As the Fed begins its two-day meeting, global stocks have recovered their footing and European shares rise, led by a bounce in tech stocks as last Friday’s global selloff that started in the sector shows signs of abating. Asian stocks and U.S. futures gain as investors turn their attention to today’s Jeff Sessions testimony as well as tomorrow’s barrage of macro data including Yellen, CPI and retail sales.

It has been a risk-on session globally as the tech rout ended and technology stocks rebound from recent weakness and amid a lack of negative fundamental catalysts. European equity markets open higher with technology sector leading, travel stocks also well supported. Bund futures pushed lower, with supply pressure also coming from 10y DSL auction. Gilts sell-off after higher than expected U.K. CPI, short sterling curve bear steepens aggressively. USD broadly weakens across G-10 except for USD/JPY which is supported by lift in EUR/JPY and general risk sentiment. SEK spikes higher after strong domestic CPI data, NOK rallies in tandem after bullish domestic growth survey.

As Bloomberg notes, highlighting the importance of the tech, “should the rebound in tech shares carry through into U.S. trading investors will likely breathe a sigh of relief; the sector has been a key driver of global equity gains and a prolonged selloff would have represented a major threat to the ongoing bull market.”

Tomorrow, the Fed is widely expected to raise its benchmark interest rate in a decision scheduled for Wednesday and may also provide more details on its plans to shrink $4.5 trillion dollars of assets it amassed to nurse the economic recovery. The gap between benchmark U.S and European bond yields hit its widest in a month as the Fed meeting also shone a light on the slow pace of change in European Central Bank policy. “If the Fed is tightening policy and embarking on a gradual normalization path, whether it is the short-term policy rates or the balance sheet, it wants the market to believe it and to adjust to it,” said Frederik Ducrozet, an economist at Pictet Wealth Management.

“It is not just about complacency and the creation of financial bubbles…but also about its own credibility.” The Bank of Japan and the Bank of England also meet this week, although no major policy changes are expected.

According to a Retuers poll, a small majority of traders in China’s financial markets think its central bank will likely raise short-term interest rates again this week if the U.S. Federal Reserve hikes its key policy rate. But the reaction to this in bond markets has been concerning. China’s two-year yields have in the last few sessions risen above its 10-year yields- a trend that has only happened in a few instances over the past decade and suggests investors have worries over the long-term health of the world’s second biggest economy.

This morning, almost every industry group in the Stoxx Europe 100 Index traded in the green, with the abovementioned tech bounce meanings technology shares are poised for the largest gain in more than a month. The Stoxx Europe 600 Index climbed 0.6 percent as of 11:17 a.m. in London, after dropping 1 percent on Monday. Tech shares rose 1.3 percent. Futures on the S&P 500 Index rose 0.2 percent. The Nasdaq 100 fell 0.6 percent on Monday, adding to its 2.4 percent rout on Friday. Apple fell 2.4 percent while Microsoft Corp. slid 0.8 percent.

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.5 percent, recouping about half of the previous session’s losses. The MSCI Asia Pacific Information Technology index steadied, after sliding 1.4 percent on Monday. Australian equities rallied 1.7 percent, the most since November, as bank stocks jumped after investors returned from a holiday. South Korea’s Kospi added 0.7 percent, with Samsung Electronics Co. little changed after leading declines in Asia during Monday’s rout. Hong Kong’s Hang Seng rose 0.6 percent as Tencent Holdings Ltd., which tumbled 2.5 percent in the previous session, rebounded 0.7 percent.

Some analysts had predicted Asian tech shares would not see as intense a sell-off as their U.S. peers as their valuations were less stretched. “Comparatively, valuations for the IT sector in the Asia Pacific region are less expensive compared to the U.S., which may be why we’re not seeing the situation further aggravate for a second session,” said Jingyi Pan, market strategist at IG in Singapore.

Sterling headed for the first increase since the election that’s left U.K. Prime Minister May battling to shore up her position. She’ll meet Northern Ireland’s Democratic Unionists today, seeking the votes she needs to be able to pass any legislation. The pound strengthened 0.4 percent to $1.2711 after sliding 0.7 percent on Monday.

The Canadian dollar hit a two-month high after a policymaker said the central bank would assess if it needs to keep rates at near-record lows as the economy grows.

“It feels like a long time since markets have been treated to unscheduled hints of tightening, and this was quite apparent when you saw the positive reaction of CAD crosses overnight,” Matt Simpson, senior market analyst at ThinkMarkets in Melbourne, wrote in a note.

