Bulletin Headline summary from RanSquawk

• European equities are lower across the board (Eurostoxx 50 -0.6%) as trade tensions continue to weigh on sentiment
• DXY remains above 95.00 in European trade after an early bout of strength (now off best-levels)
• Looking ahead, highlights include German national CPI, US GDP (F), weekly jobs, EU summit, BoE’s Haldane, US 7yr note auction

US equity markets are looking to undo yesterday’s bearish reversal, with index futures higher this morning, reversing the trend from earlier markets where Asian stocks flirted with a 9 month low and Europe was mixed.

The MSCI Asia Pacific index started off the overnight session by declining for a fourth day, helping drag a gauge of developing-market stocks to the lowest level in almost a year, although at a slower pace as Chinese stocks sank deeper into a bear market, if at a more modest pace …

… helped by a modest stabilization in the recent Yuan rout. In the end, however, the Shanghai Composite Index fell 0.9%, dropping below 2800 for the first time since March 2016 and erasing an earlier gain of 0.5%, as sentiment remained subdued amid trade concerns.

Meanwhile, the Chinese yuan remained weak but the selloff was more controlled than in recent days, with the onshore yuan declining for the sixth session, its longest losing streak since June 2017, while the offshore yuan, or CNH, dropping for a record 11th day…

… rose as high as 6.64, the highest since November 2017, before reversing some losses. Property developers and airlines have been among the hardest hit by the yuan’s decline due to their large amounts of dollar debt. Like the offshore yuan, Air China has fallen for 11 straight days in Hong Kong, its longest ever losing streak. China Southern Airlines has plunged 35% in 10 days, while developer Country Garden Holdings is the worst performer on the Hang Seng Index this week.

“The news that China will crack down on property speculation in 30 cities hurt sentiment and put pressure on shares,” said Dai Ming, Shanghai-based fund manager with Hengsheng Asset Management Co. “It makes investors agitated whenever China tightens regulation over the property sector.”

The woes of real estate companies were further compounded Thursday after the government said it was starting a six-month campaign to root out violations in the housing market. That followed a tightening this week of loan approvals for redeveloping shanty-town projects and regulators urging companies to use proceeds from overseas bond sales to repay debt.

European stocks followed the decline across Asia as investors remained confused by America’s strategy toward Chinese trade and investment. Technology companies and carmakers were the biggest losers as the Stoxx Europe 600 Index dropped.

Futures on the S&P 500 pointed to a firmer open in the wake of Wednesday’s slump. West Texas Intermediate crude extended gains and China’s yuan headed for another drop. The British pound weakened, and Italian bonds slipped after a disappointing auction.

With equity markets relatively calm, it was all about the dollar, which remained above 95.00 in European trade after an early bout of strength, which has since reversed and the BBG dollar index dipped to session lows, with trade posturing remained a key focus for investor sentiment.

As a result of the stronger dollar and rising oil price, it was generally a bloodbath across EM FX, with the Indian rupee slumping to record low, while the Indonesian rupiah weakened to lowest since 2015. Kiwi slides to two-year low after dovish RBNZ statement.

Separately, the rout across the broader Emerging Markets FX space sent the MSCI EM FX index to the lowest level since November 2017.

USD strength has however somewhat abated as the session progresses with some commentators highlighting month-end rebalancing flows set to come into-play. Models suggest the USD could be sold amid equity re-balancing and thus provide some support for EURUSD which has thus far been able to maintain at 1.1500 handle. The Euro initially dipped then edged toward session highs against the dollar following Italian inflation data that modestly beat expectations, and may presage euro-zone CPI figures on Friday; the European summit is also later today. The USDJPY edged lower after gaining 0.2% Wednesday when White House adviser Larry Kudlow said the president wasn’t retreating on China and China growth was “not doing well.”

In terms of the latest state-of-play, trade uncertainties remain in focus after White House economic adviser Kudlow rejected the perception that Trump was softening his stance on China. Markets continued to weigh counter-measures from China with CNY devaluation increasingly becoming part of the narrative in the spat between the two nations with China also announcing adjustments of tariffs on some imports from other Asia-Pac nations.

