It has been an exhausting overnight session of two distinct, and dramatic, halves… and then Trump arrived.

The start of overnight trading was marked, as has often been the case in recent weeks, with traders attention focusing squarely on China, and specifically the country’s currency which tumbled in early trading after the PBOC fixed the yuan sharply lower by 605 pips to 6.7671, the weakest level in two years, and the offshore yuan initially plunging to 6.83 against the dollar in response which caused a risk-off move cross asset classes on fears this was China directly “weaponizing” the Yuan and devaluing the currency in response to the latest Trump statements including his criticism of high Fed rates and the Yuan which was “dropping like a rock.”

However, shortly after the early drop which dragged it to a fresh 1 year low the Yuan staged a dramatic turnaround after a major Chinese bank – a proxy for PBOC market intervention – sold the USD and then was repeatedly seen making large offers to sell dollars in the 6.81-6.83 level according to traders quoted by Bloomberg. As a result, the onshore yuan pared all losses after sinking as much as 0.49% earlier, while the offshore equivalent erased over 400 pips of losses, and posted modest gains before trading largely unchanged for the remainder of the session, while the dollar also declined after solid early gains which spooked emerging markets and US futures.

A similar risk-off/risk-on move was observed in Chinese stocks, which initially slumped only to explode higher, led by bank shares, on expectations regulators will loosen rules on the asset management industry. Specifically, the market moved on a report in 21st Century Business Herald which said mutual funds will be allowed to buy non-standard products, with China expected to release the bank wealth management rules soon. The CSI 300 financial was top performing of 10 CSI 300 indexes, climbing 3.8%, its biggest intraday gain since May 2017

Ample Capital director Alex Wong added that “China is probably using extraordinary measures to restore confidence in the financial sector.” Separately, Dai Ming, a fund manager at Hengsheng Asset Management, said that there’s speculation that the asset management rule will be looser than expected, and that “liquidity on mainland will be boosted if mutual funds are able to buy non-standard products and banks don’t need to rush to clean up their off- balance-sheet assets” a move that would be positive for the market and economic growth. Or, in other words, even more easing to prop up the market. Chinese stocks were delighted by the report, and proceeded to storm higher, with the Shanghai Composite rising back over 2800, and closing 2.05% higher to 2,829.

It wasn’t just China, however, that provided excitement overnight.

Italian political risks returned with a bang following a report in Italian La Repubblica according to which Deputy PMs Di Maio and Salvini unofficially threatened to force Finance Minister Tria to resign in dispute over appointing new head at state lender CDP, the news of which caused a sharp sell-off in BTPs from the open, spreading to bunds which widened by 10bps before sentiment gradually stabilized and half the initial move is faded. Italian bonds pared the earlier slide after Five Star Movement’s Di Maio denied the report of a clash although in a subsequent interview by Corriere with the euroskeptic head of the budget committee, Claudio Borghi, he said Italy will leave Euro sooner or later.  “I am completely convinced of it.” That did not help sentiment and Italian 2Y yield were trading near session wides.

And with most attention focused on FX and bonds, equities also moved, with European stocks fluctuatinh between gains and losses and U.S. index futures were also mixed, even after Asian equities reversed declines amid signs the Chinese central bank stepped in to stem weakness in the yuan. The dollar edged lower along with Treasuries, on concerns Trump really means to take on the Fed in pushing for lower rates.

The Stoxx Europe 600 Index trimmed early losses, with carmakers and miners among the losers, after the abovementioned whiplash session in Asia saw the Shanghai Composite Index post the largest gain in a week. Futures on the Dow Jones and S&P 500 initially declined, then recoupled all losses, before they tumbled again when shortly after 6am CNBC released the full Donald Trump interview in which in addition to his comments about the Fed, Trump also said (this was not reported before) that he is “ready to go” to $500BN on China import tariffs.

“I’m ready to go to” $500b, Trump told CNBC’s Joe Kernen: “I’m doing this to do the right thing for our country.”

Trump’s comment sent futures tumbling for the second time on the session, with Dow Jones futs sliding 130 points and the E-mini back under 2800.

Meanwhile, amid all the drama, earnings season is in full swing, with a mixed picture so far doing enough to propel U.S. equities back toward the all-time high reached in January.

In FX, the dollar fell against all G-10 peers following Trump’s comments on Fed rate hikes and the yuan’s drop, its first drop in 4 days. Treasuries whipsawed as the PBOC weakened the yuan fix, trading about 1 bp higher to 2.85%. The pound held near a 10-month low on jitters over U.K. politics and signs the EU isn’t keen on the government’s Brexit proposals. Meanwhile, as noted above, Italy’s bonds pared early losses after the government denied a report that euro-friendly Finance Minister Giovanni Tria might be forced to step down.

