i)BANK OF ENGLAND/UK

S&P futures were fractionally higher (+0.1% to 2,476) with all eyes on the Fed’s rate decision as investors await another earnings deluge from companies including Facebook, Coca-Cola and Boeing. Asian and European shares were also higher, prompted by momentum from the latest US record high; the Dollar rebound continued while oil rose above $48 as copper hit a two year high.

Risk appetite improved yesterday as oil prices kept climbing following Saudi Arabia’s commitment to export cuts. Safe-haven assets sold off, the VIX reached a new historic low, equities were up across the board, and the USD outperformed after a consumer confidence measure was higher than expected. Asian markets were mixed at midday local time. WTI advanced 0.8% to $48.26 a barrel, extending gains from the highest close in seven weeks. Crude inventories slumped by a whopping 10.2 million barrels last week according to the latest API data. Copper gained 0.6 percent in its fifth consecutive advance, hitting the highest in two years, lifting shares of producers including Glencore on expectations that demand in China will fuel a global shortage, with plans in the country to curb metal-rich waste imports reinforcing a bullish outlook.

In the overnight session, sovereign bonds opened lower in Asia following yesterday’s sharp Treasuries sell off where several selling blocks slammed futures; the Australian 10-year yield rose as much as seven basis points before easing well off the highs on an unexpected miss in headline inflation (Q2 CPI 0.2%, Exp. 0.4%) followed by a dovish speech by the RBA’s Lowe; Yield were softer at 2.32% after Senate healthcare debate gets off to a difficult start.

Stocks gained in Sydney and Tokyo, fall in Shanghai and Seoul. Japan’s Topix index rose 0.2 percent and Australia’s S&P/ASX 200 Index added 0.9 percent. South Korea’s Kospi index fell 0.2 percent, while the Hang Seng Index in Hong Kong gained 0.3 percent. The Shanghai Composite Index added 0.1 percent. The Aussie fell 0.4 percent to 79.09 U.S. cents after as noted above Australia’s Q2 headline inflation rose less than expected. 10-year Australian government notes saw yields climb four basis points to 2.73 percent. WTI crude slips below $48.50 after surging the most since November on Tuesday; Dalian iron ore futures flat.

A broad rally in commodities from oil to copper boosted European stock momentum with the Stoxx 600 index jumping 0.6%, its biggest gain in a week, as positive results from energy firms such as Subsea 7 and Tullow Oil continued to feed into markets. Energy stocks joined the broad-based global rally as oil rose above $48 a barrel for the first time since early June.  The U.K.’s FTSE 100 Index increased 0.6 percent. Germany’s DAX Index increased 0.5 percent, the biggest climb in two weeks.

“The indications are more positive on the outlook for energy stocks. While there was a lot of kitchen sinking from firms in Q2 numbers, they have reset the expectations over the valuations now, they have cleaned up balance sheets,” said Angelo Meda, head of equities at Banor SIM in Milan. “The outlook is not so bad (…) We are still missing one component which is the commentary from big oil firms Total, BP, Royal Dutch Shell.”

Copper reached a two-year high on expectations of increasing demand from China. Treasuries and European government bonds rose following Tuesday’s selloff, while boosting the dollar.

While there are some nerves ahead of today’s Fed statement, Yellen is not expected to “rock the boat” in what many anticipate will be a non-event announcement. Meanwhile, earnings continue to be a source of optimism, as more than 80% of reporting S&P 500 companies beaten earnings forecasts so far this reporting period, helping to support optimism in the global economy and pushing volatility to record lows. As Bloomberg notes, “Investors are looking for guidance from the Fed on how it plans to unwind its bond portfolio, with policy makers seen keeping interest rates on hold as the U.S. central bank meeting concludes on Wednesday.”

“Top of our mind is whether there will be more clarity on efforts to unwind the US$4.5 trillion portfolio of Treasuries and mortgage-backed securities,” Isaah Mhlanga, an economist at Rand Merchant Bank in Johannesburg, said in a client note. “We think the bank will give more clarity on its intention to do so but without the specifics of timing. When the Fed eventually introduces Taper 2.0, that will be the return of volatility.”

In previewing today’s FOMC announcement, DB’s Jim Reid writes that given its late July and given the Fed will likely announce an end to balance sheet reinvestment in September (starting from October), this could be a relatively dull meeting. DB believes the Fed is unlikely to take any action in a policy firming direction at the meeting this week, partly because inflation has continued to surprise to the downside as of late. The bank expects the statement to focus on how the Fed will handle the dichotomy between a resumption of moderate growth and continuing improvement in the labour market on one hand and ongoing softness in inflation on the other. On the topic of the timing of the initial taper of balance sheet reinvestment DB writes that it will be a September announcement and October commencement remains most likely (in line with consensus), and the Committee can get by without giving any more specific guidance on timing even within this week’s statement given these relatively strongly held market expectations.

