For much of the overnight session, the market’s attention was focused on North Korea’s amicable reaction to Trump’s cancellation of the June 12 summit, an indication that yesterday’s selloff may have been overdone as Trump’s gambit was merely a negotiating ploy, and a successful one at that.

For those who missed the latest twist, North Korea expressed regret regarding the US cancellation of the summit and said it is willing to talk with the US anytime. North Korea added it is still willing to resolve issues with US “whenever and however” and that they hoped for issues to be resolved “Trump style”. Furthermore, North Korea stated that the Summit was necessary to resolve current hostile bilateral relationship and that its previous remarks regarding the summit had been in protest against strong US comments, according to reports citing Vice Foreign Minister Kim Kye Gwan.

While some in the markets saw this as a window of opportunity for the summit to be salvaged, and thus a “risk on” catalyst, others twisted the narrative and said nobody had really expected the summit to take place, so yesterday’s diversion was to be expected, and thus also a “risk on” catalyst (and yes, this is an example of how the “market” spins any event as bullish). Which is why for much of the session, bullish sentiment prevailed.

And sure enough, after a mixed Asian session which saw The MSCI Asia Pac close down -0.2%, but up +0.1% ex Japan, Europe’s Stoxx Europe 600 Index rose, with most sectors in the green, and equity-index futures pointed to a higher U.S. open as concerns about an escalation in tensions over North Korea’s nuclear program eased.

However, things rapidly reversed when Saudi energy minister Al-Falih said that OPEC and Russia are now contemplating boosting output in the second half of 2018, sending WTI tumbling below $70, and pressuring energy stocks.

Meanwhile, the plunge in Italy’s bonds continued, with the BTP yield rising above the key resistance level of 2.40%, and the Bund-BTP spread blowing out beyond 200bps, which Goldman said yesterday was the “contagion” threshold beyond which Italy’s crisis becomes Europe’s crisis and is set to hit Portugal next.

Commenting on the move, Nomura said that Italian government bond yields will likely rise toward a four- year high against German bunds, and any relief rally should be short-lived.

Still, for now complacent investors seem to generally be taking a more sanguine view on geopolitical risks, even as things continue to deteriorate, and while North Korea’s apparent willingness to keep talking appeared to soothe markets, other risks remain, most notably the start of what appears to be yet another European political crisis as Spain’s biggest opposition party Ciudadanos said it was ready to push for a no-confidence motion against Prime Minister Mariano Rajoy, while tensions around global trade linger as the following list from Bloomberg’s Garfield Reyonds summarizes:

• Italy’s populists managed to stun markets with their policies more than two months after the election. They are now close to finally taking office
• Erdogan’s determination to use his own, contrarian, monetary policy playbook
• The summit between the mercurial leaders of the U.S. and North Korea was canned, for now
• Fresh outbreaks in trade tensions surrounding China and Nafta
• Argentina seeking an IMF bailout

Still, nearly 10 years of Pavlovian reactions to BTFD have made a dip virtually impossible, and this morning despite the growing storm clouds, US equity futures are well in the green.

In other macro news, the Bloomberg Dollar Spot index rose on the day but was lower on a weekly basis amid fading risk-off sentiment, ahead of a long weekend in the U.S. and the U.K. The euro stayed in close proximity to 1.17 handle while the Swedish krona led gains in G-10. The lira swung between gains and losses of as much as 2%, though still heading for its worst week since in eight years, after the central bank said it would allow exporters to repay dollar-denominated loans in the local currency, while the pound weakened after the European Union dismissed many of the U.K.’s plans for their post-Brexit relationship.

Turkey could certainly contemplate another rate hike next month if the exchange rate continues to come under pressure, says James McCormack, global head of sovereigns at Fitch Ratings.

As noted above, oil is set to close the week in the red for the first time this month as both WTI and Brent are negative for the day at USD 69.31 and USD 76.95 respectively. This comes amid confirmation of a potential easing of supply cuts by OPEC to make up for the lost capacity of Venezuela and Iran with Russian Oil Minister Novak stating that all proposals will be discussed in June when asked about possible oil production increase by 1mln bpd. In addition to this the Saudi Energy Minister said they are certainly prepared to adjust policy in June, and release of supply will be gradual, adding that there is likely to be an oil supply boost in the second half of 2018. Furthermore, SocGen have revised their oil forecast higher for Q4 2018 with Brent revised to USD 78/bbl (+USD 14) and WTI revised to USD 73/bbl (+USD 13).

