It was supposed to be a typical post-payrolls subdued session to start the week, however there was already a lot of excitement with Asian stocks mixed and European stocks finding a bid to push the continent into the green as a result of a buying program just before 6am EDT, and sending US index futures in the green.

Following Friday’s two-fer from China, in which Beijing announced a $60BN tariff retaliation to Trump’s latest sanctions, coupled with an assault on yuan shorts after the PBOC hiked the reserve ratio on FX forwards, all eyes were on China, and in an ominous move the Shanghai Composite resumed its slide, dropping for a 4th consecutive day and testing 2018 lows into the close with the “National Team” nowhere to be seen.

Just as concerning is that despite the PBOC’s latest “red line” for the Yuan which on Friday dropped as low as 6.91 vs the dollar before the Chinese intervention, the USDCNH resumed its climb, rising as high as 6.86 although there was no major reaction seen to weekend trade rhetoric from U.S. and China. 

Spooked by China’s weakness, after an initial rise, Asian shares earlier succumbed to selling pressure with Japan’s Nikkei and South Korea’s Kospi index also dropped in sympathy to China.

Overnight, Chinese state media launched an unusually personal attack against U.S. President Donald Trump’s trade policies on Monday, saying Trump’s trade “extortion” would not work.It also sought to reassure investors about Chinese economic strength as the months-long dispute rattles financial markets and raises deepening worries about the impact on the real economy according to Reuters.

“In his latest Twitter tirades and his latest appearances in front of his supporters the U.S. president has indicated something akin to a “strategy” behind his trade war policy,” Commerzbank said. “The trade war will remain in place regardless of how much the Chinese cave in.”

Europe’s Stoxx 600 initially pushed lower before a sharp rally back to positive mid-morning; although no catalysts cited for the move. The buying program helped European stocks advance 0.1% and erase a loss of as much as 0.3% earlier, with autos and oil and gas stocks contributing the most to gains, after disappointing corporate earnings in the European banking sector added to the cautious start to the week’s trading. Banks were among the biggest losers in the Stoxx Europe 600 Index after HSBC’s earnings disappointed. Volume was muted, at about 17% below its 30-day average. Weighing on European sentiment was the biggest plunge in German industrial orders since the start of 2017 on trade concerns, which added to early pressure on German stocks.

In a major development to Brexit, over the weekend, UK Trade Secretary Fox said the likelihood of a no-deal Brexit is increasing in which he blamed the “intransigence” of the European Commission. Fox also placed the chances of leaving  the EU without a deal at “60-40”and stated that EU Chief Negotiator Barnier dismissed the UK’s Chequers proposals simply because “we have never done it before”. This also comes alongside commentary in the Sunday Times over the weekend that businesses and investors are scrambling to protect themselves against a plunge in the value of the pound if Britain crashes out of the EU in March. As a result, sterling weakened to the lowest level in 11 months, as GBPUSD tumbled below 1.30.

The Bloomberg Dollar Spot Index climbed for the fourth day in five sessions, extending last week’s advance, but moves in currencies were limited. The euro was flat after German manufacturers took a hit in June.

In EM, the big mover – and loser – was the Turkish Lira, with the TRY tumbling over 2% against the dollar in response to U.S. review of Turkey’s duty-free access following Erdogan’s announcement he would sanction two US officials in the escalating diplomatic spat over the release of Pastor Brunson.

The yield on 10-year Treasuries steadied at 2.95 percent. Bunds and UST curves are unchanged, Italian BTPs move above Friday’s highs as treasury’s buyback continues to support.

Oil crept higher on the day with WTI +0.7% and Brent +0.7% amid a Saudi crude output cut on Friday alongside the US rig count falling for the second time in three weeks, seeing a decline of 4 to 1044. The EU said that other signatories are committed to the continuation of Iranian exports of oil and gas In the metals scope, gold is essentially unmoved and is still languishing around 17-month lows, currently trading at USD 1211.90/oz. London Copper has fallen for the 3rd session in 4 as trade concerns weigh on the construction material. Zinc is also faring poorly and has fallen 2.2%, with Shanghai lead also down 1.4%.

In other geopolitical news, North Korea Foreign Minister Ri described US actions as alarming in response after US Secretary of State Mike Pompeo urged other countries to keep up sanctions pressure on Pyongyang. In addition, a UN report stated that North Korea has not halted its nuclear and missile program which is in violation of sanctions.

