After yesterday’s torrid rally, which sent stocks higher the most in 2 months on the back of Lael Brainard surprisingly dovish comments, we have seen an unexpected profit-taking session overnight – maybe the market’s concern about a September rate hike is back – with US equity futures down 0.6%, driven largely by a renewed drop in oil prices which slid after the IEA said a surplus in global markets will last longer than initially estimated, persisting well into 2017 as reported previously. As Bloombergobserves, investors remain wary of riskier assets even after dovish comments on Monday from Federal Reserve Governor Lael Brainard damped expectations for a U.S. interest-rate increase next week. The Fed and the Bank of Japan have policy decisions on Sept. 21, with the latter weighing the case for more stimulus.

The oil drop dragged  down currencies of commodity-producing nations, while a flat USDJPY meant that the Nikkei was unable to capitalize on yesterday’s US surge. In China, the Composite was unchanged after stronger than expected industrial production and retail sales data, together with the PBOC unveiling a 28-day repo, doused expectations of a near-term monetary stimulus.

“The lack of U.S. data and the start of the Fed blackout period need not stand in the way of further risk underperformance and outperformance against commodity and high-yielding currencies,” said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA’s corporate and investment-banking unit in London. The dollar’s reliance after the Brainard speech “suggests that other factors may be at play that could keep the dollar supported especially against commodity and risk-correlated currencies,” he said.

Given the moves over the last few days, it’s worth taking stock of where markets are this morning relative to the closing levels last Wednesday. Most notable perhaps is the fact that the September implied probability for a rate hike is now unchanged in that time frame at 22%. December odds have crept up from 52% to 57%. In terms of US Treasuries, the 10y yield is up 11bps, while 2y yields are a much more modest 2bps higher. 30y yields are also 14bps higher so we have seen a reasonable steepening across the curve. At the other end of the risk spectrum, the S&P 500 and Dow are -1.24% and – 1.09% in the time, while CDX IG is just 2bps wider. In the commodity complex Gold is -1.20% and WTI Oil is +1.10%. So all in all, notwithstanding a reasonable steepening in the yield curve, overall moves have been relatively contained in general.

“Markets are really struggling to read the runes of Fed statements,” said Andrew Parry, London-based head of equities at Hermes Fund Managers Ltd. “Only last week they were talking about the need to have an early rate rise. They are still very nervous about the process of normalization,” he said in a Bloomberg TV interview.

European stocks were little changed as investors assessed a selloff that sent equities to their lowest level in almost three weeks. Partners Group Holding AG led financial-services shares to the biggest gains among industry groups, up 10 percent after posting a jump in first-half earnings. Energy producers fell the most, tracking declines in crude. Ocado Group Plc plunged 14 percent after the online grocer said it sees no respite from sustained margin pressure in the short term. Health-care companies, traditionally viewed as stocks with greater payouts, contributed the most to Stoxx 600 gains today. A Morgan Stanley index tracking companies with high and sustainable dividends is faring its worst versus the broader European gauge since at least January 2013 amid an uptick in bond yields and a shift into so-called cyclical shares. Graham Secker, head of European equity strategy at the bank, says the extent of the rout has made such shares attractive. A gauge of miners fell for a fourth day, the longest losing streak since June. Anglo American Plc and BHP Billiton Ltd. dropped at least 1.2 percent.

The Stoxx Europe 600 Index was largely unchanged, erasing gains of as much as 0.6 percent. The benchmark fell for the past three days as investors fretted central banks may be less willing to use monetary policy to stimulate economic growth. It’s trading near its lowest valuation in more than a month, on an estimated earnings basis.

