Bulletin headline summary from RanSquawk

• DAX and FTSE at 1 month lows in sour risk tone as Trump issues USD 200bln tariff threat
• Tariff threats send the DXY to YTD high
• Looking ahead, highlights include, the Technical committee meeting between OPEC and non-OPEC members, ECB’s Lane and Fed’s Bullard

The headline news that dominate markets today are not that different from yesterday, especially since it is really just one: the escalating trade war between the US and China. Only unlike yesterday, when futures were modestly lower and levitated higher all day, with the Nasdaq closing in the green and the S&P barely lower, today’s tripling down by the Trump administration, which has now threatened to re-double down and set 10% tariffs on up to $200BN in Chinese imports has finally spooked US equity futures and global markets, with the Dow futures down 340 points this morning, and global markets a sea of red, while safe havens such as the dollar and US Treasurys are sharply bid.

In response, China Mofcom said China will have to adopt comprehensive steps to fight back firmly and warned it will take qualitative and quantitative measures if US publishes additional tariff list; China also warned that it was preparing a second round of tariffs on US energy; US oil, gas and coal face 25% levy in threatened second round of duties.

While tough trade talk is nothing new for investors in 2018, a sense that stress is ratcheting up between the U.S. and China is clearly taking a toll on markets. The protectionist moves come at a time when many are already voicing concern that global growth could lose momentum, as it also contends with America’s faster tightening of monetary policy and the end of European stimulus.

“What you saw at the start of the year was global synchronized growth,” Emad Mostaque, co-chief investment officer at Capricorn Fund Managers, said in an interview on Bloomberg Television. “It was a cooperative game. Now, we’re moving to a more competitive, negative-sum game.”

In light of the escalating tit-for-tat trade war, which so far shows no signs of stopping, and to the contrary appears to be accelerating, S&P futures have fallen sharply throughout the session, while Dow futures are -340 points, with the cash index set for its 6th consecutive down day.

The MSCI index of Asia-Pacific shares outside Japan fell 1.9 percent to its lowest since early December. The losses intensified through the day as the rout deepened in China where the 3,000 support level in the Shanghai Composite finally gave way as Beijing’s “National Team” plunge protectors failed to step in after Monday’s holiday, resulting in the lowest close in nearly two years as the Shanghai Composite Index plunged 3.8%, its lowest since June 27, 2016, while Hong Kong’s Hang Seng .HSI shed as much 3 percent before ending 2.8% down.

“Trump appears to be employing a similar tactic he used with North Korea, by blustering first in order to gain an advantage in negotiations,” said Kota Hirayama, senior emerging markets economist at SMBC Nikko Securities in Tokyo.
“The problem is, such a tactic is unlikely to work with China.”

Predictably, hardest hit were tech stocks which stand to suffer the most in any direct trade war, with Orient Securities, 360 Security Technology plunging by the 10% daily limit, while the tech heavy Shenzhen Composite index crashed -5.9%, while the ChiNext Index of small-cap and tech shares slumped 4.8%, to its lowest level in more than three years, and is now 61% below peak reached in June 2015. Not even the PBOC adding liquidity with 200BN MLF operation and net 50BN reverse repo injection helped boost sentiment.

“You only have to look at how far the main Shanghai index has fallen to see that people would probably want some safe-haven assets at this point,” said DZ Bank analyst Andy Cossor. China had warned it will take “qualitative” and “quantitative” measures if the U.S. government publishes an additional list of tariffs on its products.

China’s economy has already been clouded by a sharp slowdown in fixed asset investment growth due to the government’s deleveraging drive, a problematic property sector, a mounting debt burden and rising credit defaults. Economists at Nomura wrote, “The rising risk of a disruptive trade conflict makes a bad situation tentatively worse.”

Elsewhere, Japan’s Nikkei lost 1.8%, South Korea’s KOSPI dropped 1.3% while Australian stocks bucked the trend and added 0.1%, helped by a depreciating currency and an overnight bounce in commodity prices.

In Europe it was more of the same, with the Stoxx Europe 600 tumbling for a third day. The stock move in Europe was tempered by a weaker euro, however, which unlike its reaction to last week’s trade jitters, promptly tumbled, wiping out all of Monday’s gains. European mining stocks lead the Stoxx 600 Index down to touch lowest level since late-April; the export-heavy DAX underperformed, sliding 1.4% as automakers continue declines.

As usual, during times of stress and suring dollar, emerging markets were in turmoil as the implications of a possible trade war filter through to investors. Developing-nation stocks headed for the biggest drop since March, and currencies slid as the South African rand and Turkish lira led declines.

