Global stock markets were firmer on Wednesday, supported by Tuesday’s euphoric tone when not even the Netflix debacle could hold back the Nasdaq from hitting a new all time high, as a positive assessment of the US economy from Fed chair Powell boosted the dollar, lifted bond yields and and hit raw materials and emerging-market currencies, while pummeling gold to a one-year trough.

On Tuesday, Powell “had a little something for everyone“, cementing the rate hike path while preserving his options by saying gradual tightening would continue “for now.” The Fed chairman offered few surprises, which allowed markets to focus on earnings. Day two of Powell’s testimony is later today, this time in the House.

“Powell’s testimony to the U.S. Senate yesterday gave currency markets a much-needed reality check,” DBS Group strategists Philip Wee and Eugene Leow write in note. “Looking past the trade war worries meant a stronger U.S. dollar, not vice versa.”

“It basically means another rate hike in September and most likely another one after that in December,” said Rabobank market economist Stefan Koopman. “He couldn’t stay away obviously from the potential threats of protectionism, but he is still waiting to see how everything pans out so he wasn’t really concerned about it – and that is giving the market another boost.”

Stocks in Europe climbed, Asian stocks were mixed, while S&P 500 futures initially edged higher only to hug the unchanged line later in the day, although if yesterday’s action is any indication, expect another burst higher out of the gate, now that 2,800 in the S&P is in the rearview mirror and the next resistance level for the S&P is the January 26 all time high of 2,873. In overnight trading, Google parent Alphabet fell in pre-market trading as it was said to be facing an imminent $5 billion fine, curbing Nasdaq futures.

“The S&P has finally broken to the upside through 2,800 out of the range that has confined it for most of this year, and this could now be the start of a grind higher in global equities over the next few weeks,” wrote analysts at JPMorgan in a note.

Shares in Europe advanced after a mixed session in Asia, as carmakers were boosted by the prospect of negotiations to reduce tariffs, while technology shares were spurred by an apparent turnaround at Ericsson AB and forecast of greater profitability at chipmaker ASML Holding NV, as well as yesterday’s Nasdaq gains. European auto names are supported by reports Europe is exploring dialogue with US President Trump regarding a reduction in US auto tariffs. Earnings have been dominating the morning with the likes of Novartis (+2.2%), Akzo Nobel (+0.9%), UbiSoft (+6.3%) reporting. BHP (+3.0%) currently stands at the top of the FTSE 100 after reporting positive Q2 production. Elsewhere, Italian banks fell to the foot of the Italian benchmark after UK clearing house LCH raise the margin call on BTPs.

Earlier, Asian stocks started off on the front foot, with the MSCI Asia Pacific index advancing after Nikkei gained as much as 0.7% and Chinese stocks rise for first time in four days. However, the relentless rise in the dollar spooked the Yuan and the Chinese currency tumbled, with the USDCNH rising above 6.75, the highest level since last July, and prompting fresh questions if the PBOC “redline” which was drawn earlier this month when the currency slid below 6.70, has been long forgotten and whether Beijing will allow the Yuan to depreciate much further.

The continued weakness in the Yuan prevented Chinese stocks from rebounding, and the Shanghai Composite slumped again, closing near session lows.

In FX, the dollar rose for the second day against all of its G-10 peers after Powell’s upbeat economic assessment on the U.S. economy and that the Fed will continue to gradually raise interest rates “for now.” The Bloomberg Dollar Spot Index rose 0.4%, climbing to a two-week high ahead of day two of Powell’s testimony, this time before the House.

Meanwhile, the pound tumbled to a 10-month low against the dollar and gilt futures rallied after U.K. CPI data fell short of consensus, with BOE rate hike odds sliding to ~74% for Aug. meeting, from ~83% ahead of the print. Meanwhile, the yen briefly weakened 113 against the dollar for first time since January as Bloomberg dollar index remains bid following Powell testimony.

Treasuries held steady; core euro-area bonds edged higher while peripheral bonds slipped even as Germany sold 30- year bunds.

In other overnight news, Fed’s George (Non-Voter, Hawk) stated the US economy is in excellent condition and that monetary policy remains accommodative. Fed’s George also stated that gradual rate hikes are required and uncertainty remains regarding speed and distance of Fed rate hikes. Elsewhere, Alphabet’s Google are to be fined €4.3bln by the EU regarding Android, according to reports, pressuring the Nasdaq.

