S&P500 futures have started the second half solidly in the green, up 0.3% to 2,429, tracking European markets broadly in the green, while Asian stocks fell slightly and crude oil is little changed. With US markets set to close at 1pm today trading volumes in many markets remain light before Tuesday’s July 4th holiday and as investors await Friday’s report on the American jobs market. Traders will be looking at key upcoming economic data for validation of the hawkish shift from central banks that roiled markets last week.

The Asian session opened with the Yen initially strengthens following Prime Minister Abe’s shocking election loss in the Tokyo Assembly elections, but later reversing gains to trade materially weaker at 112.95 last, on speculation Abe will be forced to inject more stimulus to salvage his standing amid a muted reaction to strongest Tankan survey since 2014. Australian 10-year yield rise four basis points; T-note yield two basis points firmer at 2.32%; shares in Tokyo and Sydney steady in narrow ranges. MSCI’s broadest index of Asia-Pacific shares outside Japan held steady, staying within a stone’s throw of a two-year peak hit last week. Japan’s Nikkei ticked up 0.1 percent, helped by the solid Tankan report.

In China, the PBOC drained liquidity for ninth day, pulling a net 70 billion yuan; Hong Kong’s Hang Seng and the Shanghai Composite climbed 0.1 percent amid concerns the world’s second-biggest economy could be slowing down. In Hong Kong financial shares benefited from the launch on Monday of the “Bond Connect” scheme linking China’s $9 trillion bond market with overseas investors. Industrial metals rose across the board after the Chinese Caixin Mfg PMI rebounded back into expansion territory, rising to 50.4 in June from 49.6 in May, and beating estimates.  Dalian iron ore 2.3% higher: the benchmark iron ore contract climbed on Friday for its best one-week gain since November and is up almost 22% from its $53.36 June 13 low, which by definition places it in a bull market. China’s bond connect program with Hong Kong will give offshore investors another way to access the mainland’s $10 trillion debt market.

European stocks started the new quarter with solid gains, rising for the first time in five days as oil and metal gains spurred energy companies and miners. Bank stocks rallied, supported by an FT report of a secret Brexit plan for financial services, sending the Stoxx Europe 600 Index solidly in the green, up 0.7% to 382.03, after suffering its biggest monthly loss in a year in June on worries over tightening monetary conditions. France’s CAC 40 index rose 0.8 percent, Spain’s IBEX 0.9 percent and Italy’s FTSE MIB 1 percent. Britain’s main FTSE 100 index added 0.3 percent.

European economic data showed a modest retreat with most final Eurozone PMIs backing off slightly from recent flash reading (except for Germany which printed at 59.6, above the 59.3 exp.). Final Eurozone Manufacturing PMI was at 57.4 in June (Flash: 57.3, May Final: 57.0), with a notable observation that Greece returned to expansion while job creation stayed close to May’s survey record.

While the final PMIs disappointed modestly from the preliminary prints, this is how Eurozone’s various mfg sentiment surveys close the month of June:

• Austria, 60.7: 76-month high
• Germany, 59.6: 74-month high
• Netherlands, 58.6: 74-month high
• Ireland, 56.0: 23-month high
• Italy, 55.2: 2-month high
• France, 54.8: 2-month high
• Spain, 54.7: 2-month low
• Greece, 50.5: 37-month high

Meanwhile, unemployment in Italy rose to 11.3% in May, higher than the expectation of an unchanged 11.2% April print.

Crude was modestly in the green, climbing for an eighth day running, the longest winning streak this year extending gains after Baker Hughes data on Friday showed the number of active U.S. rigs falling for the first time in 24 weeks. WTI has climbed 8% in the past 8 days. Hedge fund wagers on lower prices in the week through June 27 increased at a slower pace than the two previous weeks, according to data from the Commodity Futures Trading Commission, suggesting the bearish sentiment may be about to turn.  Prices surged last week while WTI and Brent still posted a monthly loss in June on concerns over rising global supply; Libyan production has climbed to more than 1m b/d for 1st time in 4 years.

“Given the recent upward momentum, it wouldn’t be surprising to see oil fairly close to some sort of downward correction,” says Ric Spooner, a market analyst at CMC Markets in Sydney. “Libya is probably close to its peak production. Nevertheless, the fact its output reached these levels faster than some had anticipated is a negative for the overall supply situation.”

