While global markets remain largely a sea of green, ignoring the threat of a trade war between the US and the rest of the world which remains a non-event for now (for reasons discussed overnight), the move higher has been more muted overnight, and even as European and Asian stocks extended Monday’s gains and U.S. futures pointed to a higher open, some familiar risks have re-emerged.

Europe’s Stoxx 600 Index advanced for a third day, if off its highs, led by tech companies and automakers. Looking at sectors, Telecoms are underperforming while IT names outperform. In terms of stock specifics, RBS (-3.6%) is hit after the UK government decided to sell a 7.7% stake in the company worth around GBP 2.6bln following the bank bailout during the crisis.

Following some early outperformance, Italy’s FTSE MIB slumped into the red as Italian PM Conte delivered his inaugural speech before Senate (ahead of a confidence vote later today which is expected to pass) in which the new prime minister re-asserted that the Five Star-League government will follow a radical policy program, noting that citizens have a right to universal income and minimum wage, proposals which are set to blow out Italy’s budget and public debt. It is therefore not surprising that Italian bond yields spiked to session highs as Conte spoke.

Here are the highlights so far from Conte’s inaugural speech:

• This is a project for the change of Italy.
• I take up this responsibility with humility and determination … I am motivated by nothing but a spirit of service … like a lawyer representing all of Italy’s people.
• This is not a simple novelty. The truth is that we have brought a radical change, of which we are proud.
• We will put an end to the immigration “business” which has grown out of control under the guise of solidarity.
• We want to reduce public debt by increasing the wealth of our economy, not through austerity.
• We intend to preliminarily restate our convinced membership of our country of NATO, with the United States of America as a privilege partner.
• The elimination of the gap in growth between Italy and the European Union is our objective, which must be followed in a framework of financial stability and the trust of markets.
• This government intends to act with determination (against political privileges). The struggle against the privileges and waste is not a merely symbolic question.
• Italian public debt is fully sustainable today. However, its reduction must be pursued, but with a view to economic growth. Fiscal and public spending policy should be geared towards the pursuit of the objectives set for stable and sustainable growth. In Europe, these issues will be strongly pushed forward with the aim of change of its governance, a change already at the centre of reflection and discussion in all EU member states.

Furthermore, as Bloomberg’s Heather Burke points out, “Italy’s CDS remains elevated, and above their five-year average despite a pullback from last week’s peak (which was within striking distance of the July 2013 high).”

The spread between Italy’s CDS and that of emerging markets … still shows investors are paying more to hedge against a default in the euro-area nation than for a basket of 14 developing countries — a dynamic that hasn’t persisted since the height of the euro crisis in 2012

Elsewhere, there was more bad economic news for Europe this morning, when the Markit PMI dropped to a fresh 18 month low of 54.1 from 55.1 in Apr, although it is still above the 50-mark separating growth from contraction.

Earlier, Asian equity markets traded indecisive after the momentum faded from Wall St, where all majors extended on gains and the Nasdaq Comp. posted a record close. ASX 200 (-0.5%) was negative with the index weighed by the energy sector after oil prices slipped to below USD 65.00/bbl and with Retail Food Group the worst performer in the index after it flagged a statutory net loss due to termination payments. Elsewhere, Nikkei 225 (+0.3%) remained afloat following the recent currency weakness, while Shanghai Comp. (+0.7%) and Hang Seng (+0.3%) were choppy as participants mulled over a mild liquidity drain as well as inconclusive Chinese Caixin Services and Composite PMI data which were unchanged from the prior month.

U.S. futures also turned higher following the S&P 500’s highest finish since mid-March, on the back of more records by tech stocks, as the S&P 500 gradually morphs into the FAAMG 5.

Treasury yields slipped for the first time in five days, while those of Italian bonds seemed ready to resume their push higher (as Morgan Stanley warned overnight) and were poised for the first increase since they blew up a week ago.

In overnight FX trading, the dollar meandered without a direction and was largely unchanged against Group-of-10 peers, with the the Bloomberg Dollar Spot Index paring modest earlier gains as traders adjusted positions before the G7 summit this week (which will be attended by Trump) and policy decisions by the Fed and the ECB.

