It was a tale of two markets on Thursday, with industrial and European stocks opening much higher on Thursday, pushing world stocks to new four-month highs after Donald Trump and Jean-Claude Juncker agreed to negotiate on trade, putting fears of a transatlantic trade war on hold for the time being. At the same time, Nasdaq futures and tech stocks around the globe were hit after Facebook shocked investors yesterday, by not only missing on revenue (for the first time in 3 years), and number of users, but with its unexpectedly low guidance. S&P 500 futures also pointed lower, however the drop has been contained.

In what the EU chief called a “major concession,” President Trump agreed on Wednesday to refrain from imposing car tariffs while the two sides launch negotiations to cut other trade barriers. As a result, there were gains across the board for European stocks on Thursday morning, led by the continent’s auto sector, which was up 2% at one point German’s export-reliant and auto-heavy index rose 1.4%.

It wasn’t just Europe: the global trade truce sent the MSCI world equity index to its highest level since March 16.

“The lifting of the threat of tariffs on the auto sector in particular is a major development. We’ve not seen a lot of actual measures implemented but it should lift the confidence of manufacturers,” said RBC European economist Cathal Kennedy.
“The feedthrough should come through in the manufacturing sector and confidence indicators in the coming months.”

Meanwhile, some more dark clouds gathered over China: Asian stocks were held back by weakness in China, where the Shanghai Composite index fell 0.7% and blue-chip shares lost 1.1%, despite China announcing even more stimulus overnight.

Why? Because with Europe now siding with the US, and with transatlantic mood was improving, the collapse of the Qualcomm-NXP deal means that Trump will focus his attention on trade war with China even more.

And then there was Facebook, which plunged as much as 24% after reporting Q2 earnings, but it was the conference call that shocked investors, and sent the stock into freefall. In fact, this was the single most costly conference call in history. At one point, the total market value lost by Facebook was $151 billion – representing the biggest one day stock wipeout in history – and more than the entire market cap of Bitcoin.

Nasdaq 100 futures were pressured by Facebook’s collapse; eslewhere NXP Semiconductors plunged -10.2% after it confirmed Qualcomm’s (+5.5% pre-market) exit from the deal. Qualcomm will pay a USD 2bln termination fee.

Adding insult to injury, Facebook is the most widely held stock among the hedge-fund community by a wide margin  according to Goldman, which means today there may be some serious margin calls.

If anything, Facebook’s collapse showed just how complacent the momentum-chasing market has become, and how susceptible it is to sudden, sharp repricings. For now, however, FANG has been defangded to just AG, and A has yet to report.

It wasn’t just tech on the receiving end: automakers General Motors, Ford Motor and Fiat Chrysler Automobiles have cut profit forecasts, while Daimler blamed U.S.-China tariffs for a 30% drop in second-quarter profit. GM suffered its biggest daily drop in 3 years.

Focus will now turn back to central bank policy: as Reuters notes, the softer U.S.-EU tone should help the European Central Bank stick with its plan to gradually withdraw stimulus when it meets later on Thursday. Few expect Draghi to make any notable announcement today, however, in what is expected to be a status quo call.

The Euro weakened as Mario Draghi is expected to repeat a guidance that bond purchases will end in December and interest rates could start rising after the summer of 2019. The yen fell 0.3% against the dollar, reversing 6 consecutive days of gains, but traders will carefully watch the BOJ’s policy announcement on July 30-31 after this week’s brief jump in yields and the Japanese currency on reports authorities were debating paring back some stimulus. BoJ is reportedly reviewing the allocation of ETF purchases and is considering purchasing more ETFs linked to TOPIX and less associated with Nikkei indices, but is likely to maintain the total annual ETF buying at JPY 6tln. In separate reports, Twitter sources noted the BoJ may consider dropping JGB buying operation dates release and may allow slight JGB yield curve steepening, while there BoJ were also said to see higher super long yields having a favourable effect.

The Bloomberg Dollar Spot Index rose 0.1% after slump on Wednesday with dollar marginally stronger against most G-10 peers.

Treasuries rose, in contrast to a drop in bonds across most of Europe. Japan’s benchmark 10-year bond yield climbed 3.5bps to 0.1%, a level last seen in July 2017. Yield rose as much as 6bps on Monday, the most intraday since  September 2016, following media reports of possible changes to the central bank’s ultra-loose monetary policy at its meeting next week.

