Once again, the overnight session was all about China.

Shortly after the PBOC fixed the Yuan weaker by 340 pips to 6.6497, the weakest since August 25, 2017, a wave of selling hit the Chinese currency, sending the yuan past 6.7 to the dollar for the first time in a year, with the offshore CNH dropping as low as 6.7332, at which point the verbal interventions began.

Shortly after the rout sent the Yuan plunging, PBOC deputy governor and SAFE head, Pan Gongsheng, said that China has ample foreign reserves and many foreign exchange tools. He also said that Chinese policymakers are “confident” that the yuan can be kept basically steady, and that the PBOC has “rich experience and plenty of policy tools” to keep the currency stable.

His commentary however was not sufficient and he was followed by PBOC Governor Yi Gang himself, who using standard language to describe Beijing’s stance on the currency said China will “keep the yuan exchange rate basically stable at reasonable and balanced level.” According to Bloomberg, the two sets of comments were the first clear statement on the currency from the authorities since the yuan started weakening in mid-June.

“Recently the foreign exchange market has shown some volatility and we’re paying close attention to that,” Yi said in a statement posted on the central bank’s website, which was a response to questions from the China Securities Journal. He added that the fluctuation is “mainly due to factors such as a stronger dollar and external uncertainties, and there’s been some pro-cyclical behavior.” Said otherwise: don’t blame us.

Like Pan, Yi said that “China’s economic fundamentals are sound and financial risks are controllable” adding that the nation must stick with its foreign-exchange policy of “managing a floating currency exchange rate mechanism, which is based on market supply and demand and with reference to the basket of currencies.” The central bank will maintain a prudent, neutral policy stance, he assured markets.

In other words, the PBOC made it clear that the recent collapse in the Yuan was due to market forces, and not as a result of central bank intervention, a stance which would have very negative repercussions just days before the US is set to launch tariffs on $34BN worth of Chinese imports.

More importantly, Pan and Yi succeeded in arresting the Yuan’s collapse, which staged a dramatic turnaround, as the CNH rose by nearly 800 pips in the span of 4 hours, and the USDCNH dropped from a session high above 6.733 to just above 6.65. A failure to contain the tumble would have fed speculation that officials are effectively depreciating the currency to defend against the effects of trade tariffs.

While there were no clearly visible, heavy-handed actions in the market, there were some signs of mild, suspected intervention during morning trading on Tuesday. Some major Chinese banks sold the dollar after the yuan slid past 6.7 per greenback, a move that strengthened the currency above that level, according to four traders who asked not to be named.

Furthermore, in addition to purely verbal jawboning, there were also indications of “mild”, direct intervention during morning trading on Tuesday, when some major Chinese banks sold the dollar after the yuan slid past the 6.7 per greenback “redline” – which has traditionally market the central bank’s intervention threshold – a move that strengthened the currency above that level, Bloomberg reported citing four traders. Separate media reports noted that major state-owned Chinese banks were seen to be exchanging CNY for USD in forwards and then immediately offloading them into the spot market to support the domestic currency.

The FX intervention quickly funneled through to Chinese stocks, which after tumbling earlier in the morning session, not only recovered all losses, but closed modestly in the green.

Commenting on the sharp overnight reversal, Commerzbank analyst Zhou Hao told Bloomberg that “the PBOC is sending a verbal warning and intervention that the recent slump in the yuan was too quick” adding that “in the short term, the yuan could strengthen as traders take profit from the recent slide. But if the market ignores the PBOC and keeps pushing the yuan weaker quickly, the central bank may conduct heavy intervention to send a stronger signal.”

Not everyone was convinced that the yuan weakness is over: “while it does seem that PBOC is looking to smooth the move lower in the RMB, it doesn’t look like its ready to call time on the downtrend just yet,” said Stephen Gallo, head of European FX strategy at BMO. “My preference here is to continue looking for opportunities to get long of the 3M USDCNH forward in expectation of a move toward the 6.80 area heading further into the summer”

China’s fireworks affected the rest of global markets, with US futures initially sliding, dragged lower alongside the Yuan on concerns currency war had broken out in parallel with trade war, but then also recouping all losses as China’s verbal interventions kicked in.

Emerging-market shares also pared declines after the PBOC’s Gang said the country aimed to keep its currency at a stable and reasonable level.