Elsewhere, wheat jumped to a two-year high on the Chicago Board of Trade as agriculture markets soared on an expanding drought in the U.S. and disappointing data on sowed acreage.  Gold slipped 0.5 percent to $1,235.89 an ounce.

The yen fell 0.4 percent to 112.87 per dollar, after erasing an earlier advance of as much as 0.4 percent. The Bloomberg Dollar Spot Index rose 0.3 percent after dropping 1 percent last week and touching the lowest level since October. The euro, which hit 14-month highs against the dollar last week after European Central Bank President Mario Draghi hinted at tweaks to the bank’s bond-buying stimulus program, fell 0.3 percent to $1.1394.

The pound finally fell 0.4% to $1.2973 after an eight-day rally…

… following weaker than expected June PMI data (54.3, vs Exp. 56.3, Last 56.3).

The yield on 10-year Treasuries rose one basis point to 2.31 percent, adding to a 16-basis point surge last week, the steepest since March. U.K. 10-year yields added two basis points to 1.27 percent.  While French and German 10-year yields fell one basis point, the hawkish sentiment hardly looks exhausted, with 0.50% on the 10Y Bund looking increasingly likely.

Later today, investors can look forward to ISM data and Wards vehicle sales data later on Monday.

Market Snapshot

• S&P 500 futures up 0.3% to 2,429.00
• STOXX Europe 600 up 0.7% to 382.14
• MXAP down 0.2% to 154.32
• MXAPJ down 0.09% to 504.51
• Nikkei up 0.1% to 20,055.80
• Topix up 0.2% to 1,614.41
• Hang Seng Index up 0.08% to 25,784.17
• Shanghai Composite up 0.1% to 3,195.91
• Sensex up 0.8% to 31,173.55
• Australia S&P/ASX 200 down 0.7% to 5,684.49
• Kospi up 0.1% to 2,394.48
• German 10Y yield fell 0.4 bps to 0.462%
• Euro down 0.3% to 1.1387 per US$
• Italian 10Y yield rose 0.6 bps to 1.865%
• Spanish 10Y yield fell 4.6 bps to 1.493%
• Brent Futures up 0.3% to $48.91/bbl
• Gold spot down 0.5% to $1,236.08
• U.S. Dollar Index up 0.3% to 95.95

Top Overnight News

• ECB’s Mersch says patience needed as upturn in inflation not yet self-sustained, don’t need 2% inflation to adjust policy; Weidmann says council agrees expansive policy needed, will normalize once inflation justifies it
• European June Manufacturing PMIs: Spain 54.7 vs 55.6 est; Italy 55.2 vs 55.3 est; France 54.8 vs 55.0 est; Germany 59.6 vs 59.3 est; U.K. 54.3 vs 56.3 est.
• FT: a City of London delegation will negotiate a secret plan for a free-trade deal on financial services based on the concept of “mutual access” according to people familiar
• U.S. Navy sends a guided- missile destroyer near disputed Triton Island
• China June Caixin manufacturing PMI 50.4 vs 49.6 previously
• Japan PM Abe’s LDP suffers a surprise defeat in Tokyo assembly election
• Abe adviser Nakahara says BOJ needs fresh face as Kuroda out of ideas
• Goldman Said to Review Commodities After Worst Start in a Decade
• Trump’s Rural Broadband Goal Won’t Be Easy. It Will Be Costly
• Qatar to Respond to Saudi-Led Bloc Demands as Trump Works Phones
• Kindred Sells Nursing Unit to BlueMountain-Led JV for $700m
• Autoliv Enters LiDAR Commercialization Deal with Velodyne
• Rakuten, Lifull Team Up With Homeaway on Home Sharing in Japan
• CN Resumes Service Near Chicago After Derailment, Crude Leak
• Delek Drilling Says Tamar Reserve 13% Bigger Than Pvs Estimate
• EU’s Vestager Says Received No U.S. Reaction to Google Fine
• HuntsmanClariant May Sell Units for M&A Cash, FuW Cites Next CEO
• VTG Aktiengesellschaft to Buy CIT’s Nacco Unit for About EUR780m
• Jakks Pacific Files Up to 5.24m- Share Offer for Holder Meisheng
• Facebook Wins Dismissal of Privacy Suit Over Internet Tracking
• Facebook’s Small Print Might Be Antitrust’s Next Big Target
• Tesla CEO Says Model 3 Passes All Regulatory Requirements

