Bulletin Headline Summary from RanSquawk:

• Oil rebounds on OPEC source reports mentioning an output hike of 300k-600k bpd (vs. 1.5mln bpd touted previously)
• The Dollar is mixed overall, but the index did revisit 95.000+ ytd peaks (around 95.150)
• Looking ahead, highlights include comments from Fed’s Dudley, Bostic and Williams, BoC’s Deputy Governor and ECB President Draghi

Global stocks and US index futures are a sea of red this morning amid growing concerns over the escalating trade war between China and the U.S., which on Friday launched tit-for-tat $50BN in tariffs, coupled with the growing risk that Merkel’s government is on the edge of collapse.

As Bloomberg notes, it’s pretty risk-off this morning no matter where you look: it’s blow for blow in the U.S.-China trade spat sending European and Asian stocks sharply lower, metals have been melting, EM currencies remain under pressure with Argentina’s peso sinking further.

Global trade is (once again) back at the top of the wall of worry, with investors afraid that the confrontation between the U.S. and China can escalate out of control, hitting both the global economy and corporate earnings. On Friday, China immediately responded after President Donald Trump slapped tariffs on $50 billion of imports, putting an additional 25 percent levy on $34 billion of U.S. agricultural and auto exports starting July 6.

“Up to now it’s been hypothetical; action has been taken, tariffs are coming and you need to pay very, very careful attention to the impact it’s going to have on your holdings,” Bank of Singapore Chief Investment Officer Johan Jooste told Bloomberg Television. “There are too many unknowns right now to be terribly specific. The thing you do know is risk is higher. The market will take something of a cautionary stance.”

Analysts expect the U.S.- China confrontation to be a war of attrition: while China has shown a willingness to make a deal on shrinking its trade surplus with the U.S., it has made clear it won’t bow to demands to abandon its industrial policy aimed at dominating the technology of the future.

Looking ahead, as a reminder on Friday Reuters reported the US may impose higher tariffs on an additional $100bn of Chinese imports. If this triggers another round of actions from China, then this second round of trade war will likely be much more damaging for both sides. According to DB, this could reduce China’s GDP growth by c0.3% of GDP, but importantly, the US tariff list will likely include big item consumer goods such as phones, computers, TVs etc, which could mean a lot more workers in China and US consumers would be negatively affected. If this second scenario eventuates, economists expect China to loosen policy such as tolerating the property and land market boom in tier 3 cities and cutting the RRR twice over the rest of this year to partly offset the potential drags

In Europe, Angela Merkel’s political future is on the line amid a crisis over Germany’s migration policy, while U.K. prime minister Theresa May seems cornered by Brexit foes. Meanwhile, there is some confusion over Europe’s grand MiFID II overhaul on market transparency: according to Robert Ophele, chairman of French market regulator Autorité des Marchés Financiers, the jury is still out, given the “surprise” surge in off-exchange trading.

As a result, the Stoxx 50 is down -0.9%, with the rebound in the Euro not helping export-heavy Germany. The DAX is the clear underperformer, down -1.3%, with Germany’s political drama the main source of angst this morning. The FTSE 100, with its heavier weighting of energy and metals vs other European indices, is falling in line with peers, which however according to Bloomberg implies that neither Brexit nor the possible clash at Friday’s OPEC meeting are rattling energy shareholders that much.

In Asia, markets were closed for the holidays in China and Hong Kong, but Japan’s Topix Index fell the most in almost three weeks as the yen edged higher and after a strong earthquake hit Japan’s industrial heartland of Osaka.

Oil tumbled below $64 initially, after Saudi and Russia signaled global output would continue to rise while the US-China suggested Chinese demand could decline.

View image on Twitter

Amanda Cooper@a_coops1

#Oil is down between 1-2% (sub $73 Brent, sub $64 WTI) after Saudi and Russia signalled output would (continue) rising and, in a blow to global trade, China said it would impose tariffs on US crude imports #OOTT

However, oil then promptly rebounded ahead of this Friday’s key OPEC meeting, following a Bloomberg report that OPEC was discussing output hikes of only up to 600,000b/d, well below earlier rumors of as much as 1.5mmb/d.