In overnight central bank news, the RBNZ maintained the Official Cash Rate at 1.75% as unanimously expected, while it reiterated that it expects to keep rates at current expansionary level for considerable period and that the next direction is equally balanced between up and down. RBNZ added that global economic growth is likely to underpin demand for New Zealand products and services, but also stated that recent weaker GDP implies marginally more spare capacity in economy than anticipated and that CPI remains below target. Furthermore, the RBNZ later announced from 2019 onwards rate decisions will be announced after 1400 local time on a Wednesday and implemented the following day.

Ahead of today’s EU summit, German Interior Minister Seehofer said the CSU party is not seeking a break-up of the coalition government nor oust Chancellor Merkel, while there were also comments from German Finance Minister Scholz said he does not rule out possibility coalition can reach solution to migration issue. German Chancellor Merkel said on migration, “we are not where we want to be yet”; adding “we won’t be able to reach a common migration agreement at the June Summit”. She went on to say Germany must consider coalition of the willing on migrant policy if an agreement is not reached by the 28 EU members and the migrant policy may make or break the EU.

In geopolitics, South Korean and US Defence Chiefs agree UN Sanctions against North Korea will be in place until North Korea takes solid, irreversible measures towards denuclearisation.

10-year Treasury yields remained immune to any risk on sentiment, with the yield barely rising 1bp to 2.83%. The yield curve flattened in U.S. on Wednesday as Treasuries rallied following Kudlow’s comments.

West Texas Intermediate crude extended gains and China’s yuan headed for another drop. The British pound weakened, and Italian bonds slipped after a disappointing auction

Expected data include jobless claims and GDP. Accenture, McCormick, Shaw Communications, Walgreens Boots and Nike are among those reporting earnings.

Top Overnight News from Bloomberg

• The European Central Bank warned in its Economic Bulletin that global growth — already forecast to slow as many advanced economies approach capacity constraints — might take an additional hit from recent threats to trade
• Chancellor Angela Merkel said German-French proposals for the euro area won’t lead to a “debt union” and rejected unilateral measures to curb migration as she headed to a summit with other European Union leaders
• China is slowing approvals for offshore bonds and considering whether to ban short-dated issuance in dollars, according to people familiar with the matter, moves that would reduce financing options for the developers that have led record sales of such debt
• China’s expansion looks to have slowed further this month, underscoring the fragility of its economy as the next wave of tariffs in the trade dispute with the U.S. approaches
• The Indian rupee slumped to an all-time low as a resurgence in crude prices and the emerging-market selloff took a toll on the currency of the world’s third-biggest oil consumer
• United Co. Rusal is doing everything it can to avoid punitive U.S. restrictions due for full enforcement in October, according to the Russian aluminum giant’s acting Chief Executive Officer Evgeny Nikitin
• Treasury Secretary Steven Mnuchin won a battle inside the Trump administration over trade policy this week after a series of setbacks as he tries to ease economic tensions with China
• Russia’s Finance Ministry is on track for its biggest bond-issuance miss in 3 years as investors demand a premium to hold the nation’s debt after the toughest U.S. sanctions to date and a selloff in emerging markets
• U.K. Treasury said it was won over by Jonathan Haskel’s expertise in productivity and innovation when choosing the only man among the five candidates to join the Bank of England’s Monetary Policy Committee
• Hungarian forint tumbled to a record against the euro as the central bank maintained a dovish monetary policy seen as out of line with the rest of Europe

Market Snapshot

• S&P 500 futures little changed at 2,706.25
• STOXX Europe 600 down 0.2% to 379.38
• MXAP down 0.4% to 164.48
• MXAPJ down 0.6% to 530.47
• Nikkei down 0.01% to 22,270.39
• Topix down 0.3% to 1,727.00
• Hang Seng Index up 0.5% to 28,497.32
• Shanghai Composite down 0.9% to 2,786.90
• Sensex down 0.4% to 35,085.11
• Australia S&P/ASX 200 up 0.3% to 6,215.39
• Kospi down 1.2% to 2,314.24
• German 10Y yield fell 0.3 bps to 0.318%
• Euro down 0.1% to $1.1539
• Italian 10Y yield fell 7.8 bps to 2.541%
• Spanish 10Y yield unchanged at 1.356%
• Brent futures up 0.1% to $77.73/bbl
• Gold spot down 0.2% to $1,249.37
• U.S. Dollar Index little changed at 95.33