In FX, the dollar rose against most major peers ahead of the Federal Reserve’s policy decision, though options show traders are betting the euro will see more upside.  The euro dropped as much as 0.3 percent to $1.1613, the lowest in nearly a week before rebounding back to 1.65 as the Bloomberg Dollar Spot Index rose for a third day. And yet, as discussed on Monday, three-month 25-delta risk-reversal for Euro options – insurance against a sharp drop in the USD – was at the highest since 2009

“There is a bit of temptation to get caught up in the current wave of euro optimism by revising our baseline forecasts higher,” ING’s Viraj Patel wrote. The strategists prefer to view the $1.16-$1.17 range as “a near-term overshoot.”

On the political front, on Tuesday the US Senate received sufficient votes to proceed on GOP healthcare legislation motion debate, although the plan to repeal and replace Obamacare later failed to get enough votes for approval (43-57). More votes are expected.

Elsewhere, the euro declined 0.2 percent to $1.1626. The British pound decreased 0.1 percent to $1.3018 after data showed the U.K. economy expanded 0.3 percent in the second quarter, matching estimates. The yen was little changed at 111.84 per dollar after declining 0.7 percent on Tuesday.

In commodities, as noted above West Texas Intermediate crude advanced 0.8% to $48.26 a barrel, the highest in seven weeks. Crude inventories declined by 10.2 million barrels last week according to the latest weekly API data. Copper gained 0.6 percent in its fifth consecutive advance. The Bloomberg Commodity Index climbed 0.1 percent while gold dipped 0.3 percent to $1,246.32 an ounce.

In rates, 10Y TSY yields dipped two basis points to 2.31 percent, after surging eight basis points in the previous session. Germany’s 10-year yield decreased one basis point to 0.56 percent. Britain’s 10-year yield declined three basis points to 1.231 percent.

Bulletin Headline Summary from RanSquawk

• European equities enter the North American crossover in positive territory in what is set to be a busy day for earnings across the Atlantic
• UK GDP printed in-line with Exp. with all eyes now on today’s FOMC announcement
• Looking ahead, highlights include DoE’s and the FOMC rate decision

Market Snpashot

• S&P 500 futures up 0.1% to 2,476.25
• STOXX Europe 600 up 0.6% to 382.95
• MXAP up 0.01% to 159.06
• MXAPJ down 0.02% to 526.28
• Nikkei up 0.5% to 20,050.16
• Topix up 0.2% to 1,620.88
• Hang Seng Index up 0.3% to 26,941.02
• Shanghai Composite up 0.1% to 3,247.68
• Sensex up 0.4% to 32,358.18
• Australia S&P/ASX 200 up 0.9% to 5,776.63
• Kospi down 0.2% to 2,434.51
• German 10Y yield fell 1.7 bps to 0.549%
• Euro down 0.3% to 1.1617 per US$
• Brent Futures up 0.7% to $50.56/bbl
• Italian 10Y yield rose 9.0 bps to 1.853%
• Spanish 10Y yield fell 2.7 bps to 1.525%
• Brent Futures up 0.7% to $50.56/bbl
• Gold spot down 0.4% to $1,245.36
• U.S. Dollar Index up 0.2% to 94.27