The pound rose to a session high in the wake of a strong U.K. services PMI that exceeded expectations, and as the economy continued its modest recovery from the snow disruption of the first quarter. Australia’s dollar fell from a six-week high as the current-account deficit widened more than economists’ forecast, dampening the optimism toward GDP data due tomorrow, and the central bank kept interest rates on hold. The yen touched the lowest in more than a week before recovering to trade little changed as investors were reluctant to sell beyond 110 on caution of heavy positioning before a slew of events including the FOMC meeting next week. Overnight, BoJ member Wakatabe said they are still distant from the 2% inflation target and thus too early to talk about specific exit strategies.

Just after midnight EDT, Australia’s RBA announced that it kept its cash rate at 1.50%, as expected by all economists; the RBA said that its policy is consistent with sustainable economic growth and reaching inflation target. Low level of rates continues to support economy. Inflation and wage growth likely to remain low for a while. Expect pick up in domestic growth this year and next, global economy has strengthened. Strengthening currency would result in slower pick up of growth and inflation.

Earlier this morning, Bloomberg reported that Trump had explicitly requested that Saudi Arabia/OPEC boost oil production by 1MMb/d, offsetting the Iranian export drop; the news promptly sent Brent and WTI to session lows.  Trump’s request comes ahead of US mid-terms later this year, which has recently seen US President Trump try to talk down the price of oil via OPEC with US retail gasoline prices at 3 year highs.

Looking ahead traders are eyeing the OPEC+ meeting on June 22nd. Energy ministers did initially signal a rise in output to offset supply disruptions from Iranian and Venezuelan sanctions but then switched rhetoric at the unofficial OPEC+ meeting over the weekend. An official restriction ease is still anyone’s guess. Meanwhile, participants await the latest stockpile count with API inventories due after-hours.

Elsewhere, in the metals complex, the yellow metal takes a breather with little price change following three consecutive days in the red. Dalian iron ore futures rise despite record stockpiles after reports Tangshan (China’s number 1 steelmaking city) is to shut 226 mining companies. Furthermore, copper rose for a fourth consecutive session to its highest in almost six weeks as the red metal is underpinned by potential supply disruptions amid wage talks at the world’s largest mine.

In overnight geopolitical news, Iran nuclear official Kamalvandi said Tehran will inform the UN atomic agency regarding beginning of capacity increase for uranium gas production. Iran has begun work on infrastructure for advanced centrifuges at the Natanz facility, as according to the Iranian atomic energy organization, these activities will be within the framework of the nuclear agreement.

It’s a relatively quiet day, with data includingJOLTS job openings and the final May PMIs. HD Supply, Navistar, Guidewire, and YY Inc are among companies reporting earnings.

Bulletin Headline Summary from RanSquawk

• Cable saw a significant jump in the wake of UK PMI data that exceeded expectations
• Reports suggest that the US has asked OPEC to raise output by 1mln BPD
• Looking ahead, highlights include, US ISM non-manufacturing, APIs, and ECB’s Weidmann

Market Snapshot

• S&P 500 futures up 0.2% to 2,749.50
• STOXX Europe 600 up 0.2% to 388.77
• MXAP up 0.02% to 174.57
• MXAPJ up 0.09% to 573.11
• Nikkei up 0.3% to 22,539.54
• Topix up 0.02% to 1,774.96
• Hang Seng Index up 0.3% to 31,093.45
• Shanghai Composite up 0.7% to 3,114.21
• Sensex down 0.4% to 34,860.09
• Australia S&P/ASX 200 down 0.5% to 5,994.88
• Kospi up 0.3% to 2,453.76
• German 10Y yield fell 0.5 bps to 0.413%
• Euro up 0.1% to $1.1713
• Italian 10Y yield fell 14.9 bps to 2.273%
• Spanish 10Y yield rose 1.8 bps to 1.348%
• Brent futures down 0.1% to $75.21/bbl
• Gold spot little changed at $1,292.46
• U.S. Dollar Index down 0.2% to 93.90

Top Overnight News from Bloomberg

• President Donald Trump plans to meet Tuesday with Senate Republicans concerned about restrictions he’s weighing on Chinese investments in the U.S., two people familiar with the matter said
• While Trump has sown confusion and frustration among fellow political leaders, economists at most Wall Street banks are barely changing their forecasts for solid global growth this year as they estimate only modest fallout from a skirmish over commerce
• Germany is ready to challenge any attempt by Italy’s populist government to flout European Union regulations or seek special treatment from the bloc
• Italian Premier Giuseppe Conte’s maiden speech to Parliament Tuesday will be the first public test of his ability to navigate between the contrasting demands of the populist leaders who got him appointed
• When a group of London hedge-fund managers gathered last month for a quarterly working dinner hosted by corporate-intelligence firm Third Bridge, the discussion struck a tone they hadn’t heard in years. This time guests were asked to suggest bonds likely to fall in value
• Teamwork is the new way at Pimco, and that’s evident right at the top. Whereas Gross once ran the show, Ivascyn and Roman embrace their shared responsibilities
• Investors holding Ukrainian debt are approaching a crucial moment as the country counted among the shakiest emerging markets prepares for a vote that can alleviate a swirling political crisis — or tip the nation deeper into turmoil

