It started off well enough, with S&P futures in the green and the Nasdaq set for another all time high after trade war concerns eased further after Commerce Secretary Wilbur Ross told the Senate neither the U.S. nor China want a trade war, while President Donald Trump said he expects to announce new trade deals with unspecified countries soon.

However, it did not last long, and the risk-off move across asset classes started as soon as Europe opened for traders, and accelerated after the appointment of two prominent euroskeptics to Italian parliamentary positions, sending global markets in the red.

“At the moment we just want to be a little bit cautious,” Eastspring Investments’ Colin Graham said on Bloomberg Television. “Overall Goldilocks is still alive and it’s going to be fine this year – risk assets are still going to outperform safe-haven assets – but we are going to see more choppy returns.” Let’s look back on that forecast in 6 months, shall we.

The German DAX slumped from the open as yesterday’s unexpected Daimler profit warning – the first to cast the blame on the US-China trade war – hit the auto sector.

Why does Daimler have so much sway on the German market? Simple: because as the chart below shows, German automakers account for no less than a third of the DAX’s 2018 net income.

But the biggest news of the day is the return of “Italian jitters”, with the FTSE MIB sliding, dragged lower by the bank sector as risk-off move accelerates as Italian 2Y BTPs aggressively sold-off. As noted above, the catalyst for the Italian selloff was that Euroskeptic, German critic Economics Professor and League Senator Alberto Bagnai was named as Italy’s Senate Finance Committee Head. At the same time, Claudio Borghi, a top economic adviser for the coalition partner League, was named the head of the budget committee in the lower house.

As Bloomberg notes, “the appointments are likely to add weight to the new government’s pledge to challenge the European Union in key areas. However, the new finance minister, Giovanni Tria, has pledged that the country remains committed to the euro single currency.”

Spooked by the news, Italian bondholders sold off, with abysmal liquidity exacerbating the reaction as shown below:

Meanwhile, Italian Interior Minister Matteo Salvini threatened to stir up more trouble for the EU unless the rest of the bloc meets his demands for help to contain immigration. In an interview with RAI television Thursday, Salvini, who is also deputy prime minister and head of the League, said Italy might review its contributions to the EU budget if it isn’t given more support. La Repubblica newspaper reported that he also raised the prospect of setting up controls on Italy’s land borders at a meeting with Prime Minister Giuseppe Conte in Rome on Wednesday.

Earlier, shares in Asia declined as benchmarks in Hong Kong, Seoul and Shanghai all fell at least 1%.  Chinese stocks erased early advance as yuan drops to weakest since January, sliding 1.4% to 2,875. Stocks in the Philippines entered a bear market, while Indonesia’s rupiah slumped as markets reopened after a holiday. West Texas oil dropped below $65 a barrel ahead of a crucial OPEC meeting that will decide on output.

So as a result of the first tangible manifestation of trade war in corporate earnings (or at least the scapegoating thereof) and Italian risk returning to Europe, S&P futures slumped lower in tandem and were trading near session lows.

And as risk sold off, safe havens gained, with the Bloomberg Dollar Spot Index touching a fresh 11-month high as the euro slipped as much as 0.5%, to 1.1509, the lowest in almost a year, amid the Italian bonds weakness. Treasuries climbed and stocks fell on Thursday as two prominent euroskeptics were handed key roles in the Italian parliament, adding to the worry list for investors fretting over the outlook for global trade.

Elsewhere in FX, Switzerland’s franc held gains against the euro after the SNB kept rates unchanged. The Norwegian krone rallied to the highest level in almost eight months against the euro after Norges Bank said it will most likely raise its key policy rate in September.  The New Zealand’s dollar fell to its weakest in six months after data showed first-quarter growth slowed, bolstering the case for the central bank to keep rates at a historic low.

Finally, and perhaps most importantly, as the dollar rose, the offshore yuan weakend as much as 0.33% to 6.5024 in Hong Kong, the lowest intraday level since Jan. 11; CNH has now slumped 1.6% over past six sessions. At the same time the onshore yuan dropped 0.29% to 6.4936.

The yield on 10-year Treasuries fell 3bps to 2.91%, the biggest fall in a week. Germany’s 10-Y yield also fell 3bps to 0.35%, the lowest in three weeks on the largest fall in a week. Meanwhile, Britain’s 10-year gilts yielded 2bps less to 1.297%, the lowest in almost three weeks. Finally, as noted above, Italy’s 10-year yield jumped 13 bps to 2.682%, the highest in a week on the largest surge in more than two weeks.

