One day after Steven Mnuchin engaged in damage control in Buenos Aires, saying there was “no chance” that a currency war would break out in the aftermath of Trump’s comments from last week, and which saw a turbulent start to the week with both the BOJ and PBOC stepping up to stabilize markets, European stocks opened lower as traders reacted to warnings from the G-20 about the adverse impact of protectionism on growth before gradually edging back with the auto sector underperforming while US equity futures pointed towards a muted open with ES trading just below the unchanged line.

The big overnight news came early in the session, when Japanese 10-year government bonds plunged as cash markets caught up with Friday’s drop in futures on a media report of possible changes to the BOJ’s ultra-loose monetary policy, sending the yield up the most in almost two years…

… while the yen surged to a 2-week high, sending the USDJPY briefly below 111 below rebounding modestly.

“It’s all that concern investors have about the move from global quantitative easing to global quantitative tightening. That fear gets stoked when you have reports such as this,” said Psigma Investment Management’s Rory McPherson. “The ECB meeting this week will be more in focus now that we’ve had this concern about Japan.”

The sharp drop in JGBs spurred the central bank to offer to buy an unlimited amount of bonds  in a fixed-rate operation at a rate of 0.11% (which was left unused), reinforcing Kuroda’s Yield Curve Control policy. Yet while the BOJ denied the report of an imminent change to its YCC framework, JGBs slumped throughout the session seemingly uncomforted by the BOJ’s actions.

Looking at the dollar, it initially slumped in continuation from Friday’s Trump-induced jawboning which saw the president warn that a strong dollar hurts the economy, but has since rebounded as US traders started coming in; they may be taking Treasury Secretary Steven Mnuchin’s comments at face value, after he gave assurances of the U.S. commitment to a strong greenback at the weekend G-20 summit. The Bloomberg Dollar Spot Index turned positive, recouping all losses and sending the euro, pound and yuan lower in tandem.

“The current U.S. administration has a clear preference for lower U.S. dollar rates and a weaker currency,” said Australia & New Zealand Banking Group’s Daniel Been in a note to clients Monday. “This will keep markets wary of further strength in the U.S. dollar; especially given the scale of the recent rally and the large long position already held by the market.”

Dollar strength also led to a reversal in China’s yuan, which erased a gain of as much as 0.66% to trade little changed at 6.7863 per dollar as of 4:41pm in Shanghai, while the offshore yuan slumped as low as 6.8165 after trading as low as 6.77.

The PBOC was also active, halting reverse-repurchase operations and draining net 170b yuan via open- market operations, but at the same time it provided 502BN yuan in one-year Medium-term Lending Facility and keeps interest rate unchanged at 3.30%. Today’s MLF operation adds to 188.5BN yuan of such loans provided on July 13 that matched the maturities on the day with the monthly net MLF injections the highest since December 2016 as China continues to gradually ease financial conditions.

Going back to equities, Europe’s Stoxx 600 fell 0.2% in early morning trade as investors braced for a packed earnings week and a meeting between European Commission President Jean-Claude Juncker and Trump to discuss threatened auto tariffs which could damage carmakers. “The pattern of Trump’s meetings has generally been more conciliatory when he meets in person. It could actually be good for autos,” Psigma’s McPherson said.

Europe’s autos sector fell 0.6 percent, hitting a 2-1/2 week low, led by Fiat Chrysler (-2.1%) which announced the sudden departure of long-time CEO Sergio Marchionne. The index is down 9% this year and is among the worst performing European sectors. Goldman analysts said auto tariffs, if they came to pass, were likely to cause weakness in the Canadian dollar and Mexican peso, possibly also affecting the euro, pound, yen, and Korean won as investors priced in a hit to the economy.

“The global economy is still okay, but the risk is now very high, and if trade policies don’t make a U-turn very soon, we’ll see a measurable impact on growth already next year,” UniCredit chief economist Erik Nielsen said.

