In what has been a less exciting session than the previous two, the euro retraced some recent gains as traders grew concerned they may have overestimated the ECB’s hawkish bias ahead of Thursday’s rate decision; in turn the dollar edged higher after the collapse of the GOP healthcare bill sent it to the lowest since September on Tuesday.

Not even Citi could infuse any  excitement in the overnight session, which its called “Purgatorial”:

Markets are more or less flat so far today as we face a temporary dearth of data and speakers. USD remains weak, but there has been no real excuse to continue selling yet. The ECB and the BoJ are both up tomorrow and any potential moves may be linked to pre-positioning/squaring rather than anything that today may offer us…

 

There is little of note this afternoon that could tickle the fancy of even the most excitable FX watcher – We are staring into the abyss… and DoE inventories are staring right back. As oil is flat so far today, that print could provoke a small twitch. Elsewhere, we get US housing starts and Canadian manufacturing shipments…

 

In Dante’s inferno, Purgatorio immediately precedes Paradiso. Fingers’ firmly crossed.

European equities got a boost from both the weaker euro and from corporate results, while oil fluctuated and gold fell. The Stoxx Europe 600 gained 0.3% in early trading after falling 1.1% Tuesday, its largest drop this month as concerns emerged that the stronger Euro would pressure exporters, leading to the first decoupling between the EURUSD and the Stoxx in two months.

S&P 500 futures were little changed (up 0.05%) after the cash index closed at another record on Tuesday.

With the USD just off 10-month lows, there continues to be an easing of loosening of financial conditions for emerging markets which also supports equities. After decent gains in Asia on the back of positive signs from China this week, MSCI’s world stocks index looked set for a ninth day of gains which would mark its longest winning streak since October 2015.

Cited by Reuters, Marijke Zewuster, Head EM research at ABN AMRO said “Most emerging markets are doing quite well at the moment, especially in Asia. The figures for China are positive. If you look at the underlying figures they are relatively strong at the moment.”

In Asia, MSCI’s index of Asia-Pacific shares outside Japan and its index of emerging market shares were both up 0.5 percent at their highest since April 2015. China’s Monday fireworks were long forgotten, with the CSI 300 index leading winners as mainland stocks rallied sending the Shanghai Composite and ChiNext higher by 1.4% and 1% respectively. Hong Kong’s Hang Seng Index was up 0.6 percent. Japan’s Topix Index swung between gains and losses, while South Korea’s Kospi Index rose 0.2 percent.  The Yuan weakened for first time in eight days despite strongest daily fixing since October; seven-day repo falls five basis points after PBOC injects 100 billion yuan of liquidity.  Following Tuesday’s unexpectedly hawkish RBA announcement, Australian bonds were firmer with the 10-year yield dropping 3 bps. Australia’s S&P/ASX 200 Index rose 0.8 percent as bank shares climbed. Analysts said new capital requirements looked fairly benign.

The U.S. dollar, which dropped sharply on Tuesday after the collapse of the GOP healthcare bill, managed a modest rebound on Wednesday. Against a basket of other major currencies, it was up 0.3 percent at 94.878, but still down around 7 percent on the year and within sight of Tuesday’s low of 94.476. The modest USD gains were due to expectations the European Central Bank and the Bank of Japan may strike dovish tones when they meet on Thursday which could dent recent strength in the euro and the Japanese Yen. Meanwhile, the bearish pileup continues, with hedge funds most bearish on the dollar since 2013.

On Thursday, the ECB is expected to adjust their language but substantive changes to their policy will likely come later in the year. The BOJ is expected to raise its growth forecast but cut its inflation outlook, underlining the cautious tone adopted recently by major central banks.

Emerging-market stocks climbed for an eighth-straight day to the highest since April 2015, lifted by strong finish for Chinese equities, iron ore futures also +3.7%, helping AUD and NZD marginally outperform with domestic equity markets. MXN initially rallies after S&P raises country’s outlook.

Treasuries pare rally with longer maturities leading declines; 10-year yield +1bp to 2.27%. USD swap spreads are edging wider across the curve, led by 10-year sector as swapped issuance is expected to dry up after the latest wave of financial issuance pricings, tempting fast-money dip buyers. Open interest points to liquidations of longs in 10-year futures into Tuesday’s rally.

In commodities, WTI crude fluctuated before slipping 0.2 percent to $46.29 a barrel after API reported an unexpected rise in inventories on Tuesday; today’s DOE number will be closely watched. Gold dropped 0.3 percent to $1,238.74 an ounce. Iron ore futures jumped 2.6 percent, building on a 7 percent advance over Monday and Tuesday.