Asian equity markets traded indecisive after the momentum somewhat petered out from Wall St, where all majors extended on gains and the Nasdaq Comp. posted a record close. ASX 200 (-0.5%) was negative with the index weighed by the energy sector after oil prices briefly slipped to below USD 65.00/bbl and with Retail Food Group the worst performer in the index after it flagged a statutory net loss due to termination payments. Elsewhere, Nikkei 225 (+0.3%) remained afloat following the recent currency weakness, while Shanghai Comp. (+0.7%) and Hang Seng (+0.3%) were choppy as participants mulled over a mild liquidity drain as well as inconclusive Chinese Caixin Services and Composite PMI data which were unchanged from the prior month. Finally, 10yr JGBs were flat amid similar quiet trade in T-notes and the indecisiveness in the region, while the10yr JGB auction failed to provide a catalyst as the results were mixed which added to the sombre tone.

Top Asian News

• Krishnan Is Said to Mull Buyout of $1.9 Billion Pay-TV Operator
• Dubai Buyout Firm Abraaj Says Close to Debt Standstill Pact
• Giant Waste-Spewing Mine Turns to Battleground in Indonesia
• TPG Enters Private Equity Secondaries With Asia-Focused NewQuest

European bourses are trading mostly in the green (Eurostoxx 50 +0.5%) with the exception of the SMI 20 and FTSE 100. The UK index is feeling pressure from the strengthening GBP following an above consensus UK Services PMI, adding to the slew of recent PMI beats. The FTSE MIB is outperforming its peers while Italian PM Conte is to speak before Senate and go through a confidence vote later today, where the chance of a rejection is almost non-existent following the limbo-state Italy has been in for months. Looking at sectors, Telecoms are underperforming while IT names outperform. In terms of stock specifics, RBS (-3.6%) is hit after the UK government decided to sell a 7.7% stake in the company worth around GBP 2.6bln following the bank bailout during the crisis.

Top European News

• U.K. Services Growth Quickens Amid Subdued Economic Rebound
• Waning Italy Political Risk Can Prop Up the Euro Only So Much
• Elliott, CRC Are Said to Bid for Banco BPM’s $6 Billion Loans
• German, French Services Cool as Euro Area Growth Loses Steam

In FX, the USD has seen relatively quiet trade overall, but the index has inched back to the 94.000 handle as the Greenback claws back losses vs G10 counterparts and/or rival currencies lose some of their recent momentum. A raft of Eurozone PMIs are not providing much impetus, but the US slate is busy and could prompt more in the way of price action as Treasury yields sit off late May/very early June lows. GBP: The Pound has leapt to the top of the pile in wake of another UK PMI beat that has lifted the composite reading to its best ytd level and prompted survey compiler Markit to predict Q2 GDP growth of 0.3-0.4% q/q (vs just 0.1% in Q1). Cable has duly extended gains above 1.3300 towards 1.3400, while Eur/Gbp has retreated from almost 0.8800 to sub-0.8750. CHF/EUR/JPY:  All keeping tabs with big figure levels vs the Usd with the Franc not straying too far from 0.9900, Eur/Usd pivoting 1.1700 and Usd/Jpy still capped around 110.00. For the single currency especially, a band of option expiries spanning 1.1675-1.1750 and totalling 5 bn looks set to keep the pair rangebound barring any other significant driver. EM: The Peso is a notable laggard with Usd/Mxn back over 20.000 after Mexico upped the trade war ante vs the US buy proposing a 20% tax on pork, while raising objections via the WTO in response to the US tariffs on steel and aluminium

In Commodities, oil is negative on the day with WTI down 0.2% and Brent down 1.2% as traders focus on the US reportedly asking OPEC for a 1mln BPD oil output increase, as according to sources. In an immediate move WTI moved from USD 64.94 to USD 64.78. This comes ahead of US mid-terms later this year, which has recently seen US President Trump try to talk down the price of oil via OPEC with US retail gasoline prices at 3 year highs.

