced as soon as Tuesday, WSJ reports, citing unidentified person familiar
• Spotify Mulling Some New Music Release for Subscribers Only: NYP

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Looking at regional markets, we start in Asia where equities traded mostly higher following the positive lead from the US where financials advanced after the recent hawkish Fed commentary and encouraging US Spending and Consumption data. This saw financials underpin ASX 200 (+0.5%) while gains in metals also boosted mining names. Nikkei 225 (-0.1%) was initially lower on profit-taking and a firmer JPY, but then recovered as USD/JPY reclaimed the 102.00 handle. Elsewhere, Hang Seng (+0.9%) & Shanghai Comp (+0.2%) were also positive following encouraging earnings and as the PBoC continued with its longer dated liquidity injections. Finally, 10yr JGBs traded flat with demand dampened as Japanese stocks recovered from their lows, while today’s 2yr JGB auction was mixed with an improvement in the b/c and a narrower tail in price, although the amount sold was less and the lowest accepted price declined from prior. Japanese PM Abe adviser Hamada stated the MoF has lost credibility in intervention threats and should ‘courageously’ intervene in FX markets to cap JPY appreciation. Hamada added that allowing JPY to appreciate to damaging levels will result in a failure of Abenomics and that FX speculators must be placed under control before risky policy such as helicopter money can be discussed.

Asia Top News

• Japan’s Household Spending, Unemployment Fall in July: joblessness at lowest since 1995, spending down for 5th month
• Questions Linger on China Drug Safety Even as Sales Rise in U.S.: companies struggle to gain trust of patients, regulators
• KKR’s Most Senior China Executives Exit as Firm Plans Fund: Liu, Wolhardt plan to form their own China-focused fund
• Southeast Asia’s Most Valuable Startup Running Toward an IPO: Garena valued at close to $4 billion
• AirAsia to Sell Leasing Arm as Early as December to Cut Debt: company had received offer valued at $1 billion for unit
• Hanjin Shipping Creditors Reject Revamp Plans: company’s voluntary debt-restructuring program ends Sept. 4
• Singapore’s Dual-Class Shares Move Wins Nod From Listings Group: shares will be subject to governance safeguards
• Samsonite Sees Tumi Sales Doubling to $1 Billion on Global Push: Tumi to develop new products
• Shenzhen-Hong Kong Link Expected to Start in November, CSRC Says: gives date in slideshow presentation
• China’s Credit Party Winds Down in Headwind for GDP Growth: net issuance drops 39% in August

European equities are trading modestly higher (Eurostoxx +0.9%) led by financial names, with notable gains in Italian bank Unicredit (+2.8%) following reports that they could offload EUR 20bIn NPLs with state guarantee. Elsewhere, the FTSE 100 lags the region as UK participants play catch up, with losses in the index stemming from material names. While losses have also been seen in South African exposed Old Mutual and Investec amid the political uncertainty surrounding South Africa with reports suggesting that Finance Minister Gordhan could be charged in relation to a ‘rogue spy unit’. Additionally, E-mini Nasdaq futures have been pressured after the EU commission concluded that Ireland granted undue tax benefits of up to EUR 13bIn to Apple (AAPL). However, according to an Official, Ireland is preparing to appeal the EUR 13bIn Apple (AAPL) ruling. In credit markets, Bunds are slightly in the red amid the upside in the equities, underperformance has been seen in short end of the curve. While focus is on the peripheral market with participants awaiting the outcome of the Spanish confidence vote, which is expected to fall short of an absolute majority with 170 seats against the required 176.

European Top News

• Euro-Area Economic Confidence Declines as Brexit Shock Sinks In: Euro-area economic confidence worsened more than analysts predicted in August
• VW CEO Sees First Fruits From Turnaround Effort in Two Years: Revamp involves about 60 projects, including cultural shift
• U.K. Mortgage Approvals Hit 18-Month Low; Consumer Credit Slows: Banks and mutually owned lenders signed off on 60,912 home loans, fewest since Jan. 2015, the Bank of England said; U.K. Salaries Weaken as Employers Start to Hesitate Post-Brexit
• U.K. Foreign Investment Sets Record, Boosted by Emerging Markets: 11% more projects backed by overseas cash, says government
• Denmark Cuts Economic Outlook as Brexit Fallout Leaves Mark: GDP will expand 0.9% in 2016, compared with a May forecast for 1.1%, according to government documents seen by Bloomberg
• Bundesbank Sees Need to Re-Calibrate Basel Reform Proposals: Dombret says risky banks will see capital requirements rising
• Merkel Ally Says Post-Brexit U.K. Must Pay for EU Market Access: CDU foreign-policy lawmaker cites Norway model of EU ties