Elsewhere, the euro fluctuated before gaining less than 0.1 percent to $1.1210. The Bloomberg Dollar Spot Index fell by 0.1 percent.  The yen fell 0.2 percent to 110.12 per dollar, after Monday’s 0.3 percent gain.

The yield on 10-year Treasuries was little changed; before today it climbed for four straight sessions. German benchmark yields rose two basis points, French equivalents increased three basis points and U.K. yields added five basis points.

WTI, Brent were supported by positive risk sentiment globally. Brent trades near $48.50/bbl, WTI above $46 with industry-funded API data on U.S. stockpiles due later. “The market’s just waiting for the API data,” says Nitesh Shah, commodities strategist at ETF Securities. “There’s some expectations for a bit of a correction from last week’s disappointment.” API data due 4:30pm ET, crude inventories forecast to decline 2.25m bbl in more definitive EIA data Wednesday. Weaker dollar, positive equities supported prices earlier Tuesday.

Tomorrow the Fed is expected to raise its benchmark rate for the second time this year on Wednesday. Since that’s widely expected, the more market-sensitive elements of the meeting will relate to signals on future policy — either the path for rates or plans to cut the $4.5 trillion balance sheet. Central banks in Japan, Switzerland and Britain are also scheduled to weigh in with policy decisions this week.

Bulletin headline summary from RanSquawk

• Tech names recoup losses to lead European bourses higher
• UK inflation rises yet again to its highest level since June 2013, while GBP moves back above 1.27
• Looking ahead, highlights include US PPI and API Crude Oil Inventories

Market Snapshot

• S&P 500 futures up 0.2% to 2,430.50
• STOXX Europe 600 up 0.6% to 388.92
• MXAP up 0.3% to 154.94
• MXAPJ up 0.6% to 504.10
• Nikkei down 0.05% to 19,898.75
• Topix up 0.1% to 1,593.51
• Hang Seng Index up 0.6% to 25,852.10
• Shanghai Composite up 0.4% to 3,153.74
• Sensex up 0.3% to 31,195.41
• Australia S&P/ASX 200 up 1.7% to 5,772.77
• Kospi up 0.7% to 2,374.70
• German 10Y yield rose 1.9 bps to 0.268%
• Euro up 0.1% to 1.1217 per US$
• Brent Futures up 0.7% to $48.64/bbl
• Italian 10Y yield fell 6.5 bps to 1.729%
• Spanish 10Y yield fell 0.9 bps to 1.436%
• Brent Futures up 0.7% to $48.64/bbl
• Gold spot down 0.3% to $1,262.70
• U.S. Dollar Index down 0.1% to 97.04

Top Overnight News

• The stakes of an intensifying Russia investigation are growing for President Donald Trump, as his attorney general Jeff Sessions prepares to confront lawmakers on Capitol Hill for the first time about what role he played in the inquiry and the firing of FBI director James Comey
• The Trump administration laid out its highly anticipated plan for overhauling bank rules, calling on the government to ease, though not eliminate, many of the strictures that were imposed on Wall Street after the financial crisis
• U.K. Prime Minister Theresa May bought herself a stay of execution by apologizing to her own lawmakers for the election debacle as she prepared to meet Northern Ireland’s Democratic Unionists to secure the votes needed to prop up her minority government
• Goldman Sachs, Morgan Stanley and Societe Generale top the ranking of global lenders at JPMorgan as analysts led by Kian Abouhossein reiterate their preference for U.S. investment banks over Europeans
• President Donald Trump plans to follow through on a campaign promise by rolling back the Obama administration’s effort to open Cuba to U.S. tourism and trade, with new limits being considered on travel and investment by U.S. companies
• Several U.S. senators struck a bipartisan deal to expand existing sanctions against Russia and let Congress review any move by President Donald Trump to lift existing penalties, a sign of congressional frustration amid probes of interference in the 2016 election
• Janet Yellen’s Federal Reserve is getting ready to set off on a path
  toward a smaller balance sheet without knowing quite where it will end
  up.
• U.K. inflation resumed its upward march last month, accelerating more than forecast to the fastest pace in four years
• U.K. Prime Minister Theresa May bought herself a stay of execution by
  apologizing to her own lawmakers for the election debacle as she
  prepared to meet Northern Ireland’s Democratic Unionists to secure the
  votes needed to prop up her minority government
• German Investors Confidence in Economy Unexpectedly Declines: German Jun. ZEW Expectations: 18.6 vs 21.7 est; Current Situation 88.0 vs 85.0 est.
• The European Union is pushing ahead with plans to assert control over the clearing of euro-denominated derivatives, a politically charged step that could force firms to move from London to the EU after Brexit
• A rally in bonds of China’s most-indebted developer has some analysts
  warning that steps to cut borrowings have yet to bring leverage down to
  healthy levels.
• U.K. May CPI y/y: 2.9% vs 2.7% est; Core CPI 2.6% vs 2.4% est; highest CPI since Apr. 2012, core highest since Dec. 2011; weaker GBP increased costs of computer games, laptops and package holidays
• Senior U.K. cabinet ministers are holding secret talks with Labour MPs to secure cross-party backing for a soft Brexit: Telegraph
• Italian Finance Minister: solution for Italian Veneto banks is close, there will be no bail-in
• Sweden May CPI y/y: 1.7% vs 1.6% est; CPIF 1.9% vs 1.7% est; largest upside contribution from restaurants and hotels