Top Overnight News from BBG

• Senate Republicans have embarked on an unpredictable and potentially chaotic floor debate aimed at repealing Obamacare amid significant doubts that they can muster 50 votes to pass any kind of health bill
• Oil extended gains from the highest close in seven weeks as industry data showed U.S. crude stockpiles plunged, easing a glut
• Copper surged to the highest level in more than two years, lifting shares of producers including Glencore Plc, on expectations that demand in China will fuel a global shortage, with plans in the country to curb metal-rich waste imports reinforcing a bullish outlook.
• Viacom has informed Scripps Networks Interactive that it is willing to pay all cash to buy the network operator, Reuters reports
• HNA Group Co.’s proposed $416 million investment in an in- flight entertainment and Internet-services provider collapsed after the two companies failed to get regulatory approval from the U.S.
• The U.K. economy’s lackluster performance extended into the second quarter, with growth only modestly picking up in the period
• The U.K. became the latest European country to mark the end of the line for diesel and gasoline fueled cars as automakers such as Volvo race to build electric vehicles or face the consequences of getting left behind
• ECB’s Nowotny sees no need to set timetable to end bond buying; BOJ’s Nakaso pledges to ’persistently continue’ powerful easing
• RBA’s Lowe says some coverage of neutral rate misinterpreted intention; doesn’t need to move in lockstep with other central banks; global tightening has no automatic implications for RBA
• Australia 2Q CPI 0.2% vs 0.4% est; trimmed mean 0.5% vs 0.5% est
• RBNZ’s McDermott says inflation pressures ’relatively moderate’; neutral interest rate estimated to be 3.5%
• API inventories according to people familiar w/data: Crude -10.2m; Cushing -2.6m; Gasoline +1.9m; Distillates -0.1m
• Russia Says New U.S. Sanctions Killing Chances for Improved Ties
• Russian Senator Suggests ‘Sanitary Sanctions’ Against McDonald’s
• SoftBank Is Said to Take Stake in Roomba Maker in Tech Buildout
• Luxury Brands Can Block Online Retailers: EU Court Aide
• Lawmakers Negotiating Self-Driving Car Bills Ahead of Markup
• Apple Judgment Increased to $506 Mln in Wisconsin Patent Case
• Ford Says to Challenge ACCC Allegation on Transmissions Issue
• Transwestern Has Force Majeure in N.M. After Mechanical Failure
• KKR’s Rockecharlie Sees Energy Asset-Sales Mkt Reaching $90B
• UniCredit Says 400,000 Clients Affected by Security Breach

Asia equity markets were mostly higher following a record setting day on Wall St. where the S&P 500 and NASDAQ posted fresh all-time highs as earnings buoyed sentiment, with gains led by strength in financials and energy sectors. ASX 200 (+0.6%) outperformed in Asia as the commodity sector shined with copper at 26-month highs and after oil gained over 2% amid a larger than expected drawdown in API crude inventories. Nikkei 225 (+0.5%) was bolstered by a softer JPY, while Shanghai Comp. (-0.1%) and Hang Seng (+0.35%) both initially conformed to the advances after the IMF’s recent upgrade on China growth forecasts and alongside the PBoC’s continued liquidity efforts with a CNY 130b1n injection today. However, mainland stocks then pulled back on regulatory concerns. Finally, 10yr JGBs tracked the softness in T-notes with demand also dampened as participants shifted positions into riskier Japanese assets, while today’s Rinban announcement was for a relatively modest JPY 400bn. PBoC injected CNY 80bln in 7-day reverse repos and CNY 50bln in 28-day reverse repos.

• Australian CPI (Q2) Q/Q 0.2% vs. Exp. 0.4% (Prey. 0.5%). (Newswires)
• Australian CPI (Q2) Y/Y 1.9% vs. Exp. 2.2% (Prey. 2.1%)

Top Asian News

• Bankers Ditch Fat Salaries to Chase Digital Currency Riches
• Vietnam 7-Month Disbursed FDI Seen at $9.05B, up 5.8% Y/Y
• China Plans to Begin Trial of Spot Power Trading, Daily Says
• Investors ’Cautiously Opportunistic’ on Asia Hedge Funds: DB

European bourses have followed their US counterparts (Eurostoxx 50 +0.3%) and have begun their Q2 earnings season on the front foot. EU major equity markets all trade in the green; with sector support coming from Energy, as the oil heavyweights have seen a bid following the unexpected 10m1n draw in last night’s API report. European auto names have seen mixed performance with Peugeot (+5.3%) and Daimler (-0.2%); post-earnings. European fixed income future markets followed the risk tone overnight and ground lower throughout trade. However, a marginal bid has been seen through the European morning, following the slight gap up seen in German and UK paper. In the periphery, Spanish front-end bonds have seen modest selling pressure with some attributing this to speculation over selling this week from international real money accounts, according to IFR.

Top European News

• EU to Update Poland Sanctions Stance After Court-Revamp Veto
• Italy Confidence Gauges Rise, While Jobless Worries Keep Growing
• U.K. FCA Extends Senior Managers Regime to All Financial Firms
• ITV Gains as Stable Outlook Soothes Brexit Advertising Concerns
• Swedish Government Faces No Confidence Votes After IT Scandal
• ASMI Slides on ASM Pacific Unit 3Q Bookings Outlook

In currencies, all eyes for GBP were placed on domestic UK GDP figures ahead of next week’s ‘Super Thursday’ at the BoE. However, markets were left relatively unfazed after in-line readings for both the Y/Y and Q/Q. In terms of components of the release, construction and manufacturing were the largest downward pulls on quarterly GDP growth, following 2 consecutive quarters of growth. CAD buying looks to have petered out given the relatively unfazed reaction to the huge 10mln drawdown in US crude oil inventories, as shown by last night’s API’s. 1.25 support in USD/CAD remaining firm with 1.2461 (2016 low) another level to the downside offering near term support. USD-index a touch higher heading into FOMC meeting having consolidated above 94.00.