In global FX it has been a quiet session, with Sweden’s ensuing World Cup football encounter probably more discussed at trading desks than major currencies (at least according to Bloomberg’s Love Liman). The dollar tried and failed to build on gains soon after the London open but made no progress even though the euro was held was down by concerns surrounding the fate of Merkel’s ruling coalition. The Bloomberg Dollar index slumped to session lows not long after it hit session highs around the time Europe opened. The EUR first slumped, erasing all of Friday’s gains, however, then rebounded back over 1.16 after Europe opened for trading.

Looking ahead, it could be the dollar that benefits from this week’s gathering of central bankers in Sintra, Portugal, given a renewed focus on the widening gap between monetary policy in the U.S. and the euro area, Credit Agricole says (and to think it was just a year ago that Draghi’s Sintra speech sent the Euro soaring higher). In other G-10 FX, the Yen strengthened as Osaka earthquake adds pressure from trade wars on Japanese stocks; Topix index declines 1%.

Meanwhile in EM, the Thai baht, the South Korean won and the Philippine peso led weakness in emerging Asian currencies as rising trade tensions between the U.S. and China escalated against a backdrop of a strengthening U.S. dollar.

“There is no break for Asian FX as a more hawkish Fed, and stronger USD are adding to the expanding wall of worry for Asian currencies,” Stephen Innes, head of trading for Asia Pacific at Oanda Corp. in Singapore, writes in a client note. “Like a nagging backache, there appears to be little relief from the protracted trade unease between U.S. and China”

Elsewhere, the South African rand’s implied volatility against the USD is rising at a faster rate than actual price swings, indicating that traders are anticipating a wild ride ahead for South Africa’s currency. After falling to a three-year low in April, the rand’s three-month implied volatility has climbed as crises in Turkey and Argentina soured sentiment toward emerging markets and rising U.S. rates attracted capital to the dollar, and is now at the highest since December.

Surprisingly, the Turkish lira was today’s outperformer, as it started the week with heavy swings and bond yields climbed to a record high ahead of the country’s presidential and general elections on Sunday. The strength may not last: “The external backdrop is not conducive for risky assets due to growing trade tension between the U.S. and China,” said Piotr Matys, an emerging-market currency strategist at Rabobank in London.

Sovereign bonds were mixed, while developing-nation Asian equities extended declines for a fourth day. Euro-area bonds and Treasuries found support from investors. While Italy’s bonds continue to recover, local investors are skeptical. They are avoiding the nation’s debt after political uncertainty fueled a market rout at the end of May, even as the securities may look more attractive after the slump according to Bloomberg.

Ahead of the Bloomberg report on smaller than expected OPEC production cuts, the market’s attention was focused on reports that Russian energy minister Novak stated OPEC and non-OPEC countries will discuss raising the oil output by 1.5mln bpd in Q3 only. However, Iran stated that 3 OPEC members (Iraq, Iran & Venezuela) will veto a proposed production increase. Ahead of this meeting banks are expecting production increases of 700k BPD (SocGen & Barclays) to 1mln BPD (Goldman Sachs). Sources in EU trade suggested that this would be a smaller hike than expected, however, with 300-600k BPD the stated figures.

In the metals scope gold is in the green (+0.15%) as market sentiment sours on Chinese trade concerns and investors are flocking to safe haven assets. Copper has slipped for the second straight session and is at USD 6,997/tonne hovering just above 2 week lows as supply concerns continue to ease. Aluminium is also falling and has hit 2 month lows at USD 2,193/tonne, with support seen at the 200dma of USD 2,175/tonne.

It’s a quiet calendar for the US, with the only expected data on Monday the NAHB Housing Market Index. Elsewhere, highlights include comments from Fed’s Dudley, Bostic and Williams, BoC’s Deputy Governor and ECB President Draghi.

