European stocks and U.S. futures blasted off higher early in the session following yesterday’s euphoric, meltup close to US trading, but have since pared their gains on Thursday as the stellar rally in tech shares showed signs of easing, amid growing concerns about a potential G-7 meeting fiasco, as well as growing emerging markets clouds, where after the recent turmoil in Turkey and Argentina, all eyes are now on Brazil (and India) to see if the contagion spreads to these behemoths.

Europe’s Stoxx 600 trimmed most of its early gains and briefly turned flat after rising as much as 0.6% earlier, as the euro strengthened again despite disappointing data on euro-area exports and German factory orders (Germany April factory orders fall 2.5% m/m vs est. +0.8% m/m), and as bond-proxy defensive sectors including telecoms, real estate and food & beverage lost ground amid a sharp rise bund yields on concerns that the ECB will discuss the end of QE at its Thursday meeting next week. As a result, the German 10-year bund yield up 5bps at 0.51%.

Alongside the selling in European core bonds, Treasuries added to recent losses, with 10-year yields crawling toward 3 percent, trading as high as 2.99% this morning.

As discussed yesterday, the Euro has continued to strengthen, and was up to 1.1830 this morning, up for a fourth straight day amid talk of an end to the ECB’s quantitative easing program. However, not even renewed talk of an end to ECB bond buying could dent Italian bonds today after the country new Prime Minister Giuseppe Conte, whose populist government has already been buffeted by financial markets, sought to reassure on his fiscal expansion plans with a pledge to gradually reduce the country’s massive debt burden, sending 2Y yields modestly lower on the session.

Curiously, while traditionally the stronger Euro would have resulted in stock weakness, the following chart from Bloomberg shows an abrupt reversal ever since the start of Italian turmoil in mid-May, roughly around the time redenomination risk re-emerged, and equities are glad to see that the common currency isn’t continuing to slide – as it did pre-Draghi’s “whatever it takes” speech – on fears Italeave may bring the grand experiment to a close.

Earlier shares rose from Tokyo to Sydney in the wake of another record finish for the Nasdaq. Asian stocks traded higher as the regional bourses took impetus from the gains in their US counterparts in which the S&P 500 and
Nasdaq notched a 4th consecutive win streak, with the latter closing at fresh all time highs. ASX 200 (+0.5%) and Nikkei 225 (+0.9%) both opened higher on the tailwind from Wall St and with commodity related sectors leading Australia higher, while the Japanese benchmark continued to benefit as the recent weak JPYrisk appetite dynamic remained intact despite the currency attempting to nurse losses overnight. Elsewhere, Shanghai Comp. b and Hang Seng (+0.8%) conformed to the optimism seen across global stock markets with trade concerns placed on the back burner, although gains in the mainland were capped following a net drain by the PBoC.

After weeks in the doldrums, stocks have managed to regain some composure and upward momentum in recent days. Helped by Treasury yields holding below the psychological barrier of 3 percent, the global “expansion narrative” remains intact and U.S. technology shares – the biggest driver of past rallies – have been notching successive records.

“If you think of where we were relative to the start of the year, we’ve seen quite a lot of de-risking, particularly from systematic strategies, which paves the way for equities to do well in the second half,” Grace Peters, European equities strategist at JPMorgan Private Bank, told Bloomberg TV.

However, despite the recent post-Italy relief euphoria, dark clouds remain and investors will now be watching the G-7 meeting this week for clues on the trade outlook. We reported this morning that France is joining Germany in warning President Donald Trump that it won’t sign a joint statement at the G7 summit without major concessions from the U.S.  At the same time, President Trump is said to be planning on adopting a confrontational tone at G7 in response to the other 6 nations collectively pressuring him regarding tariffs. The impact has been to sharply weaken the dollar in the past few days as traders were on edge over the outcome of the Toronto meeting.

At the same time, all eyes are fixed on the growing economic and financial storm in Brazil that seems to be gathering strength, so it’s worth keeping an eye on European companies with exposure to the country and there are quite a few of them. Overnight, Mohamed El-Erian became the latest voice to warn that Brazil may be the next domino to fall in emerging markets. The other EM hot spot is Turkey, where President Recep Tayyip Erdogan called on Turks to deposit their savings in banks, according to state-run Anadolu Agency. Turkey’s benchmark index entered bear  market territory yesterday, and the focus is now on the central bank meeting at 2pm local time today.

