European stocks were flat after starting off strongly earlier, dragged lower by energy stocks. Asian stocks, U.S. futures little changed as oil tumbled with Brent tumbling as low as $45.85/bbl to the lowest intraday since November 30 and taking out a 38.2% Fib support, after a one-minute spike in volume to a day-high 5,208 lots just after 6am, with WTI mirroring Brent’s momentum, and falling as much as 98c to $43.22, lowest since November 14.

As Reuters’ Jamie McGeever points out, “maybe not too much of a surprise to see oil prices fall, given how much the G10 economic surprises index has collapsed in recent weeks.”

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Maybe not too much of a surprise to see oil prices fall, given how much the G10 economic surprises index has collapsed in recent weeks.

The pound sank for a second day, with the GBPUSD tumbling to 1.2661, alongside gilt yields as Britain central bank governor Mark Carney reversed the earlier BOE “vote split” hawkishness and said he is still worried about the impact Brexit will have on the U.K. economy and said he “now is not the time” to raise rates. Sterling weakened against all of its Group-of-10 peers, and gilt yields declined as Carney said that domestic inflation pressures remain subdued. Speaking at London’s Mansion House on Tuesday, he also highlighted the weakness in the economy and the increased uncertainty as the nation formally starts talks to exit the European Union.

Carney’s first major speech since May comes a day after negotiations over Britain’s exit from the European Union formally began, and his comments addressing weakness in the U.K. economy and subdued inflation join a raft of talking points for investors this week.  As Bloomberg adds, Carney’s comments were seen as pushing back against a hawkish shift at last week’s Monetary Policy Committee meeting, where three members unexpectedly voted to raise the benchmark rate from a record-low 0.25 percent. That split in the MPC is exacerbating the uncertainty faced by pound traders as the U.K. begins its Brexit negotiations in the wake of inconclusive elections earlier this month. Sterling’s weakness boosted U.K. stocks with the FTSE 100 and 250 both benefitting from the falling sterling and regained some early losses seen in the UK indices.

Similarly, in a speech late in U.S. time on Monday, Chicago Federal Reserve President Charles Evans said it may be worthwhile for the U.S. central bank to wait until year-end to decide whether to raise rates again. Also overnight, we got the latest in a string of appearances from U.S. central bank officials when Federal Reserve Vice Chairman Stanley Fischer speaking in Amsterdam, discussing the impact of low rates on high home prices.

Hong Kong shares retreated ahead of MSCI Inc.’s decision on whether to include China’s domestic equities in its main indexes. As a reminder the MSCI will announce whether it approved Chinese-listed stocks in its global benchmarks. China’s $6.8 trillion onshore market is the world’s second largest and accounts for 9% of global stock value, but has been rejected for index inclusion three times by MSCI over issues including capital controls and long trading halts. MSCI’s decision is expected Tuesday after the close of U.S. markets.

Elsewhere, Japan’s Nikkei jumped to a near two-year high on Tuesday while Japan’s Topix rose 0.7% to the highest since August 2015 amid weakness in the yen.

In Europe, the Stoxx 600 was up less than 0.1% as of 11:33am in London, trimming gains of as much as 0.3% with miners and energy shares lead declines among sectors as crude extends drop to lowest intraday since Nov. 15. Stoxx 600 miners down 1.7%, tracking copper prices lower, while banks were the third-worst decliners as 10- year German bond yield falls. Drops offset by gains in food and beverage and media stocks, among others.

As noted above, Brent crude oil hit new year-to-date low at $45.85, which could spur a move toward the $44.66 measured support line according to Bloomberg technician Sejul Gokal; possible trend-exhaustion signals may temporarily delay the move. Brent crude oil -1.7% to 46.02. Support at $44.66 represents the 100% extension line of April-May selloff (~$10 selloff), projected from May peak ($54.67). Drop to support may not happen immediately as market on possible trend-exhaustion signal. West Texas oil erased a gain to slump 1.7 percent to $43.44 a barrel. Gold climbed 0.2 percent to $1,246.36 an ounce, after closing Monday at the lowest in more than a month.

In rates, the yield on 10-year Treasuries dropped one basis point to 2.18 percent, after rising four basis points Monday. Benchmark yields in the U.K. fell after Carney’s dovish comments with the yield on 10-year gilts dropping 2bps to 1.0%, having earlier dropped 4bps. Odds of a 25bps hike by end of 2018 tumbled to ~47% according to MPC=dated SONIAs, compared with around 77% ahead of Carney’s comments.

Currencies saw the British pound falling 0.3 percent to $1.2695, erasing an earlier gain. The euro edged 0.1 percent higher to $1.1155. The Bloomberg Dollar Spot Index was little changed, after advancing 0.4 percent on Monday. The measure touched the lowest level since October last week. The yen fell 0.1 percent to 111.61 per dollar. The currency retreated 0.6 percent on Monday.