Market Snapshot

• S&P 500 futures down 0.6% to 2,767.75
• STOXX Europe 50 down 1.1% to 3466.45
• MXAP down 0.7% to 171.55
• MXAPJ down 0.4% to 559.81
• Nikkei down 0.8% to 22,680.33
• Topix down 1% to 1,771.43
• Hang Seng Index down 0.4% to 30,309.49
• Shanghai Composite down 0.7% to 3,021.90
• Sensex down 0.04% to 35,607.98
• Australia S&P/ASX 200 up 0.2% to 6,104.13
• Kospi down 1.2% to 2,376.24
• German 10Y yield fell 1.6 bps to 0.387%
• Euro down 0.3% to $1.1581
• Italian 10Y yield fell 12.7 bps to 2.343%
• Spanish 10Y yield unchanged at 1.297%
• Brent futures up 0.8% to $74.04/bbl
• Gold spot up 0.2% to $1,281.51
• U.S. Dollar Index up 0.1% to 94.85

Top Overnight News

• U.S. and China trade war escalates. In his announcement of tariffs on Chinese goods on Friday, Trump vowed additional duties if China retaliated — which Beijing immediately did. An announcement on U.S. restrictions on investments from China will follow
• Germany’s crisis over migration policy is entering a critical phase with Chancellor Angela Merkel’s political future on the line and the ripples already being felt across Europe
• Merkel’s CDU allies stand behind chancellor in migration crisis; German Interior Minister Horst Seehofer said to target immediate refusals at border, RND reports
• OPEC is said to debate output hike of 300k to 600k b/d versus Russia’s proposal of 1.5m b/d; Bloomberg survey showed majority forecast of 500k b/d
• Iran says Venezuela and Iraq will join it in blocking a proposal to increase oil production that’s backed by Saudi Arabia and Russia when OPEC and its allies meet in Vienna this week
• Pound faces another week of political turmoil as the Conservative Party’s internal battle over Brexit rages ons
• U.K. Prime Minister Theresa May has been warned that rebels inside her own party could bring down her government if they don’t like the final Brexit deal she negotiates with the European Union
• Oil fell near $64 a barrel as Saudi Arabia and Russia prepared for a clash with allied crude producers over whether to lift output and as China and the U.S. exchanged threats over trade
• Three people were confirmed dead and almost 100 injured after a strong earthquake hit Osaka on Monday morning, rattling one of Japan’s industrial heartlands and halting trains and factories across the region
• Steady growth in Japanese exports for a second straight month offered more reassurance that Japan’s economy is rebounding in the current quarter, despite rising trade tensions. A surge in imports pushed the trade balance to a bigger-than-expected deficit
• A falling tide lowers all boats, it seems. Amid an exodus from emerging markets, investors are pulling out of even Asian economies with solid prospects for growth and debt financing
• After two months of cutting bets on rising prices, hedge funds are feeling optimistic again as OPEC prepares to meet
• China, Hong Kong, Taiwan and Indonesia closed for holidays

Asia stocks mostly backpedalled at the start of the week as the region digested the tit-for-tat trade spat between US and China, in which the US confirmed tariffs on USD 50bln of Chinese goods and China responded with reciprocal tariffs of the same value against the US. ASX 200 (+0.3%) and Nikkei 225 (-0.8%) both opened negative with Australia initially led lower by commodity-related sectors although strength in financials and healthcare later reversed the downside in the index, while sentiment in Japan was dampened by a firmer JPY and amid a fatal earthquake in Osaka. KOSPI (-1.3%) underperformed as a fallout from the US-China tariff dispute due to fears South Korea could feel the brunt of the trade war between its 2 largest trading partners, and with index-heavyweight Samsung Electronics pressured after it was ordered to pay USD 400mln for patent infringement related to semiconductor technology. Finally, markets in mainland China, Hong Kong, Taiwan and Indonesia were all closed for holiday, while 10yr JGBs were uneventful despite the risk averse tone as prices took a breather from last week’s upside and following a lack of a Rinban announcement by the BoJ.

Top Asian News

• HDFC Bank Is Said to Mull Relying on India in $2.3 Billion Offer
• Noble Group Halts Shares as Restructuring Hangs in Balance
• India Is Said to Plan to Sell a Stake in State-Run Coal Miner
• Deutsche Bank Head of Asia Equity Sales Tan Is Said to Leave
• Emerging Asia Hit by Biggest Foreign Investor Exodus Since 2008

European equities took impetus from Asia as the fallout from the US-China tariff dispute continue to subdue the market. FTSE 100 (-0.2%) outperforms its major peers as the index is kept afloat by currency effects. In terms of sectors, energy names are extending losses following the slump in oil prices (ahead of the key OPEC+ meeting later this week) while material names are also hitting rock bottom amid trade woes effecting base metal prices. IT names are underperforming, albeit off worse levels, as risk averse investors flee to less risky sectors. Looking at stock specifics, Aviva (+2.4%) and RSA (+1.7%) are amongst UK’s top performers after reports that DAX 30 heavyweight Allianz (-0.3%) is considering the companies for a large UK deal. Elsewhere, Hermes (-0.7%) replaced Lafargeholcim (-0.1%) in the CAC 40 today.