As one would expect, the safe haven US Dollar advanced across the board and pressured G-10 and EM counterparts, with the EUR/USD sliding below 1.1600 and GBP/USD falls below 1.3200; the Bloomberg Dollar Index, BBDXY, is now the highest it has been since April 2017.

Meanwhile, as Chinese stocks crashed, the yuan hit a five-month low amid speculation that China may launch an aggressive FX devaluation in retaliation hence the scramble to frontrun the next major central bank move. The dollar wasn’t the only safe haven: the Japanese Yen also strengthened 0.7% while commodity-currencies AUD and CAD underperform G-10 peers. The British pound was also under pressure as U.K. Prime Minister Theresa May prepares for another knife-edge Brexit vote on Wednesday. The Australian dollar, often seen as a proxy for China-related trades, brushed a one-year low of $0.7381.

But the big FX story was once again in EM currencies, which as shown below have been another sea of red as capital flight becomes a major concern for most of these nations which until recently were the happy recipients of excess dollar funding.

The rush for safety also manifested itself in the Treasury complex with US 10-year yields sliding as low as 2.85%, before settling three bps lower to 2.88% as T-note futures clear Friday’s high. Elsewhere it was more of the same with Germany’s 10-year yield dropped 4bps to 0.36%, the lowest in almost three weeks with its sixth straight decline; Bunds got further support from Draghi’s Sintra speech which was similar to ECB meeting, and certainly not the fireworks from last year. Britain’s 10-year yield dipped 5bps to 1.324 percent, reaching the lowest in almost three weeks on its sixth straight decline and the biggest decrease in three weeks, while Italy’s 10-year yield dipped less than one basis point to 2.554%, hitting the lowest in more than two weeks.

Once again, the stress was highest in emerging markets, where the average yield on domestic currency debt was the highest since March 2017 and fast approaching 7%.

The Bloomberg Commodity Index fell 1% as crude, base metals and agriculture products slide in tandem.

With Russia and Saudi Arabia pushing for higher output, crude oil markets remained volatile ahead of Friday’s OPEC meeting. Brent crude futures fell 0.8 percent to $74.76 a barrel after rallying 2.5% overnight, while U.S. light crude futures retreated 0.9 percent to $65.27. Lower-risk assets gained on the latest round of trade threats with spot gold up 0.35% at $1,282.26 an ounce albeit after its sharpest drop in 1-1/2 years late last week.

Looking ahead, highlights include, the Technical committee meeting between OPEC and non-OPEC members, ECB’s Lane and Fed’s Bullard.

Market Snapshot

• S&P 500 futures down 1.2% to 2,747.00
• STOXX Europe 600 down 1.1% to 381.54
• MXAP down 1.5% to 168.92
• MXAPJ down 2% to 548.61
• Nikkei down 1.8% to 22,278.48
• Topix down 1.6% to 1,743.92
• Hang Seng Index down 2.8% to 29,468.15
• Shanghai Composite down 3.8% to 2,907.82
• Sensex down 0.5% to 35,359.32
• Australia S&P/ASX 200 down 0.03% to 6,102.12
• Kospi down 1.5% to 2,340.11
• German 10Y yield fell 3.8 bps to 0.36%
• Euro down 0.6% to $1.1555
• Brent Futures down 0.5% to $74.97/bbl
• Gold spot up 0.1% to $1,279.24
• U.S. Dollar Index up 0.5% to 95.18
• Italian 10Y yield fell 5.4 bps to 2.289%
• Spanish 10Y yield rose 0.2 bps to 1.256%

Top overnight news from Bloomberg

• Chinese shares plunged after Trump ordered the identification of up to $200 billion in imports from the country for additional tariffs of 10% — with another $200 billion after that if Beijing retaliates. China vowed to respond “forcefully” to any such moves
• The ECB will remain patient in determining the timing of the first rate rise and will take a gradual approach to adjusting policy thereafter, money-market rates “broadly reflects these principles” Draghi said in speech in Sintra, Portugal
• ECB’s Liikanen says can hold rates even after summer 2019 if needed (NOTE: Liikanen will step down as Finnish central bank governor and GC member next month)
• The EU’s 27 remaining leaders may warn the U.K. that it faces crashing out of the bloc without a deal and call for contingency preparations, as an update due from the Brexit negotiators is set to highlight the limited progress made since March
• Anti-Brexit U.K. lawmakers pushing for more power over the divorce process will meet government officials on Tuesday for talks, as the government tries to head off a potentially humiliating defeat in Parliament. After the House of Lords defeated the government on Monday, May won’t be offering more concessions, a person familiar with her position said
• Fed’s Bostic comfortable continuing to move policy toward more neutral
• Iran says OPEC output hike would swell oil stockpiles again