Crude futures weaker as Saudi energy minister reiterates likelihood of supply increase. Oil was negative on the day as news reports from multiple energy ministers suggest a deal is nearing for an output increase, with Iran’s oil minister expressing confidence a deal will be done, and the OPEC secretariat suggesting this could be under a deal where higher output quotas would be set. The Iraqi oil minister has suggested, however, that they do not intend to increase output this year. Saudi’s energy minister has stated a 1mln BPD increase as a “reasonable goal” (higher than the previously stated figure of 600-800k BPD), but negotiations are still ongoing

Economic data on Thursday include initial jobless claims. Red Hat and Darden are among companies due to release results

Market Snapshot

• S&P 500 futures down 0.3% to 2,762.75
• STOXX Europe 600 up 0.05% to 384.47
• MXAP down 0.6% to 168.79
• MXAPJ down 0.7% to 548.79
• Nikkei up 0.6% to 22,693.04
• Topix down 0.1% to 1,750.63
• Hang Seng Index down 1.4% to 29,296.05
• Shanghai Composite down 1.4% to 2,875.81
• Sensex up 0.05% to 35,566.08
• Australia S&P/ASX 200 up 1% to 6,232.13
• Kospi down 1.1% to 2,337.83
• German 10Y yield unchanged at 0.376%
• Euro down 0.2% to $1.1553
• Italian 10Y yield fell 0.8 bps to 2.284%
• Spanish 10Y yield rose 5.4 bps to 1.301%
• Brent Futures down 2.1% to $73.19/bbl
• Gold spot down 0.3% to $1,263.69
• U.S. Dollar Index up 0.3% to 95.44

Top Overnight News

• Italy: Euroskpetics Bagnai (author of two books advocating the dismantling of the EMU) and Borghi appointed heads of Senate Finance Committee and president of Budget committee in Lower House respectively
• Concerns about a global trade war increased with China reiterating it will hit back if the latest tariff threats from President Donald Trump materialize, while India followed the EU in slapping retaliatory levies on U.S. goods. China is “fully prepared” to respond to any new list of U.S. tariffs, according to a commerce ministry spokesman, who said the nation will use a combination of quantitative and qualitative measures
• OPEC+: Saudi Energy Minister says OPEC is to discuss how much oil needs to be released and is optimistic a consensus can be reached
• The Bank of England is set to wait a little longer before following up on last year’s interest-rate hike after a run of mixed economic data.
• Commerce Secretary Wilbur Ross told the Senate neither the U.S. nor China want a trade war. President Donald Trump said he expects to announce new trade deals with unspecified countries soon
• China is “fully prepared” to respond to any new list of U.S. tariffs on Chinese exports, according a commerce ministry spokesman
• The European Central Bank is expecting to plow at least 160 billion euros ($185 billion) of maturing debt back into bonds next year and could consider relaxing the rules on buying, according to euro-area officials familiar with the matter
• Theresa May dodged yet another bullet, avoiding defeat in Parliament over her flagship Brexit bill — which now goes onto the statute book — and ensuring she lives on as prime minister
• President Donald Trump is planning to meet with Vladimir Putin, the president of Russia, during Trump’s visit to Europe next month, according to two people familiar with the matter
• Russia cut its holdings of Treasuries nearly in half in April as Washington slapped the harshest sanctions to date on a selection of Russian companies and individuals
• Italian Interior Minister Matteo Salvini said the country might review its contributions to the EU budget if it isn’t given more support to help contain immigration
• Ireland’s government lashed out at the U.K.’s failure to make progress on a plan to avoid a border on the island following Brexit, escalating a warning that Britain could crash out of the bloc without a deal

Asia traded mixed although were initially mostly higher following a similar showing on Wall St where most major indices finished positive in which the Nasdaq Comp. and Russell 2000 rose to fresh record highs, while the DJIA lagged and posted a 7th consecutive loss. ASX 200 (+1.2%) was led higher by tech which mirrored the outperformance of the sector stateside and with sentiment also underpinned after the Australian parliament passed the income tax cut package. Furthermore, the biggest gaining stocks APN Outdoor and Gateway Lifestyle were boosted by takeover approaches which lifted the former by over 10%. Elsewhere, the weak-JPY-increased-risk dynamic spurred Nikkei 225 (+0.7%), while Hang Seng (-0.9%) and Shanghai Comp. (-0.2%) initially conformed to the improved global risk sentiment amid injections by the PBoC which also expects further increases in liquidity, although the tone in China later soured following comments from China’s Mofcom which renewed its tough talk on trade against the US. Finally, 10yr JGBs were flat with demand sapped amid gains in riskier Japanese assets and weaker demand in the 5yr JGB auction.