Asian stocks shrugged off the negative lead from US where the tech sector once again underperformed and posted its worst 2-day period YTD. Nonetheless, the tone in Asia improved throughout the session with ASX 200 (+1.2%) underpinned by financials after gains in the big 4 banks, while Nikkei 225 (Unch.) recovered from early losses alongside a rebound in USD/JPY. Elsewhere, Shanghai Comp. (+0.4%) was indecisive with early weakness observed alongside speculation the PBoC may raise rates in response to a US Fed hike and after another lacklustre liquidity operation, although Chinese stocks then recovered to conform to the overall improvement of risk sentiment in the region. 10yr JGBs were lower amid an improvement in risk sentiment throughout the session, while today’s 20yr auction later also failed to spur demand with the results mixed in which the accepted prices declined from prior. PBoC injected CNY 10bIn in 7-day reverse repos and CNY 40bIn in 28-day reverse repos.

Top Asian News

• U.S. Bears Target China With Shorts Circling $6 Billion ETFs
• Japan Leveraged Fund Outflows in May ‘Warrants Caution’: Nomura
• JGB Sale Price Beats Estimate as $117b of Maturities Spur Demand
• Chinese Coal Producers Jump After Regulator Says to Cut Capacity
• India Signals Flagship Tax Reform on Track as Timing Questioned
• Shanghai Backs Homebuyers’ Rights After Protest on Streets
• Steel Coil Drops in Shanghai as China Plans Auto Capacity Curbs

European bourses have seen mixed gains with the Eurostoxx 50 roughly halfway to recouping yesterday’s losses led by the recovering the tech sector. Notable movers of the morning is Capita with shares surging as much as 15% as the company pins hopes on improving profitability and secure more contract wins in the second half of the year. In fixed income markets, core European bond yields have seen a recovery this morning with the German 10yr up 1.2bps, while outperformance has been observed in peripheral markets led by Spain and Italy.

Top European News

• Credit Agricole Said to Plan Part Sale of Saudi Fransi Stake
• Deutsche Bank Said to Offer Ex-Managers Portion of Their Bonuses
• ECB Said to Be Unlikely to Include Greece in QE in Coming Months
• U.K. Inflation Rate Rises More Than Forecast to Four-Year High
• Heineken to Offer Deal Concessions to Appease U.K. Regulator
• Trump Administration Reviewing Eni’s Arctic Drilling Plan
• LSE Rises to Highest on Record as Analysts Bullish on Growth
• Capita Soars Most Since 2002 on Update, Following Mitie Jump
• Sweden Inflation Slows Less Than Expected in Relief for Riksbank
• ECB’s Liikanen: Economic Recovery Not Enough to Raise Inflation
• Italy Finance Minister Says Solution Is Close for Veneto Banks

In commodities, it has been another mixed session where on the upside we see some modest gains in Oil price this morning, which as yet looks to be corrective, though value levels in WTI seem to have drawn in buyers ahead of USD45.00. Brent is keeping its USD2.00-2.50 differential and trades in the mid USD48.00’s, but where `value’ currently stands is arbitrary to a larger degree, given the weakness has been down to the rise in US shale production which translates into greater self-sufficiency. Elsewhere, metals prices are lower, but all inside familiar territory to point to sideways price action more than anything else. Copper has dipped back towards USD2.60 and just under, but the moves above this level were somewhat of a surprise in any case. On the day, Zinc is the underperformer at down over 1.0%. Gold is still better supported than Silver as the latter has now relinquished the USD17 handle.