There is a divergence in the performance of WTI (-0.1%) and Brent (+0.8%) with the latter supported by reports that Saudi Arabia have temporarily halted shipments via the Red Sea shipping lane after 2 vessels were attacked by Houthi rebels. This was then followed by reports that Kuwait are debating whether to halt oil exports via the passage given  recent events. In metals markets, spot gold (-0.2%) is slightly softer in European trade amid the modestly firmer USD after the PBoC bucked their recent trend by strengthening the CNY fix rate. Elsewhere, metals prices in London have broadly been supported by the aforementioned breakthrough in trade talks between the EU and US. Steel prices were seen higher during Asia-Pac trade with gains capped by fears over the Chinese crackdown on domestic pollution.

Data include wholesale inventories and durable-goods orders. Allergan, Comcast, Conoco, Mastercard, McDonald’s, Amazon, and Intel are among companies reporting earnings

Market Snapshot

• S&P 500 futures down 0.1% to 2,837.25
• STOXX Europe 600 up 0.5% to 389.13
• MXAP up 0.4% to 168.47
• MXAPJ up 0.1% to 544.57
• Nikkei down 0.1% to 22,586.87
• Topix up 0.7% to 1,765.78
• Hang Seng Index down 0.5% to 28,781.14
• Shanghai Composite down 0.7% to 2,882.23
• Sensex up 0.3% to 36,953.82
• Australia S&P/ASX 200 down 0.05% to 6,244.50
• Kospi up 0.7% to 2,289.06
• German 10Y yield rose 1.2 bps to 0.408%
• Euro down 0.08% to $1.1720
• Italian 10Y yield fell 0.7 bps to 2.411%
• Spanish 10Y yield rose 0.9 bps to 1.36%
• Brent futures up 0.6% to $74.37/bbl
• Gold spot down 0.3% to $1,227.54
• U.S. Dollar Index little changed at 94.27

Top Overnight News from Bloomberg

• Facebook Inc.’s scandals are finally hitting the company where it hurts: growth; the company’s shares plunged as much as 24 percent in after-hours trading, which if replicated in Thursday’s regular session would be the biggest stock-market wipeout in American history
• Six years to the day since his historic pledge to do ‘whatever it takes’ to keep the euro together, Mario Draghi is likely to confirm that the currency bloc is back to relatively solid economic health
• British officials are considering allowing the EU to impose its market regulations on Northern Ireland, while the rest of the U.K. breaks away after Brexit, according to a person familiar with the matter
• U.S. and EC leaders pledged to expand European imports of U.S. liquefied natural gas and soybeans and both vowed to lower industrial tariffs, excluding autos. The U.S. and European Union will “hold off on other tariffs”’ while negotiations proceed, as well as re-examine U.S. steel and aluminum tariffs and retaliatory duties imposed by the EU “in due course,” Juncker said
• British officials are considering allowing the EU to impose its market regulations on Northern Ireland, while the rest of the U.K. breaks away after Brexit, according to a person familiar with the matter who declined to be named outlining proposals that aren’t public
• Cities outside London are more exposed to the effects of a bad deal for financial services after Brexit than the U.K. capital, according to a report published on Thursday
• Some Chinese banks have received notice from regulators that a specific capital requirement will be eased in order to support lending, as the authorities try to mitigate increasing risks to the economy from the trade war
• European carmakers surged after President Donald Trump and European Commission President Jean- Claude Juncker agreed to declare a ceasefire in their trade spat while they negotiate lower barriers to transatlantic commerce

The major Asia-Pac equity markets traded subdued as a plethora of corporate updates dominated news flow and somewhat drowned out the US-EU trade talks where concessions were made to avoid a trade war, while Nasdaq 100  futures were also pressured overnight as Facebook’s market cap dropped by around USD 140bln after revenue and active user numbers missed expectations. ASX 200 (Unch) and Nikkei 225 (-0.1%) were subdued with M&A news the catalyst for the biggest movers in Australia as Fairfax surged from a takeover deal by Nine Entertainment which subsequently weighed on the latter, while the Japanese benchmark was dampened by a firmer currency and reports the BoJ could adjust its ETF purchases more towards those associated with the TOPIX and less at those associated with Nikkei indices. Shanghai Comp. (-0.7%) and Hang Seng (-0.5%) were also lower alongside the broad lacklustre tone in the regional majors and following another consecutive liquidity drain by the PBoC. Finally, 10yr JGBs were lower as yields continued to gain in which the 10yr yield rose to its highest level in a year of 0.1% amidst the speculation of a possible BoJ policy tweak next week, while today’s 2yr JGB auction was also weaker than previous on nearly all metrics. BoJ is reportedly to review the allocation of ETF purchases and is considering purchasing more ETFs linked to TOPIX and less associated with  Nikkei indices, but is likely to maintain the total annual ETF buying at JPY 6tln. In separate reports, Twitter sources noted the BoJ may consider dropping JGB buying operation dates release and may allow slight JGB yield curve steepening, while there BoJ were also said to see higher super long yields having a favourable effect.