In FX, the Bloomberg Dollar Spot Index rose 0.2% in early trading with the U.S. currency strengthening 0.2 percent against the euro and 0.4 percent versus the yen, which was trading at 102.34 per dollar. Fed funds futures ended Monday indicating a 36 percent chance that the Fed will raise rates in September, up from 24 percent a week earlier, and Fischer has said U.S. payrolls figures on Friday will be key to the central bank’s decision making. The report is projected to show employers added 180,000 jobs this month, following a gain of 255,000 in July. Prospects for higher U.S. rates has prompted options traders to turn bullish on the currency versus yen for the first time since November. One-month 25-delta risk reversals show that call options on the dollar cost seven basis points more than put options, a sign more investors expect the dollar to rally than to weaken. Put options on the dollar had traded at a premium throughout this year. The pound fell for a fourth day against the dollar as a report showed U.K. mortgage approvals slumped to an 18-month low in July and consumer borrowing slowed following Britain’s vote to leave the European Union. Sterling weakened 0.3 percent to $1.3067, and was 0.1 percent weaker versus the euro. South Korea’s won rose 0.5 percent versus the dollar, the best performance among 16 major currencies.

In commodities, West Texas Intermediate crude was up 0.7 percent at $47.30 a barrel. U.S. stockpiles probably increased by 1.5 million barrels last week, according to analysts surveyed by Bloomberg before official data due Wednesday. Oil explorers discovered just 2.7 billion barrels of new supply in 2015, the smallest amount since 1947, and this year’s tally is on track to be even smaller, according to figures from consulting firm Wood Mackenzie Ltd. “We’ve had a big rally and a bit of a dip but oil has been resilient, holding comfortably above $45 a barrel,” said Angus Nicholson, a market analyst in Melbourne at IG Ltd. “We’ve seen a lot of jerky trade based on various rumors associated with the OPEC meeting and I’m sure that will continue.” Gold fell 0.2 percent to $1,320.15 an ounce, putting it on course for the seventh loss in eight sessions as a stronger dollar made the metal less attractive in countries outside the U.S. Central banks, the biggest holders of bullion, cut their purchases by 40 percent from a year earlier in the last quarter to the lowest since 2011, World Gold Council figures compiled by Bloomberg show. Copper erased earlier gains of as much as rose 0.7 percent in London. Zinc dropped 0.8 percent.

The key event highlight in the US is the August consumer confidence reading which is expected to fall modestly to 97.0 from 97.3 last month. The S&P/Case-Shiller house price index for June is also due to be released. As noted earlier, it’s worth keeping an eye on Fed Vice-Chair Fischer again when he speaks later this morning.

* * *

Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities trade modestly higher amid the upside in financials, particularly Italian banks as Unicredit may offload EUR 20bIn worth of NPLs.
• E-mini Nasdaq futures pressured after the EU commission concluded that Ireland granted undue tax benefits of up to EUR 13bIn to Apple (AAPL).
• Looking ahead, participants will also await US Case Shiller, CB Consumer Confidence and API crude inventory report.
• Treasuries pare declines along with U.S. dollar, while global equities; Vice Chair Stanley Fischer said pace of rate hikes depends on data, fiscal policy changes likely but uncertain in 2017-18.
• Euro-area economic confidence worsened more than analysts predicted in August in a sign that the reverberations of Britain’s decision to leave the EU may finally be reaching companies and households
• An ally of German Chancellor Angela Merkel said the U.K. will have to pay into the EU’s budget if it wants the single market’s advantages, diminishing Britain’s prospects for a low-cost solution after its vote to exit the bloc
• U.K. mortgage approvals slumped to an 18-month low in July and consumer borrowing slowed following the decision to quit the EU
• The Czech Republic’s ambition to throw off its crisis-era currency regime is in danger of being delayed by Mario Draghi
• The yuan’s recent stability may be coming to an end as derivative markets are pointing to renewed bets on yuan depreciation, with a three-month measure of expected price swings poised for the biggest monthly increase since January
• Bank of China Ltd., the nation’s fourth-largest lender, reported a 3.4 percent increase in second-quarter profit even after setting aside extra provisions to boost its bad- loan buffer

DB’s Jim Reid concludes the overnight wrap

The day after the August bank holiday here in the UK always seems to mark the beginning of the end of summer frivolities and a return to more serious matters ahead with the added disadvantage of darker and colder mornings. This week will still likely be relatively quiet but it’s a big payroll report coming up on Friday in light of all the recent Fed speakers and we’ll likely see more activity in the build up and then next week given that by then most will be back from hols. As Craig discussed yesterday, Yellen’s Jackson Hole speech didn’t really give much away as to the Fed’s near-term thinking. However it seems many of the others on the FOMC have got their fingers hovering over the rate hike button and are not ashamed to broadcast it. I’m still inclined to believe they won’t hike next month but it could come down to Friday’s random number generator as to what they do.