Top European News

• Equinor Awards Record $3.7 Billion in Drilling-Service Deals
• Norwegian Air Gains as Lufthansa CEO Says He’s Mulling Bid
• UBS Credit Rating Is Raised at Moody’s on Wealth Management
• Credit Suisse Gears Up for Next Wave of Leveraged Loan Issuance

In FX, the Dollar is mixed overall, but netting more gains vs the Eur and Gbp in particular against losses elsewhere to nudge the index back up to 95.000 and close to ytd peaks (around 95.150) forged in wake of last week’s divergent Fed and ECB policy actions/guidance. A clearer or convincing break above the big figure would bring strong resistance just ahead of 95.500, but this may also require other G10 pairs to breach levels that have held so far, like 111.00 in Usd/Jpy and 1.3200 in Usd/Cad. EUR/GBP: As noted, the major laggards as Eur/Usd remains capped ahead of 1.1600, while Cable is retreating towards 1.3200 amidst ongoing Brexit jitters and ahead of this week’s BoE policy meeting that is widely if not unanimously expected to see the MPC stand pat again and signal no urgency to normalise policy further. Nearest support is 1.3210 and for Eur/Usd the 2018 base at 1.1510. JPY/CAD: Marginal outperformers with Usd/Jpy pivoting around 110.50 and the Jpy benefiting from a degree of safe-haven demand amidst the latest import tariff trade-off between the US and China, while the Loonie has recovered some lost ground to trade back above 1.3200 vs its US peer after sliding in wake of the G7 fall-out. Note, latest OPEC spec suggesting 300-600k BPD output increase has boosted crude prices and the Cad to a degree. TRY: Attempting to pare some of its recent losses beyond 4.7000 vs the Usd, but still looking very vulnerable against the backdrop of widespread EM weakness relative to the Dollar as Turkey’s election looms and polls indicate a very unpredictable outcome. Indeed, even improvements in the jobless rate and a swing in the budget balance to a surplus from deficit is not offering the Lira any real comfort.

In commodities, oil rebounded from losses seen at the end of last week as concerns over Chinese crude tariffs were offset by a Bloomberg report OPEC may cut oil output by a far smaller 300-600kb/d. Still WTI was down modestly ahead of the upcoming OPEC meetings this week that are set to announce increased production for the cartel. Brent is outperforming WTI on Libyan internal conflicts affecting refinery production.

Reports have noted that Russian energy minister Novak stated OPEC and non-OPEC countries will discuss raising the oil output by 1.5mln bpd in Q3 only. However, Iran stated that 3 OPEC members (Iraq, Iran & Venezuela) will veto a proposed production increase. Ahead of this meeting banks are expecting production increases of 700k BPD (SocGen & Barclays) to 1mln BPD (Goldman Sachs). Sources in EU trade suggested that this would be a smaller hike than expected, however, with 300-600k BPD the stated figures.

In the metals scope gold is in the green (+0.15%) as market sentiment sours on Chinese trade concerns and investors are flocking to safe haven assets. Copper has slipped for the second straight session and is at USD 6,997/tonne hovering just above 2 week lows as supply concerns continue to ease. Aluminium is also falling and has hit 2 month lows at USD 2,193/tonne, with support seen at the 200dma of USD 2,175/tonne

Looking at the day ahead, the most significant event today is the start of the ECB’s Forum on Central Banking in Sintra (continuing until Wednesday), with President Draghi due to make opening remarks in the evening. Away from that, the Fed’s Dudley and Williams are all due to speak while datawise in the US the NAHB housing market index reading is due for June. Finally the Brexit withdrawal bill passes to the House of Lords on Monday and Germany Chancellor Merkel meets new Italy PM Conte.