Earlier in the session MSCI’s index of Asia-Pacific shares outside Japan fell 0.2 percent. In Japan the Nikkei closed 1.3% to 22,396.99, while the Topix was only 0.4% lower to 1,738.70. The reason behind the divergence of Japan’s two benchmark equity indexes: the price action of one stock, Fast Retailing. The shares of the $48 billion Uniqlo owner – which was down as much as 5.2% on Monday – have a material 8.3% weighting in Nikkei 225, but a tiny 0.3% weighting in Topix.

Emerging market equities traded down 0.1% as the dollar recovered. Dollar strength has driven selling in EM stocks this year as the currency puts pressure on emerging economies with large dollar-denominated debt piles.

Europe’s bond yields climbed after a Reuters report that the BoJ was discussing modifying its huge easing program sent Japan’s 10-year bond yield to a six-month high. The report rekindled anxieties about monetary stimulus easing around the world and piled further pressure on investors already struggling to navigate rising protectionism.

The yield on Europe’s benchmark bond, the German 10-year Bund hit a one-month high of 0.39% and U.S. 10-year Treasury yields also hit their highest in a month at 2.90% before retracing all gains as the dollar rose, and were trading at 2.88% last.

In other overnight news, G20 officials reaffirmed FX commitments made in March and will subsequently pledge to not engage in competitive devaluations. They said global growth remains robust and many emerging-market countries are better prepared to face crises, but risks to the world economy have increased.

US President Trump warned Iranian President Rouhani to never threaten the US again or they will suffer consequences the likes of which few throughout history have ever suffered before. Trump added that US will no longer stand for Iran’s demented words of violence & death, while he warned the Iranian President to be cautious. This was after comments from Rouhani that the US cannot prevent Iran from exporting oil and who warned a confrontation would be the ‘mother of all wars’. US President Trump was also said to be asking for daily updates on how North Korean negotiations are proceeding and is said to have shown frustration regarding the pace despite tweeting about how well it is going.

Crude futures rally as Trump/Iran tension ratchets up over the weekend following a furious Trump tweet on Sunday night warning Iran’s president Rouhani never to threaten the US or suffer unimaginable consequences.  WTI oil was steady near $69 a barrel amid concern that escalating trade disputes will undercut energy demand, undermining reassurances from Saudi Arabia that it won’t flood global crude markets.

Copper rose 0.2% from a one-year low hit last week, trading at $6,160 a tonne, having declined for the sixth week in a row last week. Gold prices declined 0.2 percent to $1,229.1 an ounce.

This week we’ve got 175 S&P 500 companies slated to release their latest quarterly reports, including more of the tech heavyweights. The highlights include Alphabet on Monday, Verizon, AT&T and Harley Davidson on Tuesday, Coca-Cola, General Motors, Facebook and Boeing on Wednesday, Intel and Amazon on Thursday, and Exxon Mobil and Chevron on Friday. In Europe UBS reports on Tuesday and Royal Dutch Shell on Thursday. It’s still relatively early stages so far with just 86 S&P 500 companies having reported but an eye watering 81 of those companies have beat earnings expectations, while a still solid 65 have beaten revenue expectations.

Expected data include June existing home sales and Chicago Fed National Activity Index. Alphabet and Halliburton are among companies reporting earnings.

Market Snapshot

• S&P 500 futures down 0.04% to 2,799.50
• STOXX Europe 600 down 0.2% to 384.93
• MXAP up 0.06% to 166.01
• MXAPJ down 0.07% to 536.94
• Nikkei down 1.3% to 22,396.99
• Topix down 0.4% to 1,738.70
• Hang Seng Index up 0.1% to 28,256.12
• Shanghai Composite up 1.1% to 2,859.54
• Sensex up 0.4% to 36,624.49
• Australia S&P/ASX 200 down 0.9% to 6,227.56
• Kospi down 0.9% to 2,269.31
• Brent Futures up 0.6% to $73.53/bbl
• Gold spot down 0.06% to $1,228.81
• U.S. Dollar Index up 0.1% to 94.53
• German 10Y yield rose 1.6 bps to 0.386%
• Euro up 0.01% to $1.1725
• Brent Futures up 0.3% to $73.25/bbl
• Italian 10Y yield rose 8.3 bps to 2.324%
• Spanish 10Y yield rose 6.5 bps to 1.379%