Oil declined after API reported a surprise increase in U.S. crude inventories. Commodities have been subdued, in tandem with overnight price action, WTI flirts around USD 67.50/bbl while Brent is below USD 71.50/bbl, weighed on by last night’s API’s printed a surprise build in crude inventories. Metals are lower today (Gold -0.4%), pressured by the firmer USD. Elsewhere, while copper’s attempts to nurse losses were somewhat futile alongside broad subdued tone across the complex. US API Weekly Crude Stocks (9 Jul) +0.629M vs. Exp. -3.600M (Prev. -6.795M)

Looking ahead, highlights include US building permits, housing starts, DoEs and Fed’s Powel; scheduled earnings include IBM, Morgan Stanley, Abbott and American Express.

Market Snapshot

• S&P 500 futures up 0.1% to 2,813.50
• STOXX Europe 600 up 0.5% to 386.74
• MXAP down 0.02% to 164.98
• MXAPJ down 0.1% to 535.21
• Nikkei up 0.4% to 22,794.19
• Topix up 0.4% to 1,751.21
• Hang Seng Index down 0.2% to 28,117.42
• Shanghai Composite down 0.4% to 2,787.26
• Sensex down 0.5% to 36,351.67
• Australia S&P/ASX 200 up 0.7% to 6,245.11
• Kospi down 0.3% to 2,290.11
• German 10Y yield fell 0.7 bps to 0.339%
• Euro down 0.4% to $1.1610
• Brent Futures down 1% to $71.41/bbl
• Italian 10Y yield fell 10.8 bps to 2.204%
• Spanish 10Y yield rose 0.4 bps to 1.254%
• Gold spot down 0.4% to $1,223.21
• U.S. Dollar Index up 0.3% to 95.25

Top Overnight News from Bloomberg

• Google will be fined around 4.3 billion euros ($5 billion) by the European Union over Android apps on Wednesday, setting a new record for antitrust penalties, according to a person familiar with the EU decision
• Jerome Powell said in his semi-annual testimony Tuesday the central bank’s plan to “keep gradually raising the federal funds rate” with the caveat “for now”. He added protectionism can hurt economic growth and potentially undermine wages,
• U.K. govt whips’ tactics are under attack after PM May wins knife-edge vote, saving her from what would have been a catastrophic Brexit defeat. EU govts will probably resist further inflaming the U.K.’s Brexit turmoil when they meet on Friday
• The Trump administration plans to open an investigation into whether uranium imports are harming national security, a move that could lead to tariffs on foreign shipments of the metal, said three people familiar with the matter.
• European Commission President Jean-Claude Juncker will meet President Donald Trump in Washington next week to explore the possibility of starting negotiations on reducing car tariffs for several key trade partners, according to two people with knowledge of the plans.
• President Donald Trump said Tuesday he accepts the conclusion by U.S. intelligence agencies that Russia interfered in the U.S. presidential election, marking a rare retreat from comments just a day earlier amid a backlash from Republicans.
• European Commission President Jean-Claude Juncker will meet President Donald Trump in Washington next week to explore the possibility of starting negotiations on reducing car tariffs for several key trade partners, according to two people with knowledge of the plans
• U.K. inflation unexpectedly held at 2.4 percent last month as cheaper clothing and computer games offset the rising cost of filling up a vehicle

Asian equity markets traded with a positive tone as momentum rolled over from US where all majors gained and the Nasdaq posted fresh record highs on tech outperformance, with sentiment also underpinned after upbeat comments from Fed Chair Powell. ASX 200 (+0.7%) and Nikkei 225 (+0.4%) were higher with Australia led by miners including BHP after  the industry giant posted strong Q4 iron ore production numbers, while Japanese exporters were lifted by favourable currency moves in which USD/JPY briefly rose above 113.00 for the first time since January. Hang Seng (-0.2%) and Shanghai Comp. (-0.4%) bucked the trend despite the PBoC conducting a 3rd consecutive daily net injection via reverse repos with losses spurred by continued weakness in blue chip energy names, while Xiaomi shares surged amid reports HKEX agreed with mainland exchanges on changes to Stock Connect inclusions which will ultimately allow shares with weighted voting rights to be included for Southbound trade. Finally, 10yr JGBs were uneventful as focus was centred on riskier assets, and after an enhanced liquidity auction for longer bonds also failed to spur price action despite a higher b/c than previous.

Top Asian News

• India Stocks Erase Gains as Government Gets No Confidence Motion
• Japan’s Summer Power Prices Surge to 4-Year High Amid Heat
• Taiwan Stocks Resilient to Trade Concern as Locals Step Up
• Topix Posts Best Four-Day Advance Since February as Yen Dips

European equities kicked off the session on an optimistic note (Eurostoxx 50 +0.5%) as the tech sector is boosted by NASDAQ’s record close and earnings from ASML (+6.4%), dragging counterparts higher in sympathy. European auto names are supported by reports Europe is exploring dialogue with US President Trump regarding a reduction in US auto tariffs. Earnings have been dominating the morning with the likes of Novartis (+2.2%), Akzo Nobel (+0.9%), UbiSoft (+6.3%) reporting. BHP (+3.0%) currently stands at the top of the FTSE 100 after reporting positive Q2 production. Elsewhere, Italian banks fell to the foot of the Italian benchmark after UK clearing house LCH raise the margin call on BTPs.