Bulletin Headline Summary from RanSquawk

• BoE’s Carney says now is not the time to hike given ‘anemic’ wage growth and mixed signals in consumer spending
• European equities trade higher across the board. Energy names underperform as prices fail to recoup yesterday’s losses
• Looking ahead, Fed’s Fischer, Rosengren, Kaplan and ECB’s Coeure

Top Overnight News from BBG

• DAX ended at record close, up 12% YTD; S&P 500 jumped to record high; dollar dips after rally, oil steady
• Fed’s Evans suggests delaying next rate hike
• Fed’s Fischer Says House Prices ‘High and Rising’ Amid Low Rates
• EU wins first Brexit battle, as U.K. retreats on timing
• MSCI review watch: China, Saudi Arabia, Argentina, Nigeria
• Macron’s ministers meeting with companies in which French state holds stakes; Macron considers possible divestments
• Wait for bigger drop to buy tech shares: Morgan Stanley
• Tesla Said Close to Agreeing on Plan for China Production Plant
• Blackstone-Backed GEMS Said Valued at $4 Billion in London IPO
• Boeing’s Vision for the Future Has No Place for the Iconic 747
• Aviation Capital Group Orders 20 Boeing 737 Max 10 Airplanes
• Lockheed Martin Gets Air Force Contract for Sniper ATP, LANTIRN
• Bombardier Said to Near Turboprop Plane Order From SpiceJet
• Pamplona Capital Said Near Deal to Buy Parexel for $4.6b: WSJ
• Georgia House Race May Guide How Candidates Deal With Trump
• Bayer CEO Sees Potential for Small Pharma Deals After Monsanto
• Spain Regulator Starts Probe Vs Philip Morris Unit, Altadis
• BlackRock to Take Minority Equity Stake in Scalable Capital
• KKR Gives Up on Joining Bid With Bain for Toshiba Unit: Sankei

Market Snapshot

• S&P 500 futures up 0.01% to 2,447.00
• STOXX Europe 600 up 0.2% to 392.81
• MXAP up 0.08% to 155.37
• MXAPJ down 0.09% to 506.00
• Nikkei up 0.8% to 20,230.41
• Topix up 0.7% to 1,617.25
• Hang Seng Index down 0.3% to 25,843.04
• Shanghai Composite down 0.1% to 3,140.01
• Sensex down 0.01% to 31,308.11
• Australia S&P/ASX 200 down 0.8% to 5,757.25
• Kospi down 0.07% to 2,369.23
• German 10Y yield fell 1.4 bps to 0.267%
• Euro up 0.02% to 1.1151 per US$
• Italian 10Y yield fell 3.1 bps to 1.664%
• Spanish 10Y yield fell 3.3 bps to 1.415%
• Brent Futures up 0.2% to $47.01/bbl
• Gold spot up 0.3% to $1,247.16
• U.S. Dollar Index up 0.02% to 97.57

In Asian markets, stocks were mixed after failing to sustain the momentum from Wall Street where stocks closed at fresh all time highs after the tech sector rebounded from last week’s underperformance and the DJIA extended into record territory. Nikkei 225 (+1.1%) outperformed and printed fresh 22-month highs due to a weaker currency, while ASX 200 (-0.5%) was dampened by softness across commodities and with financials pressured after Moody’s downgraded ratings on Australia’s big 4 banks. Shanghai Comp. (+0.1%) and Hang Seng (-0.1%) traded choppy after the PBoC’s reduced its liquidity operations to a paltry CNY1Obln, which was counterbalanced by a decline in money market rates with the CNH Overnight HIBOR at an 8-month low. 10yr JGBs were subdued amid a positive risk tone in Japan and with the demand at the enhanced liquidity auction for super-long JGBs virtually unchanged from prior.

• Top Asian News
• ‘Dangerous Situation’ for Hong Kong Property Market, Says Chan
• Sinochem Group Said to Consider Oil Asset Listing in Hong Kong
• Gaming the Yuan: Making Money on a State-Controlled Currency
• Zhou Says China’s Banks Risk Laziness Without Outside Rivals
• China’s Surging Bonds Show Angst About a Cash Crunch Is Easing
• Noble Group’s Shares Extend Rally as Trader to Sell More Assets
• Hong Kong Stocks Fall as Investors Wait for MSCI’s Call on China
• Indian WhatsApp-Rival Hike Gets Into Busy Digital-Payments Arena

In European bourses, the FTSE 100 and 250 both benefited from the falling sterling and regained some early losses seen in the UK indices, stemmed by equity specific morning news, where poor earnings from Wolseley (WOS LN) and Orange reducing its stake in BT (BT/A LN) set the FTSE off to a slow start. The Eurostoxx 600 sectors were positive, with 9/10 trading the morning in the green — the noticeable laggard was the energy sector, with WTI and Brent Crude failing to bounce from yesterday’s losses. Fixed income markets were led by Gilts, as the aforementioned dovish tone from Carney led Gilts to outperform, trading near session highs, as the other triple A’s followed. Note, supply from Europe is particularly light this week.