Top Asian News

• Sony’s Potential Value Seen as U.S. Studios Realign: SMBC Nikko
• Malaysia to Complete TRX Project With 2.8b Ringgit Govt Funds
• BOJ’s Funo Says Price Outlook Faces Large Downside Risks
• Carlyle Group Closes Its Latest Asia Buyout Fund at $6.55B
• India Joins China, Europe in Hitting Back at Trump on Trade

European stocks are mostly lower (EuroStoxx 50 -0.6%) as Europe is hit by Italian political developments alongside trade war woes. The FTSE MIB underperforms while Italian banks plumb the depths (Italian Banking Index -1.7%) following the appointing of a Eurosceptic as the head of the Italian Senate Finance Committee. In stock specifics, the most notable story of the day, DAX heavyweight Daimler (-4.3%) has issued a profit warning, blaming the US-Sino trade tensions as the main factor to hit earnings. BMW (-3.1%) is subsequently hit by the news as both German auto names have major US plants that export more cars from the country (by value) than other brands. Volkswagen (-2.7%), Peugeot (-1.6%) and Fiat Chrysler (-2.2%) move in sympathy. On the flip side, Novo Nordisk (+5.0%) is showing a strong performance following successful new trials of an oral diabetes drug.

Top European News

• Ireland Slams May’s Failure to Make Progress on Brexit Plan
• BTP Futures Take a Hit With Spanish Bonds Pressured Into Supply
• Dixons Carphone CEO Sees Few Signs of Life in Weak U.K. Market
• SNB Warns of Political Risks as Rates Kept at a Record Low

In FX, the dollar index has eked out more upside amidst widespread Dollar gains and no further physical action on the US vs China and other trade partner tariff front. A fresh ytd peak has been posted around 95.510 and technically eclipsing strong resistance along the way. EUR – The single currency is also on the backfoot vs the Greenback and within a few pips of this year’s 1.1510 base on the relative interest rate/yield dynamic and hyped up global protectionism/trade war risk. AUD/NZD – Both prone to further downside as well, with the former only just holding above 0.7350 and Kiwi underperforming just over 0.6925, as the cross climbs above 1.0750 after overnight data showing a loss of momentum in NZ GDP, while the Aud may be gleaning some support from the Government’s income tax cuts. JPY – Rangy around 110.50 vs the Dollar and largely moving in tandem with overall risk sentiment. Meanwhile, CHF/NOK/GBP are all on Central Bank watch, with the Franc relatively mixed after the latest SNB quarterly policy review that maintained the need for NIRP and currency market vigilance given recent moves underlining fragility. The Chf is still deemed to be highly valued so intervention to curb excessive strength remains appropriate and the Franc is softer vs the Usd, but firmer vs the Eur circa 0.9975 and 1.1500 following the unchanged policy decision/statement. However, Eur/Nok is down to new 2018 lows under 9.4000 as the Norges Bank firmly pinned September as the month for a first hike and thereby confirmed divergence from the ECB that intends to hold rates through Summer 2019. Conversely, Cable is losing more ground towards 1.3100 into the BoE at high noon with little or no expectation of any change from the MPC, but the vote split and tone of the minutes less certain.

In commodities, oil is negative on the day as news reports from multiple energy ministers suggest a deal is nearing for an output increase, with Iran’s oil minister expressing confidence a deal will be done, and the OPEC secretariat suggesting this could be under a deal where higher output quotas would be set. The Iraqi oil minister has suggested, however, that they do not intend to increase output this year. Saudi’s energy minister has stated a 1mln BPD increase as a “reasonable goal” (higher than the previously stated figure of 600-800k BPD), but negotiations are still ongoing

Looking at the day ahead, the main focus will be the BoE meeting at midday. Governor Carney will hold a press conference and then later in the evening is due to make his Mansion House speech. Data releases on Thursday include June confidence indicators in France, May public sector net borrowing data in the UK, June confidence indicators for the Euro area, along with weekly initial jobless claims, June Philly Fed business outlook, May leading index and April FHFA house price index readings in the US. The ECB’s Villeroy and Nowotny are also scheduled to speak along with the Bundesbank’s Weidmann. Elsewhere the Fed’s 2018 bank stress test results will be released, while Thursday also marks the deadline for Greece’s debt relief deal.