In commodities, crude oil was the noticeable mover following the US closing bell yesterday in the wake of the 10.2mln bpd draw seen during last night’s API release which saw WTI futures break through USD 48.00/bbl. The long-term 2017 range continues, as the 42.00/bbl level acted as support, if a firm break through the 49 handle can be seen, markets could eye a test of 52/bbl. Gold and other precious metals have seen marginal selling pressure over the week, as gold failed to test 1260/oz. The risk on sentiment has also weighed on the market, largely trading in tandem with treasury markets, as many await tonight’s FOMC.
The API Crude Oil Inventory Report saw a huge drawdown of -10,200K (Prey. 1628K). Will it be confirmed by today’s DOE report?

Turning to today’s data releases, the focus will turn to the US with the July FOMC rate decision due.

US Event Calendar

• 7am: MBA Mortgage Applications, prior 6.3%
• 10am: New Home Sales, est. 615,000, prior 610,000; MoM, est. 0.82%, prior 2.9%
• 2pm: FOMC Rate Decision

DB’s Jim Reid concludes the overnight wrap

Welcome to another FOMC decision day, although given its late July and given the Fed will likely announce an end to balance sheet reinvestment in September (starting from October), this could be a relatively dull meeting. Famous last words. We’ll provide a slightly more detailed preview in the day ahead at the end. Before this excitement ahead, global equity markets picked up steam yesterday with both US (S&P +0.3%) and European (STOXX 600 +0.4%) equities posting gains. Decent earnings, a strong German IFO and the promise of Saudi oil production cuts underpinned risk markets and led to a notable sell-off in bonds.

The uptick in the US drove the S&P 500 to a new all-time high, with the Energy (+1.3%) and Financials (+1.3%) sectors the biggest gainers in the US. At one stage the VIX hit what would have been an all-time closing low of 9.04 before retracing into the close to be unchanged at 9.43 and the 9th successive close below 10 – the longest ever streak, comfortably beating the 4 days it spent below 10 in December 1993.

Over in Europe the STOXX 600 index was led by large gains in Basic Resources (+2.6%) and Banks (+1.6%). European equity performance was consistently strong across regions as well, with the DAX (+0.5%), FTSE (+0.8%), CAC (+0.7%) and FTSE MIB (+0.6%) all rising on the day. As touched on above, the commodity complex was helped as oil prices jumped by 3.3% – first on news that Saudi Arabia is planning deep crude export cuts next month and then climbed another 1.5% immediately after the US close on news that API was reporting Crude inventories falling 10.2m barrels last week. It has retracted around half a percent this morning.

Over in government bond markets, yields rose across all maturities for both German Bunds (2Y: unch; 10Y: +6bps) and US Treasuries (2Y: +3bps; 10Y: +8bps). Both curves saw a general steepening which likely helped drive the strong bank equity performance yesterday. Gilts (2Y: +3bps; 10Y: +7bps), OATs (2Y +2bps; 10Y +7bps) and BTPs (2Y: +2bps; 10Y: +9bps) also exhibited similar moves. Turning to currency markets, the US dollar index was up a touch (0.1%) yesterday while the Euro (vs USD) was flat at 1.1646 having climbed to a high of 1.171 intraday. Sterling was flat on the day following larger intra-day gains of around 0.5%. A tweet from Donald Trump suggesting that the US was working on a trade deal with the UK seemed to help for a while. Precious metals were lower on the day (Gold -0.4%; Silver -0.1%) while industrial metals were mixed (Copper +0.4%; Aluminium -0.2%). Agricultural commodities were broadly lower on the day.

Away from the data, Trump’s efforts to repeal Obamacare took a small step forward yesterday, securing enough votes (51 to 50) to allow senators to start debating on the healthcare legislation. The narrow win was sealed with the help of Vice President Pence and the ailing Senator McCain flying in to help. Trump has called the win a “giant step”, but this morning, the senate has rejected Senator’s McConnell’s replacement plan by a vote of 43-57. More attempts will be made today to find a proposal that will pass.