Top European News

• Barclays, Four Former Executives Charged Over Qatar Fundraising
• Carney’s Brexit Concerns Mean BOE Governor in No Rush to Tighten
• Centrica Plans to Close Only U.K. Long-Term Gas Storage Site
• Amazon-Whole Foods Deal Puts Spotlight on France’s Carrefour
• Trump’s Steel-Import Threat Prompts EU to Warn of Retaliation
• Italy Seeks to Entice Foreign Buyers With New Rules on Bad Loans
• Atlante May Buy Paschi NPLs After Fortress, Elliott Drop: Sole
• French Defense Minister Goulard Resigns, AFP Says on Twitter

In currencies, the price action this morning has been focused on the Pound, as BoE gov Carney allayed any ‘fears’ that UK rates were on the rise any time soon. This was a known factor given the vote split revealed last week, but the algos jumped on his accommodative tone on policy over the near term, focusing on anaemic wage growth — we also knew this — as reported in the jobs report last week.
Even so, Cable dived below 1.2700 from circa 1.2750, while from the mid 0.8700’s, we were testing 0.8800 again. Both pairs have since pulled back off their respective extremes, with Brexit themes and the cordial start to the talks yesterday proving supportive to a very modest degree. Elsewhere, USD/JPY remains the key path for USD bulls concurring with Fed chair Yellen last week and NY’s Dudley yesterday. We still run into seller ahead of 112.00, as their optimistic tunes are clearly being met with scepticism from some quarters. Modest gains in mid curve UST yield is testament to this.
EUR/USD is still finding buyers well ahead of 1.1100, with this morning’s upturn in EUR/GBP having provided some support.

In commodities, since the FOMC announcement last week, the USD has recovered some ground, notably against the USD as Treasuries have edged lower. This has fed into some weakness in Gold which is now trading below USD1250, with Silver finding a little more support having lagged the yellow metal on the way up. The steady risk tone has also added to weakness here, and as a result, base metals have pushed up to a modest degree. Copper is a little more balanced, but Aluminium, Zinc and Lead all showing moderate gains on the day but with few individual drivers which stand out. Oil prices have also stabilised, but as we have noted in recent weeks, the backdrop of rising US shale production precludes any significant upturn in WTI or Brent — both still trading relatively close to the recent lows, but WTI finding support well ahead of the key USD40 mark.

Looking at the day ahead, we’ve got another fairly thin calendar of data ahead of us today. We’ll get current account balance readings for both the US and Euro area. China’s conference board leading index is also out this afternoon. It’s a busy day for Fedspeak though with Fischer (3.15pm EDT), Rosengren (8.15am EDT) and Kaplan (3pm EDT) all scheduled to speak. House Speaker Ryan’s speech will also be a key focus.

US Event Calendar

• 8:30am: Revisions: Current Account
• 8:30am: Current Account Balance, est. $123.6b deficit, prior $112.4b deficit
• 3:15am: Fed’s Fischer Speaks in Amsterdam
• 8:15am: Fed’s Rosengren to Speak at Macroprudential Conference
• 3pm: Fed’s Kaplan Speaks in San Francisco

* * *

DB’s Jim Reid concludes the overnight wrap

Not many divorce settlements start with a cheery exchange of gifts between the spurned partners. Well Brexit is like no divorce in history as UK Brexit Secretary David Davies yesterday kickstarted talks by giving EU lead negotiator Michel Barnier a rare mountaineering book with a hiking stick going in the opposite direction. There was no suggestion that the latter gift was Europe’s way of asking the UK to take a hike. In fact everything was very cordial. If it carries on like this (unlikely) it could be the friendliest divorce since Coldplay’s Chris Martin and Gwyneth Paltrow’s conscious uncoupling. We’d note that the latter sung backing vocals on Coldplay’s last album so proof that it is possible to remain friends.

The first round perhaps went to the EU as the UK agreed to their sequencing of sorting out agreement on the divorce payments first before any trade negotiations could progress. It seems EU and UK citizen rights living in the other’s region will be discussed early on in the talks as will the contentious Irish border issue. UK Brexit Minister David Davis confirmed that the UK would present its offer on rights for citizens at some stage next week. Timing wise we’re expecting one week of negotiations every month. In between those weeks consultations and technical work will go on behind the scenes. For now the overall tone and relationship between the two camps in the press conference yesterday appeared friendly and talks as being constructive in the very early going. However expect the real details to emerge in the weeks and months ahead. It’s worth pointing out that there is an EU leaders’ summit this Thursday and Friday which might provide a decent summary as to how the first week of talks has proceeded.