In currencies, the key USD rates have been in consolidation mode this morning, with USD/JPY edging back above 110.00 but with little conviction. The FOMC meeting ahead is now in focus, and while traders are not phased over the 25bp hike largely priced in, there is a sense that the market may have gotten a little overly dovish on the accompanying statement and rhetoric, but on the balance on the data, this has been justified to some degree. This morning’s data focus was on UK inflation, but despite the welcome break from politics, inflation was only slightly higher than expected (worth noting during a time of GBP appreciation), but not by enough to trouble the BoE who are set to keep policy measures as they are, and more so given fresh political uncertainty. At the start of Europe, Wesaw Cable retesting the 1.2610-40 base, and having survived tests in NY, Asia and early London, higher levels now look set to be tested at 1.2740-50 initially. EUR/GBP is also giving way a little, with sellers benefitting from the more relaxed tone in EUR/USD. The CAD continues to grind higher in the aftermath of the comments from the BoC’s Wilkins, who says it is time to assess the current stimulus levels. We cannot help but point out that the Q1 GDP data was healthy, as was Friday’s jobs report, but clearly the market required some reassurances from official quarters, so USD/CAD is now probing the next support zone into 1.3250-1.3150.

Looking at today’s calendar, we get the May NFIB small business optimism number which printed at 105.2, unchanged from last month, and missing expectations 105.2, while the May PPI report is due later in the afternoon (2.3% YoY vs. 2.5% previous).

US Event Calendar

• 6am: NFIB Small Business Optimism, est. 104.5, prior 104.5
• 8:30am: PPI Final Demand MoM, est. 0.0%, prior 0.5%
  • PPI Ex Food and Energy MoM, est. 0.1%, prior 0.4%
  • PPI Ex Food, Energy, Trade MoM, est. 0.1%, prior 0.7%
  • PPI Final Demand YoY, est. 2.3%, prior 2.5%
  • PPI Ex Food and Energy YoY, est. 1.9%, prior 1.9%
  • PPI Ex Food, Energy, Trade YoY, prior 2.1%

* * *

DB’s Jim Reid concludes the overnight wrap

Global equities were on the soft side yesterday. Over in the US the S&P 500 saw losses of -0.1% while the NASDAQ extended Friday’s declines by falling another -0.5%. However both markets were off the lows of the session. The very recent tech sell-off was the talk of the town yesterday as opinion was divided as to whether this was money leaving equities or simply a rotation back into more defensive stocks. Markets in Asia have stabilised overnight with the Nikkei -0.05% but with the Hang Seng +0.5% and the Shanghai Comp +0.3%.

In Europe the STOXX fell by -1.0%, with the DAX and FTSE also dropping by -1.0% and -0.2% respectively. Credit markets however seemed immune to these risk-off moves. In Europe iTraxx Main and Crossover tightened by -1bp and -2bps respectively. In the US CDX IG was flat on the day while HY tightened by -2bp. Turning to the government bond market, German and US 10Y yields both fell by -1bp, while their respective 2Y points were unchanged on the day – hence a small flattening. Elsewhere in Europe Gilts (2Y: -1bp; 10Y: -4bps) and French OATs (2Y: -3bp; 10Y: -5bp) saw yields drop across maturities, while Italian BTPs saw all yields beyond the 2Y point drop (10Y: -7bp). The strong performance of President Macron’s party in the first round of the French legislative elections helping as did the relatively weak performance of the 5SM in regional elections in Italy over the weekend.

Turning to FX markets now and Sterling extended Friday’s losses by dropping another -0.7% yesterday (flat overnight though). On the whole the election shock last week has compounded political uncertainty in the UK and has thrown up a number of new questions clouding the outlook for the currency. Our FX strategists published a note yesterday arguing that developments over the weekend following the election have provided sufficient evidence for a muddlethrough Brexit strategy (as previously outlined as their baseline). They highlight that it is premature for the market to start pricing the soft Brexit narrative given that no political party or grouping has an incentive to change the status quo, which would likely lead to a period of acute political paralysis in coming months. Hence the risk of a disruptive Brexit is rising – as timelines are fixed, the more decisions are delayed, the greater the risk that there is no time left to negotiate something non-disruptive. All of the above increase downside risks to an already gloomy outlook for the UK economy, leaving the BoE on hold as the Fed and ECB tighten and push interest rate differentials further against the pound. Taking these factors into consideration, the outlook for Sterling is particularly negative and the team reiterates their bearish view.