Looking ahead traders are eyeing the OPEC+ meeting on June 22nd. Energy ministers did initially signal a rise in output to offset supply disruptions from Iranian and Venezuelan sanctions but then switched rhetoric at the unofficial OPEC+ meeting over the weekend. An official restriction ease is still anyone’s guess. Meanwhile, participants await the latest stockpile count with API inventories due after-hours.

Elsewhere, in the metals complex, the yellow metal takes a breather with little price change following three consecutive days in the red. Dalian iron ore futures rise despite record stockpiles after reports Tangshan (China’s number 1 steelmaking city) is to shut 226 mining companies. Furthermore, copper rose for a fourth consecutive session to its highest in almost six weeks as the red metal is underpinned by potential supply disruptions amid wage talks at the world’s largest mine.

In terms of the day ahead, we’ll also get April retail sales data for the Euro area, and April JOLTS and the May ISM non-manufacturing prints in the US. Elsewhere, the Brussels Economic Forum is due to begin with Juncker and Moscovici due to speak, while the BoE’s Cunliffe and ECB’s Weidmann speak this morning at separate events. Meanwhile, Italy’s confidence vote in the Senate will be today with the vote in the Lower House still yet to be announced.

US Event Calendar

• 9:45am: Markit US Services PMI, est. 55.7, prior 55.7
• 9:45am: Markit US Composite PMI, prior 55.7
• 10am: JOLTS Job Openings, est. 6,350, prior 6,550
• 10am: ISM Non-Manf. Composite, est. 57.6, prior 56.8

DB’s Jim Reid concludes the overnight wrap

Well it hasn’t taken long for Italy, and to a lesser extent Spain, to already feel a bit like yesterday’s news. While in all honesty it hasn’t been the most exciting last 24 hours in markets – which is probably welcome following last week – it does seem like the attention is firmly back on the US versus the ROW trade war tit for tat. Aside from the odd Trump tweet or two yesterday and China announcing on Sunday that it’s prepared to backtrack on some its recent commitments in negotiations should Trump pursue tariffs on the country, there were no real developments and instead all eyes appear to be on this Friday and Saturday’s G7 meeting in Quebec and whether or not it will be a united G7 meeting or more a G6+1. But with the calendar reasonably sparse over the next few days it appears that markets are also keeping a close eye on whether or not Trump will be backed far enough into a corner to make him stand down on his threats.

Markets for now seem to be trading as though a worst-case scenario will be avoided with the S&P 500 last night rising +0.45% and Dow +0.72%. The Nasdaq also rose +0.69% and to a new record high although still remains slightly below the intraday highs from mid-March. European markets were in a similarly jovial mood with the Stoxx 600 (+0.31%), DAX (+0.37%) and CAC (+0.14%) all up modestly. The IBEX (+1.22%) was the bigger mover post the positive political developments in Spain although the FTSE MIB (-0.45%) did struggle a bit. Treasury yields finished the day +4.0bps higher while Bunds and OATs were +3.6bps and +2.1bps higher respectively. Meanwhile BTPs continue to recoup some of the recent damage done with 2y and 10y yields ending yesterday -28.3bps and -14.1bps lower. That means 2y BTP yields have now rallied 205bps from the intraday highs of last Tuesday and the spread to similar maturity Bunds and Bonos are now at 138bps and 96bps respectively compared to the intra-day wides of 361bps and 292bps.

On a related note there was a bit made about the latest ECB bond buying numbers yesterday with the data showing a decent slowdown in net purchases of BTPs in May to 16.5%. That is below the implied capital key level of 17.5% and also the roughly 18-19% monthly purchases in 2018 through to April. On the flip side Bund purchases were much higher in May with the ECB stating that this was due to Bund reinvestments being carried over from April, and likewise a timing impact of BTP reinvestments in Italy which lowered net purchases. Indeed gross purchases of BTPs were actually higher but it’s noteworthy that the ECB made the point of addressing the purchases data directly which is something the ECB very rarely does. No doubt this shows how hypertensive the bond market is at present.