President Trump tweeted on Saturday “Iran, and its economy, is going very bad and fast! I will meet, or not meet, it doesn’t matter – it’s up to them… Iran Is messing with the wrong President”. Furthermore, US Secretary of State Pompeo said the White House will make an announcement detailing reinstatement of some Iran sanctions on Monday. Note: The first round of Iran sanctions imposed by the US to come into effect on Tuesday – the Iranian government will no longer be able to purchase US banknotes and broad sanctions will be imposed on Iranian industries.

Venezuela said there was an assassination attempt on President Maduro by far-right opponents after several drones armed with explosives blew up near President Maduro, while reports also noted Maduro was unharmed and that 7 people were being treated for injuries.

Monday’s event docket is quiet with no major economic data expected. Sempra, Tyson and Marriott International are among companies reporting earnings.

Market Snapshot

• S&P 500 futures down 0.1% to 2,836.50
• STOXX Europe 600 down 0.05% to 388.97
• MXAP unchanged at 165.25
• MXAPJ up 0.3% to 534.67
• Nikkei down 0.08% to 22,507.32
• Topix down 0.6% to 1,732.90
• Hang Seng Index up 0.5% to 27,819.56
• Shanghai Composite down 1.3% to 2,705.16
• Sensex up 0.5% to 37,748.75
• Australia S&P/ASX 200 up 0.6% to 6,272.98
• Kospi down 0.05% to 2,286.50
• German 10Y yield unchanged at 0.408%
• Euro down 0.05% to $1.1562
• Italian 10Y yield rose 1.4 bps to 2.657%
• Spanish 10Y yield fell 2.0 bps to 1.402%
• Brent futures up 0.4% to $73.50/bbl
• Gold spot down 0.2% to $1,212.74
• U.S. Dollar Index up 0.2% to 95.30

Top Overnight News from Bloomberg

• After a weekend of claims by U.S. President Donald Trump that he has the upper hand in the trade war with China, Beijing responded through state media by saying the nation is ready to endure the economic fallout. This follows the release late Friday in Beijing of a tariff list designed to retaliate against the U.S. threat to impose new duties on USD200b of Chinese imports. The yuan pared gains and mainland equities declined
• The pound fell to its lowest level versus the dollar since September, pressured by weekend comments from U.K. International Trade Secretary Liam Fox predicting a messy split from the European Union, adding there’s now a 60% likelihood of a no-deal outcome as the clock ticks down to Britain’s scheduled departure in March
• German manufacturers took a hit in June as a slide in overseas demand knocked factory orders amid escalating trade tensions. Orders fell 4 percent from the previous month — eight times as much as forecast in a Bloomberg survey of economists
• Matteo Salvini, Italy’s outspoken deputy premier, said the “Italian economy is sound, so we will block” speculative attempts to influence growth trends. The next budget law will include measures aimed at easing fiscal pressure, which will attract foreign investments, Salvini said
• President Trump tweeted that he didn’t know about his son’s meeting at Trump Tower during the 2016 presidential campaign, adding that a gathering that included a Russian lawyer with links to the Kremlin was held to get information on Democratic candidate Hillary Clinton
• U.S. Secretary of State Michael Pompeo warned against easing up on sanctions until North Korea gives up its nuclear weapons, drawing a rebuke from the regime that underscored how far apart the two sides remain
• London’s moribund luxury homes market is showing signs of bottoming out. Values in the best districts rose 1.2% in the second quarter from a year earlier
• Saudi Arabia halted new trade and investment dealings with Canada as a dispute over the kingdom’s arrest of a women’s rights activist escalated
• Not content with a previous warning investors should brace for Treasury yields of 4%, Jamie Dimon went one further at the weekend, suggesting 5% was a distinct possibility

Asian equity markets began the week mostly positive as bourses followed suit from Friday’s gains on Wall St, although upside was limited as the region took its first opportunity to digest Friday’s key events including China’s tariff retaliation list announcement and the mixed US jobs data. ASX 200 (+0.6%) was led higher by commodity-related stocks and Nikkei 225 (+0.1%) was positive but with upside limited by recent JPY strength. Elsewhere, Hang Seng (+0.5%) and Shanghai Comp. (-1.2%) were mixed as the mainland failed to hold on to early gains due to trade uncertainty and further PBoC inaction. Finally, 10yr JGBs were quiet overnight but still edged mild gains as yields slightly eased from last week’s BoJ-triggered surge, while reports also noted that the BoJ bought a record amount of 5yr-10yr JGBs last week in its efforts to cap gains in yields. China state media commented that China is prepared for a long trade battle with the US, while it also noted that US is escalating trade friction with China and is turning international trade as a zero-sum game. In addition, China state media said President Trump is starring in his own carefully orchestrated Street Fighter-style deceitful drama and wants others to play along which is wishful thinking