Away from Sterling, the US dollar and the Euro were both broadly flat on the day. Over in the commodity space, oil saw gains of +0.4% on the day while metals were broadly higher. Gold however failed to recoup any of its past week’s losses and remained essentially unchanged.

Going back to all things Brexit/UK related, the FT reported over the weekend that today marks the day that Brussels opines on how it will police the $850bn a day OTC Euro-denominated derivatives market that currently clears in London. This may be an early marker for how financial markets, banks and Brexit will coincide so worth watching. Also worth noting is that PM Theresa May met her influential 1922 backbench committee last night and it’s been reported that she took the blame for the party’s disappointing performance last week.

On a related theme, one of the more amusing stories yesterday was news (Reuters/ BBC) that the UK’s Queen’s speech (where the government set out the next year’s legislative agenda) scheduled for next Monday may be delayed a few days as the Conservative Party’s ‘understanding’ with the DUP Party has not been finalised yet. Although it’s expected to be agreed very soon, the Queen’s speech apparently has to be written on goat’s skin parchment paper, which takes a few days to dry.

The latest ECB CSPP numbers were out yesterday. They bought €1.421bn last week which is €355mn/day (assuming 4 days given the European holiday last Monday). The average daily run rate since CSPP started is €367mn. In relative terms, the CSPP/PSPP ratio dropped to 11.9% last week (PSPP purchases were €11.94bn) which is still mildly above the 11.6% average ratio before QE was trimmed. Since the taper it’s been 13.4% on average indicating less tapering of corporates. There’s still quite a lot of noise week to week to be a 100% confidence that corporates have been tapered less but the evidence still points in that direction.

Yesterday was a very quiet day in terms of data. The only data point of note out of Europe was the Bank of France business sentiment for May which was in line with consensus (105 vs. 104 previous). There was no real data to note out of the US. Today is a bit busier in terms of data. We kick off in the UK where we are due to receive the May inflation numbers (CPI +0.2% mom expected; RPI +0.3% mom expected; PPI +0.1% mom expected). Elsewhere in Europe we will also get the ZEW survey in Germany where survey numbers are expected to tick up marginally (Current situation: 85.0 expected vs. 83.9 previous; Expectations: 21.7 expected vs. 20.6 previous). Over in the US we get the May NFIB small business optimism number which is expected to hold steady (104.5 expected) while the May PPI report is due later in the afternoon (2.3% YoY vs. 2.5% previous).

In Major Win For Beijing Panama Establishes Ties With China, Cuts Relations With Taiwan

The Chinese auto market is having it’s own version of a “cash for clunkers” moment.  After artificially pulling sales forward for all of 2016 with a purchase tax that was cut in half from 10% to 5%, the Chinese auto market is now suffering the consequences of removing that stimulus.  As Reuters notes, Chinese auto sales have declined sharply so far in 2017 with April and May registering the first consecutive monthly declines since 2015.

Chinese auto sales slipped in May from a year ago, registering two straight months of declines for the first time since 2015, with the automakers’ association saying the weakness may drag on as the rollback of a tax incentive continues to hurt.

 

The world’s biggest auto market got a shot in the arm in 2016, growing at its fastest pace in three years, after Beijing halved the purchase tax on smaller-engined vehicles. But buyers have shied away since taxes climbed to 7.5 percent, from 5 percent, at the start of this year.

 

Auto sales in China fell 0.1 percent in May from a year ago to 2.1 million vehicles, China Association of Automobile Manufacturers (CAAM) said on Monday. In April, sales recorded their steepest fall in 20 months.

Of course, for those of old enough to remember 2009, the U.S. auto market had it’s own, albeit short-lived, experience with massive government subsidies for auto purchases.  Unfortunately, sales crashed as soon as the stimulus was removed.

Meanwhile, as China Association of Automobile Manufacturers spokesman Xu Haidong notes, the downturn in China is probably far from over given that auto purchases taxes will increase again in 2018 back to their original 10%.

The current downturn in China’s auto market could extend through July or August, said Xu Haidong, a CAAM spokesman.

 

“Last year was just too strong and now the policy impact is fading away,” said Yale Zhang, managing director of Shanghai-based consultancy Automotive Foresight. “The growth (last year) overdrew some of the demand.”

 

China’s auto market recorded a 13.7 percent rise in sales last year, helped by the tax incentive. The purchase tax on vehicles with engines of 1.6 litres or below will rise to the normal 10 percent next year.

Seems as though China is experiencing an auto plateau of their own…

.

OPEC Oil Production Rises Most In 6 Months, Hits Highest Since December

(courtesy zero hedge)