Commodities are mostly in the green on the day with WTI (+0.6%) and Brent (+0.7%) just off highs (at around USD 70.14/bbl and USD 73.36/bbl respectively), albeit both benchmarks are on track to set their third week of losses amid oversupply concerns fused with US-Sino trade tensions. To recap, this week’s API and DoE inventories both printed a surprise build in stockpiles, whilst speculation amounts over the potential for an economic slowdown caused by trade tensions which could lower demand in the future.

On today’s calendar, s James Bullard is scheduled to speak on the economy and monetary policy. GE, Honeywell, Schlumberger, and VF Corp. are among companies reporting earnings.

Market Snapshot

• S&P 500 futures little changed at 2,805.25
• STOXX Europe 600 up 0.03% to 386.31
• MXAP up 0.5% to 165.43
• MXAPJ up 0.7% to 536.66
• Nikkei down 0.3% to 22,697.88
• Topix down 0.3% to 1,744.98
• Hang Seng Index up 0.8% to 28,224.48
• Shanghai Composite up 2.1% to 2,829.27
• Sensex up 0.3% to 36,442.45
• Australia S&P/ASX 200 up 0.4% to 6,285.85
• Kospi up 0.3% to 2,289.19
• German 10Y yield rose 0.6 bps to 0.336%
• Euro up 0.09% to $1.1653
• Italian 10Y yield unchanged at 2.241%
• Spanish 10Y yield rose 0.4 bps to 1.285%
• Brent futures up 0.6% to $73.04/bbl
• Gold spot little changed at $1,222.92
• U.S. Dollar Index little changed at 95.11

Top Overnight News

• Donald Trump intensified the uproar over his meeting with Russian leader Vladimir Putin by extending an invitation for a second summit as worries about what the two leaders discussed in Helsinki this week were rising
• President Donald Trump criticized the Federal Reserve’s interest-rate increases, breaking with more than two decades of White House tradition of avoiding comments on monetary policy out of respect for the independence of the U.S. central bank
• President Donald Trump is being warned that tariffs on car imports would hurt the U.S. economy, disrupt the global auto industry, and widen the rift between America and its closest allies
• A slump in the yuan deepened on Friday after the central bank weakened its daily reference rate for the currency by the most in two years
• U.K. Prime Minister Theresa May will reaffirm her pledge to keep the border between Ireland and Northern Ireland open following Brexit, saying the notion of a hard border is “almost inconceivable”
• From the U.K. to Indonesia, global bond investors have been joining their U.S. counterparts in driving yield curves flatter, adding to signs that escalating trade tensions are depressing expectations for economic growth and inflation
• Mario Draghi will squeeze in one interest-rate increase before his term as European Central Bank president ends next year, according to a Bloomberg survey of economists

Asian equity markets traded choppy with sentiment spooked overnight amid a China currency sell-off after the PBoC set the reference rate to its weakest in over a year. This weighed on US equity futures with selling exacerbated after the Emini S&P and DJIA broke below 2800 and 25000 respectively, while Nikkei 225 (-0.3%) wiped out initial gains in the panic. Elsewhere, Shanghai Comp. (+2.0%) and Hang Seng (+0.8%) were also initially downbeat as the currency-related concerns overshadowed the PBoC’s recent efforts including this week’s CNY 540bln net liquidity injection. However, Chinese stocks were recovered from intraday lows as and moved back into the black amid rumours surrounding modifications on New Asset Management Rules. ASX 200 (+0.3%) remained stable throughout the session. Finally, 10yr JGBs were higher with prices supported amid losses in Japanese stocks and the brief market panic, although gains were capped heading into an enhanced liquidity auction for 2yr, 5yr, 10yr & 20yr JGBs which proved to be uneventful. PBoC skipped open market operations for a net weekly injection of CNY 540bln vs. last week’s CNY 90bln net drain

Top Asian News

• Yuan Erases Decline Amid Suspected Intervention, Stocks Surge
• Fosun Is Said to Consider $500 Million India IPO of Gland Pharma
• SoftBank Fund Is Said to Seek Investment in Chinese AI Giant
• Philippines Signals Strong Monetary Move, Sees Peso as CPI Risk

European equities began the session relatively mixed (Eurostoxx 50 +0.6%) with significant underperformance in the Italian FTSE MIB amid political jitters. This comes after the Italian newspaper Repubblica reported tensions in the Italian administration with Deputy PM’s Salvini and Di Maio clashing with Finance Minister Tria (later denied), while  Corriere reported hard-line Eurosceptic comments from Italy’s Budget Committee head. In stock specific news, Anglo-Dutch giant Unilever (+1.3%) completed the first EUR 3bln tranche of EUR 6bln buyback program, while the second tranche starts as of today. European equities have been dealt a blow in recent trade by comments from Trump that the US is ready to impose tariffs on all USD 505bln of Chinese goods with the DAX (-0.9%) underperforming amid declines in auto names following the recent comments from Merkel