Top Overnight News

• BOJ officials are said to be looking for ways to keep the stimulus program sustainable, while reducing the adverse effects on markets and banks’ profitability, according to several reports ahead of the July 31 policy announcement
• As the clock counts down to the Bank of Japan’s July 31 policy announcement, officials are looking for ways to keep their stimulus program sustainable while reducing the harm it causes in markets and to the profitability of commercial banks
• Italy’s Deputy Premier Matteo Salvini and one of his League party’s top economic advisers said Italy should push back against European Union budget restrictions, which officials in Brussels say are vital for the country’s economic expansion
• The Bank of Japan announced its first unlimited fixed-rate bond purchase operation since February after yields jumped on reports it will discuss possible changes to its ultra-loose monetary policy next week
• U.S. President Donald Trump fully supports Federal Reserve independence and isn’t trying to interfere in foreign-exchange markets, Treasury Secretary Steven Mnuchin said Saturday. He also reiterated the strong-dollar policy is in the U.S. interest in the longer term
• Trade tensions threaten global growth as the engines of leading economies fall out of sync, finance ministers and central bankers from the Group of 20 nations warn in a statement at the end of the 2-day summit
• Iran’s president warned his U.S. counterpart Donald Trump not to threaten the Persian Gulf nation’s oil exports and called for improved relations with its neighbors, including arch-rival Saudi Arabia. Trump warns Iran’s Rouhani to ‘NEVER, EVER THREATEN” the U.S. again
• U.K. Foreign Secretary Jeremy Hunt is heading to Berlin on Monday to warn that the EU needs to do its part to avoid the chaotic scenario of Britain leaving without a divorce deal

Asian stocks traded mixed with the regional bourses initially dampened across the board amid speculation the BoJ could
discuss tweaking policy and after last week’s renewed tariff threats from US President Trump who stated that the US is ready to impose tariffs on all USD 505bln of imported goods from China. ASX 200 (-0.9%) and Nikkei 225 (-1.3%) were lower with Japan the underperformer amid a firmer JPY and slump in bonds after source reports suggested the BoJ may discuss potential policy changes at its meeting including the yield curve target to allow for a long-term natural increase. This was despite a denial by Governor Kuroda of having any knowledge of the basis for the reports and who stated that remarks would be inappropriate given the proximity of the bank’s monetary policy meeting. Elsewhere, Hang Seng (+0.1%) and Shanghai Comp. (+1.1%) also began subdued amid ongoing trade concerns, although later found some support from PBoC efforts in which the central bank injected CNY 502bln through its 1yr Medium-term Lending Facility. Finally, 10yr JGBs were lower by around 50 ticks shortly after the open on policy tightening fears which saw 10yr yields higher by around 6 bps. This later prompted the BoJ to announce its first fixed-rate buying operation since February to purchase an unlimited amount of 10yr JGBs at 0.110%, which effectively placed a floor on JGBs and helped them nurse part of day’s losses. As noted above, the PBoC skipped reverse repos but later announced to inject CNY 502bln through its Medium-term Lending Facility

Top Asian News

• China Takes ‘More Flexible Way’ on Wealth Products Rule Changes
• Japan Stocks to Watch: Retail, Olympus, Shionogi, Showa Shell
• Arroyo Installed as House Speaker Before Duterte Congress Speech
• Even a Small BOJ Tweak May Have Repercussions for Global Bonds

European equities (Eurostoxx 50 -0.4%) trade lower across the board amid a mixed lead from Asia with traders mindful of ongoing trade concerns with US President Trump last week stating that the US is ready to impose tariffs on all USD 505bln of imported goods from China. This also comes in the context of the US Commander-in-Chief having taken to social media to complain about currency manipulation that has subsequently led to a firmer USD. Newsflow from the European session has otherwise been particularly light with not much to look ahead to on the calendar. In terms of sector specifics, losses are relatively broad-based with price action across the equity space largely dominated by individual stock stories with earnings season well underway. Ryanair (-4.0%) stand at the foot of the Stoxx 600 after their latest earnings update revealed a 20% decline in profits; easyJet (-2.4%) lower in sympathy. Elsewhere, Fiat Chrysler (-2.5%) shares are lower amid the news that their CEO Marchionne has had to stand down from the Co. due to ill-health with Jeep boss  Manley named as his successor; Ferrari (-4.2%) and CNH Industrial (-2.4%). Finally, markets await any developments from reports suggesting that Shell could consider a huge USD 25bln buyback alongside their earnings on Thursday and speculation that GSK could consider spinning-off their consumer division.