Market Snapshot

• S&P 500 futures down 0.6% to 2139
• Stoxx 600 up less than 0.1% to 342
• FTSE 100 down less than 0.1% to 6697
• DAX up 0.3% to 10462
• German 10Yr yield down 3bps to 0.01%
• Italian 10Yr yield down 2bps to 1.26%
• Spanish 10Yr yield down 3bps to 1.06%
• S&P GSCI Index down 0.9% to 353.5
• MSCI Asia Pacific down 0.1% to 137
• Nikkei 225 up 0.3% to 16729
• Hang Seng down 0.3% to 23216
• Shanghai Composite up less than 0.1% to 3024
• S&P/ASX 200 down 0.2% to 5208
• US 10-yr yield down less than 1bp to 1.66%
• Dollar Index up 0.13% to 95.22
• WTI Crude futures down 2.2% to $45.26
• Brent Futures down 1.9% to $47.41
• Gold spot up less than 0.1% to $1,329
• Silver spot up 0.3% to $19.17

Top Global Headlines

• Brainard’s Argument for No September Hike Likely to Sway Fed: Fed governor spells out risk-management calculus for prudence
• Bond Traders Left Doubting Rate Hike as Fed Speakers Go Silent: Traders pare bets on a Sept. rate increase after speech
• Wells Fargo’s CEO to Face Senate Panel in Cross-Selling Scandal: Senate Banking Committee to hold a hearing Sept. 20
• Oil Declines as IEA Says Surplus Will Last Longer Than Expected: Surplus to persist into late 2017 as demand slows: IEA
• Anadarko Pays Freeport $2 Billion for Deepwater Gulf Assets: Driller will generate $3 billion for U.S. drilling efforts
• DraftKings CEO Leaves the Door Open for a Possible FanDuel Merger: Combining co. could also reduce legal and lobbying costs
• Golfsmith May File for Chapter 11 Within Days: NYP: Owner OMERS decided to not invest more capital to save Golfsmith
• GIP to Acquire $4.3 Billion Stake in Spain’s Gas Natural: Repsol sees capital gain from sale of about 246 million euros
• U.S. Bombers Train With Japan, South Korea After Nuclear Test: Training in response to North Korea’s fifth test last week

Looking at regional markets, in Asia stocks traded mixed as they struggled to sustain the impetus from a firm Wall St. lead where S&P500 posted its largest gain in 2 months, after dovish comments Fed’s Brainard boosted sentiment. This supported Nikkei 225 (+0.3%) and ASX 200 (+0.2%) at the open with global markets hanging on to every word from the Fed ahead of next week’s FOMC, although stocks in Japan then swung between gains and losses alongside JPY fluctuations. Chinese markets are mixed with Hang Seng (-0.3%) positive and Shanghai Comp (+0.1%) choppy after better than expected Industrial Production and Retail Sales, as the firm data reduces urgency for measures while the PBoC also resumed the use of 28-day reverse repos, which some suggested could be an attempt to curb financial leveraging. 10yr JGBs traded higher to track gains in T-Notes while today’s 20yr bond auction was mixed with the average and lowest accepted prices higher than previous, although b/c printed its lowest in 6 months.

As noted above, China reported key economic data for the month of August, which saw both factory output, and retail sales rebound, suggesting that the July deterioration may have been a one off event. Here are the details:

• Chinese Industrial Production (Aug) Y/Y 6.3% vs. Exp. 6.2% (Prey. 6.0%)
• Chinese Retail Sales (Aug) Y/Y 10.6% vs. Exp. 10.2% (Prey. 10.2%)

Top Asian News:

• China’s Economy Strengthened as Factory Output, Retail Perk Up: Rebound suggests July weakness was a blip, not fresh downturn
• CEO’s Leveraged Bet on Himself Earns $423 Million as Sina Soars: Charles Chao’s investment has jumped 81% in 10 months
• BOJ Is Said to Mull Change or Abandonment of JGB Maturity Range: BOJ last adjusted the guidance in December
• Axiata Said to Seek Buyers for $700m of Overseas Holdings: Axiata to cut stakes in Indonesia, Sri Lanka, Cambodia units
• Rich Indonesians Snap Up Singapore Luxury Homes as Taxman Calls: Indonesians beat all foreign buyers of high-end units in 2016
• China’s Postal Savings Bank Seeks Up to $8.1b in H.K. IPO: Co. plans to offer 12.1b shares in price range of HK$4.68- HK$5.18 each
• Japan’s Renesas Agrees to Buy Intersil for $3.2 Billion: Renesas is offering $22.50 a share, 14% premium
• Hanjin Fall Is Lehman Moment for Shipping, Seaspan CEO Says: Gerry Wang concerned about systemic impact from Hanjin