Gold is currently trading flat as safe haven demand softens the blow of profit taking heading into the weekend. Steel strengthening as concerns over demand diminish alongside declining inventories. Copper and nickel also rising, with nickel hitting near 3 year highs, spurred on by increasing base metals prices

Expected data include durable goods orders and University of Michigan Consumer Sentiment Index. Foot Locker, CAE, and Buckle are among companies reporting earnings.

Bulletin Headline Summary from RanSquawk

• Oil slides as Russian and Saudi energy ministers confirm speculation of possible production increases in June
• Italian/German spread continue widening as markets await news from Italy, party leaders to meet today
• Looking ahead, highlight include, US Durables, Uni. Of Michigan and Coeure, Powell, Kaplan, Weidmann and Carney speaking

Market Snapshot

• S&P 500 futures up 0.2% to 2,733.25
• STOXX Europe 600 up 0.5% to 392.57
• MXAP down 0.2% to 173.32
• MXAPJ up 0.1% to 566.57
• Nikkei up 0.06% to 22,450.79
• Topix down 0.2% to 1,771.70
• Hang Seng Index down 0.6% to 30,588.04
• Shanghai Composite down 0.4% to 3,141.30
• Sensex up 0.8% to 34,930.01
• Australia S&P/ASX 200 down 0.07% to 6,032.82
• Kospi down 0.2% to 2,460.80
• German 10Y yield fell 2.0 bps to 0.452%
• Euro down 0.02% to $1.1718
• Italian 10Y yield fell 0.2 bps to 2.136%
• Spanish 10Y yield rose 1.0 bps to 1.402%
• Brent futures down 1.4% to $77.66/bbl
• Gold spot little changed at $1,304.23
• U.S. Dollar Index little changed at 93.82

Top Overnight News from Bloomberg

• Spain’s Ciudadanos, the centrist party that holds the balance of power in the Parliament, said it’s ready to back a no-confidence vote against Prime Minister Mariano Rajoy unless he calls a snap election; the opposition Socialists registered a no-confidence motion against Rajoy after his former aides were convicted of running a multimillion-euro corruption racket inside the party on his watch
• OPEC and its allies are likely to gradually boost oil output in the second half of the year to ease consumer anxiety as prices trade near $80 a barrel, said Saudi Minister of Energy and Industry Khalid Al-Falih; Oil is set for its first weekly decline this month as OPEC and its allies consider easing supply cuts
• North Korea said it was surprised by President Donald Trump’s decision to cancel a June 12 summit with Kim Jong Un and that the country remains willing to meet with the U.S. at any time
• U.K. consumer spending lost momentum in the first quarter and companies cut investment after severe weather swept the country
• Global finance chiefs urged the Turkish President Recep Tayyip Erdogan to preserve the independence of his country’s central bank after confusion sent the lira plummeting
• Bank of England Governor Mark Carney said Brexit is entering a crucial phase and this means his oft-criticized guidance on monetary policy is more important than ever.
• The European Union dismissed many of the U.K.’s plans for their post-Brexit relationship as little short of “fantasy” as the mood of negotiations deteriorated and progress stalled
• Mexico told the U.S. that it can be flexible on automotive wages and content in exchange for President Donald Trump’s negotiators withdrawing some of their other toughest demands, according to two people familiar with the Nafta talks.

Asian stock markets traded cautiously as the region reacted to US President Trump’s cancellation of the summit with North Korea. However, losses for the regional bourses were contained in a similar fashion to their US counterparts after Trump kept the door open for the summit to take place in the future. ASX 200 (-0.2%), Nikkei 225 (Unch.) and KOSPI (-0.1%) all began weaker due to the summit cancellation with South Korea taking the brunt of the news, although the picture somewhat improved as participants digested a more conciliatory tone from North Korea overnight which stated it was still willing to resolve issues with the US, while US and South Korea officials also agreed to create conditions for talks between US and North Korea. In addition, Japanese stocks found some reprieve from a weaker currency, while Shanghai Comp. (-0.1%) and Hang Seng (-0.2%) were kept subdued amid a lack of drivers and as this week’s PBoC liquidity operations resulted to a net drain of CNY 30bln in contrast to the substantial net injection of CNY 410bln last week. Finally, 10yr JGBs were flat with only minimal support seen amid a cautious-but-improved risk tone in the region, while the BoJ’s Rinban announcement for over JPY 1tln of JGBs in 1yr-10yr maturities also failed to spur demand as the central bank kept all purchase amounts unchanged. US Commerce Secretary Ross will visit China June 2nd-4th for trade discussions.