Top European News

• Italy’s League Pushes for Challenge to EU Budget Restrictions
• A Rare Hedge Fund Bet Targets the World’s Biggest Shipping Firm
• Turkey’s Finance Minister Is Said to Meet With Economists Monday
• How to Revive Active Fund Management? AGI Is Trying Sneakers

In FX, the DXY dollar index is relatively rangebound between 94.200-450 after the G20 meeting and aforementioned Trump verbal intervention, with support seen circa the bottom end of the band and not a lot in terms of resistance until 95.000 and the ytd high of 95.652 set last Thursday. All in all, a quiet start to Monday’s session, but US data later may provide some impetus. The Yen was the clear G10 outperformer was the JPY on sourced reports suggesting that the BoJ will look at various policy tweaks at its end of July meeting, including potential changes to the way it manages the JGB yield curve to allow for a long-term natural increase. Even though Governor Kuroda denied any knowledge of the claims, Usd/Jpy retreated further from recent 113.00+ peaks to a low circa 110.75 before retesting offers around 111.00, while Jpy crosses also dropped sharply to 1+ week lows. Technically, the landscape will remain bearish if the headline pair closes below 111.25 (Fib), and more so sub-110.96 (30 DMA). EUR/CAD/AUD – All narrowly mixed vs the Greenback with  the single currency maintaining around 1.1700, the Loonie holding above 1.3150 and Aud reclaiming 0.7400+ as China’s Yuans hold off recent lows (Usd/Cny and Usd/Cnh both just below 6.8000).

In commodities, WTI and Brent crude futures sit comfortably in positive territory (WTI +1.0%, Brent +1.3%) with traders eyeing mounting geopolitical tensions between the US and Iran, while the benchmarks breached USD 69/bbl and USD 74/bbl respectively. Tensions between the two rose over the weekend after Iranian President Rouhani reiterated the US cannot stop its oil exports and warned Trump not to play with the lion’s tail or he will regret it, while Trump responded aggressively in which he warned Rouhani to never threaten the US again or they will suffer consequences the likes of which few throughout history have ever suffered before. Earlier today, reports stated Total’s North Sea oil platforms are hit by a 24-hour strike (as warned of at the end of last week) Price action for oil markets could also be swayed by any trade developments as European Commission Juncker heads to Washington on Thursday in an attempt to defuse tensions. In metals markets, spot gold sits in minor negative territory alongside the modestly firmer USD. Copper in London is  hovering about the yearly lows set last week, whilst steel prices were firmer overnight as production cuts in the Chinese city of Tangshan kicked-in.

On Today’s calendar, we’ll get the June Chicago Fed National activity index print followed by June existing home sales data. Away from that, the BoE’s Broadbent will speak to the Society of Professional Economists in London in the evening. Meanwhile, Alphabet will releasing earnings.

US Event Calendar

• 8:30am: Chicago Fed Nat Activity Index, est. 0.3, prior -0.1
• 10am: Existing Home Sales, est. 5.45m, prior 5.43m
• 10am: Existing Home Sales MoM, est. 0.18%, prior -0.4%

DB’s Craig Niccol concludes the overnight wrap

The relentless summer heatwave here in the UK at the moment got us thinking that usually at this time of the year when we’re doing the EMR we’re struggling a bit for interesting stories with markets generally on autopilot and enjoying the summer lull. However, this year couldn’t be much different and it may well be that we look back at last week as a bit of a turning point for markets. Indeed, what started as a war on trade now appears to have grown a new set of roots with the seeds of a potential currency war now seemingly sown and threatening to break out. For those off enjoying a summer break last week, Friday’s session included President Trump publically making his feelings known about China’s Yuan depreciation, tweeting that the nation has been “manipulating” their currency lower. He also said that the EU was doing likewise and that both were also manipulating interest rates lower. This of course comes after China’s Yuan has fallen for six consecutive weeks, including a -1.17% fall last week to the weakest level in over a year.