After opening soft, Europe also posted a strong rebound, continuing its second day of gains, boosted by last night’s CDU/CSU agreement in immigration, also aided by China’s yuantrevention, with Telecom companies leading an advance in the Stoxx Europe 600 Index. As a reminder, on Monday, German Interior Minister/CSU leader Seehofer said he’ll stay on in the role and that he has a clear agreement on migration with Chancellor Merkel.

There were some fireworks, however, after miner Glencore Plc plunges, headed for its biggest decline in two years, after saying it has been subpoenaed by the U.S. DOJ, sending the stock lower by double digits..

In FX, the Bloomberg dollar index started off the session at the highs, only to fade as the Yuan rebounded from its own lows.

The dollar fell against all of its G-10 peers, with the biggest advance observed against the Swedish krona after the Riksbank’s hawkish rhetoric suggested a rate hike may be coming before the end of the year; the euro strengthened as political worries in Germany ebbed.

Treasuries were little changed after a three-day decline; benchmark yield reached a one-week high of 2.88%, while 10-year German bund yields rose 2bps to 0.32%.

In other overnight news, the Swedish Riksbank kept its rate unchanged at -0.50% as expected. Riksbank’s repo rate path is unchanged and slow repo rate rises will be initiated towards end of year. Ohlsson advocated for a rate hike, Floden and Ohlsson wanted a higher rate path. The executive board has decided to extend the mandate that facilitates rapid intervention on the foreign exchange market. Floden and Ohlsson had some reservations on this position.

In commodities, WTI broke above yesterday’s highs amid a softer USD and ongoing supply disruptions. WTI is currently trading at USD 74.61 and Brent is currently at USD 77.82. In a news thin morning the most significant news came from UAE’s ADNOC who said they have the ability to increase oil production by several hundred thousand barrels per day in coordination with OPEC and non-OPEC monitoring committee. This had no effect on oil prices, however. Gold is up 0.2% on the day as a weaker USD leads the yellow metal into positive territory. Copper has rebounded from a seven month low as trade tensions are pushing the construction material higher on supply concerns. Platinum is languishing around a near 10 year low as demand is sliding for the metal on Auto tariff concerns.

Looking ahead, highlights include, US factory orders, APIs and ECB’s Praet. US carmakers are expected to record another good sales month for June, while Facebook will be in focus as more federal agencies probe the company’s disclosures about user-data sharing.

Market Snapshot

• S&P 500 futures up 0.4% to 2,739.00
• STOXX Europe 600 up 0.7% to 379.21
• MXAP down 0.2% to 163.70
• MXAPJ down 0.2% to 533.79
• Nikkei down 0.1% to 21,785.54
• Topix down 0.2% to 1,692.80
• Hang Seng Index down 1.4% to 28,545.57
• Shanghai Composite up 0.4% to 2,786.89
• Sensex up 0.3% to 35,381.68
• Australia S&P/ASX 200 up 0.5% to 6,210.21
• Kospi up 0.05% to 2,272.76
• Brent Futures up 1.1% to $78.11/bbl
• Gold spot up 0.4% to $1,246.96
• U.S. Dollar Index down 0.2% to 94.67
• German 10Y yield rose 2.1 bps to 0.325%
• Euro up 0.2% to $1.1662
• Brent Futures up 0.4% to $77.59/bbl
• Italian 10Y yield fell 2.8 bps to 2.385%
• Spanish 10Y yield rose 0.4 bps to 1.302%

Top Overnight News from Bloomberg

• China will keep the currency stable at an equilibrium level, and the central bank will maintain a prudent, neutral policy stance, according to People’s Bank of China Governor Yi Gang
• Glencore Plc, the world’s biggest commodity trader, tumbled the most in two years as its African troubles escalated dramatically after U.S. authorities demanded documents relating to possible corruption and money laundering.
• President Donald Trump’s global trade war is posing a growing risk to the kind of robust job gains that the U.S. probably enjoyed again in June — labor data due Friday cover the first weeks since the U.S. imposed steel and aluminum tariffs on some of its largest trading partners
• U.K. companies are at “breaking point” over the lack of clarity on Brexit, and are slowing down their investments as they await answers to key questions, one of the country’s main business lobby groups said
• Global foreign-exchange reserve managers cut yen holdings by the most since 2008 in 1Q as the incentive for holding Japan’s currency decreased
• German Chancellor Angela Merkel halted the immediate threat of a government breakup in Europe’s biggest economy, crafting a plan to tighten migration and keep her Bavarian sister party in the fold
• Sweden’s central bank stuck to a plan to start lifting interest rates toward the end of the year as it nears victory in an all-out effort over the past four years to stabilize inflation around its target