European equities started off on the front foot but as the session continued energy prices dampened the mood with the energy sector underperforming to see European equities slip into negative territory (Euro Stoxx -0.1 %) with newsflow particularly light from a European perspective and markets unreactive to the latest German ZEW survey. In fixed income markets, prices have ebbed higher alongside the downtick in equities with Europe absorbing supply from the Netherlands and Italy this morning. As has been the case for equity markets, newsflow is on the light side with the next source of focus on the latest BoE buyback and 30yr Bond auction from the US.

Top European News:

• U.K. Inflation Holds at 0.6% as Import Price Pressures Build: U.K. inflation was unexpectedly unchanged in August
• German ZEW Investor Confidence Unchanged as Brexit Risks Persist: ZEW cites ‘ambiguity’ in signals for economic prospects
• Air Liquide Starts 3.3 Billion-Euro Rights Issues for Airgas: French gases supplier offers one share for every eight held
• Veolia $1.3b Deal Shows French Company Unfazed by Brexit: Waste-to-energy contract caps series of recent U.K. deals
• Porsche Said to Show First Station Wagon in 2017 to Expand Range: New car to challenge Mercedes-Benz’s CLS Shooting Brake
• ABN Amro Chief to Leave Early After Returning Bank to Market: Zalm, CEO since 2009, says lender needs longer-term leader
• Esure Shares Advance on Plan to Spin Off Gocompare.com Unit: Demerger to take place in fourth quarter, backed by board
• Ocado Shares Slump as U.K. Grocery Price War Damages Profits: Amazon encroachment in London also pressures margins: analyst
• Vedanta Wins Cairn Nod for BHP-Style Resources Conglomerate: Vedanta shareholders gets cash while Cairn’s add debt
• Italian Industry Output Exceeds Expectations, Boosting Outlook: Pharma, vehicle production lead monthly increase

In FX, it has been a mixed session in early Europe, with FX markets showing no discernible theme other than watching the broader risk sentiment reflected in the equity markets. The JPY has seen a modest bid to keep the USD rate below the 102.00 mark. USD sentiment has been mixed with last night’s comments from Fed member Brainard having taken the shine off a little, but in the case of EUR/USD, the market still has designs to a test on 1.1200, having snapped up to 1.1265 or so in NY yesterday, but returning lower just as sharply. German and EU ZEW were weaker than expected this morning, with the former down on the previous month, but there was little noticeable impact on the single unit. In terms of data, UK CPI was a potential mover, but given the sharp post Brexit losses in GBP, both the headline and core Aug reads were unchanged vs Jul, but there was no major impact on the Pound as we look to the BoE later this week as well as the key retail sales number. EUR/GBP is holding off resistance levels ahead of .8500, while Cable is flitting either side of 1.3300. The commodity currencies remain pressured after some temporary relief late yesterday, but USD/CAD shot back up to 1.3100 again on Oil prices (and S&P futures deep in the red again) — the !EA forecasting the surplus to persist into 2017 and reducing 2016 demand by 100k bpd.

In commodities, WTI and Brent crude futures reside in negative territory amid a paring of some of yesterday’s gains as well as the latest update from the IEA, in which the organization predicted the current surplus in oil markets will persist in 2017 while also reducing its oil demand forecast for 2016 by 100k bpd to 1.3mln bpd. Looking ahead, markets will await the latest after-market API data which comes in the context of last week’s significant drawdown in inventories — the largest since 1999. Elsewhere, in precious metals, price action has been relatively muted, with the likes of gold and silver in modest positive territory having traded in a tight range throughout European hours.

Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities enter the North American crossover relatively unchanged with early gains erased alongside a downtick in energy
• FX markets showing no discernible theme while the JPY has seen a modest bid to keep the USD rate below the 102.00 mark
• Looking ahead, highlights include German CPI, UK CPI, German ZEW, API Crude Oil Inventories and a speech from ECB’s Draghid
• Treasuries slightly higher in overnight trading with global equities lower; auctions conclude with $12b 30Y bonds reopening, WI 2.35%, last sold at 2.274% in August, 27.7% primary dealer award was lowest on record for a refunding.
• The bond market is signaling growing skepticism over the prospect of a Federal Reserve interest-rate increase before next week’s policy meeting
• Libor has risen above 0.75%, could amount to about an extra $250 million of total interest expense annually for junk- rated companies with about $230 billion of loans outstanding, according to data compiled by Bloomberg
• The Bank of Japan is considering either a tweak to or an abandonment of its guidance on the range of government bonds that it buys, according to people familiar with the discussions
• The negative interest rate strategy that Japan and Europe’s central banks have embraced may do more harm than good, according to John Taylor, the creator of an eponymous rule for guiding monetary policy
• Banks may face an increase of about 10% in their capital requirements as a result of the overhaul of risk-assessment rules under way at the Basel Committee on Banking Supervision, according to Philippe Heim, CFO of Societe Generale
• U.K. inflation was unexpectedly unchanged in August at 0.6%, though more signs emerged of imported price pressures because of the weaker pound, according to figures from the Office for National Statistics
• German investor confidence was unchanged in September after recent data signaled economic momentum cooled, with an index of investor and analyst expectations, which aims to predict economic developments six months ahead, held at 0.5
• Italian industrial output rose 0.4% compared with June, more than economists estimated in July, led by pharmaceuticals and vehicle production, prompting hopes for a renewed recovery after growth stalled in the second quarter

DB’s Jim Reid concludes the overnight wrap

The main conclusion from yesterday was that 2+2 sometimes just equals plain old 4 as the conspiracy theories around the timing of Brainard’s speech were proved unfounded. It’s rare that a Fed speaker gets so much global attention. I even forced my wife to sit through the Q&A when I got home last night. She was thrilled.

Indeed Brainard made her view pretty clear and stuck to her well versed dovish script. The Fed Governor said that ‘in the presence of uncertainty and the absence of accelerating inflationary pressures, it would be unwise for policy to foreclose on the possibility of making further gains in the labour market’ and so ‘to the extent that the effect on inflation of further gradual tightening in labour market conditions is likely to be moderate and gradual, the case to tighten policy pre-emptively is less compelling’. She also added that asymmetry in risk management in today’s new normal ‘counsels prudence in the removal of policy accommodation’. In the Q&A the question was asked if she would dissent at a hike in September but she sidestepped this. Overall it was pretty clear from the speech that there was little change in her uber dovish views.

Prior to this we’d also heard from a couple of the more centrist non-voters of the FOMC in the Minneapolis Fed’s Kashkari and Atlanta Fed President Lockhart. The former preached a similar cautious tone, saying that he ‘wants to see more movement in core inflation’ and that ‘he doesn’t see huge urgency to do anything’, while the latter was a little more upbeat but largely consistent with his prior view, saying that he expects the FOMC to have a ‘serious discussion’ at next week’s meeting but that he didn’t ‘feel that we are incurring the costs of patience that put a lot of urgency on the question of raising rates’.

It was Brainard’s comments that dominated the market though. Treasuries retraced a bit of Friday’s losses with the benchmark 10y yield closing 1.2bps lower at 1.664% although had been as high as 1.696% prior to the comments.

2y yields were also 1.2bps lower by the close at 0.772% although were nearly 4bps down from the pre-Brainard highs. Her comments took 6 percentage points out of the September hike odds with it closing at 22% while December is now down to 57% from 60% on Friday. Meanwhile the USD edged lower (Dollar index closing -0.23%) and risk assets rallied back. The S&P 500 closed +1.47% and sector wise it was a mirror image of what we got on Friday with high yielding dividend stocks in telecoms, consumer staples and utilities sectors leading gains, while financials lingered towards the bottom (albeit still in positive territory). There was a similar rebound for credit with CDX IG nearly 3bps tighter on the day.