That’s not to say that the trade war has been put to one side. In fact it’s quite the opposite with President Trump on Friday also saying that he is “ready to go” with tariffs of $500bn on China imports. It is worth caveating that this isn’t the first time the President has threatened tariffs on what amounts to be virtually all of China’s imports before, however these comments clearly continues to signal that there is no near-term de-escalation of these tensions in sight. As a side plot to all this you’ve also now got the President’s criticism of the Fed and it’s worth noting that the blackout period for the FOMC actually kicks in this week so it’s likely that the comments remains one-sided for now and we’ll have to wait some time to hear Fed officials’ responses to questions about the President’s comments.

For now though the biggest question for markets is whether the bark is bigger than the bite. Indeed if you ignored the headlines going around and looked purely at moves last week across various asset classes you probably wouldn’t think much of it. For equities, the S&P 500 (+0.02%) and Nasdaq (-0.07%) were virtually unchanged over the 5 days, with as we touch on further down a strong earnings season clearly well timed, while the Stoxx 600 was down a very modest  -0.15% in Europe. In China the Shanghai Comp was also down a very modest -0.07% while the Nikkei was actually up a solid +2.30%. In credit the likes of CDX IG (+0.7bps), CDX HY (+5.8bps) and iTraxx Crossover (+5.8bps) were barely concerned while in bond markets, most of the action came on Friday but over the week the 10y Treasury was a fairly modest +3.5bps higher in yield, 10y Bund a minuscule +0.8bps higher and yields in Asia similarly uninterested. What this shows is that any signs of concern at the moment are really only showing up in moves for FX and Commodities for now. Indeed as well as that move for China’s Yuan, other EM currencies like the Russian Ruble, Chilean Peso, Argentine Peso and South African Rand all weakened at least 1% last week. In commodities WTI Oil tumbled -3.87% while metals like Gold (-1.19%), Silver (-1.90%), Copper (-1.43%), Lead (-3.04%) and Nickel (-3.18%) were all sharply lower.

So the other big question is will this stay contained or broaden out into other assets. In terms of what to look out for this week President Trump’s meeting with European Commission President Juncker on Wednesday should be a closely watched event given the auto import tariffs talk and it could well set a bit of a benchmark for how things progress in the near term. Over the weekend we’ve also had a conveniently timed G20 meeting with the final communique unsurprisingly referencing the risk from trade tensions, specifically saying that “downside risks over the short and medium term have increased” including “rising financial vulnerabilities, heightened trade and geopolitical tensions and global imbalances and inequality”. Treasury Secretary Steven Mnuchin was the US representative at the meeting and speaking on the sidelines of the event he told reporters that the President’s intention isn’t to put pressure on the Fed and also that Trump’s comments on currencies “is not in any way the President trying to intervene in the currency markets”. Further, when asked if investors should be concerned about the prospect of a currency war, he said “no”.

So a quick glance at our screens this morning and there’s only one place to start and that’s with China’s Yuan (+0.17%) which is slightly stronger following a fairly well behaved session so far, while futures on the S&P are down -0.12%. Equities across Asia are trading more mixed, with losses led by the Nikkei (-1.42%) while the Kospi (-0.46%) is also in the red. The Hang Seng (+0.10%) and Shanghai Comp (+0.37%) are higher however.