Asia-Pac equity markets were mostly lower amid a further escalation of trade tensions after President Trump asked the US Trade Representative to identify USD 200bln in Chinese goods for further tariffs of 10% which will be imposed if China goes ahead with reciprocal tariffs, while he also threatened tariffs on another USD 200bln of goods if China retaliates yet again. This wasn’t taken sitting down by China as Mofcom responded that China will take strong counter measures if US issues a new list. As such, US equity futures sold off and Asia stocks were mostly pressured with Hang Seng (-2.8%) and Shanghai Comp. (-3.8%) feeling the brunt of the blaring sabre-rattling between the world’s 2 largest economies as they move closer to the brink of a trade war. In addition, the mainland blood bath was also exacerbated by the Shanghai Comp.’s decline below the 3000 level for the first time in 2 years. Elsewhere, Nikkei 225 (-1.8%) was also negative alongside the widespread risk averse tone and on JPY strength, while ASX 200 (flat) bucked the trend led by strength in energy following the recent rebound in oil prices. Finally, 10yr JGBs traded marginally higher amid the risk averse tone in the region, but with gains limited as focus was centred on stocks and amid a mixed 30yr JGB auction. PBoC injected CNY 70bln via 7-day reverse repos, CNY 20bln via 14-day reverse repos and CNY 10bln via 28-day reverse repos for a net daily injection of CNY 50bln, while it also PBoC announced CNY 200bln in 1yr MLF loans.

Top Asian News

• China High-Grade Bond Spreads Widen as Trade Tensions Intensify
• Xiaomi CDR Said to Be Delayed Amid Valuation Dispute: Reuters
• China Urges U.S. to Stop Actions Which Will Hurt Both: Ministry
• Europe Credit Widens as U.S.-China Trade Tensions Roil Markets
• Emerging-Market ETF Outflows Most in Over a Year as Rout Deepens

European equites are experiencing significant losses (Euro stoxx 50 -1.0%, at 2 month lows) after US President Trump’s announcement asked the US Trade Representative to identify USD 200bln in Chinese goods for further 10% tariffs, with an additional USD 200bln prepared should retaliation occur. This has hammered European markets , with all equity bourses in the red. The DAX is the underperformer (-1.3%) at 1 month lows with FTSE 100 (-0.5%, at 1 month lows) outperforming due to support from a weakening GBP. The technology sector is currently drifting lower as investors are avoiding high beta stocks in the risk off  environment, with Infineon leading the losses in this sector.

Top European News

• Pound Is on Verge of Large Move as Technical Picture Gets Messy
• Ifo Sees ‘Storm Clouds’ Over German Economy, Cuts Forecasts
• Moneysupermarket Falls; Stock May Lose Discount Appeal: Barclays
• Bain, Cinven Sued by Stada Minority Shareholders Over Payout

In FX, the DXY index and broad Dollar are back in the ascendency amidst ramped up global trade war concerns, as the US and China threaten to impose significantly higher tariffs against each other. The DXY has just eclipsed its previous peak for the year to set new pinnacle at 95.270 and the next decent technical objective around 95.470 is firmly back in sight and within striking distance. JPY/AUD – Polar opposites amidst heightened risk aversion as Usd/Jpy extends and accelerates its pull-back from recent peaks (circa 110.90) to just a few pips off 109.50 and fib support at 109.51. Conversely, Aud/Usd has fallen through fib support at 0.7413 and 0.7400 on the way to 1 year+ lows not far from 0.7350, with dovish-leaning RBA minutes overnight adding further downside pressure on the headline pair.
CHF – The Franc retains a degree of underlying safe-haven demand and relative resilience vs the Greenback within 0.9920-60 trading parameters, but remains reluctant to rally to far against the Eur (hovering above 1.1500 after only a brief dip under) as Thursday’s SNB quarterly review looms with growing prospects of a more concerted attempt to curb the Chf’s appeal. EUR – The next biggest G10 casualty of broad risk-off sentiment, but also on further dovish rate guidance from the ECB, as the single currency probes new post-policy meeting lows sub-1.1540 and could re-test bids/support ahead of the 1.1510 ytd base if stops are tripped. EM – Fresh depths plumbed for the already  beleaguered currencies, and with some predictions that the misery is unlikely to end as forecasts for Usd/Try rise to 5.0000 in some quarters given the increased risk of capital flight.