Elsewhere, in an interview with the WSJ, Trump said he may reappoint Yellen for a second term (expires in Feb) and noted that “I like her” and “I like to see rates stay low…she’s historically been a low rate person…” Gary Cohn was also touted as a potential contender. Mr Trump also said in the interview that his next priority is overhauling the tax code.

This morning in Asia, markets have been a little more mixed after yesterday’s US/European strength, with the Nikkei (+0.4%), Kospi (-0.3%), Hang Seng (unch) and the 3 Chinese bourses down -0.4 to 0.8%. Treasuries have given up -1.5bps of their climb yesterday. Also, AU’s headline 2Q CPI missed expectations (1.9% yoy, vs 2.2% expected; 2.1% previous), with the miss mainly in the food group. However, the more important weighted median inflation came in at 1.8% yoy (vs 1.7% expected; 1.7% previous). DB’s Adam Boyton believes the data will be largely viewed as ‘in line with RBA’s expectations’. The AUDUSD fell 0.3%.

Taking a look at yesterday’s calendar, data out of Europe was broadly positive. In Germany we saw the IFO business climate reading unexpectedly tick up (116 vs. 114.9 expected; 115.1 previous) to hit its highest levels since the German reunification. This increase was driven by unexpected positive surprises in both the expectations index (107.3 vs. 106.5 expected; 106.8 previous) and current assessment index (125.4 vs. 123.8 expected; 124.1 previous), the latter of which was also at its historical high. We also saw the latest set of confidence indicators out of France, with the both the business (108 vs. 106 expected) and manufacturing (109 vs. 108 expected) confidence indicators for July beating expectations. Over in the US we saw some soft housing market data for May with the FHFA House Price Index (+0.4% mom vs. +0.5% expected) and the S&P 20- City House Price index (+0.10% mom vs. +0.30% expected) both disappointing. On a more positive note we also got the July readings for the conference board consumer confidence indicator which unexpectedly surprised on the upside (121.1 vs.116.5 expected; 118.9 previous), as the present conditions measure rose to a 16-year high of 147.8 (146.3 previous) and consumer expectations for the next six months rose to 103.3 (100.6 previous). The Richmond Fed Manufacturing Index (14 vs. 7 expected) also rose against expectations of holding steady in July.

Before we look at the day ahead, yesterday saw the DB House View team publish their latest report yesterday highlighting their key views on global macro and markets. They note that the global economy is in better shape than it has been in several years and this has allowed global central banks to follow the Fed and gradually start to normalise monetary policy. While inflation is still below target, the House View team expects that labour market tightness will soon feed into wages, driving core inflation higher over the medium-term in the US and Europe and thus supporting further monetary tightening and a normalisation of yield curves. On this note they expect that the Fed will likely announce a taper of balance sheet reinvestment in September and will hike rates again in December. As for the ECB, they note that rate hikes are still far off and expect the announcement of another QE extension and tapering in October. Away from central banks, the team notes that their global macro outlook is little changed for this year as they expect growth to rebound from post-crisis lows seen in 2016. With regard to markets they remain constructive on risk assets expecting material upside to US equities and positive but more balanced performance in EM. In FX they note that there are signs the dollar has peaked, but do not expect a material devaluation yet. They are more positive on the euro, seeing upside versus the dollar and sterling. In rates they expect yield curves to normalise gradually, but there is risk of a more sudden upward shift, depending on the path of core inflation. A link to the full report is https://goo.gl/e5SKDP

Turning to today’s data releases, Europe will see the consumer confidence reading out of France (108 expected; 108 previous) followed by UK Q2 GDP (1.7% YoY expected). Thereafter the focus will turn to the US with the July FOMC rate decision due. We recap the views of US economists (as highlighted in Monday’s EMR) who expect that the Fed is unlikely to take any action in a policy firming direction at the meeting this week, partly because inflation has continued to surprise to the downside as of late. They do expect the statement to focus on how the Fed will handle the dichotomy between a resumption of moderate growth and continuing improvement in the labour market on one hand and ongoing softness in inflation on the other. On the topic of the timing of the initial taper of balance sheet reinvestment the team believes that a September announcement and October commencement remains most likely (in line with consensus), and the Committee can get by without giving any more specific guidance on timing even within this week’s statement given these relatively strongly held market expectations.

Away from data, Minneapolis Fed President Kashkari will be the first speaker following the FOMC decision. On the earnings front Coca-Cola, Ford, Boeing and Facebook are due to report today