Asia equity markets traded somewhat indecisive following the headwinds from Wall St where all major indices wiped out intraday gains, as trade uncertainties remained in focus after White House economic adviser Kudlow rejected the perception that Trump was softening his stance on China. ASX 200 (+0.2%) and Nikkei 225 (Unch) were mixed with Australia kept afloat by commodity names as the energy sector outperformed on further gains in crude and with Santos underpinned after the board approved a new dividend policy which targets paying 10%-30% of free cash flow, while a firmer currency and disappointing Retail Sales data weighed on sentiment in Tokyo. Hang Seng (+0.4%) and Shanghai Comp. (+0.2%) were choppy on the trade uncertainties and following another net liquidity drain by the PBoC, although Chinese stocks later recovered amid pre-emptive measures in the face of a looming trade war including a further devaluation of the currency and adjustments of tariffs on some imports from other Asia-Pac nations.  Finally, 10yr JGBs traded flat amid the indecisive risk tone and amid weaker demand at today’s 2yr auction later, in which accepted prices also declined from prior.

Top Asian News

• Vietnam Forces Facebook and Google to Pick Privacy or Growth
• Rupee Hits Record Low as India Pays for Insatiable Oil Demand
• China Turmoil Batters Last Emerging-Market Haven as Rout Deepens
• China Digs In on Trade as Tariffs Near, Economy Deepens Slowdown

European equities are lower across the board (Eurostoxx 50 -0.6%) in recent trade with all major bourses in the red as trade tensions continue to weigh on sentiment. Consumer staples outperform while IT names lag behind (Europe’s tech sector -1.7%) amid NEC Director Kudlow rejecting the notion that US President Trump has softened his stance in regards to China on foreign investment, adding that the approach is aimed at “protecting our technological family jewels”. In terms of stocks specifics, Shire (+2.1%) shares are higher after Takeda shareholders rejected a proposal which opposed a deal with Shire.

Top European News

• ECB Publishes Methodology for New Euro Short-Term Interest Rate
• Takeda’s Shareholder Vote Signals Support for Shire Takeover
• BP to Buy U.K.’s Largest Electric Vehicle Charging Company
• Merkel Says Stronger Europe Is in Germany’s National Interest

In FX, the DXY remains above 95.00 in European trade after an early bout of strength (now off best-levels) with trade posturing remaining a key focus for investor sentiment. In terms of the latest state-of-play, trade uncertainties remain in focus after White House economic adviser Kudlow rejected the perception that Trump was softening his stance on China. Markets continue to weigh countermeasures from China with CNY devaluation increasingly becoming part of the narrative in the spat between the two nations with China also announcing adjustments of tariffs on some imports from other Asia-Pac nations. GBP has managed to recoup some of it’s initial losses against the USD (albeit still on a 1.3000 handle) after taking out stops to the downside at 1.3100 early doors in Europe before then running into support around 7-month lows at 1.3068. From a fundamental perspective, BoE’s Cunliffe did little to reveal his voting intentions at the August QIR and instead focused on household debt with a more medium-term focus. Narrative for the GBP could now shift towards Brexit ahead of the EU leaders summit; albeit expectations for any progress are particularly low with PM May set to get a slap on the wrist from her peers. USD/CAD is continuing to return to pre-Poloz levels amid USD softening after the BoC head took time to note the uncertainties facing the Canadian economy which saw pricing for a rate hike decline to beneath 50%. Large option expiries could come into play for CAD with 1.3bln in USD/CAD at 1.3345-50.