Top Asian News

• China Is Said to Ease Bank Capital Rule to Free Up Lending
• China’s Yuan, Stocks Lag Global Peers as Trade Concerns Persist
• China Approves Essilor, Luxottica Merger Deal With Conditions
• Old-School Media Unite in Australia to Confront Netflix Era

European bourses trade mostly higher across the board as markets digest the fallout of yesterday’s EU-US trade talks and react to a slew of large cap earnings. Sentiment for the auto sector in particular has been boosted by news that the EU and US agreed to not raise tariffs on autos and parts during negotiations. This has boosted the likes of Volkswagen (+3.1 %), BMW  (+3.0%) and Daimler (+2.3%) with the latter seeing gains capped by its pre-market earnings report; DAX outperforms its peers with gains of 1.4% (vs. Eurostoxx 50 +0.8%). Elsewhere, on a sector basis, energy names lag their peers amid losses in Shell (-2.1%) with the Co.’s USD 25bln buyback and 30% increase in profits not enough to satisfy investors with some flagging concerns surrounding cashflow; FTSE 100 (Unch) lags its peers given Shell’s weighting in the index, with the FTSE also hampered by recent gains in the GBP and an overall lack of upside catalysts. Other notable movers post-earnings include: Airbus (+5.0%), British American Tobacco (+4.5%), Smith & Nephew (+3.8%), KPN (+3.4%), Roche (+2.0%), Nestle (+1.7%), Nokia (-8.1%), Valeo (-6.7%), AB Inbev (-5.1%), Schneider Electric (-1.4%), Anglo American (-1.2%) and Diageo (-1.1%).

Top European News

• Repsol Earnings Miss, Rising Costs Offset Higher Oil Output
• Accor Drops Plan to Buy Minority Stake in Air France-KLM
• Anglo Bucks Mining Trend by Pouring Profit Into Mega Project
• Barclays, UBS Win Dismissal From Silver, Gold Price-Fixing Suits
• Trump-Juncker LNG Pledge Is Just Hot Air for Europe’s Gas Market

In FX, there was another DXY downturn and breach of near term support for the index in wake of a truce on tariffs struck between Trump and  Juncker yesterday, pending more talks to resolve the trade barriers and import restrictions at issue. The DXY is trying to stabilise and pare some losses after hitting a new low for the week just above 94.000 vs 94.206 at worst on Monday. Chart-wise, 93.950 is now within striking distance if the index fails to sustain recovery momentum and loses more ground vs G10 peers. JPY – The biggest beneficiary of the latest Usd downturn, but also in its own right as hawkish BoJ reports continue to circulate ahead of next week’s policy meeting. Consequently, the headline pair is back under 111.00 and looking at bearish/downside tech levels around 110.65 (50% Fib) before 110.51 (55 DMA). AUD – Back to the bottom of the pile and heavy again above 0.7400 vs its US counterpart as initial euphoria over the aforementioned US-EU ‘agreement’ wanes amidst ongoing US-China strains that have more bearing down under. YUAN – Intervention of sorts, with a marked drop in the PBoC’s official Usd/Cny fix overnight (to 6.7662 vs 6.8040 on  Wednesday) and widespread reports of 1 year forward selling down to flat points from 100+ against spot at 6.7800 and 6.7900 for the Cnh.

In commodities, once again markets are seeing a divergence in the performance of WTI (-0.1%) and Brent (+0.8%) with the latter supported by reports that Saudi Arabia have temporarily halted shipments via the Red Sea shipping lane after 2 vessels were attacked by Houthi rebels. This was then followed by reports that Kuwait are debating whether to halt oil exports via the passage given recent events. In metals markets, spot gold (-0.2%) is slightly softer in European trade amid the modestly firmer USD after the PBoC bucked their recent trend by strengthening the CNY fix rate. Elsewhere, metals prices in London have broadly been supported by the aforementioned breakthrough in trade talks between the EU and US. Steel prices were seen higher during Asia-Pac trade with gains capped by fears over the Chinese crackdown on domestic pollution.