Bulletin Headline Summary From RanSquawk

• Quiet thus far in Europe with EU bourses trading with marginal gains.
• EUR loses its shine amid slight profit taking ahead of tomorrow’s ECB meeting.
• Looking ahead, highlights include US Building Permits, Housing Starts and DoE Crude Report

Market Snapshot

• S&P 500 futures up 0.04% to 2,458.75
• Brent Futures down 0.2% to $48.74/bbl
• Gold spot down 0.3% to $1,238.23
• U.S. Dollar Index up 0.2% to 94.83
• STOXX Europe 600 up 0.2% to 383.29
• Dax up 0.05% to 12,437.20
• Shanghai Composite up 1.36% to 3,230.98
• ChiNext up 1.04% to 1684.77
• Hang Seng Index up 0.6% to 26,672.16
• Nikkei 225 up 0.1% to 20,020.86
• Topix up 0.09% to 1,621.87
• MXAP up 0.3% to 158.63
• MXAPJ up 0.6% to 524.27
• Sensex up 0.5% to 31,856.89
• Australia S&P/ASX 200 up 0.8% to 5,732.13
• Kospi up 0.2% to 2,429.94
• German 10Y yield fell 0.7 bps to 0.547%
• Euro down 0.3% to 1.1525 per US$
• Italian 10Y yield fell 4.3 bps to 1.9%
• Spanish 10Y yield fell 1.4 bps to 1.541%
• Natgas down 0.3% to $3.08/Mmbtu
• Crude oil up 0.2% to $46.49/bbl
• Gold down 0.3% to $1,238.60/oz
• Silver down 0.6% to $16.13/oz

Top overnight news

• ECB’s Villeroy: Euro-zone economic situation is improving; ECB has defeated the risk of deflation
• Japan Cabinet Office monthly assessment: repeats the Japanese economy is on a moderate recovery
• Treasuries Soar as Big Futures Trades Show Bulls Are in Control
• The ECB’s Frankfurt-based staff are examining scenarios for the future path of quantitative easing ahead of a Governing Council decision that is expected to take place in September or later, according to euro-area officials familiar with the matter
• President Donald Trump is now more likely than ever to end his first year in office without a single major legislative accomplishment
• Greece’s much anticipated return to bond markets this week has been held off partly due to a ceiling set by the International Monetary Fund on the amount of debt the country can hold, according to three officials familiar with the matter who asked not to be identified as the talks are confidential
• ECB said to study QE wind down options for decision seen in fall
• China increases U.S. Treasury holdings for a fourth straight month
• BOJ easing likely to continue past 2019, ex-director Hayakawa says
• S&P raises Mexico’s credit rating outlook to stable
• API inventories according to people familiar w/data: Crude +1.6m; Cushing +0.6m; Gasoline -5.5m; Distillates -2.9m
• Libya’s ascendant oil boss poses challenge for OPEC and Russia
• As OPEC wrestles over oil output, top importer’s demand in peril
• BP mulls partnership for pipeline assets, with possible IPO
• BHP to double spending in U.S. shale unit amid investor disquiet
• Hungry oil upstart outsmarts majors in race for Mexico’s riches
• China drafts rules to regulate crude, fuel retailers

Asian stocks traded mixed, following a similar lead in the US where Goldman Sachs’ quarterly revenue weighed on the DJIA, while Netflix led the NASDAQ 100 into positive territory following its beat on earnings. ASX 200 (+0.6%) finished positive, with the financial sector providing the support, whilst Nikkei 225 (+0.1%) was choppy amid a lack of news flow and tier-1 data releases to provide a catalyst. Elsewhere, Shanghai Comp. (+0.9%) and Hang Seng (+0.5%) traded in an upbeat fashion, gaining influence from the CNY 140b1n liquidity injection by the PBoC. Finally, 10yr JGBs were flat with some underperformance seen in the long end, while the JGB auction for enhanced liquidity auction added no direction for the market. PBoC set CNY mid-point at 6.7451 PBoC injected CNY 100bln via 7-day reverse repos and CNY 40bln in 14-day reverse repos.