Commodities are mixed with choppy trade in gold (unch) after initially hitting 6-month lows as the yellow metal tracks the change in the dollar. WTI (+0.3%) and Brent (+0.1%) are back in positive territory, printing fresh highs for the day at USD 72.87/bbl and USD 77.93/bbl respectively. During the week, API and EIA crude inventories printed the largest drawdown since September 2016 with oil stocks dropping by nearly 10mln barrels. Traders will be mindful of halted oil exports in Libya following the country’s Eastern NOC’s instructions. Meanwhile, India’s oil ministry requested that refiners prepare for a ‘drastic reduction or zero’ imports from Iran from November, (according to sources) following US President Trump asking allies to quit importing Iranian oil. Libya’s Eastern NOC have instructed companies in the East of the nation to halt oil exports. Tankers attempting to enter East Libyan ports will be deemed illegal, a tanker due at Libya’s Zueitina port is said to have been turned away. (Newswires)

Looking at the day ahead, the big focus will likely be the EU Summit in Brussels where leaders are due to discuss migration policy, the EU budget, Brexit, security and reforming the economic and monetary union. In the US the third and final reading for Q1 GDP and Core PCE is due, as well as the June Kansas City Fed manufacturing activity index and latest weekly initial jobless claims data. The Fed’s Bullard and Bostic and the BOE’s Haldane and Bailey are due to speak. The Fed will also release part two of its annual bank stress test results.

US Event Calendar

• 8:30am: Initial Jobless Claims, est. 220,000, prior 218,000; Continuing Claims, est. 1.72m, prior 1.72m
• 8:30am: GDP Annualized QoQ, est. 2.2%, prior 2.2%;
  • Personal Consumption, est. 1.0%, prior 1.0%
  • Core PCE QoQ, prior 2.3%
• 9:45am: Bloomberg Consumer Comfort, prior 56.5
• 11am: Kansas City Fed Manf. Activity, est. 26, prior 29

DB’s Jim Reid concludes the overnight wrap

The flip-flopping (mostly flopping) of trade related headlines is enough to be driving markets crazy at the moment with sentiment swinging from more positive early on yesterday to negative by the close. By the end of play the S&P 500 ended -0.86% and was down -1.69% from intraday highs, while the Dow closed -0.68% and Nasdaq -1.54%. Within the S&P, financials (-1.26%) continued a run of now 13 consecutive losing days – the longest streak on record and  are now off -12.6% since the late January highs and -5.9% down from c3 weeks ago. The Energy sector was a bright spot (+1.34%) once again with Oil more than doing its part after WTI and Brent rose +3.16% and +1.72%, respectively, following supply outages in Libya and data which showed the biggest fall in US stockpiles since 2016. WTI hit YTD intraday highs yesterday in trading above $73.

In bonds, US 10y yields fell 5.1bps to 2.826% – the lowest since late May, while Bunds (-2bp) and Gilts (-5.8bp) also firmed amidst the risk off tone. The relentless flattening of the Treasury curve did continue however with 2s10s down another 2.2bps and to a new fresh post 2007 low of 32.1bps. Before the late US selloff, Europe indices were actually quick to wipe out early losses with the Stoxx 600 (+0.72%) and DAX (+0.93%) finishing higher on the back of a solid rally in European energy stocks (+2.63%).

With Oil back to the highest since December 2014 (+22% in YTD 2018) and bond yields generally heading towards the lower end of their recent ranges we’re set up for interesting European inflation numbers over the next two days. Certainly something to watch. Also watch for headlines from the important EU summit over the next couple of days. There a fuller preview below.

This morning in Asia, markets are trading mixed but have improved from a weaker opening with the Hang Seng (+0.58%) and Shanghai Comp. (+0.19%) rebounding while the Nikkei (-0.09%) and Kospi (-0.82%) are both down as
we type. The Chinese Yuan is weakening further (-0.1%) while the Yen is up marginally. Meanwhile after a 14 hour marathon session, the budget committee of the German Parliament has approved a €344bn budget plan for 2018 that will boost spending by 4% yoy without incurring any new debt. The budget will boost investments by €2.8bn to €39.8bn with additional funding for jobs in police / security forces. As for data, Japan’s May retail sales fell the most in c2 years and was below market at -1.7% mom (vs. -0.8%), which has led to annual growth of 0.6% yoy.

