If the global trade war was merely a race between the US and China whose stock market will slide into a bear market first, then Trump could take a victory lap today.

Also, if it was Peter Navarro’s intention to halt the market selloff with his last hour appearance on CNBC on Monday, in which he toned down investor concerns by saying that the US restrictions on foreign investment won’t be as sweeping as markets are anticipating, he succeeded, and this morning calm has returned to European markets which suffered their biggest one-day drop since the start of March, while US equity futures halted their slump and were stable in another relatively quiet session, trading fractionally in the red one day after the Dow Jones slid below its 200DMA for only the first time since June 2016, while Treasuries were flat even as the dollar regained all of yesterday losses after four days of declines.

Stocks stabilized despite escalating trade war rhetoric and fears that the tit-for-tat tariffs and protectionist measures lobbed between Trump and Xi could pass a point of no return.

Some commentators were surprised it took stocks this long to respond to what could potentially become a global trade war: “It’s taken a long time for the markets to feel like the trade commentary that’s been coming, particularly out of the U.S., had some meaning and so what we are seeing investors doing is finally taking a look at this and saying something might actually happen,” said Sheila Patel, CEO of Goldman Sachs Asset Management ’s international division, in a Bloomberg Television interview. “We’ve turned more cautious as have our investors.”

And while the markets were gripped by a furious selloff yesterday – at least until Navarro’s soothing appearance – stability has returned to Europe’s Stoxx 600 Index where modest gains were led by miners and utilities while earlier in Asian trading Japanese shares reversed early losses to finish slightly higher tracking the rebound in the USDJPY.

The mood was more subdued in China, where stocks entered an official bear market amid fears the country may not be prepared to wage a full-blown trade war with the US. Having closed on the verge of a -20% drop on Monday, the Shanghai Composite Index fell 0.5% at the close, taking its loss since a January high to more than 20%, officially entering its 4th bear market in 3 years. Airlines extended a rout as a slumping yuan boosted the cost of their dollar-denominated debt, while property developers also sank.

In addition to being down 20% from its January highs, the Shanghai Composite is also down 14% for the year, the worst performance among major benchmarks, while valuations have fallen to the lowest in more than two years.  The rout which comes three years after China’s equity bubble burst, has now wiped out $1.8 trillion in market cap since January’s high according to Bloomberg.

The escalating trade tensions have come at a bad time for the government in Beijing, with deleveraging efforts tightening liquidity and threatening to slow economic growth. The collapse in China’s credit collapse has also hurt sentiment as China’s Total Social Financing, the broadest measure of new credit, slumped in May to the lowest in almost two years.

Worse, there is little hope of a sharp rebound, as investors brace themselves for secondary effects from the rout: “Pessimism will keep growing as many companies are on the edge of margin calls and bond defaults,” said Sun Jianbo, China Vision Capital president in Beijing. “The benchmark Shanghai Composite Index will fall at least 10 percent from the current level.”

At the same time, China’s yuan continued its stealth devaluation,and weakened 0.3% against the dollar to a fresh six-month low, while the offshore exchange rate slid for a ninth day, its longest losing streak in more than four years, now down to levels last seen in December 2017.

To be sure, commentators were almost uniformly bearish: “I don’t see the bottom,” said Qian Qimin, a strategist at Shenwan Hongyuan Group Co. in Shanghai. “The weakening yuan is hurting companies with high levels of dollar debt.”

“Fundamentals in China are very bad,” said Hao Hong, chief strategist at Bocom International Holdings Co. “The market started to correct even before the trade war flared up.”

And while China has dramatically underperformed US markets this year, judging by the last two days, perhaps the global trade war contagion has finally washed ashore in America…

In FX, the dollar reversed an earlier drop, undoing all of yesterday’s losses and halting – for now – a streak of 4 consecutive declines.