With those talks going on behind the scenes then, in an otherwise fairly quiet start to the week most of the focus was on comments from the NY Fed’s Dudley. Most significant appeared to be his remark that recent rate hikes by the Fed have not tightened financial conditions to any significant degree and also that halting the tightening cycle now would imperil the expansion. Dudley appeared upbeat about the US economy overall and also that the expansion has “a long way to go”. On inflation he said that prices are a little lower than what the Fed would want – which was no great surprise – but also that he expects  wage growth to quicken a bit more as the job market continues to tighten. So overall fairly upbeat and the comments helped both the Greenback to firm up (Dollar index +0.40%) and Treasury yields to edge higher (10y +3.7bps to 2.190%), while Gold (-0.79%) nudged lower.

Overnight we’ve also heard from the Chicago Fed’s Evans who was similarly upbeat. The Fed official said that the “real economy is really doing quite well” and that “I think where we are with the funds rate right now is kind of in line with my outlook”. He didn’t offer any further clues as to his expectation for how many more hikes we might get this year but did say that “the important feature is that the current environment supports very gradual rate hikes and slow preset reductions in our balance sheet”. Staying with the US for a moment, it’s worth noting that House Speaker Paul Ryan is due to deliver his first major speech on tax reform in an address today. It’s due to kick off at 12.45pm ET/5.45pm BST. That should be well worth keeping an eye on.

Elsewhere in markets yesterday it was a decent start to the week for global equity markets with the S&P 500 (+0.83%) and Dow (+0.68%) both rallying to new record highs. A decent rebound for the Nasdaq (+1.42%) appeared to be the main driver as tech stocks surged after being beaten up in recent days. In fact the Nasdaq actually had its best day since November 7th and is now ‘only’ 1.66% off its intraday all-time high from June 8th and up 2.10% from its intraday low on June 9th when it had a mini sell-off. For all that talk of a correction it’s worth also highlighting that the Nasdaq has now gone 154 consecutive sessions without a 5% drawdown from the peak. The record is 156 days set in he mid-1980’s. Elsewhere yesterday European equities also turned in a solid session with the Stoxx 600 (+0.86%) having its best day since April 24th.

This morning in Asia, despite a positive start, most major bourses have pared early gains and faded. The Hang Seng (-0.02%), Shanghai Comp (-0.12%) and Kospi (-0.05%) are little changed as investors await the decision on whether or not the MSCI will include mainland China stocks in its benchmark indices later today. Elsewhere the ASX (-0.41%) is underperforming with Banks under pressure after Moody’s yesterday downgraded Australia’s major banks. The one market which has rallied this morning is the Nikkei (+1.10%) which appears to be getting some support from a weaker Yen.

Moving on. While there was no significant macro data released yesterday we did get the latest ECB CSPP holdings data. Although the average daily run rate was €318mn and below the average daily run rate since CSPP started of €366mn, the CSPP/PSPP ratio was still 12.7%, which is above the average of 11.6% before QE was trimmed in April. So after a buoyant May where CSPP seemed to increase again (likely in line with high issuance), we’ve dropped back down to lower than average levels. However the ratio still suggests a higher taper for PSPP than CSPP.

Staying with the ECB, there was a bit of focus on comments from Governing Council member Jan Smets yesterday. He said that the ECB is closely watching wages and inflation expectations with the ECB still not seeing convincing signs that price stability can be supported without monetary support. The EUR 5y5y inflation swap rate is currently holding at 1.533% and at around 7-month lows. Meanwhile over at the BoE Silvana Tenreyro was appointed to the Bank’s MPC as Kristen Forbes’ (a notable hawk) replacement. She will start next month. Tenreyo is currently a professor at the LSE and a former Bank of Mauritius official. It’s difficult to really get a gauge on where she sits on the hawk-dove scale although we do know that she has published an academic paper arguing the impact of monetary policy as being asymmetric which could put her closer to the core of the committee than Forbes. At least the current balmy English summer is somewhat comparable to the warmer Mauritius climate.

Looking at the day ahead, we’ve got another fairly thin calendar of data ahead of us today. We’ll get current account balance readings for both the US and Euro area, along with PPI data in Germany this morning. China’s conference board leading index is also out this afternoon. It’s a busy day for Fedspeak though with Fischer (8.15pm BST), Rosengren (1.15pm BST) and Kaplan (8pm BST) all scheduled to speak. The aforementioned House Speaker Ryan speech will also be a key focus. The other key event for markets today is the Mansion House speeches by BoE Governor Carney and Chancellor of the Exchequer Hammond. The event was rescheduled as a breakfast so we are expecting the speeches to take place early this morning.