Asian markets traded mixed following an indecisive close last Friday on Wall St. where US indices finished their best H1 performance since 2013 in a choppy manner, as energy posted a 7th consecutive gain and tech underperformed. ASX 200 (-0.6%) slipped below 5,700 with utilities and healthcare weighing on the index, while Nikkei 225 (+0.2%) was kept afloat following the mostly better than expected Japanese Tankan data. Shanghai Comp. (Unch.) and Hang Seng (Unch.) failed to benefit from better than expected Caixin Manufacturing PMI data (50.4 vs. Exp. 49.8) and the launch of the bond connect, with participants despondent after the PBoC refrained from liquidity injections for the 7th consecutive session. However, Chinese markets then recovered gradually throughout the session to return flat. Finally, 10yr JGBs were flat alongside an inconclusive risk tone, although mild support was seen after the BoJ’s JPY 880b1n Rinban operation. Chinese Caixin Manufacturing PMI moved back into expansion overnight, rising to 50.4 for June, vs. Exp. 49.8 (Prey. 49.6). The Japanese Tankan Large Manufacturers Index also beat expectations for Q2 rising to 17 vs. Exp. 15 (Prey. 12). Tankan Large Manufacturing Outlook (Q2) Q/Q 15 vs. Exp. 14 (Prey. 11) Tankan All Large CAPEX (Q2) Q/Q 8.00% vs. Exp. 7.40% (Prey. 0.60%)

Top Asian News

• Tarnished Abe Plunged Into Crisis After Tokyo Election Loss
• Xi, Abe Get Phone Calls From Trump as Asian Tensions Rise
• Idemitsu to Sell Shares, Diluting Founding Family’s Stake
• Tata Steel 1Q Sales Volume Jumps 28% to 2.75m Tons
• Toshiba Mulls a Swiss IPO for Landis+Gyr by September

European stocks traded in the green in subdued fashion amid cautious trade as we open the second half of the year. Markets have opened in the green; with global equities trading near record highs on bets of improving growth. All ten sectors trade in the green, as Energy is one of the noticeable out performers as a result of oil continuing to extend on gains, now in the green for the eighth consecutive day — longest winning streak of the year.
The uncertainty out of Japan, following a crushing defeat of Japanese Prime Minister’s Shinzo Abe’s party in the Tokyo elections did not weigh on stock markets, however the flight to safety was clear, as initial buying was seen in safe haven assets. The Asian buying was short lived, as last week’s hawkish tone continued to weigh on treasuries through the afternoon of Asian trade. lOy paper is struggling, despite some reprieve seen in Bunds and Gilts, the selling pressure is evident with Gilts trading near session lows around 124.96.

• Top European News
• BOE Staff Vote in Favor of Strike Action Over Pay, Unite Says
• U.K. Manufacturing Slowdown Raises Doubts About Economic Outlook
• Euro-Area Manufacturing Accelerates as Orders Fuel Optimism
• Nets Rises on Deal Report; Wirecard Leads Payments Peers Higher
• Poland’s Kaczynski Invokes Nazis as EU Refugee Clash Deepens
• EU Presidency Clouded by Feud Threatening Host’s Government
• Thyssenkrupp Rises on HB News; Bankhaus Lampe Expects Tata Deal

Looking at Monday’s economic data, we’re kicking off in Europe with the final revisions to the June manufacturing PMIs along with a first look at the data for the UK and periphery. Also due out this morning is the Euro area unemployment rate for May. Over in the US we’ll also receive the final manufacturing PMI revision along with the manufacturing ISM for June and May construction spending. Later in the day we’ll also get June vehicle sales data.

US Event Calendar

• 9:45am: Markit US Manufacturing PMI, est. 52.1, prior 52.1
• 10am: ISM Manufacturing, est. 55.2, prior 54.9; Prices Paid, est. 58.5, prior 60.5; New Orders, prior 59.5; Employment, prior 53.5
• 10am: Construction Spending MoM, est. 0.25%, prior -1.4%
• Wards Total Vehicle Sales, est. 16.5m, prior 16.6m
• Wards Domestic Vehicle Sales, est. 12.9m, prior 12.8m

DB’s Jim Reid concludes the overnight wrap

As I reflected on H1 over the weekend, the highlight at home was welcoming back my wife and Maisie yesterday from “In the Night Garden” live. For those not in the know this is basically hallucinogenic Teletubbies. My wife bought Maisie a huge replica of star character Upsy Daisy (who she also had a meet and greet with) and from the moment she got given her to the moment she went to bed 8 hours later she refused to let her go. She wouldn’t eat lunch or dinner without her by her side. She wouldn’t walk around in the house or garden without dragging her along (impressive as she’s bigger than her) and wouldn’t let me change her nappy without Upsy helping and she wouldn’t go to  bed without her in her cot. It was very sweet but she really wasn’t interested in Daddy all day. Good preparation for the teenage years.