Top European News

• Italian Bonds Decline After Tria’s Future Is Thrown Into Doubt: Italian Populists Join Up to Fight Finance Chief on State Lender; Borghi Says Italy Will Leave Euro Sooner or Later: Corriere
• European Paper Giant Stora Enso Hit by Worst Selloff Since 2010
• Telia Takes Page From AT&T With $1 Billion Broadcaster Purchase
• European Tobacco Stocks Advance After Philip Morris Pares Drop

In FX, the DXY is back on the 95.000 handle, just, after the US President turned his attention away from international trade and other issues to the Usd and Fed, lamenting the strength of the former and the hawkishness of the latter. However, the Greenback and index indirectly, are still looking at other factors for direction, and in particular moves in the YUAN that was fixed considerably higher on shore by the PBoC today (circa 4.7600 vs the Usd) and pushed both the Cny and Cnh above 6.8000 before a bounce amidst intervention speculation and reports about local banks selling at 6.8100.  EUR/JPY/CHF/GBP – All marginally firmer vs the Greenback and off psychological/round number levels or fresh ytd lows on the aforementioned Usd fade, with the single currency straddling 1.1650, Jpy pivoting 112.50 having bounced off its 200HMA around 112.25-30, Franc at the upper end of a tight range either side of parity and Cable regaining 1.3000+ status.

Commodities are mostly in the green on the day with WTI (+0.6%) and Brent (+0.7%) just off highs (at around USD 70.14/bbl and USD 73.36/bbl respectively), albeit both benchmarks are on track to set their third week of losses amid oversupply concerns fused with US-Sino trade tensions. To recap, this week’s API and DoE inventories both printed a surprise build in stockpiles, whilst speculation amounts over the potential for an economic slowdown caused by trade tensions which could lower demand in the future. Traders will be looking out for the Baker Hughes rig count later today. Elsewhere, gold trades relatively flat as the USD eases off highs. London copper rose as much as 1% as the red metal pulls away from one-year lows. Russian Oil Minister Novak says can return to oil cuts after 2018 if needed; adding the new OPEC Russia Organisation may start on January 1st 2019

US Event Calendar

• Nothing major scheduled

DB’s Craig Nicol concludes the overnight wrap

In recent days much of the focus has been on the relative strength of US assets, however this has overshadowed what is starting to become a much more dislocated broader market. Indeed, in the last 24 hours markets appear to have finally taken notice of the move for the Chinese Yuan and the warning signs for a potential currency war. After the PBoC weakened the Yuan’s reference rate by the most in two years this morning, the CNY passed 6.800 in the early going, although has settled slightly below that at 6.794 as we type, albeit still -0.29% weaker. Still, that leaves it on course to lose -1.54% this week, having weakened by an average of 0.88% in each of the five weeks prior to this. With the PBoC refraining from intervening, authorities in China turning towards further monetary loosening, the PBoC announcing this morning that China’s leverage ratio has stabilised and China officials hitting back at the US for accusing China of stalling trade talks – suggesting then that there is no evidence of de-escalation on the trade war front – one has to wonder when the broader market will start to react even more. DB’s George Saravelos noted yesterday that it might be that the CNY at 7.0 is a level assets can no longer ignore.

Despite there being very different drivers, the recent CNY move is reminiscent of the 2015 devaluation although the actual magnitude of the current move is larger. To put some numbers around all this, if we use the start date of the  recent CNY slide as the 14th of June, then the following are some of the moves for a select group of assets. First and foremost the CNY and CNH have weakened -6.14% and -6.32%, respectively, (the magnitude of the CNY devaluation in 2015 was closer to 3%, although in fairness it did continue to weaken for all of 2016). The biggest pain in this current selloff has been for metals with the Bloomberg metals index down -14.87%. The broader Bloomberg commodity index is off -6.85% while Gold is down -6.45%. WTI Oil is actually up +4.28% but as we know it’s lost about $5 in the last couple of weeks. Meanwhile the Shanghai Comp has fallen -9.03% and the Hang Seng -8.48%. EM equities are also down -5.78% and broad EM FX -3.10%. By contrast the S&P 500 is up +0.79%. Remember that included a mini correction at the end of June. The NASDAQ is also up +0.83% and in that time struck a new all-time high, while Treasuries have also been incredibly benign with 10y yields just 9.2bps lower and firmly entrenched in the current range.