Looking at the day ahead now, the main focus for markets will be the aforementioned ECB monetary policy meeting at 7:45am ET followed by Draghi’s press conference after. Data-wise, we’ll get the June advance goods trade balance, preliminary June wholesale inventories, June retail inventories, preliminary June durable goods and capital goods orders and the July Kansas City Fed manufacturing activity reading are all slated for release. Away from the data, the WTO will hold a General Council meeting to cover issues related to the US-China trade conflict, while notable earnings releases for the day include Intel and Amazon.

US Event Calendar

• 8:30am: U.S. Wholesale Inventories MoM, June P, est. 0.3%, prior 0.6%
• 8:30am: U.S. Initial Jobless Claims, July 21, est. 215k, prior 207k; Continuing Claims, July 14, est. 1733k, prior 1751k
• 8:30am: U.S. Durable Goods Orders, June P, est. 3.0%, prior -0.4%; Durables Ex Transportation, June P, est. 0.5%, prior 0.0%
• 8:30am: U.S. Cap Goods Orders Nondef Ex Air, June P, est. 0.5%, prior 0.3%; U.S. Cap Goods Ship Nondef Ex Air, June P, est. 0.4%, prior 0.2%
• 9:45am: U.S. Bloomberg Consumer Comfort, July 22, no est., prior 58.8
• 11am: Kansas City Fed Manf. Activity, est. 25, prior 28

DB’s Craig Nicol concludes the overnight wrap

Needless to say, the meeting last night between President Trump and European Commission President Juncker has been the big news over the last 10 hours or so. Indeed after much second guessing throughout yesterday leading into the meeting, news broke just before 9pm BST that the two sides had reached a ceasefire in the trade war. Specifically, Trump and Juncker agreed to expand European imports of US LNG and soybeans, while both sides also agreed on lowering industrial tariffs. Trump also said that the US and EU were to work towards “zero” tariffs and called it a “new phase” of trade relations, while adding that the two sides would try to “resolve” steel and aluminium tariffs imposed earlier this year by the US.

It’s worth noting that trade in vehicles and car parts was left out of the statement, which as we know was the main point of contention going into the meeting especially after a Washington Post article hit the wires in the afternoon  stating that several of President Trump’s senior economic advisors were of the view that the President planned to impose a 25% tariff on nearly $200bn in “foreign-made automobiles” this year. However, the specific details of the statement last night between Trump and Juncker are less important right now and it’s more likely that this marks the start of what could well be a long negotiation period. Signs of a compromise are clearly more significant for now in markets with the threat of an all-out trade war receding. That said DB’s Alan Ruskin made the point last night that caution is still warranted, most obviously on what this might mean for US-China trade relations where problems are more deep-seated. So plenty still to ponder then.

In terms of what markets did, well US equity markets spent most of yesterday gently climbing but the initial headlines about the EU offering concessions following the meeting saw stocks sharply rise into the close, and that continued as more positive headlines emerged. The S&P 500, Dow and Nasdaq finished +0.91%, +0.68% and +1.17% respectively. Tech led gains while telecoms was the only sector to finish in the red for the S&P. With much of the day spent focused on autos, the sub-sector closed down -1.46% however did pare losses of as big as -5.35% at one stage. More on it shortly. Meanwhile credit indices in the US were tighter with CDX IG finishing 1.7bps tighter while Treasury yields climbed into the close with 10y yields finishing +2.6bps higher at 2.975% and the 2s10s curve flattening 1.0bps to around 30bps. The EUR/USD rose +0.64% from the lows to finish +0.36% on the day. Metals and Oil were also stronger across the board.

This morning in Asia the enthusiasm following the Trump-Juncker meeting has faded quickly with the focus quickly turning back to corporate earnings after Facebook shares plunged as much as 24% after missing consensus revenue forecasts for the first time since 2015. Depending on what happens today, we could be looking at one of the largest valuation declines for a big tech company ever. Nasdaq futures are down -0.88% as we type on the news while the Nikkei (-0.08%), Hang Seng (-0.74%) and Shanghai Comp (-0.63%) have all turned lower.Away from all that JGB yields are  higher this morning (2y +0.9bps and 10y+2.3bps) along with the Yen (+0.22%) following more reports that the BoJ might be considering a review of its ETF allocation. The 10y JGB is close to 0.09% now so it’ll be interesting to see if the BoJ steps in to offer to buy bonds again like it did on Monday.