Commodities are mostly higher on the day, with Oil +0.6%, extending the reprieve following a dip on yesterday’s surprise DoE crude stockpile build. In the metals scope Gold is marginally positive on tailwinds offered by a weaker USD. Copper has hit 2018 highs, with gains for the 6th straight session, as supply concerns are being exacerbated through Chilean mine disruption. Steel futures have hit 6-month highs as environmental inspections have slowed suggestions of a supply glut in China and boosted market sentiment.

In the latest Brexit news, UK PM May and Brexit Secretary Davis reported to be at loggerheads regarding EU customs split, which sparked some rumours that Davis was close to resigning, according to reports. (The Sun) however, the latest reports have suggested no Cabinet resignations are to be tendered today. Further to this Kuenssberg added that “more clarity” will be provided on the time limit on the backstop later in the day. US House will vote on rescission package today

Today’s expected data include jobless claims. Broadcom, Dollarama, J.M. Smucker, Saputo, and Vail Resorts are among companies reporting earnings.

Bulletin Headline Summary from RanSquawk

• Asian stocks traded higher as the regional bourses took impetus from the gains in their US counterparts
• USD was weaker with the DXY stuck around the 93.50 level to the benefit throughout the session
• European bourses largely higher with FTSE the laggard, weighed on by a firmer GBP
• Early suggestions of a resignation in the British cabinet rebuked, with markets awaiting information on the UK’s backstop arrangement
• Looking ahead, highlights include, Turkish rate decision, US weekly jobs and BoE’s Ramsden
• US President Trump is said to be planning on adopting a confrontational tone at G7 in response to the other 6 nations collectively pressuring him regarding tariffs
• Looking ahead, highlights include Turkish rate decision, US weekly jobs, and BoE’s Ramsden

Market Snapshot

• S&P 500 futures little changed at 2,778.25
• STOXX Europe 600 up 0.3% to 388.21
• MXAP up 0.6% to 176.42
• MXAPJ up 0.5% to 580.03
• Nikkei up 0.9% to 22,823.26
• Topix up 0.6% to 1,789.01
• Hang Seng Index up 0.8% to 31,512.63
• Shanghai Composite down 0.2% to 3,109.50
• Sensex up 1.1% to 35,553.45
• Australia S&P/ASX 200 up 0.5% to 6,057.29
• Kospi up 0.7% to 2,470.58
• Brent futures up 0.4% to $75.67/bbl
• Gold spot up 0.2% to $1,298.81
• U.S. Dollar Index down 0.4% to 93.28
• German 10Y yield rose 3.5 bps to 0.5%
• Euro up 0.4% to $1.1821
• Italian 10Y yield rose 14.8 bps to 2.669%
• Spanish 10Y yield fell 3.9 bps to 1.463%

Top Overnight News from Bloomberg

• France has joined Germany in warning President Donald Trump that it won’t sign a joint statement of the Group of 7 at the summit in Quebec this week without major concessions from the U.S., a French official in the president’s office said
• Italy’s new Prime Minister Giuseppe Conte, whose populist government has already been buffeted by financial markets, sought to reassure on his fiscal expansion plans with a pledge to gradually reduce the country’s massive debt burden
• Donald Trump’s top economic adviser, Larry Kudlow, called trade tensions shadowing the G-7 conference beginning Friday “a family quarrel” and said Trump will meet one-on-one with Canadian Prime Minister Justin Trudeau and French President Emmanuel Macron at the summit
• China reiterated it is willing to expand imports from the U.S. if the world’s two largest economies “meet half-way” in trade negotiations. A spokesman for the Ministry of Commerce said that China doesn’t want to escalate trade tensions with the U.S., and that boosting imports is an established strategy
• German factory orders unexpectedly dropped for a fourth month in April, raising the prospect that an economic slowdown at the start of the year may be worsening
• German bonds fell for a second day as traders brought forward the pricing for an interest-rate increase by the European Central Bank. Money markets are now betting that policy makers will raise the deposit rate in July 2019, compared with September 2019 as of Wednesday
• Brexit Secretary David Davis is said to be furious over May’s plan to tie the U.K. into European Union customs rules for an open-ended period of time after the country leaves the bloc next March
• The highest yields in the European Union aren’t juicy enough to make Romanian bonds attractive. A cocktail of above- target inflation, rising interest rates and volatile politics have forced investors to the sidelines of the leu debt market, which saw a 2.7 percent loss over the past year
• U.K. Environment Secretary Michael Gove revived his criticism of the Bank of England and its peers over the fallout from monetary- policy loosening, saying they have unduly benefited the wealthy
• The appointment of economist Jonathan Haskel to the Bank of England despite a shortlist dominated by women shows that the job was awarded on merit, according to Ian McCafferty