Fed speak continues to dominate markets but with the last 24 hours or so seemingly an unwind of much of the price action which happened post-Fischer on Friday afternoon. Indeed after yields rose fairly steeply on Friday, yesterday was very much a day of retracement for bonds. The 10y yield ended up falling 7bps to 1.560% and is more or less back to pre Jackson Hole levels again. The move wasn’t quite as exaggerated at the short end although 2y yields did still fall 3.7bps to 0.807%. They closed last Thursday at 0.791%. Meanwhile the US Dollar initially climbed steadily as the US session kicked in and so added to Friday’s gains, but then pared all of that move in the final few hours to close flat on the day.

The stalling inflation data in the US (more on that shortly) was perhaps to blame for the rally in rates, while there was also some chatter of month end buying being a factor. Perhaps it’s just a reflection that there appears to be little conviction to break out of the extraordinarily tight range of late. Over the last 34 days since July 13th, the US 10y yield has traded in just an 18bps high to low range when you include intraday peaks and troughs.

So while yesterday was a good day to be long Treasuries it also ended up being a good day to be long US equities too. A financials driven rally helped the S&P 500 close the day +0.52% in what was in fact the strongest day for the index since August 5th. The confusing element was the fact that US financials actually struck a year-to-date high yesterday despite Fed rate hike expectations dipping a little bit lower. September and December probabilities actually retraced slightly to 36% and 61% respectively from 42% and 65% on Friday. It’s worth highlighting here that a Bloomberg interview with the Fed’s Vice Chair Fischer has now been scheduled for this morning at 11.30am BST (6.30am ET). Given the reaction to his comments on Friday it’s worth keeping an eye on the headlines that emerge from this one.
That stronger day for US equities yesterday also came as WTI Oil pulled back -1.39% and closed below $47/bbl for just the second time in two weeks. This morning in Asia the majority of bourses are following the lead from the US and trading slightly firmer. The Hang Seng (+0.66%), CSI 300 (+0.07%), Kospi (+0.70%) and ASX (+0.55%) in particular are all up. The Nikkei is back to flat having initially opened on the back foot. That more than likely reflects the volatile moves in the Yen which right now is -0.21% weaker. Economic data released in Japan this morning was a bit better than expected. The jobless rate fell one-tenth to 3.0% in July. Overall household spending improved to -0.5% yoy in July from -2.3%, while retail sales (+1.4% mom vs. +0.8% expected) increased more than expected last month.
Moving on. The July personal spending and income data that was released in the US yesterday was reasonably supportive. Spending rose +0.3% mom last month as expected following an upwardly revised +0.5% mom increase in June. Spending has now in fact risen for four straight months, while yesterday we also learnt that personal income rose +0.4% mom (also in-line) which was the second most in a single month this year.

The inflation data revealed a bit of a slowing in momentum however. The PCE deflator was unchanged in July as expected following a +0.1% mom increase in June. The YoY rate is now +0.8% which is slightly down from the +0.9% in the prior month. Meanwhile core PCE rose +0.1% mom last month which was enough to keep the YoY rate unchanged at +1.6%. The only other data was the Dallas Fed’s manufacturing survey which printed at -6.2 (vs. -3.9 expected), down 4.9pts from July and the 20th negative reading in a row. There was some encouragement in the components though with new orders turning positive and the production index also increasing 4pts.

Closer to home it was unsurprisingly quiet given the UK Bank Holiday. European equity markets closed modestly lower (Stoxx 600 -0.15%) albeit on much lower than average volumes. Datawise the main highlight was the ECB’s latest CSPP holdings data and once again it was impressive given the time of year. Total holdings as of August 26th are now €19.3bn following net purchases settled last week of €1.5bn. That implies an average daily run rate last week of €301m which is only slightly below the €345m average since the program started. August purchases have almost certainly been healthier than most would have expected given the holiday season.

Looking at today’s calendar, this morning in Europe we’re kicking off in Germany where we’ll first of all receive the import price index reading. Attention will then switch over to the UK with the money and credit aggregates data for July released along with last month’s mortgage approvals data. We’ll then get the August confidence indicators for the Euro area before the flash August CPI reading in Germany gets released. The highlight in the US this afternoon is the August consumer confidence reading which is expected to fall modestly to 97.0 from 97.3 last month. The S&P/Case-Shiller house price index for June is also due to be released. As noted earlier, it’s worth keeping an eye on Fed Vice-Chair Fischer again when he speaks later this morning. The other potentially interesting event is in Brazil where the Senate impeachment trial on President Rousseff continues. Our emerging market economists noted yesterday that the final Senate vote will probably take place on Wednesday morning.