Most G10 were rangebound in an otherwise quiet session as the latest bout of doom-and-gloom headlines lost traction in the markets; the euro retreated from its strongest level since last week’s ECB meeting as the dollar advanced after the London open; the yen rose a fourth day even as it trimmed gains on the back of the dollar’s rise

As Bloomberg notes, the pound fell to a day low after the Bank of England’s Jonathan Haskel, appointed to its Monetary Policy Committee to replace Ian McCafferty, said he sees risks if the bank raises rates too quickly.

In rates, the US 10Y yield traded within 2 bps of Monday’s 2.88% close, while Italy’s 10-year yield broke above 2.85%, triggering a selloff in BTP futures. Greek bonds bucked a selloff in European sovereign debt after a ratings upgrade.

In commodities, metals retreated, with zinc leading declines and gold trading near the weakest in six months. Brent crude rose above $75 per barrel after U.S. Energy Secretary Rick Perry suggested a planned production hike isn’t enough to stop a price spike. Gold continued to slump on the back of the stronger dollar, the decline accelerated after the precious metal recently hit its death cross.

Today’s calendar includes Conference Board Consumer Confidence while IHS Markit and Lennar are among companies reporting earnings.

Market Snapshot

• S&P 500 futures little changed at 2,722.50
• STOXX Europe 600 up 0.3% to 378.33
• MXAP down 0.1% to 167.07
• MXAPJ down 0.2% to 541.10
• Nikkei up 0.02% to 22,342.00
• Topix up 0.2% to 1,731.07
• Hang Seng Index down 0.3% to 28,881.40
• Shanghai Composite down 0.5% to 2,844.51
• Sensex up 0.3% to 35,559.48
• Australia S&P/ASX 200 down 0.2% to 6,197.61
• Kospi down 0.3% to 2,350.92
• German 10Y yield rose 1.7 bps to 0.344%
• Euro down 0.3% to $1.1674
• Italian 10Y yield rose 13.0 bps to 2.557%
• Spanish 10Y yield rose 3.3 bps to 1.383%
• Brent futures up 0.4% to $75.02/bbl
• Gold spot down 0.6% to $1,257.60
• U.S. Dollar Index up 0.3% to 94.52

Top Overnight News

• White House trade adviser Peter Navarro sought to ease investor concerns about U.S. trade policy, indicating that a Treasury Department report later this week on American restrictions on foreign investment won’t be as sweeping as markets are anticipating.
• Chinese President Xi Jinping told a group of mostly U.S. and European multinational CEOs on Thursday that China plans to strike back at U.S. trade measures, WSJ reports, citing unidentified people briefed on the Global CEO Council event
• Chinese stocks fell, with the benchmark gauge poised to enter a bear market, amid growing concern about the country’s resilience to a trade war with the U.S. Prominent academics have begun to question if China’s slowing, trade-dependent economy can withstand a sustained attack from Trump
• The gap between 2- and 10-year yields reached a fresh year-to-date low Monday, underscoring the Federal Reserve’s dilemma over what Chairman Jerome Powell has called the real perplexing question in the collapsing curve: how low long-term yields are
• Goldman Sachs Group Inc. said it’s reducing an overweight position in developing-nation currencies, preferring a more “defensive” stance as China and Europe warned the escalating trade war could trigger a global recession

Asian stocks were negative across the board on spill-over selling from the US where sentiment was dragged amid trade concerns following Trump’s trade threats over the weekend and potential investment restrictions on China. This was also exacerbated after Treasury Secretary Mnuchin suggested this was not just specific to China but to all countries trying to steal US technology, which raised fears of widespread action and saw the tech sector bear the brunt of the increased protectionist views. ASX 200 (-0.3%) and Nikkei 225 (-0.1%) traded lower with losses in Australia led by commodity related sectors amid trade uncertainty and OPEC+ overhang, while a firmer JPY weighed on the Japanese benchmark. Hang Seng (-0.2%) and Shanghai Comp. (-0.8%) underperformed their peers with China dampened by trade tensions, as well as a net liquidity drain by the PBoC. Finally, 10yr JGBs were uneventful with prices stuck within Monday’s tight range and after the 20yr auction failed to spur demand despite firmer results.