US Event Calendar

• 8:30am: Initial Jobless Claims, est. 220,000, prior 218,000; Continuing Claims, est. 1.71m, prior 1.7m
• 8:30am: Philadelphia Fed Business Outlook, est. 29, prior 34.4
• 9am: FHFA House Price Index MoM, est. 0.5%, prior 0.1%
• 9am: Fed’s Kashkari Speaks in Minneapolis
• 9:45am: Bloomberg Economic Expectations, prior 54.5; Bloomberg Consumer Comfort, prior 55.8
• 10am: Leading Index, est. 0.4%, prior 0.4%

DB’s Jim Reid concludes the overnight wrap

I was reading yesterday about the viewing figures for the England game on Monday night and for the modern era they were an impressive 18.3 million at the peak out of a population of 53 million (65.6m for the UK overall where I’m sure many were watching willing England to lose). So an impressive 35% or 28% of the population and 69% of those watching TV at the time apparently. In fact the top two programs this year here in the UK are now Harry Kane’s 2 goals and Prince Harry’s wedding. It’s a good time to be a Harry. Anyway, I thought these numbers were impressive until I saw that for Iceland’s game against Argentina 99.6% of those watching any TV in Iceland at that time were tuned into the game. One of the players tweeted that the other 0.4% were obviously playing in it. In reality, of the remaining 0.4% my research tells me that most (75%) were instead watching “The Great British Bake Off”. Made me feel quite proud.

Anyway time to start hunting out your winter coat if you’re in the northern hemisphere or get your shorts out if your reading this well below the equator as today is the longest/shortest day. The sun was certainly out for tech shares yesterday as the Nasdaq (+0.72%) climbed to fresh record highs. The perception being that this is one of the more immune areas of the market to a potential trade war. It’s a similar story for the Russell 2000 (+0.80%) which also closed at record highs. Meanwhile the international, manufacturing heavy Dow closed lower (-0.17%) for the 7th successive session which is the longest streak since the 8 session decline in late March 2017.

Following on with the latest trade headlines. This morning, a spokesman for China’s Commerce ministry reiterated that China is “fully prepared” to respond to any new list of US tariffs on Chinese goods, but also noted that it was planning to negotiate on manufacturing and services with the US before the latest threats.

Earlier yesterday, the US Secretary of Commerce Wilbur Ross downplayed the potential for an extreme outcome as he told a Senate panel that “I don’t think the Chinese want a trade war any more than we do” and noted the Chinese trade concessions thus far was not enough “to justify in the President’s mind (of) not going ahead with the tariffs”, so he thinks “there are already some signs that we may get some ultimate resolution”. Back in Europe, the EU has confirmed it will begin charging 25% higher import duties on $3.2bn of US goods from Friday as retaliation for the US steel tariffs. Conversely, the WSJ reported that Germany’s leading car makers have thrown their support to the idea of abolishing all import tariffs for cars between the EU and the US after meeting the US ambassador to Germany, as part of broader efforts to find a solution to the current trade tensions. Interestingly Daimler issued a profit warning late last night on the back of concerns over car sales in China post tariffs.

This morning in Asia, markets have pared back gains and are trading mixed with the Nikkei (+0.64%), ASX 200 (+1.04%) and S&P futures (+0.3%) all higher while the Hang Seng (-0.63%) and Shanghai Comp. (-0.20%) are down as we type.

Elsewhere, an official government cabinet meeting report has also confirmed that China will use monetary policy tools to boost credit supply to smaller companies, while ensuring the economy is operating in a reasonable range and keep liquidity sufficient. Over in Japan, BOJ’s board member Funo noted that “prices remain weak” and the BOJ needs to patiently continue its monetary easing policy.