Bond markets went a bit Upsy Daisy last week and it’s hard to imagine that it was only this time last week that we were saying there wasn’t much to get excited about in markets but that there were a couple of events that we should keep an eye on in the week ahead. One of these was the ECB forum in Sintra. Although a big focus, little did we know what that event would unleash in financial markets last week. I suppose one of the big questions is whether the slew of hawkish central bank speak was vaguely co-ordinated or whether there was an element of randomness to it. It felt like the former but these words will be meaningless if the data (growth and inflation) doesn’t come through but last week’s comments probably indicate that the data bar has been lowered for tightening. Rather than looking for a reason to tighten it feels that we’ve entered a period where central banks might be looking for a reason not to.

So we will perhaps become a little more sensitive to data and as we highlight in the week ahead, today is global PMI/ISM day and a big event in the monthly calendar. The US is off for Independence Day tomorrow so trading might  be thin this week especially in the early half. By the end of the week we have another payroll number to look forward to after last month’s disappointing 138k print. Before we get there, it’s not been a particularly busy weekend for newsflow but there are a few bits and bobs worth pointing out. The first concerns more chatter out of the ECB. Bundesbank President Jens Weidmann told an audience in Germany that “at the moment we see that the economic situation is rather positive” and that “if this sustainably passes on to inflation rates then monetary policy needs to be more taut, and it’s not about putting full brakes on monetary policy, but to lift one’s foot off the gas a little”. His fellow board member, Yves Mersch, said a day later that recent ECB policy has been successful but it is not yet self-sustained and the ECB needs to continue to have “patience with this policy”. Mersch also indicated that the ECB doesn’t necessarily have to wait for inflation to hit 2% before adjusting policy.

The other significant news to report is out of Japan where PM Abe has suffered a landslide defeat in the Tokyo elections with city governor Yuriko Koike’s new party appearing to be headed for a big victory. Koike’s Tomin First party captured 49 of the 127 assembly seats while Abe’s Liberal Democratic Party won just 23 seats (down from its current 57 seats). That total for Abe is less than the previous record low for his party of 38 seats set in 1995 and 2009. With the support of the Komei Party, the Tomin First will easily secure a comfortable majority in the assembly. The FT is reporting that the result could spur Yurkio Koike to mount a similar challenge against Abe in a national election. Abe has called for an extraordinary meeting within his party this morning while reports are suggesting that the result could force Abe to reshuffle his cabinet and, according to Bloomberg, slow down his push to revise Japan’s pacifist constitution.

While seemingly a surprise, the Yen is little moved post that result although that may in part reflect an overall upbeat Q2 Tankan survey in Japan this morning. The headline manufacturing index for large manufacturers rose 5pts to +17 (vs. +15 expected) while the outlook index rose 4pts to +15 (vs. +14 expected). Nonmanufacturing readings also rose, as did readings for smaller manufacturers. Meanwhile the Nikkei manufacturing PMI in Japan this morning was revised up 0.4pts to 52.4 (versus 53.1 in May). The Nikkei (+0.13%) and Topix (+0.10%) are a shade higher as we go to print. Meanwhile in China this morning the Caixin manufacturing PMI printed back above 50 again at 50.4 (vs. 49.8 expected) which is a rise of 0.8pts from May. Despite that bourses in China are weaker (Shanghai Comp -0.30%) while the Hang Seng is little changed. It’s worth also highlighting this morning that it is the first day of the China-Hong Kong bond connect which mirror the two stock-connect programmes.