Top Asian News

• Mizuho’s Online Trading Platform Crashes as IPO Stock Debuts
• Erdogan’s Hot Election Economy Risks a Meltdown After His Win
• China Policy Banks Said to Tighten Shanty-Town Loan Approval
• Freeport Seeks Six Month Extension to Grasberg Mining Permit

European equities take a breather (Eurostoxx 50 +0.5%) as the major bourses crawl back up from the sell-off experienced in the previous session as US Trade Advisor Navarro provided relief to markets when he stated the US has no plans to impose investment restrictions (but will defend itself against threats). The sectors which experienced the heaviest losses yesterday rebound today with materials, oil and tech names recovering while utilities outperforms.  In stocks specifics, Eutelsat (+2.3%) said they do not intend to make an offer for London-based Inmarsat (-7.5%) following reports yesterday the French company was considering a possible bid for Inmarsat. Elsewhere, BMW’s (-1.9%) special representative Robertson said the company is not looking to actively relocate production out of the UK amid reports plants would have to be closed post-Brexit.

Top European News

• SNB’s Maechler Says Franc ‘Remains Highly Valued’
• Eutelsat Won’t Bid for Inmarsat, Clearing Way for EchoStar

In FX, major USD pairings remain relatively choppy and rangy, but the Greenback has regrouped after Monday’s US-China trade related downturn to trade firmer vs most G10 peers bar the Jpy (again). Hence, the DXY has nudged back above 94.400 from a marginal new pull-back low just under 94.200, awaiting more tariff and investment news in the absence of anything else market moving. JPY: As noted, still outperforming or resilient amidst latest global protectionist posturing, with 110.00 proving a formidable barrier and 109.50 protecting a deeper retracement and the 55 DMA at 109.39, all vs the Dollar. EUR/GBP: Both holding decent recovery gains vs the Usd from recent lows, but struggling to rebound further through big figure levels (1.1700 and 1.3300 respectively) that are in close proximity to technical resistance (ie 1.1721 Fib and 1.3308 DMA), and with hefty option expiries also in the mix (3 bn in Eur/Usd between 1.1650-90 tomorrow and 1.1 bn in Cable at 1.3250 today). Note also, the Eur/Gbp cross continues to respect its 200 DMA around 0.8821 and is hovering near 0.8800 amidst comments from pending member of the BoE’s MPC Haskel that featured some hawkish elements, but do not indicate that he will directly replace rate hike advocate McCafferty when he joins. In fact, the Pound has lost momentum even though the latter has underlined his stance with another call for no further delay on more tightening.

Commodities are relatively mixed with WTI (+0.2%) and Brent (+0.3%) higher as oil is supported from limited Libyan crude exports in June compared to May after oil exporting facilities seem to be removed out of the control of Libya’s NOC (the only entity permitted to sell the country’s crude oil). Elsewhere, in Canada, 360k bpd of production capacity has gone offline due to production issues at the Syncrude faciliy in Alberta, one of the largest oil sands facilities in the country. The outage is expected to tighten supplies in and potentially reduce flows into the Cushing, OK, hub. Production is not expected to return until through July. Meanwhile, the Iranian Oil Minister said that the OPEC agreement did not contain some increases members expected. Metals are lower on the day with gold (-0.8%), silver (-0.7%) and platinum (-0.9%) pressured by the firmer dollar. Copper dipped to near its weakest level in almost 3 months as risk appetite is dampened by the ongoing US-Sino trade tensions. Zinc fell to the lowest since early August 2017 as rising inventories subdue the metal.