Staying with central bankers and onto the Sintra conference yesterday, where they have all voiced their caution on the ongoing trade tensions. The Fed Chair Powell noted “changes in trade policy could cause us to have to question the outlook” and that “for the first time, we’re hearing about decisions to postpone investment (and) hiring”. Meanwhile, the ECB’s Draghi wondered about the effect of the trade tensions on business confidence and investment, he noted it’s too early to see “what the consequences on monetary policy of all this can be”, but added that prior episodes of protectionism and trade conflict were “all very negative”. Elsewhere, the BOJ’s Kuroda noted the indirect impact of the dispute could disrupt the supply chain networks across East Asia. Finally, the RBA Governor Lowe indicated that “what is happening is very disturbing. Can anyone think of a country that’s made itself wealthier or more productive by building walls?”

As for markets yesterday. Equities slightly rebounded, with the risk on tone starting in Asia with key bourses up c1% as China’s National Radio confirmed that the country will cut RRR for some banks and use other monetary policy tools to increase credit supply to small companies, in part to offset external shocks. The improved sentiment continued in Europe with most bourses modestly higher (Stoxx 600 +0.28%; DAX +0.14%) with the exception of the CAC (-0.34%). Over in the US, the S&P rose for the first time in four days (+0.17%) led by real estate and consumer discretionary stocks. Meanwhile Facebook (+2.3%) and Netflix (+2.9%) hit new highs.

Over in government bonds, core 10y European bond yields were slightly higher (Bunds +0.5bp; Gilts +1.4bp) while treasuries underperformed (+4.2bp), in part as Fed Chair Powell remained upbeat on the US economy and reaffirmed  that the case for continued gradual rate hikes “is strong”. Further, he said “there is a lot to like about low unemployment” and downplayed the parallels to 1960s inflation / unemployment trend given the differences in the economy and labour market structure. In FX, the US dollar index firmed for the second straight day (+0.12%). Sterling initially traded c0.3% higher following PM May’s crucial win in the lower House that would give Parliament less control in Brexit talks, but gains dissipated later on with Sterling closing marginally lower. Meanwhile, WTI oil rose 1.25% to $65.71/bbl, in part as US crude stockpiles fell more than expected while Iran’s oil minister offered a compromise for a smaller increase in OPEC output ahead of Friday’s meeting.

Ahead of today’s BOE meeting, our economists note that the focus will be squarely on the minutes and in particular the tone and language used to assess last week’s mostly dismal data. In particular, the drop in wage growth (mom) for the first time in over a year and the sharp fall in industrial production should be a topic of discussion. On the one hand, poor output data to kick off Q2 could raise some concerns for the MPC regarding the strength of UK economy. On the other, stronger retail sales data may keep hawks optimistic of a bounce back in Q2. They go on to say that while it is still early days, the BoE could strike a less hawkish tone though the team expect them to largely look past this in anticipation of May data (the last data they will see before the August MPC meeting). In summary our economists expect no change in policy today but still think August is ‘live’ for an opportunistic rate hike (currently priced at a little over 25% probability for a hike).

It’s worth adding that later in the evening we’ll also have Governor Carney’s annual Mansion House speech, which in the past have been important market moving events for UK assets. You can find our economists’ summary here but like the MPC meeting, they expect Carney to also sound fairly cautious but retain the MPC’s tightening bias.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the May existing home sales dipped -0.4% mom to a slightly below market print of 5.43m (vs. 5.52m), in part due to the lack of
available housing inventory as the number of properties for sale fell 6.1% yoy and would be exhausted in 4 months at the current selling rate. Meanwhile the median house price was up 4.9% yoy to an all-time high of $265k in May. The 1Q current account deficit was smaller than expected at -$124.1bn (vs. -$129bn expected) while the prior month print was also upwardly revised.

In Europe, Germany’s May PPI was above market at 0.5% mom (vs. 0.4% expected), lifting annual inflation to 2.7%  yoy (vs. 2.5% expected). Elsewhere in the UK, the June CBI industrials trends survey showed orders improved 16pt mom to 13 (vs. 2 expected) – the highest reading since January.

Looking at the day ahead, the main focus will be the BoE meeting at midday. Governor Carney will hold a press conference and then later in the evening is due to make his Mansion House speech. Data releases on Thursday include June confidence indicators in France, May public sector net borrowing data in the UK, June confidence indicators for the Euro area, along with weekly initial jobless claims, June Philly Fed business outlook, May leading index and April FHFA house price index readings in the US. The ECB’s Villeroy and Nowotny are also scheduled to speak along with the Bundesbank’s Weidmann. Elsewhere the Fed’s 2018 bank stress test results will be released, while Thursday also marks the deadline for Greece’s debt relief deal.