Top Asian News

• China Reminds Hedge Funds That the Yuan Is a Dangerous Short
• Saudi Arabia Suspends Ties With Canada Over Activist Row
• Japan Tobacco to Buy Bangladesh Cigarette Maker for $1.5 Billion
• India Bond Buyers Emerge as Nomura, StanChart Say Worst Over
• Hong Kong Defies Market Slump With Biggest-Ever Summer IPO Haul

European equites opened the week modestly lower (Euro Stoxx 50 -0.2%) as trade concerns weighed on indices initially. Most major European indices were in the red, with the DAX leading the losses and breaking through its 100DMA (12,582) to the downside following Linde (-3.5%) announcing that they and Praxair may need to shed more assets to get antitrust approval, casting doubt over the viability of their merger. The losses in the DAX and Euro Stoxx were short-lived, however, seeing choppy trade and paring back early losses into positive territory on no fundamental catalyst in a news-thin day. The materials sector (-1.2%) is underperforming on the back of softer base metals, as the US-Sino trade spat continues to weigh on the market. HSBC (-0.4%) reported earnings, where the bank highlighted rising expenses alongside a civil penalty of USD 765mln. William Hill (+0.3%) have reportedly entered into talks with US casino “giant” Penn National Gaming that would provide the co. with a greater share of the US sports betting market.

Top European News

• EU May Soften Irish Backstop Powers to Avoid No-Deal Brexit: FT
• Trade Spats Burden German Manufacturers as Factory Orders Slump
• Italy’s Di Maio Says EU Deficit Cap Can’t Block Government Plans
• Rosneft Says It Can Give Further Boost to Russia Oil Output

In FX, there was more negative news for the Pound as UK Trade Secretary Fox claims that the risk of a no deal Brexit has risen to 60% after EU chief negotiator Barnier rejected the Chequers White Paper, with Cable back down through 1.3000 and hitting marginal new lows around 1.2950, while Eur/Gbp is back above 0.8900 even though the single currency is relatively weak in its own right. Note also, a major US bank has initiated a short Cable trade at 1.2986, looking for 1.2700 and with a 1.3150 stop, while market contacts suggest stops are likely if the aforementioned ytd base is  breached from 1.2950. TRY – The Lira remains under heavy pressure and one of if not the EM underperformer again as Usd/Try soars further above 5.0000 to almost 5.1600 and fresh all-time highs. The catalyst, ongoing US-Turkey diplomatic strains due to Pastor Brunson on top of the latter’s domestic political situation and investor angst over the economy, perceived Government interference with the CBRT and a whole lot more. EUR/NZD/AUD/JPY – All holding up relatively well vs a bid Dollar in general (DXY over 95.300 and still poised for a test of 95.652 highs for the year so far), but the Eur only just keeping its head above 1.1550 and layered bids down to 1.1520 ahead of the 2018 low (1.1510), while the Kiwi remains under 0.6750 and is lagging its antipodean counterpart that is holding firm after PBoC Yuan intervention near 0.7400 and circa 1.0975 on the cross ahead of the RBA policy meeting tomorrow (full preview available via our headline feed). Usd/Jpy is very rangebound again between 111.15-35 with bids at 111.00 and offers at 111.50, 111.60 and  111.73, according to market observers.

In commodities, oil is higher on the day with WTI +0.7% and Brent +0.7% amid a Saudi crude output cut on Friday alongside the US rig count falling for the second time in three weeks, seeing a decline of 4 to 1044. Russia’s energy minister Novak reported that future output is to be in line with the OPEC+ 1mln BPD boost plan.  The EU said that other signatories are committed to the continuation of Iranian exports of oil and gas In the metals scope, gold is essentially unmoved and is still languishing around 17-month lows, currently trading at USD 1211.90/oz. London Copper has fallen for the 3rd session in 4 as trade concerns weigh on the construction material. Zinc is also faring poorly and has fallen 2.2%, with Shanghai lead also down 1.4%

On today’s calendar, there is nothing of note in the US, while in China the Q2 current account balance reading will be out at some stage. It’s worth noting that the first phase of the restoration of US economic sanctions on Iran are also scheduled to take effect from Monday. HSBC, SoftBank and UniCredit are all due to release earnings.