Top European News

• U.K.’s May Pays Price of Trust to Survive in Tory Brexit War
• Danske’s Laundering Headache and Weak Profit Spark Selloff
• Deutsche Bank Raises European Miners to Overweight on China Bet
• StanChart Private Equity to Buy Stake in TBO Group From Naspers

In FX, the DXY was back above 95.000 in wake of supportive vibes from Fed Chair Powell on Tuesday, but the broad Usd also benefiting from the demise of rival currencies amidst further posturing and positioning in global trade wars. Note, the CNY and CNH have both fallen further below levels that previously sparked official intervention, partly by design via PBoC fixing. GBP: No let-up in the negatives for the Pound as broadly softer than forecast headline and pipeline UK inflation prints compound losses made on the back of ongoing political instability and Brexit divisions within Whitehall. Cable has now lost hold of another big figure (1.3100) and tested bids just ahead of 1.3000 before some consolidation/short covering (with perhaps circa 2 bn option expiries at the strike for tomorrow also being defended), while Eur/Gbp has breached psychological resistance at 0.8900. EUR – Also a victim of the buoyant Greenback and divergent yield/CB trends, with the single currency seriously testing 1.1600 bids after dipping through near term technical support around 1.1613.

Commodities are mostly subdued, in tandem with overnight price action, WTI flirts around USD 67.50/bbl while Brent is below USD 71.50/bbl, weighed on by last night’s API’s printed a surprise build in crude inventories. Metals are lower today (Gold -0.4%), pressured by the firmer USD. Elsewhere, while copper’s attempts to nurse losses were somewhat futile alongside broad subdued tone across the complex. US API Weekly Crude Stocks (9 Jul) +0.629M vs. Exp. -3.600M (Prev. -6.795M) Citi raised long-term copper price forecast to USD 7500/ton from USD 7000/ton, while it stated that trade war is a long-term buying opportunity for copper and said to prepare for a decade of copper on steroids.

Looking at the day ahead, in the US, June housing starts and building permits data is due before the Fed’s Beige Book in the evening. Morgan Stanley, IBM and eBay will also be reporting their Q2 earnings. Fed Chair Powell will also appear  before the House Financial Services Committee although that should largely be a copy and paste of yesterday.

US Event Calendar

• 7am: MBA Mortgage Applications, prior 2.5%
• 8:30am: Housing Starts, est. 1.32m, prior 1.35m;
  • Building Permits, est. 1.33m, prior 1.3m;
• 10am: Fed Chairman Powell Appears Before House Panel
• 2pm: U.S. Federal Reserve Releases Beige Book

DB’s Craig Nicol concludes the overnight wrap

Yesterday in Washington Jerome Powell was busy flying the flag for the Fed with his semi-annual testimony in front of the Senate but it certainly lacked the drama of a mountain top finish. The prepared text was pretty much in line with expectations with one exception being the inclusion of “for now” in the sentence “the FOMC believes that, for now, the best way forward is to keep gradually raising the federal funds rate”. That was a new shift in tone and whilst the initial read-through was that it might be dovish, you could probably also make an argument both ways in that it could also mean accelerating tightening should there be obvious signs of overheating. So perhaps just an optionality play.

In terms of the Q&A much of the focus was on what the Fed Chair may or may not say about trade tensions and the flattening yield curve. On the former Powell said that there was no evidence of trade tensions coming through the data but that the Fed is hearing a “rising chorus of concerns”. That wasn’t particularly new information compared to what we’ve heard in the past from Powell. On the yield curve, Powell highlighted that what really matters is where the neutral rate sits. DB’s Matthew Luzzetti believes that while he didn’t say so explicitly, this would seem to argue for focusing on yield curve measures that may reflect expectations for neutral more accurately and are less distorted by other factors. Powell also mentioned that there are many differing views within the Committee on how concerned to be about the flattening curve so it’s certainly a topic of debate internally. Speaking at a separate event, the Fed’s Esther George sees the US economy in “excellent” shape but refrained from specific rates guidance as she noted “gradual further increases in our rates will be necessary to return policy to a neutral stance, although there is considerable uncertainty about exactly how far or fast we need to go”.