Asian stocks traded mixed as the region failed to take full advantage of the tail wind from the tech-led recovery on Wall St and early bargain hunting following the prior day’s hefty declines. ASX 200 (+0.5%) and Nikkei 225 (-0.1%) both  opened higher with defensive sectors leading the upside in Australia, although sentiment in Tokyo later deteriorated alongside flows into JPY as markets were startled by a continued currency devaluation by the PBoC. Shanghai Comp. (+0.4%) was initially negative after PBoC inaction resulted to a CNY 150bln drain from the interbank market, but went positive after the PBoC chief said they are to keep the Yuan basically stable. The Hang Seng (-1.4%) was the worst performer with intraday losses of over 3%, as it reacted to the prior day’s declines during its market closure in which the benchmark indices in Japan, mainland China and South Korea all slumped over 2%. In addition, money market rates in Hong Kong continued to surge and China Mobile was another fall-out from the ongoing US-China trade tensions with the Co. slipping after the US Commerce Department and NTIA recommended to deny the telco’s licence request to enter the US the market. Finally, 10yr JGBs were choppy alongside the flimsy risk sentiment in Japan, but with prices kept within a tight range amid a mixed 10yr auction.

Top Asian News

• PBOC Pushes Back Against Yuan Slide, Reissues Stability Pledge
• Xi Faces Hurdles Bashing American Brands in a Trump Trade War
• As $55 Billion Rout Hits Manila Stocks, Locals Step In
• China’s Stocks Stabilize With Yuan Amid Signs of Intervention

Europe bourses are higher across the board (Euro Stoxx 50 +1.2%), following on from Wall St. with the risk tone also improved following Germany’s CSU/CDU policy agreement over immigration reduces worries of political upheaval in the country. FTSE 100 (+0.3%) underperforms amid a firmer GBP and weight being placed on Glencore (-10%) shares after being subpoena by the DoJ over their operations as of 2007 in Nigeria, DR Congo and Venezuela. UK banking names are also underperforming following FT reports that PPI expenditures could increase by “billions” after legislation passed overnight. Commerzbank (+2.2%) has reached an agreement with SocGen to sell its Equity & Commodities business (EMC) to them. Terms were undisclosed, however, this division created a revenue of ~ EUR 380mln in 2017. Allianz (+2.9%) are up after the co. has announced a 41.5mln share buyback with a value of up to USD 1.16bln.

Top European News

• Riksbank Sticks to Stimulus Exit Plan as Inflation Lends Support
• U.K. Construction Growth Unexpectedly Climbs to Seven- Month High
• Deutsche Bank Managing Directors Thomson, Lie Are Said to Leave
• Equinor Greenlights $958 Million Project to Boost Troll Gas

In FX,it was all about the Chinese Yuan, and to a lesser extent the Swedish Krona:  Firm rebounds for the CNY and CNH after further depreciation following another soft fix on a combination of support from Chinese banks and PBoC comments downplaying official devaluation speculation. The onshore unit still closed at multi-month lows vs the Usd, but offshore Yuan managed to reverse earlier losses back above 6.7000. Elsewhere, the Sek has strengthened across the board on hawkish dissent against rate guidance reiterating tightening around the end of 2018, as Floden and Ohlsson both preferred earlier hikes (and registered objections vs extending the direct FX intervention mandate as well). Eur/Sek has retreated to almost 10.3100 levels from close to 10.4400 at one stage. EUR – Firmer vs the Dollar having dipped below 1.1600 yesterday, as Germany’s CSU-CDU parties reach a compromise agreement on migration, but now encountering some technical headwinds around the 30 DMA (1.1666). CAD/MXN – Both benefiting from the latest Usd downturn (DXY back under 95.000 and eyeing support above 94.500 again), with the Loonie rallying off 1.3200 lows and Peso recovering even more lost ground (Usd/Mxn retreating through 20.000) on positive initial exchanges between AMLO and US President Trump plus an advisor to the former suggesting renewed impetus for NAFTA talks.