Submitted by Wolf Richter via WolfStreet.com,

The two biggest buyers of Japan Inc. are flying blind and don’t care.

The Bank of Japan and the Government Pension Investment Fund (GPIF) have been buying stocks to inflate the market, create some kind of “wealth effect,” and bamboozle regular Japanese into pouring once again into stocks, after many of them lost a big chunk of their savings when the prior bubble imploded without ever recovering.

In 2014, the GPIF – buckling under the pressure from the Abe administration – decided to plow about 25% (“±9%”) of its assets into Japanese stocks. With assets at the time of still about $1.4 trillion, 25% would amount to about $350 billion. So the fund has been buying a lot! And it has been a disaster![Read…  Japan Mega-Pension Fund Dives into Stocks, Foreign Assets, Loses Shirt. People Not Amused]

But even after Japanese stocks took a licking over the past year, the fund’s allocation to domestic equities is still 21%, so near its range and no longer a powerful buyer. But to make up for any holes left behind by the pension fund, the BOJ announced on July 28 that it would nearly double its annual purchases of equity ETFs to ¥6 trillion ($59 billion).

The holdings of Japanese stocks by these two entities have nearly tripled over the past five fiscal years to about ¥39 trillion ($381 billion), according to The Nikkei. During that time, the Nikkei stock index soared 70%, “demonstrating their powerful support.”

But, but, but… the index remains 57% below its bubble peak of 1989.

So what has this done to overall government ownership of Japanese stocks? We don’t really know, because it’s kept purposefully opaque, according to The Nikkei:

These major public-sector buyers do not appear on shareholder lists because of their indirect ownership via trust banks and other intermediaries.

And yet, The Nikkei figured that “the two together are the largest shareholders for 474 of about 1,970 stocks” on the Tokyo Stock Exchange’s first section (the section for large companies), “based on public information.”

And this is just the beginning.

So for example, between the GPIF and the BOJ, they own 17% of TDK, 16.5% of Advantest, 14.2% of Nitto Denko, 14.2% of Yokogawa Electric, more than 10% of entertainment company Konami Holdings and security services provider Secom.

“We hope they will hold the shares over the long term,” fretted an official of Yokogawa Electric. Because if they ever tried to sell those shares, all heck would break loose.

Overall, the BOJ and the GPIF now hold over 7% of stocks in the first section of the TSE. By contrast the largest private-sector stockholder, Nippon Life Insurance, holds only about 2% of the stocks in the first section.

So hopes are high that the BOJ’s buying binge of ¥6 trillion in equity ETFs, and whatever the GPIF might still buy – though it’s largely finished as a buyer – will inflate the market. Nomura Securities chief strategist Hisao Matsuura thinks that the ¥6 trillion a year from the BOJ alone will inflate the Nikkei index by 2,000 points per year, or about 12%… year after year… come hell or high water, one would assume, because according to this logic, nothing else but central-bank and government-pension-fund buying matters.

If companies have declining sales, losses, and nightmarish management, it wouldn’t matter. These companies would still be able to raise funds and go on as if nothing happened because there will be a relentless and dumb bid, and their stocks would soar since the BOJ and GPIF are passive shareholders, blindly buying equities mostly in form of ETFs. Owners of ETFs cannot dump individual stocks; they cannot punish companies by selling their shares – the most fundamental action of the market.

In other words, the largest most relentless buyers and owners of Japan Inc. are blind, dumb, and mute. That might suit Japan Inc. just fine. Entrenched management coddled by these big passive investors has nothing to worry about. Forget the discipline of the market, or price discovery, or pressures on corporate governance, or any other function of the market. They will all disappear – if they haven’t already.

In this scenario, companies can turn into zombies while the BOJ and the GPIF will still be loading up on ETFs that contain these shares and keep their prices high. And keeping prices artificially high is the only goal of all this buying.

Neither the BOJ nor the GPIF could ever unload these ETFs without unwinding the stock price inflation their relentless and blind buying has caused. And in turn, if the BOJ and the GPIF start selling their ETFs, even high-performing companies would see their share prices get eviscerated.

With these two public elephants in the room, nothing else matters. And this has some ironic consequences, according to Shingo Ide, chief equity strategist at NLI Research Institute: “Regular investors who focus on company analyses may hesitate to buy.” And that may have something to do with the swoon of Japanese stocks over the past 12 months.

But the BOJ is already fretting about the next crash and is building up a big pile of dry powder.Read…  Bank of Japan Prepares for Crash Triggered by Fed Tightening