Top Asian News

• R&F Properties Is Said to Join Wanda-Sunac Transaction: 21st
• New BHP Chairman Flags Board Changes, Asset Review to Investors
• Murata, CyberAgent, Japan Post May Be Added to Nikkei 225: Daiwa
• Hong Kong Skyscrapers World’s Most Expensive, Knight Frank Says
• Apple’s IPhone Manufacturers Join Legal Counter Against Qualcomm
• Won Bears Stymied as Rally Defies Rate Hawks and Missiles

In Europen bourses, the week’s subdued summer trade continues, with equities trading in marginal green territory in what has been a fairly quiet session thus far. Nonetheless, notable moves has been seen in the Scandi stocks with the likes of Volvo, Swedbank and Assa Abloy all reporting before the European open. Across fixed income markets, German yields have been slipping with the curve slightly steeper, while the move had been exacerbated by a firm 30year auction. Elsewhere, gilts climbed higher after strong demand for the new 5 year gilt at today’s auction.

Top European News

• French Military Chief Quits After Public Budget Spat With Macron
• European Stock Traders’ Draghi Addiction Ebbs Ahead of ECB
• Santander Agrees to Buy Back 51% of Elavon: EL Confidencial
• London’s Home Price Growth Has Flatlined. What Happens Next?
• Aena Parent Is Said Set to Rule Out Bid for Abertis
• Cairo, Asia Have Cheapest Taxi Fares in World: Chart (Correct)

In currencies, the AUD has continued to grind higher in Asia to further pull away from 0.79, extending on its post RBA gains, while sentiment has also been boosted by rising iron ore prices. Subsequently, this has further supported AUDNZD which is now hovering around 1.0750. Focus will be on the Australian jobs data tonight, while later in the week RBA speakers could look to tame the upside in AUD. EUR slightly pulled off the mid-1.15 with the rally likely to hold until the ECB monetary policy decision tomorrow. A move to 1.16 looks to be on the card unless Draghi deviates from his recent hawkish comments made at the Sintra conference. JPY holding just north of 112.00 after making a slight breach of that level, however support from 111.80 kept USD/JPY afloat. Of note, the BoJ announce their latest decision on monetary policy tonight, with the general consensus that the central bank will maintain its monetary policy and YCC, while they are also expected to lift growth forecasts and cut inflation targets.

In commodities, Slight recovery in the USD has pressured the commodity complex with Gold prices slipping slightly. Crude prices trickling lower following last night’s API crude report which showed a 1.6m1n build in inventories.

Looking at the day ahead, the UK and Europe will be fairly quiet. The US will release data on housing starts for June (est: 1,160k), building permits (est: 1,201K) and MBA mortgage applications. Away from the data, the inaugural meeting of the US-China Comprehensive Economic Dialogue will take place in Washington to discuss economic and trade issues which should be worth a watch. US earnings seasons remains a focus too, with Morgan Stanley, AMEX, Reynolds American and Qualcomm schedule to report.

US Event Calendar

• 7am: MBA mortgage applications July 14; prior -7.4%
• 8:30am: Housing starts June; est. 1160k, prior 1092k; Building permits June; est. 1201k, prior 1168k
• 10:30am: DOE weekly petroleum status report July 14
  • U.S. crude oil inventories; est. -3500k, prior -7564k
  • U.S. gasoline inventories; est. -1300k, prior -1647k
  • U.S. distillate inventory; est. 1200k, prior 3131k
  • U.S. refinery utilization; est. 0.3%, prior 0.9%

DB’s Jim Reid concludes the overnight wrap

We might be inching closer to the dog days of summer but there has still been a steady slate of interesting newsflow for markets to feed off this week. Indeed the last 24 hours has had a bit of everything with data, politics and earnings all in vogue. Softer than expected inflation in the UK, further disappointment with the latest US healthcare bill developments – albeit where expectations were hardly high in the first place – and a fairly mixed read-through from the latest US bank  earnings all had a say in markets one way or another yesterday.

Tackling those one at a time, the inflation versus central bank battle continued yesterday following the June inflation report in the UK. Headline CPI missed (0.0% mom vs. +0.2% expected) which pushed the annual rate down three-tenths and more than expected to +2.6% yoy. The core also fell two-tenth to +2.4% yoy, albeit back to where it was in April, after expectations were for no change. Lower prices for clothing, recreation, food and alcohol all appeared to weigh on the slightly softer reading. Interestingly that is the fifth time in the last nine months that YoY headline inflation has deviated at least 0.2ppts from the consensus in either direction (of those five occurrences, two have been misses to the downside) which seems to emphasise some of the difficulty in forecasting inflation at the moment. In any case yesterday’s data will perhaps give the BoE doves a little bit of breathing room at next month’s MPC meeting but the wider story in markets is that the last three global inflation readings (UK, NZ and US) have all disappointed (excluding the Euro area reading given it was more of a rubber stamping). It’s worth noting that in the next week we’ll get inflation prints out of both Canada and Australia so it’ll be interesting to see if the softer
momentum continues.