In commodities, oil is trimming gains seen on Monday, with WTI currently down 1% ahead of the OPEC and non- OPEC technical committee monitoring meeting, with Brent outperforming on Libya losing 400k BPD. The fossil fuel is also being pressured by a soured risk tone on the possibility of Chinese crude tariffs and a rising dollar, which has hit YTD highs. Copper, iron and steel are all being hit by the widening trade war with the construction materials down 3%, 2% and 2.9% respectively, as supply concerns in all of these markets have taken a back seat to potential tariffs in China. OPEC to consider Republic of Congo’s application to join the cartel, according to a delegate. Multiple OPEC source say Venezuela, Iran and Algeria oppose an output increase in oil. OPEC sources say they see strong oil demand in H2 2018, suggesting market may absorb extra production. Iran’s Commerce Minister Kazempour reiterates opposition to output increase in oi

Looking at the day ahead, the ECB Sintra conference features comments from President Draghi again, along with Board Member Praet and Governor Lane. The Fed’s Bullard is also due to take part. Away from that the only data of note is the Euro area’s current account balance reading for April and US housing starts and building permits for May. It’s worth noting that Germany Chancellor Merkel will also meet France President Macron today. Meanwhile, Italy’s Senate will debate the fiscal policy for 2019.

US Event Calendar

• 7am: ECB’s Lane, St. Louis Fed’s Bullard speak in Sintra, Portugal
• 8:30am: Housing Starts, est. 1.31m, prior 1.29m; MoM, est. 1.86%, prior -3.7%
• 8:30am: Building Permits, est. 1.35m, prior 1.35m; MoM, est. -1.03%, prior -1.8%

DB’s Jim Reid concludes the overnight wrap

Markets started yesterday as jumpy as a kangaroo rushing home to watch the football although a bit of a recovery in the US session at least helped put the brakes on. Momentum has been lost in the Asian session though as Mr Trump said in a White House statement late last night that he had instructed the US Trade Rep. Office to identify higher tariffs (+10%) on an additional $200bn worth of Chinese imports and threatened to impose tariffs on another $200bn of goods if China retaliates. He said “the US will no longer be taken advantage of on trade by China and other countries”. On the other side, China’s Ministry of Commerce said “if the US…publishes such a list, China will take comprehensive quantitative and qualitative measures and retaliate forcefully”. Earlier on, Secretary of State Pompeo also stepped up the tension as he noted “Chinese leaders…have been claiming openness and globalisation, but it’s a joke” and added that “it’s the most predatory economic government…” which is “a problem that’s long overdue in being tackled”.

Markets are in a risk off mode following the new US tariff threat with losses accelerating post China’s response. Across the region, the Nikkei (-1.52%) and Kospi (-0.86%) are down while the Hang Seng (-2.18%) and Shenzen Comp. (-4.35%) are leading the declines, with the latter impacted by shares in ZTE (-25% in HK), as the US senate passed legislations that would restore the penalties on the telco company. Elsewhere, safe haven assets are in demand with the YEN c0.6% stronger and UST 10y yields c3bp lower while futures on the S&P are down c0.8%.

Before all this, the German political drama was the main story in Europe where Chancellor Merkel was forced into considering concessions to stave off a potential political crisis. As a reminder all this centres around the migrant debate with Interior Minister Horst Seehofer, who is head of Bavaria’s Christian Social Union party (one-third of the coalition), insisting that Merkel reaches a deal by the end of this month with EU governments to negotiate the return of migrants to countries where they were first registered, or else begin turning migrants away from the German border. Merkel agreed to the timeframe (if not committing to a solution) and announced that she will report back on July 1st. As a reminder the EU summit is scheduled for June 28th and 29th.

Our economists in Germany highlighted in their note yesterday (link) that the setting up of such controls by Seehofer would leave Merkel with only two options, either she would go along with Mr. Seehofer’s more restrictive policy approach – a loss of face she might not survive for very long – or she would have to sack him which would almost certainly cause the CSU to leave the coalition and ultimately result in a collapse of the Groko. Our colleagues consider the latter option very unlikely and see a further muddling through with no clear winner but a substantially damaged Merkel as the most likely outcome. Therefore, they expect this conflict to linger around up until the Bavarian elections on October 14, unless polls provide insights that this approach will not improve the CSU’s election chances. They also add that while yesterday’s compromise buys time for Merkel and her European approach, the German government crisis has weakened her role on the EU and international stage, in particular. Her room for manoeuvre in this question will remain constrained. This will also have repercussions for Merkel’s ability to move forward on euro area reforms as both CDU and CSU are reluctant to back proposals on budget lines for investment and/ or support in case of asymmetric shocks for individual member states.