Looking at the day ahead, the most significant data due out is the June CB consumer confidence reading while the June Richmond Fed manufacturing index and April S&P CoreLogic house prices index data are also due. Away from that the ECB’s Hansson and De Guindos, the BOE’s McCafferty, Haskel and Fried as well as the Fed’s Bostic and Kaplan will speak at separate events. Elsewhere, German Chancellor Merkel is also due to hold private talks with her coalition partners on refugee policy and euro area reform.

US Event Calendar

• 9am: S&P CoreLogic CS 20-City MoM SA, est. 0.4%, prior 0.53%; YoY NSA, est. 6.8%, prior 6.79%
• 10am: Richmond Fed Manufact. Index, est. 15, prior 16
• 10am: Conf. Board Consumer Confidence, est. 128, prior 128;

DB’s Jim Reid concludes the overnight wrap

Global financial markets wouldn’t be recording a particularly friendly message to Mr Trump at the moment as the Trade War escalations created a big risk off yesterday with the S&P 500 -1.37% but at least closing off the -2.04% lows an hour before the bell. Meanwhile the Dow was down for 9th time in last 10 sessions (-4.22% in total over that period), the DAX was down -2.46% – worst day since 8th February (around the vol shock) and is now off c6.4% from midmonth highs and down -5.01% YTD. Indeed virtually all Euro indices are negative YTD now. Vol spiked with the VIX and V2X both up c26% to 17.33 (intraday high 19.61) and 17.87 respectively. Meanwhile Credit was notably weaker  with Europe and US IG credit indices 2-3bp wider while iTraxx sub-financials widened 10.2bp with the weakness led by Italian banks.

Overnight in Asia markets are extending losses but have recovered from the session lows with the Nikkei (-0.08%), Kospi (-0.40%), Hang Seng (-0.22%) and Shanghai Comp. (-0.82%) all down but recovering. However if losses for China hold into close, it would represent a c20% decline from its January highs and c12% fall since mid-May. Meanwhile key Chinese airline stocks are down for the eighth straight day as concerns for higher costs from a lower  Yuan continue to build. This morning, the Yuan is down c0.2% to another fresh 6 month low.

Datawise, Japan’s May PPI services was steady mom and in line at 1% yoy. The story which we mentioned yesterday about the US Treasury preparing rules to potentially block Chinese investments in certain US industries through the implementation of an emergency law appeared to be the early trigger for yesterday’s sell off. It’s worth noting that we may know more about this story on Friday when Treasury Secretary Steven Mnuchin releases a report that supposedly recommends administering such a law according to Bloomberg, although the early suggestion is that it could be a two-tier approach and it’s not entirely clear if it’ll be specific to China. Indeed Mnuchin did call the report “fake news” in the context of it applying only to China although Politico also reported that “Trump appears to have sided with more aggressive actions”. Later in the US session, White House adviser Navarro sought to calm investors as he noted “there’s no plans to impose investment restrictions on any countries that are interfering in any way with our country….the whole idea that we’re putting investment restrictions on the world – please discount that”. He added that “all we’re doing here…is trying to defend our technology when it may be threatened”.

Anyway that’s one to watch. China’s Foreign ministry spokesman Geng noted the US should view Chinese commercial activities “objectively” while the Vice Premier Liu He warned that “China and the EU firmly oppose trade unilateralism and protectionism and think these actions may bring recession and turbulence to the global economy”. Meanwhile the WSJ reported that China’s President Xi met with a group of US / European multinational CEO last Thursday and told them that re trade measures, “if somebody hits you on the left cheek…in our culture, we punch back”, while also suggesting that for companies whose countries that are not involved in a trade dispute with China, then “if one door closes, another will open”. As a reminder our China and US economists believe the measures announced so far (10% tariff on $200bn) will have a fairly negligible impact on growth in China and the US (0.2% to 0.3% hit to GDP) but clearly this is an incredibly fluid situation and it’s hard to argue against the view that risks appear to be firmly placed to the downside given the rhetoric of late.