US Event Calendar

• 10am: NAHB Housing Market Index, est. 70, prior 70
• 8:45am: Departing NY Fed Chief Dudley Speaks at Bank Culture Conference
• 9am: Dudley, Duke and Gorman Speak on Culture in Finance Panel
• 1pm: Fed’s Bostic Speaks on Economist and Monetary Policy Outlook
• 4pm: Fed’s Williams Speaks at NY Fed Bank Culture Conference

DB’s Jim Reid concludes the overnight wrap

Happy Monday. Whether it’ll be a happy Tuesday for me might depend on whether Tunisia help England to end a stretch of only one win in their last eight World Cup games tonight. Having said that, half of Deutsche Bank is going to be in mourning today after Germany’s opening match defeat yesterday. Outside of football I hope you all had a good weekend. I spent yesterday afternoon watching Paddington 2 for the fifth time as Maisie loves it. In fact it might be Hugh Grant’s best film since “Mickey Blue Eyes”! Talking of Mr Grant, once we get past the BoE meeting on Thursday, it will be a case of “Four Central Bank meetings and a nuclear summit” over the last week.

Of those central bank meetings so far, the main outcomes were that the Fed was more hawkish than expected and with the ECB pulling off a remarkably dovish QE exit routine. As such our rates strategists have now upped their 10 year US Treasury forecast for YE 2018 to 3.50% (from 3.25%) and lowered their 10 year Bund forecast to 0.90% from 1.25%. We can’t stray too far away from central bankers this week as between today and Wednesday we have the ECB’s Forum on Central Banking due to take place in Sintra.

Chances are that coming so close after the big ECB meeting, it’s unlikely to have the same impact on markets as it did this time last year when Draghi announced that the ECB was ready to start phasing out extreme monetary stimulus. However it’s a true A-list gathering of Central Bankers that makes the casting agents of Ocean’s Eleven look like they ran out of money. As such headlines will be aplenty. Kicking things off tonight, President Draghi will deliver opening remarks followed by a speech from former US Secretary of State Lawrence Summers. Tomorrow morning Draghi will then make the introductory speech, before board member Peter Praet speaks in two separate panels, the second including the Fed’s Bullard and ECB’s Lane. Finally on Wednesday we’ll hear from ECB board member Sabine Lautenschlager in the morning and then Benoit Coeure. The main event might well come on Wednesday afternoon though when we get to watch a policy panel featuring Draghi, the Fed’s Powell, BoJ’s Kuroda and RBA’s Lowe.

Elsewhere we have a BoE meeting (Thursday) and a likely contentious OPEC meeting in Vienna (Friday) where ministers are due to discuss a possible lift back up in output after the freeze last year. Headlines will start from Wednesday as officials and companies start to gather before the meetings. Global flash PMIs at the end of the week are likely to be the big data highlight. With regards to other potentially important things to look out for, early this week the Brexit withdrawal bill passes to the House of Lords and back to the Commons with plenty of opportunity for rebellion and headlines about the future of Brexit and PM May. Mrs Merkel will be busy keeping her party’s coalition together while also meeting Italian PM Conte in Berlin today and Macron tomorrow re-strengthening the Euro Area. Finally the Fed’s results from its 2018 bank stress tests will be out on Thursday. The rest of the week ahead is included at the end.

Back to Ms Merkel, last week speculation swirled about the health of her party’s (CDU) 69-year old coalition with the CSU due to policy differences on immigration, as Sonntag reported Germany’s Interior Minister Mr Seehofer (a member of CSU) will defy Chancellor Merkel and unilaterally implement a plan to turn away refugees from Germany as early as today. Over the weekend, the tone was a bit more conciliatory as the Bild newspaper reported the CSU Party will meet today and may give Ms Merkel another two weeks to get an EU deal facilitating the return of immigrants to countries where they were first registered.

Notably, Mr Seehofer noted “the situation is serious but manageable” and that “no one in the CSU has an interest in toppling the Chancellor, in dissolving the union of the CSU-CSU”. Elsewhere, the WSJ reported Ms Merkel has reached out to some of her southern EU neighbours to sound out their willingness to readmit migrants. Looking ahead, as highlighted above Ms Merkel will meet with her Italian and French counterparts this week and then also have the June 28-29 summit of EU leaders to seek some sort of agreement.