In commodities, WTI has broken above yesterday’s highs amid a softer USD and ongoing supply disruptions. WTI is currently trading at USD 74.61 and Brent is currently at USD 77.82. In a news thin morning the most significant news came from UAE’s ADNOC who said they have the ability to increase oil production by several hundred thousand barrels per day in coordination with OPEC and non-OPEC monitoring committee. This had no effect on oil prices, however. Gold is up 0.2% on the day as a weaker USD leads the yellow metal into positive territory. Copper has rebounded from a seven month low as trade tensions are pushing the construction material higher on supply concerns. Platinum is languishing around a near 10 year low as demand is sliding for the metal on Auto tariff concerns.

Looking at the day ahead, we will get May factory orders and also final reads for May durable goods and consumer goods orders. Later in the evening June vehicle sales data will be released. Aside from the data, the ECB’s Peter Praet will speak at a Romanian Central Bank conference in Bucharest while the European Council President Donald Tusk and European Commission President Jean-Claude Juncker will address the European Parliament.

US Event Calendar

• 10am: Factory Orders, est. 0.0%, prior -0.8%; Factory Orders Ex Trans, prior 0.4%
• 10am: Durable Goods Orders, est. -0.5%, prior -0.6%; Durables Ex Transportation, prior -0.3%
• 10am: Cap Goods Orders Nondef Ex Air, prior -0.2%; Cap Goods Ship Nondef Ex Air, prior -0.1%
• Wards Total Vehicle Sales, est. 17m, prior 16.8m

DB’s Jim Reid concludes the overnight wrap

There was an article on Bloomberg yesterday suggesting that with all the regulatory changes in research there was a risk of analysts sensationalising reports unnecessarily to try stand out. No danger of that here. In other news ahead of their last 16 game tonight there is absolutely no doubt in our minds now that England will definitely win the World Cup.

Ahead of the big game for us here in England, and the half day close in the US today ahead of Wednesday’s holiday, Q3 didn’t get off to an auspicious start in global markets as a notable late day sell-off in Asia rocked the European session. However the US clawed back early losses to see the S&P 500 close +0.31% higher and +1.03% above the morning lows.

Given the sell-off accelerated in the last hour of trading in Asia (and in China in particular) yesterday morning it seems prudent to start there this morning. As a reminder, the Chinese Yuan weakened (-0.71%) for the 10th day out of 12 sessions yesterday to the lowest in 11 months and has been one of the worst performers in the EM space since 14 June (-4.2%). This morning, the Yuan has fallen c0.5% and past the psychological barrier of 6.70, having traded as low as 6.73. There’s lots of market chatter about policy intervention so it’s worth watching for spikes. Meanwhile, markets in Asia are trading lower even with the turnaround in the US with the Nikkei (-0.85%), Kospi (-0.58%), Shanghai Comp. (-1.27%) and Hang Seng (-2.73%) all down, with the latter partly playing catch up as trading resumed post a holiday Monday. Datawise, Reuters noted that Chinese customs said China’s exports to the US rose 5.4% yoy for the six months YTD vs.  19.3% for the same period in 2017, but did not provide more details for the month of June.

The tone in Europe may be improved this morning though by news last night that Mrs Merkel has defused the potential destabilisation to her governing coalition. The CSU Party leader Seehofer will stay on as Germany’s Interior Minister after reaching “an agreement on how we can prevent illegal immigration….” with Merkel, which involves setting holding centers for refugees at the German border. Notably the deal does require the approval of Merkel’s third coalition partner – the SPD, where they’ve rejected a similar proposal back in 2015. The euro is trading c0.1% lower this morning but did spike slightly higher late last night.

Although markets were jittery for most of yesterday because of trade fears, there were not much material news flow. In fact on the potential of the US leaving the WTO, both President Trump and Commerce Secretary Ross have downplayed this possibility, while Mr Ross noted the “WTO knows some reforms are needed….but I think it’s a little premature to talk about simply withdrawing from it”. Meanwhile DB’s Peter Hooper and team noted the recent intensification of global trade tensions imply that the probability of trade conflict has risen to levels that could result in significant pain in financial markets and a sizable drop in output and employment. They noted that higher tariffs on $250bn worth of Chinese goods and $350bn worth of automotive products could reduce imports and lift the US GDP by c0.5ppt. However, this gain is likely to be swamped by various negative effects if the tariffs are actually implemented. These include: i) -0.4ppt hit to US GDP from higher prices and lower consumer spending, ii) -0.55ppt on US GDP from retaliatory tariffs from China and the EU as it depresses exports and iii) -1ppt hit to GDP from the confidence hit to businesses and households, particularly the flow on drags on investments and consumption spending. Refer to their note for a breakdown of how trade actions could impact the macro economy.