Taking a quick look at our screens this morning, overnight in Asia markets are  broadly mixed although moves have been relatively muted. The Nikkei (+0.08%), Hang Seng (+0.16%) and Shanghai Comp (+0.23%) have posted small gains while the Kospi (-0.09%) and ASX (-0.30%) are slightly in the red. Meanwhile, the White House confirmed last night that the US/North Korea leaders’ summit will take place at 9am Singapore time on June 12th, but US sanctions will remain “unless NK denuclearized”. Elsewhere, ahead of the remaining global PMIs today, China’s May Caixin services and composite PMIs were both steady month on month and in line with expectations at 52.3 and 52.9 respectively, while Japan’s May Nikkei composite PMI fell 1.4pts to 51.7 due to a 1.5pt fall in the services reading to 51.0.

Moving on. The improved mood in Europe in particular yesterday may have also in part been due to comments from German Chancellor Merkel over the weekend and then in another interview in Berlin yesterday. Indeed, Merkel appeared to be closing the gap with French President Macron over ESM reform. In the interview, Merkel seemingly gave her approval of support for two new crisis tools which would reduce contagion risk. While some of the other aspects of Eurozone reform appeared a bit vague, crucially, the interview was seen as finally providing a bit of clarity that Merkel is willing to and ready to talk about reforms.  This all comes before the eagerly anticipated EU Leaders Summit on the 28th and 29th this month which is looking like a pivotal couple of days for markets.

Away from politics and in light of it being a fairly quiet last 24 hours for newsflow we thought we’d revisit Friday’s manufacturing PMIs and update our charts showing the data regressed against the YoY change in equity markets over the last 20 years. A good starting place for last month is Italy given the big selloff for the FTSE MIB into month end. Indeed the index is now up only +6% over the last 12 months (compared to +17% at the end of April) and despite the PMI deteriorating further, the implied level now is broadly fair compared to it being 8% expensive as at the end of April. For the rest of Europe however the same story largely holds. The Stoxx is still 17% cheap (unchanged from April), the DAX 22% cheap (versus 23% previously) and CAC 11% cheap (versus 8% previously).

Spain’s IBEX is 22% cheap and also in line with where it was at April. For the UK the FTSE 100 is 6% cheap (compared to 4% cheap at April) while in Asia the Nikkei (1% cheap) and Shanghai Comp (16% cheap) are also broadly the same. In the US, despite the manufacturing ISM rising well over 1pt in May a higher S&P 500 means that the performance gap continues to hover around the 10% cheap level. Check the PDF for the tables and charts where we’ve also included the data in USD terms.

Back to yesterday, the economic data didn’t move the dial a huge amount although the Sentix investor confidence reading for the Eurozone did at least show the impact of the Italy woes from last month after the reading tumbled 9.9pts in June to 9.3 (vs. 18.5 expected) and the lowest since October 2016. More eye catching though was the expectations component which slumped over 11pts to -13.3 and the lowest since the depths of the Eurozone crisis in 2012. In the US the data was mostly flat to slightly softer. Headline April factory orders fell more than expected to -0.8% mom (vs. -0.5% expected), while the final readings for core durable goods and capital orders were confirmed at +0.9% mom and +1.0% mom respectively (unchanged versus flash estimates).

Before we wrap up, a quick mention that yesterday DB’s Luke Templeman published a thematic note called “Wall Street’s dislocation gauge”. Luke notes that since the financial crisis, companies have experienced great variation in their profitability, yet stock returns have been remarkably similar. Yet, a reversal of this trend is finally in full swing. Investors can now buy stocks that benefit from the reattachment of RoE and market prices, and sell those that are hurt. Indeed Luke highlights that ‘reattachment’ stocks have returned 37% since the inflection point in mid-2016 (when bond yields began to rise), one-third more than the market’s return. The report identifies 74 stocks that can benefit from further normalisation and a further 76 that could be hurt. See the link for more here.

In addition to that, Michal in our team published the report “ECB CSPP Flows Picking Up but Still Below Q1”. It provides an update on the latest CSPP purchases, their breakdown into primary and secondary, and their relative weight in the  ECB QE programme. It also estimates the ECB’s average allocation of primary deals and analyses the relative pricing of CSPP-eligible and ineligible securities during the Italy-driven sell-off. You can download the full report here.

Finally, in terms of the day ahead, as noted earlier the final May services and composite PMIs in Europe and the US are due today. Outside of that we’ll also get April retail sales data for the Euro area, and April JOLTS and the May ISM non-manufacturing prints in the US. Elsewhere, the Brussels Economic Forum is due to begin with Juncker and Moscovici due to speak, while the BoE’s Cunliffe and ECB’s Weidmann speak this morning at separate events. Meanwhile, Italy’s confidence vote in the Senate will be today with the vote in the Lower House still yet to be announced.