Interestingly one month after the CNY devaluation in 2015, it was DM equities (along with EM equities) which suffered the most, with metals actually broadly higher and Gold little changed. However it’s the six month returns which really open eyes. Indeed six months following the devaluation, the S&P 500 had lost -12.24%, Nasdaq -15.29%, Nikkei -24.17% and Stoxx 600 -22.87%. WTI Oil was also down -39.16% while metals and commodities lost -13.74% and -18.83% respectively. The Shanghai Comp and Hang Seng had lost -29.64% and -24.30% respectively by this stage while EM equities and FX had fallen -18.81% and -4.35%. So broad-based capitulation. It was Treasuries that benefited, rallying  just over 48bps.

Uncertainty continues to plague markets at the moment with the trade situation still about as unpredictable as it can be. But it’s becoming a lot harder to ignore the moves for China’s currency in the face of a potential currency war particularly with the case study from a few years ago painting a fairly ugly picture for assets down further down the line.

Ironically it was FX markets which were in the spotlight last night too following President Trump’s interview with CNBC where he talked about the Fed raising rates and the stronger dollar. The White House were quick to issue a statement saying that the President “respects the independence of the Fed” and that the President “isn’t interfering with Fed decisions”. That seemed to help the USD recover from what was a sharp half a percent decline following the President’s comments, with the index eventually still closing up for a +0.08% gain. Treasury yields were broadly lower however with 2y and 10y yields ending -1.8bps and -3.1bps lower respectively, although in fairness the Trump comments put the brakes on the fall for yields if anything. Gold actually wiped out losses of as much as -1.29%, but weakened a bit by the close to finish a modest -0.37% down. Meanwhile the S&P 500 (-0.40%) and NASDAQ (-0.37%) never really recovered from a weak open, not helped but some softer earnings reports (namely eBay, Bank of NY Mellon and American Express). In Europe the Stoxx 600 had earlier closed -0.23% weighed down by materials stocks.

This morning in Asia, that move for the CNY appears to have triggered a wave of selling across equity bourses, although in fairness the moves are still fairly well contained. The Nikkei (-0.64%) and Hang Seng (-0.54%) have both leaked lower along with the CSI 300 (-0.40%) and Shanghai Comp (-0.12%). Metals remain under pressure with Gold, Silver and Platinum all lower while Copper and Zinc in Shanghai are both down about half a percent. Futures on the S&P 500 are also down -0.16% despite Microsoft’s share price climbing after the closing bell last night post earnings. It’s worth noting that there was also a bit of data this morning with Japan’s June CPI (ex-fresh food) rising for the first time in three months,
up one-tenth of a percent to an in-line print of +0.8% yoy. However, the BOJ’s favoured core CPI measure (ex-food and energy) did fall one-tenth to +0.2% yoy after expectations were for a modest increase to +0.4%.

Back to yesterday and specifically some of the trade headlines, where in Europe, the EU trade commissioner Cecelia Malmstrom hopes the EU President Juncker’s visit to the US next week will ease the trade dispute between the two sides, but also warned “if the US impose these (20% higher) car tariffs that would be very unfortunate, but we are preparing together with our member states a list of rebalancing measures as well”. She added that a plurilateral deal on car tariffs is one of the options the EU is considering, but noted “it is one idea of many….I don’t know if it would work at all”. Over in the US, Bloomberg noted there were limited support from auto groups and industry workers for higher tariffs on imported cars at a public hearing in Washington.  The Senior VP of government affairs of the Motor & Equipment manufacturers association Ann Wilson noted “the imposition of tariffs is a risk to our economic security that jeopardizes supplier jobs and investments in the US”. Meanwhile US Commerce Secretary Ross said at the hearing that it was “too early to say if this investigation will ultimately result in a section 232 recommendation on national security grounds…”
Away from trade, the economic data in the US yesterday was largely upbeat.

Elsewhere, here in the UK, June retail sales (ex-auto fuel) was below market at -0.6% mom (vs. +0.1% expected) and +3.0% yoy (vs. +3.7% expected), in part reflecting some payback after strong readings in the prior two months. Notably spending still grew at an annualized pace of over 8% saar in Q2. Following the softer CPI and retail sales print from this week, the implied probability of an August BoE rate hike has eased around 5 percentage points to 78%.

Finally in terms of today’s calendar, the June PPI reading in Germany is followed by the May current account balance reading for the Eurozone and June public finances data in the UK, while there is nothing of note in the US today. Away from the data, the Fed’s Bullard will speak on the U.S. economy and monetary policy at a Glasgow Chamber of Commerce breakfast in Glasgow, Kentucky in the afternoon. We’ll also get Q2 earnings from General Electric today. Meanwhile German Chancellor Merkel will hold her summer press conference today.