Top Asian News

• North Korea Says It Remains Willing to Meet With U.S. Any Time
• Chinese Developer Wuzhou Plunges 85% in Hong Kong Trading
• The World’s Most Profitable Banks Can Be Found in India
• China Is Said to Back Private Investment in State Carmakers
• Hon Hai Arm’s $4.3B Chinese IPO More Than 290 Times Subscribed

European equities are mostly positive as the region bucks the trend experienced in Asia and Wall St. FTSE MIB is underperforming against its peers with banks taking a hit as the Italian Banks Index falls to one-month lows. The energy sector underperforms yet again amid the continuing sell-off in oil prices. In terms of stock specifics, Novartis (+1.4%) is buoyed by an upgrade at Credit Suisse, AstraZeneca (+0.9%) is higher following a positive result from Phase 3 trials and Kingfisher (+4%) after Homebase was sold to Hilco Capital and thus marks an exit of Wesfarmers from the UK market. Some negative news for Daimler, as the German motor authority KBA probes suspected emission manipulation in the company with more than 600,000 possibly being recalled. Daimler have refused to comment.

Top European News

• Sweden’s Krona Soars as Debt Office Places Bet on Its Strength
• U.K. Economy Barely Grows as Households Rein in Spending
• BT Is Said to Draw Interest in U.K. Fixed Network Openreac
• The Tories Who Could Force May to Keep Britain Closer to Europe

In FX, the USD resides in modest positive territory (+0.1%) albeit off best levels as the greenback struggles to recoup some of the postFOMC minutes losses. Subsequently EUR/USD was knocked back below 1.1700 in early trade but failed to  make a test of the 2018 low at 1.1677 as the recent pullback in the USD moved back onto a 1.1700 handle. In terms of EZ data, this morning’s German IFO release came in slightly ahead of expectations but questions nonetheless remain about the EZ’s economic performance with ABN Amro suggesting ‘The combination of ongoing weakness in underlying inflationary pressures and more uncertainty about the economic growth outlook strengthens the case for the ECB to exit at only a very slow pace’. Elsewhere, GBP/USD remains firmly below 1.3400 with GBP softer against its major counterparts in what’s been a busy week of tier 1 data for the UK after Wednesday’s soft inflation figures and yesterday’s upbeat retail report. Today was the turn of GDP which was a key focus for traders after the prelim reading derailed expectations of a May hike by the BoE. However, the GBP failed to gain any notable traction off the figures with the Q/Q and Y/Y readings both unrevised as expected, albeit coupled with lacklustre business investment metrics. USD/JPY hovers around the 109.50 level and off worst levels as the broadly firmer USD out-muscles the JPY amid touted shortcovering and softer than anticipated inflation metrics overnight. Further direction for the pair will  likely come from the broader risktone which has been a guiding force for the pair throughout the week as trade and  geopolitical concerns have prompted a FTQ across the space.

In commodities, oil is set to close the week in the red for the first time this month as both WTI and Brent are negative for the day at USD 69.31 and USD 76.95 respectively. This comes amid confirmation of a potential easing of supply cuts by OPEC to make up for the lost capacity of Venezuela and Iran with Russian Oil Minister Novak stating that all proposals will be discussed in June when asked about possible oil production increase by 1mln bpd. In addition to this the Saudi Energy Minister said they are certainly prepared to adjust policy in June, and release of supply will be gradual, adding that there is likely to be an oil supply boost in the second half of 2018. Furthermore, SocGen have revised their oil forecast higher for Q4 2018 with Brent revised to USD 78/bbl (+USD 14) and WTI revised to USD 73/bbl (+USD 13). Gold is currently trading flat as safe haven demand softens the blow of profit taking heading into the weekend. Steel strengthening as concerns over demand diminish alongside declining inventories. Copper and nickel also rising, with nickel hitting near 3 year highs, spurred on by increasing base metals prices.