Turning to trade tensions and its potential impacts on China. DB’s Zhiwei Zhang and team estimates the impact of the announced US tariff on China’s economy is quite small for now. They note that if the US imposes 25% tariff on $50bn of Chinese goods ($34bn in July, $16bn in Sep.), the total impact would be less than 0.1% of China’s GDP in 2018.

Looking ahead, Reuters reported the US may impose higher tariffs on an additional $100bn of Chinese imports. If this triggers another round of actions from China, then this second round of trade war will likely be much more damaging for both sides. The team estimate this could reduce China’s GDP growth by c0.3% of GDP, but importantly, the US tariff list will likely include big item consumer goods such as phones, computers, TVs etc, which could mean a lot more workers in China and US consumers would be negatively affected. If this second scenario eventuates, our economists  expect China to loosen policy such as tolerating the property and land market boom in tier 3 cities and cutting the RRR twice over the rest of this year to partly offset the potential drags.

This morning in Asia, markets are trading modestly lower with the Nikkei (-0.93%) and Kospi (-1.22%) both down, while markets in HK and China are closed for holidays. Meanwhile, futures on the S&P are down c0.5% and UST 10y yields are down c1bp. Datawise, Japan’s May adjusted trade balance was lower than expected (-JPY297bn vs. +JPY144bn expected) as growth in imports was stronger than expected.

As for markets back on Friday, equities broadly weakened as trade tensions escalated. The Stoxx 600 (-0.99%), DAX (-0.74%) and FTSE (-1.70%) all declined, dragged down by materials and energy stocks (-2.43%). The S&P traded -0.7% lower initially, but recovered later in the day to close -0.10%, in part due to higher volumes on the close for index rebalancing. Government bonds were broadly firmer (UST 10y -1.5bp; Bunds -2.3bp) while 10y Italian BTPs rallied for the third consecutive day (-12.9bp), in part reflecting the ongoing reactions to a more a dovish ECB.

In commodities, WTI oil dropped -2.74% as the Russian energy minister Mr Novak signalled that Russia and Saudi Arabia both “in principle” support a gradual rise in output. Meanwhile, other LME base metals also dropped 2-3% following increased trade tensions (copper -2.19%; zinc -3.36%; aluminium -2.30%) while the price of soybeans fell to a fresh one year low (-2.05%). On Sunday, Iran’s representative to the OPEC meeting noted that Iran, Venezuela and Iraq “are going to stop” Russia & Saudi Arabia’s proposal for higher oil production. He added that if the two countries want to “act alone, that’s a breach of the cooperation agreement”. This morning, WTI oil is down another c2%. So lots to look forward to ahead of this week’s OPEC meeting.

Before we take a look at today’s calendar, we wrap up with other data releases from Friday. In the US, the May IP was weaker than expected at -0.1% mom (vs. 0.2%), weighed down by a -0.7% mom decline in manufacturing production, which was mainly due to a decline in production in the auto sector as a result of a fire at a major truck assembler. Elsewhere, the June Empire manufacturing index was above market at 25 (vs. 18.8 expected) and the highest since October 2017, with the new orders and employment indices both firmer. Meanwhile the June University of Michigan sentiment index was 99.3 (vs. 98.5 expected), with both the 1yr and 5-10 inflation expectation up 0.1ppt mom to 2.9% yoy and 2.6% yoy respectively. Notably, the 1yr ahead index is now at its highest level since March 2015. Following the above, the NY Fed’s estimate of Q2 GDP growth has edged 0.1ppt lower to 3.0% saar.

In Europe, the final reading of the Euro area’s May core CPI was confirmed at 1.1% yoy, while Italy print was revised 0.1ppt lower to 1% yoy. The Euro area April trade surplus was smaller than expected at €18.1bln (vs. €20bln) while the 1Q Euro area labour costs have increased 2.0% yoy, up from 1.4% yoy in Q4, which is the fastest pace recorded for five years.

Looking at the day ahead, the most significant event today is the start of the ECB’s Forum on Central Banking in Sintra (continuing until Wednesday), with President Draghi due to make opening remarks in the evening. Away from that, the Fed’s Dudley and Williams are all due to speak while datawise in the US the NAHB housing market index reading is due for June. Finally the Brexit withdrawal bill passes to the House of Lords on Monday and Germany Chancellor Merkel meets new Italy PM Conte.