Asian stocks traded higher as the regional bourses took impetus from the gains from the euphoric US session in which the S&P 500 and Nasdaq notched a 4th consecutive win streak, while the DJIA atoned for Tuesday’s underperformance and led the advances to surmount the 25K level. ASX 200 (+0.5%) and Nikkei 225 (+0.9%) both opened higher on the tailwind from Wall St and with commodity related sectors leading Australia higher, while the Japanese benchmark continued to benefit as the recent weak JPYrisk appetite dynamic remained intact despite the currency attempting to nurse losses overnight. Elsewhere, Shanghai Comp (down -0.2%) and Hang Seng (+0.8%) conformed to the optimism seen across global stock markets with trade concerns placed on the back burner, although gains in the mainland were capped following a net drain by the PBoC. Finally, 10yr JGBs were initially lacklustre amid similar price action in T-notes and due to the broad appetite for risk, although prices later saw mild gains on reopen from the break and following an enhanced liquidity auction in the super-long end which attracted a higher b/c than prior. China Mofcom reiterated China doesn’t want trade tensions with US to escalate and that China is willing to raise imports from US and other countries. Furthermore, Mofcom stated some specific progress was made in just completed trade talks with US which included discussions on agriculture and energy.

Top Asian News

• Tencent’s Six-Day Breakout Signals Bulls May Be Back in Control
• Jittery Casino Investors Weigh Risks of China Cash Crackdown
• Financier Jho Low to Cooperate in Malaysia’s Probe Into 1MDB
• Steel Surges to Three-Month High as China Boosts Checks on Mills
• Abraaj Creditor Seeks Embattled Dubai PE Firm’s Liquidation

European equities followed suit from Asia with all the major bourses opening firmly in the green (Euro Stoxx 50 +0.4%) with broad-based gains across all indices. UK’s FTSE failed to open with its peers due to a technical glitch, trading resumed at 0900BST. Financials lead the gains as banks surge, boosted by rising yields on speculation the ECB may soon start to wind down stimulus, with the first discussions signalled to start at the monetary policy meeting next week. In terms of individual movers, Remy Cointreau shares are eyeing losses of 6% despite reporting strong numbers as investors  show concern over flat dividend and valuation.

Top European News

• German Factory Orders Extend Slide as Economic Worries Build
• U.K. Home Price Growth Slows in ‘Relatively Subdued’ Market
• House of Fraser Store-Closing Plan Threatens 6,000 Jobs
• Euro Options Reflect Perception Shift Over ECB’s Next Meeting
• Ukraine Nears Crunch Vote on Long-Delayed Anti-Graft Court

In FX, the USD remains on the back foot (DXY -0.3%) as EUR strength and jitters ahead of the G7 meeting this weekend hampers the greenback. With regards to the G7, some traders might opt to take a cautious view on the USD amid the latest reports that US President Trump is said to be planning on adopting a confrontational tone at G7 in response to the other 6 nations collectively pressuring him regarding tariffs. Nonetheless, the broader risk tone has seen the USD out-muscle the JPY with USD/JPY approaching 110.00 to the upside where there is 2bln of option expiries is due to roll-off. From a EUR perspective, EUR/USD losses from the unexpected contractionary German factory orders proved to be short-lived as positioning ahead of next week’s ‘live’ ECB meeting remains the dominant force. Subsequently EUR/USD has reclaimed 1.1800 to the upside and breached the 30DMA at 1.1818 with ECB speakers now in their blackout period. BNP Paribas look for EUR/USD at 1.23 in the next 3-months. Elsewhere, GBP was initially resilient to some of the latest Brexit-related turmoil. GBP/USD reclaimed 1.3450 to the upside in early trade before traders began selling GBP ahead of the US entrance to market despite news that there are to be no resignations in the Cabinet. Sentiment may have soured for the GBP as it remains unclear what concessions (if any) May might have been forced to make to Davis and the Brexiteers in order to avoid mutiny. From a NAFTA perspective, CAD is unable to benefit from the broadly softer USD after NEC Director Kudlow poured cold water over the reports that Treasury Secretary Mnuchin requested exemptions for Canada is ‘patently false’. Kudlow also stated there will
be discussions on trade at G7 meeting as well as a bilateral meeting with Canadian PM Trudeau. Focus going forward will likely fall on TRY ahead of the CBRT rate decision with consensus looking for the Bank to stand pat on its one week-repo rate at 16.5%. Capital Economics suggests that the recent appreciation of the TRY following the central bank’s emergency rate hike and tweaking of its policy framework suggests that the CBT will stand pat, but concedes that there is marginal risks of a rate rise, particularly so given its recent tough talk and an emphasis on tackling high, unanchored inflation