Indeed we’re starting to see more comments at a company level too and with Q2 earnings not far away this should become more of a talking point. Yesterday it was interesting to see Harley Davidson announce that they intend to move some production out of the US to ramp up production in international plants to serve the EU, which on the face of it surely goes against Trump’s intentions. Industrials (-1.52%) certainly took much of the brunt in the Dow yesterday although to be fair there were very few places to hide with only the utilities and consumer staples sectors finishing with a positive return. It was actually tech which struggled the most with the Nasdaq down as much as -2.80% before closing at -2.09% lower – the largest daily fall since April. The Stoxx 600 saw a full house of sectors closing in the red (-2.04%).

As far as other markets were concerned yesterday, you were probably kept busy if you were trading any Turkey assets post the election with an early rally giving way to a near full reversal for the Turkish Lira. Indeed the currency was as much as +3.06% stronger in the morning but was back to broadly flat a few hours later, while Turkey’s main equity markets closed down -1.92% and traded in an incredible 6.46% intraday range while local currency 10y bonds were 17bps higher in yield. Our EM economist believes that for Turkish assets to perform sustainably, markets would look for: (1) political clarity (in either way, i.e. full AKP or opposition win); (2) explicit commitment to a policy mix steering the Turkish economy towards a more sustainable macro path that would keep worries over external financing at bay; and (3) some tailwinds from the global backdrop. Our colleagues highlight that we have more or less ticked off the first prerequisite after the election outcome, yet any outcome short of satisfying the second domestic prerequisite and some support from global backdrop may lead to renewed market strain, despite CBT’s welcome support on TRY.

Elsewhere Italian BTPs were sharply higher in yield again yesterday with 2y and 10y yields finishing 12.5bps and 13.3bps higher respectively. This came following the second round of municipal voting in Italy where the League in particular put in a strong performance, notably beating the 5SM in Terni, as well as taking left-wing Tuscan cities.

Over in Germany, the latest Forsa poll showed Chancellor Merkel leading in support levels in the state of Bavaria compared to her coalition partner – CDU’s Soeder who has taken a stronger view to migration issues (Merkel 43%; Soeder 38%). Notably, 75% of those polled noted that there are other problems “that are just as important or more important” than migration.

Elsewhere in markets yesterday, core government bonds firmed slightly (UST 10y yields -1.5bp; Bunds -1bp) while Gilts reversed much of their underperformance from Friday (-2.8bp). The US 2s10s spread also nudged down 0.6bp to another fresh post GFC low (34.7bp). Meanwhile the oil complex gave back some of its gains from Friday, as Saudi Arabia signalled higher than expected oil output over the weekend (Brent -1.09%; WTI -0.73%).

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the June Dallas Fed manufacturing index jumped 9.7pt mom to 36.5 (vs. 24.9 expected) – the highest since February. In the details, pricing indices continued to firm with the prices paid index at the highest level since November 2011 while the prices received index rose to the highest level since July 2008. Meanwhile the May Chicago Fed activity index was below market at -0.15 (vs. 0.3 expected). Elsewhere, the May new homes sales grew the fastest in 6 months, up 6.7% to 689k (vs. 667k expected), while sales in the South increased at the fastest rate in c11 months (+18%). In Europe, Germany’s June IFO business climate index softened 0.5pt to an in line print of 101.8 while the IFO expectations index was above market at 98.6 (vs. 98 expected) and steady mom after having declined for the past six months in a row.

Looking at the day ahead, the UK’s June CBI retail sales report is due. In the US the most significant data due out is the June CB consumer confidence reading while the June Richmond Fed manufacturing index and April S&P CoreLogic house prices index data are also due. Away from that the ECB’s Hansson and De Guindos, the BOE’s McCafferty, Haskel and Fried as well as the Fed’s Bostic and Kaplan will speak at separate events. Elsewhere, German Chancellor Merkel is also due to hold private talks with her coalition partners on refugee policy and euro area reform.