Moving on and quickly recapping how markets finished up on Friday. Given the magnitude of the moves for bonds over the week, while weakening a bit more of Friday the moves were relatively subdued all things considered. 10y Bund yields finished 1.4bps higher at 0.465% which means for the week as a whole they were 21.2bps higher. That is the biggest weekly sell-off since December 2015. Gilts were 0.7bps higher on Friday at 1.257% and for the week were 22.6bps higher (weakest since November 2016). OATs were less than 1bp higher on Friday and 20.8bps higher for the week. Meanwhile the periphery finished up to 1.8bps higher on Friday and for the week yields were higher by 11.9bps to 23.9bps. As we know, Treasuries got swept up in the moves too. Yields were another +3.7bps on Friday to close above 2.300% and for the week were 16.1bps higher (most since March 2017). As we’d seen over the week the sell-off for bonds continued to weigh on equity markets in Europe with the Stoxx 600 (-0.34%) ending lower for the fourth consecutive day. For the week the index was down -2.13% which is the fourth down week in succession and the weakest since November last year. It was however a slightly better story across the pond where the S&P 500 edged up +0.15% on Friday to trim its weekly loss to a more modest -0.61%. Further gains across the commodity complex and particularly late in the day for Oil (WTI +2.47% and back above $46/bbl) certainly seemed to help.

Friday’s moves for bonds in Europe could probably be put down to the flash June inflation report for the Euro area. As indicated by some of the regional reports, inflation was a little firmer than expected with headline CPI of +1.3% yoy beating estimates for +1.2% (although down from +1.4%) and core CPI of +1.1% yoy beating the consensus estimate for +1.0%. That core reading marked an increase of two-tenths from May.

Meanwhile in the US the core PCE deflator for June was confirmed as rising +0.1% mom as expected which puts the annual rate at +1.4% yoy and down one-tenth from May. Elsewhere personal spending nudged up +0.1% mom which matched the consensus although real personal spending (+0.1% mom vs. +0.2% expected) was a modest disappointment. Personal income was up a relatively robust +0.4% mom in May and a tenth more than expected. Away from that the Chicago PMI for June rose to a surprisingly high 65.7 (vs. 58.0 expected) which marked a jump of 6.3pts. That was in fact the higher level since May 2014 which is likely to be a supportive read through for today’s manufacturing data. The other data out on Friday across the pond was the final revision to the June University of Michigan consumer sentiment reading (revised up 0.6pts to 95.1). 1-year ahead inflation expectations were left unchanged at 2.6% however 5-10 year expectations were revised down one-tenth to 2.5%. It’s worth noting that the Atlanta Fed revised down their Q2 GDP forecast by two-tenths to 2.7% on Friday.

On to the week ahead now. Today we’re kicking off in Europe with the final revisions to the June manufacturing PMIs along with a first look at the data for the UK and periphery. Also due out this morning is the Euro area unemployment rate for May. Over in the US this afternoon we’ll also receive the final manufacturing PMI revision along with the manufacturing ISM for June and May construction spending. Later this evening we’ll also get June vehicle sales data. Tuesday looks to be quiet with Independence Day in the US. The main attraction is likely the RBA meeting overnight while the only data due out is Euro area PPI. Wednesday looks to be much busier. Overnight in Asia we’ll receive the remaining Caixin PMIs in China and Nikkei PMIs in Japan. In Europe we’ll also get the remaining services and composite PMI revisions as well as retail sales data for the Euro area. In the US on Wednesday data due out includes factory orders for May and the final durable and capital goods orders revisions for May. The FOMC minutes from the June meeting will then be out in the evening. Turning to Thursday, factory orders in Germany is the only release of note in Europe while in the US we’ll get the June ADP print, initial jobless claims, May trade balance, ISM non-manufacturing for June and the final PMI revisions (services and composite). We close out the week in Europe on Friday with industrial production in Germany and trade data and industrial production in France and the UK. In the US on Friday it’s all about the June employment report including nonfarm payrolls.

Away from the data, the Fedspeak this week consists of Bullard this morning, Powell on Thursday and Fischer on Friday. The ECB’s Praet and Nowotny speak tomorrow and Weidmann and Nowotny speak on Thursday on the future of the euro. The ECB minutes are also due out on Thursday. Other events to note this week are China President Xi Jinping’s visit to Moscow on Tuesday where he is due to meet Putin. Germany’s Merkel and China’s Xi meet ahead of the G20 summit on Wednesday and the summit itself is on Friday and Saturday. The Fed will also publish its 2017 monetary policy report to Congress on Friday ahead of Yellen’s testimony on July 12th.