Commodities are mostly higher on the day, with Oil +0.6%, extending the reprieve following a dip on yesterday’s surprise DoE crude stockpile build. In the metals scope Gold is marginally positive on tailwinds offered by a weaker USD. Copper has hit 2018 highs, with gains for the 6th straight session, as supply concerns are being exacerbated through Chilean mine disruption. Steel futures have hit 6-month highs as environmental inspections have slowed suggestions of a supply glut in China and boosted market sentiment

Looking at the day ahead, the latest weekly initial jobless claims print will be out along with April consumer credit data. Elsewhere, Japan PM Abe is due to meet with US President Trump to discuss the planned US summit with North Korea and the BOE’s Ramsden will speak. Meanwhile the Turkish central’s rate decision is also due today following last month’s emergency rate hike.

US Event Calendar

• 8:30am: Initial Jobless Claims, est. 220,390, prior 221,000
• 8:30am: Continuing Claims, est. 1.74m, prior 1.73m
• 9:45am: Bloomberg Consumer Comfort, prior 55.2
• 12pm: Household Change in Net Worth, prior $2.08t
• 3pm: Consumer Credit, est. $14.0b, prior $11.6b

DB’s Jim Reid concludes the overnight wrap

Morning from Berlin after a day speaking at various events associated with one of our key German conferences. There was a lot of disagreements, arguments, heated debate but the one thing all clients agreed on was that England wouldn’t win the World Cup. In return I thanked the German audience for providing Liverpool with their current goalkeeper who cost us the Champions League 2 weeks ago.

One of my themes yesterday was how Bund yields were one of the most mispriced global assets (see link here ) and the last 24 hours have been supportive of that as the ECB seemed to send a coordinated message to the bond market that next week’s monetary policy meeting on Thursday is very much on the table for signalling the date for the end point of the great QE experiment. The general feeling in the market prior to all this was that we may have to wait until July for some form of announcement. At one point last week some wondered whether the ECB could taper at all what with Italy’s huge problems. What a difference a week makes.

As for what rattled markets, the most significant comments made were probably those from the ECB’s Peter Praet given that he has previously been one of the more vocal doves. Praet said that “it’s clear that next week the Governing Council will have to make this assessment, the assessment on whether the progress so far has been sufficient to warrant a gradual unwinding of our net asset purchases”. Indeed the context of Praet’s speech was overwhelmingly positive and it was followed by similar hawkish comments from Weidmann – who said that market expectations for QE ending in 2018 are “plausible” – and Knot who said that it is “reasonable” to announce the end of asset buying soon.

By the end of play European bond yields were sharply higher everywhere you looked. 10y Bunds rose by +9.6bps to 0.459% – the second biggest single day rise in yields this year. At the intra-day lows last week we hit 0.185%. OATs were +10.8bps higher, BTPs +14.5bps and Bonos +10.0bps. Gilts (+9.0bps) and Treasuries (+4.4bps to 2.973%) were dragged along too while the Euro finished last night up +0.48% versus the US Dollar. Equity markets weren’t particularly spooked by the bond move initially but did struggle into the afternoon session before US strength took over after Europe went home. The Stoxx 600 ended the session unchanged while the DAX and FTSE nudged up c0.3%. The periphery actually held in a little better with the IBEX (+1.09%) in particular the big mover. Last night in the US, the Nasdaq rose 0.67% to a new, record high for the third straight day (+11.4% CYTD). Meanwhile, the S&P advanced for the fourth consecutive day (+0.86%), lifted by financials and materials stocks and an easing in trade tensions, while utilities was the only sector in the red. The VIX also closed at the lowest level since late January (-6% to 11.64).