As for markets yesterday. European equities were all lower, weighed down by materials stocks, a negative lead from Asia as well as ongoing trade tensions as the EU warned if the US imposes import tariffs on its cars, it could lead to counter-measures by its trading partners on $294bn worth of US exports. Across the region, the Stoxx 600 (-0.84%), DAX (-0.55%) and FTSE (-1.17%) all closed down. Over in the US, the S&P reversed losses to close +0.31% higher on lower than normal trading volumes, partly boosted by stronger tech stocks and ISM/ PMI readings. Notably, DB’s Alan Ruskin flagged the US/China equity ratio ‘pain trade’ – the Shanghai comp/SPX has now broken the 2014 low. He believes that as long as this ratio is heading down, it will likely encourage views that China is under more duress than the US to compromise on trade issues.

Meanwhile government bonds remain fairly muted with 10y bond yields for peripherals down c3bp while Gilts (-2.5bp) and OATs (-0.8%) also closed firmer Notably, 10y yields on Italian BTPs rallied back c13bp intraday while Bunds (+0.2bp) and treasuries (+1.1bp) slightly underperformed with the latter weighed down by the stronger ISM print. In commodities, LME base metals tumbled c2% (Nickel -2.35%; Aluminium -1.65%; Copper -1.55%) while Gold also retreated -0.84%.  Elsewhere, oil prices fell for the first time in five days, although Brent (-2.44%) did weakened more than WTI (-0.28%).

The main highlight datawise yesterday was the confirmation of the final June manufacturing PMI/ISM readings around the world. The biggest surprise came from the US where the ISM manufacturing printed at a stronger than expected 60.2 (vs. 58.5 expected), with the reading also up 1.5pts from May. It is also now back to testing that 60.8 high mark made back in February which still remains the highest reading since 2004. The supplier deliveries component (68.2 from 62.0) rose to the highest since May 2004 and is evidence of the strain on the supply side from tariffs and could be slightly elevating the headline number artificially. However most of the report was strong and also featured another bumper and stronger than expected prices paid reading at 76.8 (vs. 75.0 expected), albeit moderating slightly from the 79.5 in May. Notably the attached commentary for the survey data featured an unsurprising amount of chatter about tariffs. Indeed the text highlighted that “Demand remains robust, but the nation’s employment and resources and supply chains continue to struggle.  Respondents are overwhelmingly concerned about how tariff related activity is and will continue to affect their business”. US treasuries went on a round trip from around 2.86% to 2.82% and then back to 2.87% after the ISM.

Meanwhile there wasn’t much in the way of surprises from the final PMIs in Europe. The final Eurozone manufacturing reading was confirmed at 54.9 compared to the 55.0 flash print. As a reminder May was 55.5 and this still means we’ve seen six consecutive monthly declines, or one for every month this year, after the PMI rose in 11 out of 12 months in 2017. Germany was confirmed at 55.9 (unchanged versus the flash) although France was revised down 0.6pts to 52.5. More interestingly, Italy printed at a stronger than expected 53.3 (vs. 52.5) compared to 52.7 in May, with the sector showing reasonable resilience in the face of domestic political woes. Spain on the other hand was a touch softer than expected (53.4 vs. 53.6 expected) while in the UK the reading was slightly above market at 54.4 (vs. 54.0 expected), albeit relatively unchanged from last month.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. The Euro area’s May unemployment rate was lower than expected at 8.4% (vs. 8.5% expected), which is the lowest print since December 2008. Meanwhile, Italy’s May unemployment reading was also below consensus at 10.7% (vs. 11.1% expected).

Looking at the day ahead, the May YTD budget balance in France, June construction PMI in the UK and May retail sales data for the Eurozone are due this morning. In the US we will get May factory orders and also final reads for May durable goods and consumer goods orders. Later in the evening June vehicle sales data will be released. Aside from the data, the ECB’s Peter Praet will speak at a Romanian Central Bank conference in Bucharest while the European Council President Donald Tusk and European Commission President Jean-Claude Juncker will address the European Parliament.