Back to yesterday, where prior to the Trump-Juncker meeting much of the day was spent digesting the moves in the auto sector, firstly following corporate results from General Motors and Fiat Chrysler, and then following the Washington Post tariff story. General Motors and Fiat Chrysler closed -4.64% and -15.50% respectively (the latter falling by the most since January 2017) following downgraded earnings guidance for the full year. The bad news kept coming after the US close too when Ford announced weaker than expected results and a projected $11bn in charges for a five-year restructuring plan. Much was made of the GM results in particular though after it became the latest company to cite headwinds from the trade war. Indeed higher raw material prices, including steel and aluminium as a result of the tariffs, are expected to be a $1bn headwind in 2018 which is almost double what the company had previously expected. This follows Harley Davidson and Whirlpool as other high profile US companies this week highlighting risks to profits from tariffs, forcing the companies to raise prices. While last night’s developments between Trump and Juncker were positive, it’s still very early days so it’s unlikely that this is the last we hear of corporates warning about headwinds from tariffs. Indeed Daimler are due to report any second now so it’s worth keeping an eye on that.

Staying with autos, as a result of that fall for Fiat Chrysler, in Europe the Stoxx Auto and Parts sector collapsed -2.90% for the second worst day for the sector this year. Other notable auto names which retreated included Volkswagen (-2.72%), Renault (-2.14%) and BMW (-2.05%). The broader Stoxx 600 index finished -0.26% with these moves obviously coming before the evening developments post the Trump and Juncker meeting. Core bond markets in Europe were also largely 0.5bps to 1.0bp lower.

So as the market continues to digest the developments from the Trump-Juncker meeting last night, there’s also an ECB meeting to keep an eye on at lunchtime today. As a reminder, our European economists expect Mario Draghi to aim for a “Goldilocks” tone – that is neither too hawkish nor too dovish. In their view the impression from recent press stories is that the ECB thinks the market has priced its new policy stance too dovishly. Using the team’s modified Taylor Rule, they show that the market is fully pricing an escalation of trade war – a markedly worse economic scenario than the ECB’s baseline or the consensus. Without a clear materialization of the risk scenarios, they 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).

In terms of the limited data that was out yesterday, in the US, June new home sales fell -5.3% mom to the lowest in eight months (631k vs. 668k expected). Meanwhile the median selling price fell just over 4% yoy for the second month.  In Europe the Euro area’s June M3 money supply reading rose to a five month high of 4.4% yoy (vs. 4.0% expected). Adjusting for sales and securitizations, growth in household loans was steady at 2.9% yoy but loans to non-financial corporates rose to a new high of 4.1% yoy. In Germany, the July IFO survey nudged +0.1pts higher mom to 105.2 (vs. 104.9 expected), while the expectations index eased 0.9pt mom to the lowest level since March 2016 (98.2 vs. 98.3 expected). Here in the UK, the CBI’s Distributive Trades Survey reported that a net 20% of retailers are seeing positive annual growth in sales – with a net 20% expecting growth to continue next month.

Finally, as for the latest on Brexit, Irish Foreign Minister Coveney has called on the EU to be more flexible in its Brexit negotiations with the UK. He believes the latest proposal by PM May could be accommodated by both sides, but there  are “challenges” to some parts of her proposal – including a customs system where British officials collect EU tariffs at the UK border on goods destined for other countries in the bloc. Elsewhere, the BoE’s Sam Woods noted the central bank has contingency planning for Brexit, similar to its preparations for the Scottish independence referendum and Brexit vote earlier. He added that BoE’s stress tests last year showed banks are strong enough to weather a disorderly Brexit based on its own capital and liquidity.

Looking at the day ahead now, the main focus for markets will be the aforementioned ECB monetary policy meeting at 12.45pm BST followed by Draghi’s press conference after. Data-wise, we’ll get the August consumer confidence print for Germany and July consumer confidence data for France. In the US, the June advance goods trade balance, preliminary June wholesale inventories, June retail inventories, preliminary June durable goods and capital goods orders and the July Kansas City Fed manufacturing activity reading are all slated for release. Away from the data, the WTO will hold a General Council meeting to cover issues related to the US-China trade conflict, while notable earnings releases for the day include Intel and Amazon.