Staying with Merkel, last night she met with the new Italian PM Mr Conte, where she pledged to “support Italy’s desire for solidarity, and also hopes that Germany receives understanding when it comes to EU solidarity on the question of migration”. This is going to be swiftly followed by a meeting with President Macron today. Migration will be a major topic although the Franco-German meeting was supposed to hammer out a joint position on euro area reforms. Perhaps unsurprisingly President Trump also opined on the Merkel immigration saga, tweeting that “the people of Germany are turning against their leadership as migration is rocking the already tenuous Berlin coalition, big mistake made all over Europe in allowing millions of people in who have so strongly and violently changed their culture”.

Back to the markets from yesterday, no great surprises that Germany underperformed (not helped by VW -2.90% on an executive arrested after the emissions scandal) with the DAX closing -1.36% (worst day since late May) compared to -0.83% for the Stoxx 600, -0.93% for the CAC, -0.83% for the IBEX and -0.41% for the FTSE MIB. The S&P 500 pared back losses to close -0.21% (-0.81% at the lows) helped by stronger energy stocks while the Nasdaq was marginally up. Bonds had a less eventful day. 10y Bunds (-0.6bps to 0.394%) were more or less unchanged while the periphery was 4-6bps lower in yield.  OATs were 1.0bp lower and Treasuries -0.3bp lower (2s10s was also steady at 36.7bp compared to 37.3bp on Friday). Meanwhile the euro was down as much as -0.39% before bouncing back to close +0.11% by the end of play.

Conversely Oil had a much stronger showing with Brent up nearly two Dollars to finish at $75.34/bbl (+2.59%) after having traded as low as $72.45/bbl in the morning session. That came after headlines on Bloomberg suggesting that OPEC countries were discussing a smaller increase in oil production of 300k-600k barrel a day. That compares to the 1.5m bbl per day increase which Russia had previously proposed.

Now turning to Fed speak on rates and the US economy. On rates, the Fed’s Bostic noted he is “comfortable continuing to move policy towards a more neutral stance” – which he believes to be around 2.25%-3%. He also reiterated that he is “still at three” rate hikes for this year, but will “let data inform how rapidly I think we need to be moving”. Meanwhile, he noted that “(business) optimism has almost completely faded among” his contacts, replaced by concerns about trade policy and tariffs, while the bar for new business investments are getting quite high.

Elsewhere, on his first day as the new NY Fed chief, Mr Williams was relatively upbeat as he noted “the US economy is in great shape” and “this solid growth, a strong labour market and inflation near our target are exactly what I want to see”. Although he cautioned that “…paradoxically, it’s precisely the sense that things have gotten so much better that worries me most”.

Finally onto some Brexit headlines. The upper House has voted against PM May’s Brexit legislation, instead backing an amendment to ensure a “meaningful vote” for Parliament on potential Brexit deals agreed with the EU or next steps if there is no deal. The bill will now return to the lower House for negotiations before another vote on Wednesday. Meanwhile DB’s Oliver Harvey published a report discussing a possible compromise to the Brexit negotiations – the Association Agreement outlined by the EU Parliament in March. He believes the Parliament’s proposal deserves serious consideration. As well as being closer to the Norwegian than Canadian model in terms of market access, its framework could address some thorny issues – including an end to freedom of movement and more limited jurisdiction of ECJ, while mitigating EU concerns of cherry picking. Refer to his note for details.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the June NAHB Housing market index fell 2pts mom to a still solid level of 68 (vs. 70 expected). In the UK, the June Rightmove House price index was up 0.4% mom, leading to an annual growth of 1.7 % yoy (vs. 1.1% previous). Elsewhere, Italy’s trade surplus was narrower than last month’s print at €2.9bn (vs. €4.5bn previous).

Looking at the day ahead, the ECB Sintra conference will feature comments from President Draghi again, along with Board Member Praet and Governor Lane. The Fed’s Bullard is also due to take part. Away from that the only data of note is the Euro area’s current account balance reading for April and US housing starts and building permits for May. It’s worth noting that Germany Chancellor Merkel will also meet France President Macron today. Meanwhile, Italy’s Senate will debate the fiscal policy for 2019.