That relative calm in equity markets certainly suggests that there isn’t much by the way of concern about the ongoing trade war shenanigans. As a reminder the G7 meeting kicks off tomorrow and Politico ran a relatively eye catching story yesterday which included a reference to a US official who thought there was no chance that the US and other G7 members could reach common ground. The story also talked about President Trump having a “terrible” phone call with France President Macron last week. Meanwhile, White House economic adviser Mr Kudlow also sought to down play the trade tensions between the US and its G7 partners as “a family quarrel”, and noted that President Trump will hold bilateral meetings with his French and Canadian counterparts during this weeks’ G7 summit. Elsewhere, Bloomberg noted the US Treasury Secretary Mnuchin prefers to rely on existing legislations to tighten Chinese investments in the US rather than introduce new sweeping limits.

Overnight markets in Asia are extending on the positive US lead with the Nikkei (+0.87%), Kospi (+0.68%), Hang Seng (+0.63%) and Shanghai Comp. (+0.31%) all modestly higher. This morning, a spokesman for the Chinese Commerce  Ministry said China does not want an escalation of trade tension with the US and is willing to increase imports if the two countries “meet half way” on trade talks without elaborating more. Meanwhile in the US, President Trump has met with 13 GOP senators yesterday to seek support and push back against proposed legislation that would require the President to seek Congressional approval before authorising tariffs going forward. Post the meeting, Senator Graham said “now is not the time to undercut President Trump’s ability to negotiate better trade deals”.

Now recapping other markets performance from yesterday. WTI oil fell -1.21% after EIA reported a surprise rise in US crude stockpiles, but oil is rebounding modestly this morning, in part as Reuters reported that an Iraqi oil minister said OPEC won’t discuss an oil supply boost in its upcoming meeting on 22 June. In FX, the US dollar weakened for the third straight day (-0.28%) while the Brazilian real extended losses to the lowest since March 2016 (-1.1%; -16.4% CYTD). Elsewhere, Gold was flat while copper made further gains on concerns of potential supply disruptions (Copper +1.71%; Zinc -0.12%; Aluminium +0.98%).

Back in the UK, there seems to be more political conflict on how the post Brexit world should be. Bloomberg noted the Brexit Secretary Davis could quit the cabinet if PM May continues her proposal to tie the UK into EU customs rules for an open ended period of time. Elsewhere, unnamed sources told Bloomberg that a group of 12 rebel conservatives have signed an amendment calling for the UK to stay in the EU’s single market instead. So lots bubbling along before
the Parliamentary voting session on PM May’s Brexit policies next Tuesday.

Meanwhile, the BOE’s McCafferty noted business investments in the UK should be growing at double digits in the current economic cycle but is now slower, partly due to Brexit uncertainty. On rates, he flagged that most MPC officials believes a modest rise in rates is required over the next two years, although the overall level of rates will stay relatively low for some time. Notably, he also added that there is plenty of room for more QE in case of a downturn.

Over in Italy, there were not much material new developments as PM Conte reaffirmed to the Lower House Parliament that he plans to follow the program set out by the two populist parties and noted that “this government has the audacity to seek new economic policies…which means promoting social and economic growth, (and) respecting the principle of a gradual reduction of debt”.

Moving along, a quick mention that next week on Thursday 14th June we have the latest speaker in DB’s London Speaker Series for 2018. Sebastian Raedler, head of European Equity Strategy, will discuss the outlook for economic growth, interest rates, FX and political risk and their likely impact on European equities. Sebastian will also focus on the prospect for key sectors like banks, autos and energy – and highlight his favourite picks among European country indices.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the April trade deficit fell to a 7 month low and was narrower than expectations at -$46.2bln (vs. -$49bln), as exports rose to a record high with increased shipments in industrial materials and soybeans (exports +0.3% mom vs. imports -0.2% mom). Elsewhere, the final reading for 1Q nonfarm productivity was revised down to 0.4% (vs. 0.6% expected) while unit labour costs was revised up slightly to 2.9% (vs. 2.8%). Following the above, the Atlanta Fed’s estimate of 2Q GDP growth stands at 4.5% saar. Meanwhile, Spain’s April IP was much weaker than expected at -1.8% mom vs. -0.2% expected.

Finally, as for the day ahead, the final Q1 GDP revisions for the Euro area will be made along with the various growth components, while April factory orders in Germany, April trade balance in France and May house prices data in the UK is also due. In the US the latest weekly initial jobless claims print will be out along with April consumer credit data. Elsewhere, Japan PM Abe is due to meet with US President Trump to discuss the planned US summit with North Korea and the BOE’s Ramsden will speak. Meanwhile the Turkish central’s rate decision is also due today following last month’s emergency rate hike.