If the market was hoping for a bit of volatility in rates while Powell was speaking, well it will be fairly disappointed with the high to low range a paltry 2.1bps for the 10y Treasury. They eventually finished +0.2bps higher at 2.861% while 2y yields finished +1.9bps higher, meaning the curve flattened to a new low of 24bps. The US dollar index rallied pretty much from mid-morning however, closing +0.50%, while in Europe bond markets were for the most part a bit stronger (10y Bunds -1.8bps to 0.343%) with BTPs standing out after 10y yields fell -10.9bp and below  2.500% for the first time since the end of May.

At the other end of the risk spectrum it looked like equity markets might be in for a rough day after that disappointing Netflix earnings report and Goldman Sachs numbers which were also taken fairly negatively by the market. However, the damage for the Nasdaq lasted only a matter of minutes after the index wiped out an initial -0.72% fall at the open to hit unchanged just over an hour in, before closing +0.63% last night and at a new record high. Despite Netflix closing down -5.24% (albeit paring a fall of as much as -14.1%) the remainder of the heavyweight tech names merely shrugged their shoulders with the NYSE FANG index (+0.79%) wiping out an initial loss of -2.36% as the likes of Facebook, Amazon and Alphabet all hit new record highs. Meanwhile the S&P 500 (+0.40%) followed a similar pattern and edged back over the 2,800 mark to hit the highest closing level since February 1st despite the energy sector doing its best to hold the index back after WTI Oil fell -1.52% at the intraday lows, before recovering into the close. Here in Europe the Stoxx 600 nudged up to a +0.24% gain while the DAX finished +0.80% despite having been flat just over an hour out from the close.

That positive momentum has continued into Asia this morning with the Nikkei (+0.78%), Kospi (+0.17%), Hang Seng (+0.31%) and Shanghai Comp (+0.51%) all up, while futures on the S&P 500 are also pointing towards a positive start. It’s been fairly quiet for newsflow overnight however Bloomberg has cited unnamed sources that noted the US administration may open an investigation on whether uranium imports are a threat to national security, which could lead  to higher tariffs. The US Commerce department has declined to comment while the Commerce Secretary Ross said last month that he would make a decision on the probe “very shortly”.

Back to yesterday where there was no getting away from Brexit headlines again. In the end PM Theresa May managed to fend off the pro-European Conservative rebels, albeit by the slimmest of margins following more amendments voting last night. Crucially the government won to keep open the option of Britain entering into a customs union post by 307 to 301 votes.

So currently the muddle through continues for PM May. Meanwhile the BoE Governor Mark Carney also added to the debate, as he noted that not having a Brexit deal with the EU could present a “financial stability event” and that Britons could be worst off as the country is “moving from…an integrated market to a much less integrated system….(which) would be a hit to the economic performance…”. Further he added that the BoE will have to provide their views to any Brexit deal reached between the UK and the EU. Elsewhere Rolls-Royce CEO Warren East also cautioned that if there is no clarity on Brexit trading arrangements, the company may have to stockpile a “buffer” of parts to maintain production in the fourth quarter.

As for the economic data yesterday, net-net the latest industrial production data in the US was a touch on the softer side. While the June print came in slightly ahead of consensus (+0.6% mom vs. +0.5% expected), the May reading was revised down fairly materially to -0.5% mom from -0.1%. That said production is still up a solid +3.8% yoy which is the second highest reading since 2014. Manufacturing production (+0.8% mom vs. +0.7% expected) was also hit by downward revisions to prior months while in the housing sector the July NAHB housing market index printed unchanged at 68, as expected.

In Europe the main data focus was the UK’s May and June employment data. There were no real surprises from the release however with the unemployment rate confirmed as holding steady at 4.2% as expected and weekly earnings  exbonus confirmed as growing at +2.7% 3m/yoy, also in line with expectations. The August BoE hike odds are now up to 82% having dipped below 50% just last month.

Before we wrap up, a quick mention that yesterday we got confirmation that European Commission President Jean-Claude Juncker is to meet President Trump next Wednesday (27th July) with the pair expected to discuss trade amongst other subjects. Politico ran a story yesterday quoting two Berlin officials as saying that they would like Juncker to provide Trump with three different trade deals including a bilateral EU-US agreement to lower tariffs on certain goods, a plurilateral agreement to cut tariffs on autos or a watered-down version of TTIP. So one to watch.

Looking at the day ahead, we will get the June CPI, PPI and RPI data in the UK this morning along with the May house price index print. This is followed by the release of the final June CPI report for the Euro area, along with May  construction output data. In the US, June housing starts and building permits data is due before the Fed’s Beige Book in the evening. Morgan Stanley, IBM and eBay will also be reporting their Q2 earnings. Fed Chair Powell will also appear  before the House Financial Services Committee although that should largely be a copy and paste of yesterday.