After trading a little firmer leading into the data, Sterling tumbled as much as -0.90% from its highs although only ended the day a shade weaker (-0.11%) after Governor Carney added later in the session that the  data doesn’t change the outlook that price gains will remain above target “for a period of time”. Gilt yields were also sharply lower and stayed so into the close. 10y Gilt yields ended the day down 6.4bps at 1.207% and are now down over 10bps in the first two days of this week so far. Other European bond markets were stronger too with Bunds down 2.9bps to 0.547% and the periphery 5bps to 6bps lower. An ECB story was also doing the rounds on Bloomberg suggesting that the Bank is examining scenarios for the future path of QE including the studying of a tapering path, asset purchase extension and reduced pace and combination of the two strategies. That didn’t seem to suggest any new information however and was subsequently downplayed.

Across the pond Treasuries were also well bid (10y -5.5bps to 2.260%) from the off yesterday as the market digested the latest setback in the healthcare bill debacle. After a replacement of the Obamacare bill was ruled out due to a lack of Republican support, it was revealed that a subsequent repeal also lacked the sufficient support. Senate majority leader Mitch McConnell announced that a procedural vote will still be held next week regardless. President Trump had plenty to say but it’s looking more likely that the administration will be moving on to tax reform and infrastructure now, however it remains to be seen how damaging  the internal conflicts have been on the outlook for some of the more market-sensitive policies to pass. The USD index fell another -0.55% and is down four sessions in a row to the lowest since August last year.

In fairness the healthcare bill headlines didn’t have a huge impact on risk assets in the US. The initial leg lower for the S&P 500 (which was down as much as -0.35%) appeared to have more to do with the latest earnings reports out of Goldman Sachs and BofA. While both banks reported beats at both the earnings and revenue lines the market picked up on some of the softer finer details of the report. In the case of Goldman’s there was a disappointing read-through from some of the core businesses and particularly FICC. The US bank sector closed down -0.39% and lower for the third session in a row however the broader S&P 500 managed to claw back to a small +0.06% gain and with it, yet another record high. A big boost from Netflix post results on Monday evening saw the Nasdaq turn in a +0.47% gain and so joining the S&P again at a new record high. In fact after falling to a two month low back on July 6th, the index has now turned in a positive session every day since (8 sessions) which is the longest such winning streak since February 2015. Another eye opening stat is that the S&P 500 has now gone 267 days without a 5% correction – the longest such streak since 1996. For completeness European equity markets (Stoxx 600 -1.11%) suffered their weakest day this month largely as a result of the stronger Euro (+0.66%) and some earnings releases.

This morning in Asia, most key bourses are slightly up, with the Nikkei (+0.11%), Hang Seng (+0.41%) and the three Chinese bourses (+0.70% to +1.09%) paring back losses in recent days. The ASX200 strengthened +0.67%, supported by the banks (+~3%), which received a broadly benign regulatory outcome on target capital levels. US equity index futures are also a smidgen firmer, while bond markets in Asia have largely followed the lead from Wall Street and Europe in rallying overnight.

Staying with the ECB, yesterday’s Q2 ECB bank lending survey showed a net easing in credit standards for corporates as well as a strengthening in loan and CAPEX demand. On a forward basis, the survey suggests banks in Germany and Netherlands expect more easing in credit conditions, while Italian banks expect a net tightening. Loan demand is expected to strengthen further, in both corporates and consumer loans, but slightly lower in mortgages. 2Q17 demand for fixed investment by corporates increased in the Euro area, particularly in Italy, Netherlands and Germany. Before we look at today’s calendar, wrapping up the  remaining data from yesterday, in the US the NAHB housing index fell 2pts to 64 in July. Whilst still at a high level, the index is down 7pts from the March peak and is at its lowest level since November 16. Over in Germany, the ZEW survey for July was slightly down to 86.4, suggesting little changes over the past month in analysts’ assessment of current conditions or the economic outlook for the German and wider broader euro area economies.

Looking at the day ahead now, the UK and Europe will be fairly quiet. Across the Atlantic, the US will release data on housing starts for June (est: 1,160k), building permits (est: 1,201K) and MBA mortgage applications. Away from the data, the inaugural meeting of the US-China Comprehensive Economic Dialogue will take place in Washington to discuss economic and trade issues which should be worth a watch. US earnings seasons remains a focus too, with Morgan Stanley, AMEX, Reynolds American and Qualcomm schedule to report.