Looking at today’s calendar, the flash April durable and capital goods orders will likely be the highlight, while the final University of Michigan consumer sentiment survey is also due. Away from that, EU finance ministers are due to discuss the latest on Brexit negotiations, while Russian President Putin, France President Macron, Japan’s Abe and IMF’s Lagarde take part in a panel. Elsewhere, the ECB’s Villeroy and Coeure will speak while the Fed’s Powell and BOE’s Carney will attend a conference in Stockholm.

US Event Calendar

• 8:30am: U.S. Durable Goods Orders, April P, est. -1.3%, prior 2.6%;
  • Less Transportation, April P, est. 0.5%, prior 0.1%
  • Cap Goods Orders Nondef Ex Air, April P, est. 0.7%, prior -0.4%
• 10am: U. of Mich. Sentiment, est. 98.8, prior 98.8; Current Conditions, est. 98.6, prior 113.3; Expectations, prior 89.5

DB’s Jim Reid concludes the overnight wrap

Ticket to the Champions League final tomorrow? Tick. Accommodation? Tick. Permission to be away from the family for the weekend? A surprising tick. Means of getting to Kiev? Absolutely none! Well not without a 4-legged connection via a couple of different continents that might have kept me away for longer than my marriage could survive. As such I’ll be cracking open a bottle of claret in front of the TV tomorrow night at home and hopefully seeing Liverpool lift one of the biggest trophies in all global sport. I must say I was intimidated by an interview with Ronaldo yesterday who said at 33 he felt he could go on playing until 41 and that he has the body of a 23 year old. I’m 44 in a couple of weeks and feel like I have the body of a 63 year old. Apologies to all the 63 year olds out there reading this.

This week has aged all of us as you can’t look at the screen at the moment without seeing a negative macro headline. Italy, North Korea, China/US trade, wider tariff fears, Turkey, weak PMIs and the usual Brexit shenanigans have all traded blows in an attempt to grab centre stage.

Starting with the US, President Trump has cancelled his planned summit with North Korea’s Kim Jong Un, citing “open hostility” from the regime and warned that the US military “is ready if necessary” and has “massive nuclear” capabilities. Notably, there seems to be some hope that talks may restart further down the track which capped the downside yesterday.

Following on, the S&P initially traded c1% lower but pared back losses to close -0.20%. Within the S&P, the energy (-1.7%) and financials sector were hit the hardest, with the former not helped by WTI oil falling for the third straight day (-1.57% to $70.71/bbl) as Russia’s energy minister noted that OPEC and its partners will discuss phasing out supply curbs at a meeting in June. Over in Europe, all bourses trended lower (Stoxx 600 -0.52%; FTSE -0.92%; DAX -0.94%), with the DAX weighed down auto stocks (-2.5%) as President Trump ordered investigations into whether car imports into the US threaten national security.  Conversely, government bonds continued to firm with core 10y bond yields down 2-5bp (UST 10y -1.6bp; OATs -4.9bp) while Bunds (-3.5bp) fell to the lowest since mid-January. Italian BTPs were little changed (-0.4bp) as the news flow somewhat stabilised. The Dutch Finance Minister Hoekstra is withholding judgement on the new Italian government for now, as “we need to judge (them) by its deeds”, while Germany’s Finance Minister Scholz was more positive as he noted that the new Premier “…has expressed himself in a very pro-European way…” and that “the discussion with the President has proven to be very helpful”.

On the other side, Italy’s new Premier-designate Mr Conte is expected to provide the Head of State with a list of candidates for Ministry posts as early as today. Elsewhere, the League’s Mr Salvini noted “we don’t want to destroy,  but rather to help Italy to have a say once again at the European and global level”. So lots bubbling along before we find out how rhetoric would translate into policies.

This morning in Asia, markets are paring back losses to be modestly lower, in part as North Korea still seem to be open to talks as the Vice Foreign Minister Kim Kye Gwan released a statement which “express our intent that there is a willingness to sit (with the US) at any time, in any way to resolve issues”. Across the region, the Kospi (-0.22%), Hang Seng (-0.26%), and Shanghai Comp. (-0.07%) are all down while the Nikkei is marginally up as we type.