Back to yesterday and to detail the Trump trade turnaround seen. Initially markets were stronger following the news that President Trump intends to use the CFIUS as opposed to emergency law for passing legislation concerning the violation of intellectual property rights on US companies – the latest development in this seemingly never-ending  story. Significantly, this is seen as a softening stance of sorts for the President and one which puts him more in line with Treasury Secretary Steven Mnuchin. The Treasury Secretary also added yesterday that moves to strengthen  CFIUS “is not intended to target China” and that it was “unfortunate” that the market got mixed messages. Late in the European afternoon though Trump’s top economic advisor Larry Kudlow told Fox Business News that Trump is not softening his stance on China and that China’s reaction to trade demands from the US has not been satisfactory.

So as we look ahead to today, expect trade to be one of or if not, the big talking point at today’s EU summit which kicks off in Brussels and continues into Friday. There’s a laundry list of agenda points to get through for EU leaders with the not so insignificant talking points like Brexit, migration policy, the EU budget, security and the economic and monetary union amongst the big topics. The summit will be of particular significance for Merkel given domestic political tensions of late however yesterday the CDU and Social Democrats confirmed that no headway was made on migration talks in a meeting in Berlin which will only heighten the pressure on Merkel. Notably, the CSU Party leader Seehofer did reaffirm on ARD TV that “I know of nobody in my party who either wants to endanger the government….or bring down the Chancellor”. Meanwhile Italy PM Conte also confirmed that the EU draft on migration was dropped which should not be a great surprise given the limited headway made from Sunday’s mini summit.

As discussed above, it’s worth also keeping an eye on some of the regional flash European CPI reports today. Data for Italy will be out this morning with the consensus at +0.2% mom for June. Germany will be out later this afternoon with +0.2% mom also expected however base effects are expected to push the annual rate down to +2.1%.

Staying with data, US Q2 GDP prospects were given a boost yesterday after the May advance goods trade balance revealed a smaller than expected deficit of $64.8bn (vs. $69.0bn expected). That also compares to $67.3bn in April  and it means that the trade balance has now narrowed for three consecutive months to a 9 month high. The durable and capital goods orders data was a little more disappointing (durable ex transport -0.3% vs. +0.5% expected, core capex orders -0.1% mom vs. +0.3% expected) but upward revisions to prior months made that more of a wash. Pending home sales (-0.5% mom vs. +0.5% expected) were notably softer however. It’s worth noting that our US economists are forecasting Q2 GDP growth of 3.8%.

In Europe, the Euro area’s May M3 money supply was stronger than expected at 4% yoy (vs. 3.8%). After adjusting for sales and securitizations, growth in household loans was steady at 2.9% yoy for a sixth consecutive month but growth in non-financial corporate loans increased to a new cyclical high of 3.6% yoy. Meanwhile, France’s June consumer confidence index fell 2pt mom to a 21- month low of 97 (vs. 100 expected) while Italy’s overall June economic sentiment index rose 0.8pts to a three-month high of 105.4. Over in the UK, the June Nationwide house price index slowed less than expected with annual growth at 2% yoy (vs. 1.7% expected; 2.4% previous). Elsewhere, the CBI’s distributive trades survey indicated that retailers were continuing to see better conditions in Q2, with a net 32% of retailers reporting annual sales growth in June – the best result since last September.

Looking at the day ahead, the big focus will likely be the EU Summit in Brussels where leaders are due to discuss migration policy, the EU budget, Brexit, security and reforming the economic and monetary union. Datawise, it is looking like a busy day for inflation releases in Europe with preliminary June CPI reports due in Spain, Italy and Germany (2.1% yoy expected). We’ll also get June confidence indicators for the Euro area and the ECB’s economic bulletin, while in the US the third and final reading for Q1 GDP and Core PCE is due, as well as the June Kansas City Fed manufacturing activity index and latest weekly initial jobless claims data. The Fed’s Bullard and Bostic and the BOE’s Haldane and Bailey are due to speak. The Fed will also release part two of its annual bank stress test results.