Given the moves over the last few days, it’s worth taking stock of where markets are this morning relative to the closing levels last Wednesday. Most notable perhaps is the fact that the September implied probability for a rate hike is now unchanged in that time frame at 22%. December odds have crept up from 52% to 57%. In terms of US Treasuries, the 10y yield is up 11bps, while 2y yields are a much more modest 2bps higher. 30y yields are also 14bps higher so we have seen a reasonable steepening across the curve. At the other end of the risk spectrum, the S&P 500 and Dow are -1.24% and -1.09% in the time, while CDX IG is just 2bps wider. In the commodity complex Gold is -1.20% and WTI Oil is +1.10%. So all in all, notwithstanding a reasonable steepening in the yield curve, overall moves have been relatively contained in general.

Switching now to the latest in Asia where the August activity indicators in China, released this morning, have made for fairly positive reading and importantly indicated a rebound from the softer July prints. Industrial production was reported as increasing three-tenths last month to +6.3% yoy (vs. +6.2% expected) and retail sales increased four-tenths to +10.6% yoy (vs. +10.2% expected). Fixed asset investment was unchanged at +8.1% YTD yoy, but came in ahead of expectations of +7.9%. That data follows the better than expected export numbers in August, as well as the improvement in the latest manufacturing PMI and so a sign perhaps that we’ve seen some stabilization in economic activity.

We haven’t seen too much of a reaction in China’s equity markets following the data with the Shanghai Comp (-0.18%) and CSI 300 (-0.22%) modestly lower. Elsewhere though there is a better tone for much of the rest of Asia with the Nikkei (+0.19%), Hang Seng (+0.93%), Kospi (+0.45%) and ASX (+0.30%) all up. US equity index futures are a touch in the red, not helped by a near 1% decline for WTI this morning. Sovereign bond yields in Asia meanwhile are a couple of basis points lower. There’s also been some focus on the move by the PBoC to pump $9bn of liquidity into the financial system through 28-day reverse repos this morning, the first time it has done so since February and ahead of a public holiday later this week.

Back to yesterday. There wasn’t a huge amount to report during the European session with Brainard’s comments coming after the closing bell. Equity markets continued to weaken although this generally reflected some of the catch-up with the sell-off in the US session late on Friday. The Stoxx 600 finished -0.95% and has fallen for three consecutive sessions now. Sovereign bond markets also weakened further with 10y Bund yields climbing +2.7bps to 0.035% and to the highest yield since June 8th. In fact 10y Bunds are now up 15.4bps since Wednesday’s close. If you prefer more eye catching numbers then these are the last three daily moves for yields in percentage terms: +291%, +115% and +46%.

Staying in Europe the ECB’s CSPP certainly stepped back up a gear last week. The latest numbers showed that after the previous holiday shortened week, net purchases totalled €2.398bn (average €480mn/day) which is the second highest weekly run rate since buying began (average daily run rate of €352 since program started). This increase was likely helped by a pickup in primary. We won’t know updated official primary levels of purchase until next month though.

Looking at the day ahead now, this morning we’ll be kicking off in Germany where the final revisions to August CPI are due. The UK will then publish the August CPI/RPI/PPI monthly data where it’s expected that Sterling depreciation has helped to boost headline CPI +0.4% mom last month. Following that we’ll then get the September ZEW survey in Germany where the consensus is for a nearly 1.5pt fall in the current situations index. It’s fairly quiet in the US session again this afternoon. The NFIB small business optimism reading for August will be released as well as last month’s Monthly Budget Statement this evening. With the FOMC blackout now in effect there’s no Fedspeak now, while over at the ECB Lautenschlager and Nowotny are scheduled speakers.