Now recapping other markets performance from yesterday. The US dollar index weakened -0.24% while the Euro and Sterling rose 0.20% and 0.25% respectively. In Turkey, the support from its emergency rate hike seemed to be short lived as the Lira resumed its decline vs. the USD yesterday (-2.89%). Later on, in his election campaign speech, President Erdogan pledged to support economic growth, keep inflation at single digits and erase the current account deficit, but did not elaborate on the details. This morning, the Lira is down c1% and getting closer to the  preintervention intra-day record lows. In commodities, Gold jumped the most in c1 month yesterday with the risk off bias (Gold +0.87%; Silver +1.30%) while other base metal also advanced (Copper +0.49%; Zinc +0.58%; Aluminium +0.85%).
Turning back to oil prices, DB’s Michael Hsueh believes that reports of progress towards an OPEC/non-OPEC unwind of supply discipline should be taken with a grain of salt. His view is that the progression of these talks is more likely to stabilize price rather than start a meaningful downtrend (>5%), given OPEC’s propensity to err on the tighter side. Overall, he expects coalition countries will agree only minimal supply easing which would be consistent with an oil market deficit in 2019 and by implication, prices venturing above Brent US$80+/bbl on a 6-month view.

Now moving onto the US rates outlook, the Fed’s Harker noted that three rate hikes this year continues to be his base case and he has not “moved far from that”. He added that “…we’re getting close to neutral (rates, which is)…say 2.75% to 3%” and that “if we see inflation start to accelerate, then I would be open to a fourth hike this year, but I’d have to see evidence of that first”. Elsewhere, the Fed’s Bostic reiterated that he is comfortable with three rate hikes for this year.

Back in Europe, the ECB has released its latest Financial Stability Review and the “account” of its most recent Governing Council meeting. The FSR noted that systemic risk for the Euro area had remained low over the past six months, with the sovereign sector more resilient due to the improved macroeconomic outlook. On the accounts, it noted “broad agreement” by Council members with Chief economist Mr Praet’s assessment that measures of underlying inflation had moved sideways since the March meeting and had yet to show signs of a sustained upward trend. Earlier yesterday, Mr Praet also reiterated that “economic conditions (in the EU bloc) are good – there are clouds, but economic conditions are good”.

Finally on President Trump’s potential tariffs on imported cars, the Canadian PM Trudeau told Reuters that he is “…trying to figure out where the possible national security connection is” and added that “we know that (the higher tariffs) is very much linked to ongoing negotiations around moving forward on NAFTA”. Elsewhere, a spokesman for  Mexico’s President Pena Nieto said “Mexico is not going to negotiate on the basis of pressure”, although unnamed sources have told Reuters that Mexico has made a new NAFTA offer after the US launched its probe on car tariffs.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the May Kansas City Fed manufacturing index was above market and rose 3pts mom to a fresh record high of 29 (vs. 20 expected).

The production and new orders indices firmed, but the prices received index fell back from last month’s decade-high. The April existing home sales fell -2.5% mom to 5.46m (vs. 5.55m expected), impacted by the lack of available inventory as the number of homes for sale fell 6.2% yoy. Conversely, home prices in 1Q rose 6.9% yoy, the highest start to the year since 2006. Elsewhere, the weekly initial jobless claims rose to a seven week high at 234k (vs. 220k expected) while continuing claims (1,741k vs. 1,746k expected) were broadly in line.

In Europe, the final reading for Germany’s 1Q GDP was confirmed at 0.3% qoq. DB’s Marc Schattenberg expects some rebound in Q2 GDP growth but the decline in the IFO and softer PMIs suggest that the deceleration in Q1 was not just due to one offs but also reflects some moderations in the cycle. The June GfK consumer confidence was marginally below expectations at 10.7 (vs. 10.8).

Elsewhere, France’s May manufacturing confidence (109 vs. 108 expected) and business confidence (106 vs. 108 expected) indicators were mixed but broadly in line. Finally, the April UK retail sales ex-auto rebounded more than expected to 1.3% mom (vs. 0.5% expected), buoyed by shoppers responding to the more conducive Spring weather.

As for today, the May IFO survey in Germany and Q1 GDP report in the UK, including the various growth components is due. In the US flash April durable and capital goods orders will likely be the highlight, while the final University of Michigan consumer sentiment survey is also due. Away from that, EU finance ministers are due to discuss the latest on Brexit negotiations, while Russian President Putin, France President Macron, Japan’s Abe and IMF’s Lagarde take part in a panel. Elsewhere, the ECB’s Villeroy and Coeure will speak while the Fed’s Powell and BOE’s Carney will attend a conference in Stockholm.