Meanwhile JGBs have sold-off across the board this morning following reports that hit the wires from Friday and continued into the weekend. On the moves firstly 2y, 10y and 30y yields are +1.8bps, +4.5bps, and +8.0bps higher respectively while the Yen (+0.45%) has strengthened. 10y JGBs actually weakened by the most in two years at one stage before the BoJ stepped in to offer to buy unlimited bonds at a fixed rate of 0.11%, helping to cap the move. The report which garnered the most attention on Friday came from Jiji and suggested that the BoJ might be willing to let 10y JGB yields rise to some degree including a possible hike of the target level (which is currently “around 0%”). Since then Reuters reported that the BoJ is in “unusually active discussions” ahead of next week’s policy meeting including a step to make policy more flexible. Asahi reported that the BoJ statement next week might include language indicating that measures are being taken to reduce the side effects of monetary easing while the Nikkei also reported that a hike in the 10y yield target is to be considered.

It’s worth noting that our strategists in Japan do not think that the BoJ will announce a tightening policy measure as the meeting will also likely include updated inflation projections which point to lower CPI forecasts this year and next, an issue they believe the BoJ will be unable to justify if they were to tighten. They note that the statement might very well end up featuring nothing more than a declaration of intent to explore means of reducing any negative impact of monetary easing. It’s worth noting that the BoJ’s Kuroda, at the G20 meeting over the weekend, said that “I know absolutely nothing about the basis for those reports” and that it would be inappropriate to comment.

Thankfully there are some other distractions for markets his week with the global PMIs due out on Tuesday, the ECB meeting on Thursday and corporate earnings releases really starting to ramp up in the US. It’s difficult to envisage the ECB being a particularly exciting meeting however with the autopilot mode now somewhat on for the rest of the year following the last policy meeting decision. Our European economists expect Mario Draghi to aim for a “Goldilocks” tone during his conference – that is neither sound too hawkish nor too dovish. The team believes that the impression from recent press stories is that the ECB thinks the market has priced its new policy stance too dovishly. Indeed using their modified Taylor Rule, the team shows that the market is fully pricing an escalation of a trade war – a markedly worse economic scenario than the ECB’s baseline or the consensus. Without a clear materialization of the risk scenarios, the team believe the market should price a first hike by end 2019 with a reasonable probability. DB’s baseline call is a 20bp deposit rate hike in September 2019 (25bp refi. hike).

As for earnings, this week we’ve got 175 S&P 500 companies slated to release their latest quarterly reports, including more of the tech heavyweights. The highlights include Alphabet on Monday, Verizon, AT&T and Harley Davidson on Tuesday, Coca-Cola, General Motors, Facebook and Boeing on Wednesday, Intel and Amazon on Thursday, and Exxon Mobil and Chevron on Friday. In Europe UBS reports on Tuesday and Royal Dutch Shell on Thursday. It’s still relatively early stages so far with just 86 S&P 500 companies having reported but an eye watering 81 of those companies have beat earnings expectations, while a still solid 65 have beaten revenue expectations. So an impressive earnings season so far in the US.

It’s worth also noting that this week should be a decent test for the Treasury market with about $119bn due to be auctioned. That’ll all be in maturities up to 7 years so should put the spotlight back on the yield curve, especially given that last week was the first week in six that the 2s10s curve actually steepened, albeit with most of that coming on Friday.

Turning back to markets on Friday. Equities were weaker albeit modestly following softer corporate results and those further comments on trade tariffs, with the Stoxx 600 (-0.15%) and S&P (-0.09%) both marginally down. Meanwhile the  US dollar index dropped for the first time in four days (-0.72%) and 10y yields  on Treasuries rose +5.5bps. Elsewhere yields on 10y BTPs climbed +8.2bps, in part reflecting conflicting press reports on the future of Finance Minister Tria, who is generally seen as a supporter of the euro and an unified EU bloc (per FT). In FX, Sterling jumped +0.94% following a more conciliatory tone from EU Chief negotiator Michel Barnier, where he noted the EU is open to amending the Brexit proposal on the issue of Irish border, whilst also adding that “I’m sure we’ll find  a way forward”.

What to look for today: In Europe the only data scheduled today is the advance July consumer confidence reading for the Eurozone. In the US we’ll get the June Chicago Fed National activity index print followed by June existing home sales data. Away from that, the BoE’s Broadbent will speak to the Society of Professional Economists in London in the evening. Meanwhile, Alphabet will releasing earnings.