US Event Calendar

• Nothing major scheduled

DB’s Jim Reid concludes the overnight wrap

This weekend also brought more evidence that it’s unlikely that the trade war dispute will change course soon given the current and recent rhetoric. President Trump tweeted on Saturday that the U.S. market is “stronger than ever,” while the Chinese market “has dropped 27% in the last 4 months, and they are talking to us.” He also tweeted that “Tariffs are working far better than anyone ever anticipated” and would make the U.S. “much richer than it is today”. The Chinese market has actually seen that fall over 8 months not 4 but the scale of the decline is accurate. Indeed the additional fall on Friday saw it drop below Japan as the world’s second largest stock market nearly 4 years after it first went ahead. At a later rally in Ohio Mr Trump reiterated the comments and said in addition that the Europeans are “dying to make a deal”.

This follows Friday’s retaliations from China (evening their time) where they announced fresh tariffs (from 5% to 25%) on $60bn of US imports. The blow was softened by a seemingly coordinated move from the PBOC to impose a reserve requirement of 20% on trading CNY forward contracts. This basically makes it expensive to short CNY and is likely an attempt to ensure that the currency doesn’t weaken too aggressively.

Initially that appeared to work when markets opened late last night with the Yuan rallying as much as +0.40% however it’s back to flat now as we go to print. That may in part reflect China’s Global Times reporting on Sunday evening that China is prepared for a “protracted war” in response to Trump’s comments and that China does not fear sacrificing short-term economic interests. The Shanghai Comp (-0.77%) and CSI 300 (-0.76%) are also both in the red along with the  Nikkei (-0.20%) while the Hang Seng (+0.70%) and Kospi (+0.26%) have both nudged higher. US equity futures are also slightly higher while bond markets have been fairly muted, including JGBs where the 10y is hovering just below 0.10% still.

Staying with China for a second, our China Chief Economist Zhiwei Zhang published a note overnight in light of the recent trade developments. In his view China’s retaliation is a softening of policy stance on the trade war and that with the domestic economy weakening and financial assets falling, China likely feels more pressure than it did two months ago. Zhiwei has kept his GDP forecasts for 2018 (6.6%) and 2019 (6.3%) unchanged along with his CNY forecasts (6.95 end-2018, 6.40 end-2019) for now. More in Zhiwei’s report here .

In other news overnight, the Canadian Dollar (-0.10%) has been fairly volatile following headlines that Saudi Arabia has suspended new trade and investment with Canada, as well as suspending diplomatic ties following the dispute over the arrest of a women’s activist in Saudi Arabia. It appears to be a developing story so worth seeing how this plays out this morning.

As for what we can look forward to over the next five days, this week’s calendar is probably more akin to a typical summer week lull with a relative dearth in potential market sensitive data releases and events. The US CPI report for July, due out on Friday, is quite comfortably the headline event with the consensus running at +0.2% mom for the headline and core. An in-line reading for the latter should help to keep the annual rate at +2.3% yoy and therefore maintain  breathing room above the Fed’s target 2% level.

A day prior to that CPI report we’ll also get the July PPI report while outside of the US we’ll get China’s July Inflation Report on Thursday too. The market expects CPI to nudge up one-tenth to +2.0% yoy however PPI is expected to moderate two-tenths to +4.5% yoy. Other than those data releases we’ll also get preliminary Q2 GDP reports in Japan and the UK (the market and our economists expect a +0.4% qoq reading for the UK).

Meanwhile earnings will really start to taper off with just 44 S&P 500 companies reporting this week. A total of 405  companies in the S&P have reported so far and whilst it feels like we’ve seen some big share price collapses (Facebook and Twitter come to mind) it’s hard to argue against the overall picture having been a fairly solid one this quarter. Indeed 85% of companies have beaten EPS expectations while 73% have beaten top line expectations. Aggregate growth in earnings is around 27% which is up very slightly on Q1. Revenue growth has also hit double digits at 10% – the first time it has done so in 7 years. Markets have responded as you’d expect. Using July 10th as the de-facto start date for earnings season, the S&P 500 has climbed +2.02% and the DOW +2.77%, while the NASDAQ has risen a more modest +0.60%.

Talking of earnings our European equity strategy team have published a note this morning highlighting that with 70% of market cap having reported so far, European Q2 EPS growth is at 5% year-on-year, up from 0% in Q1 and only slightly below the 6% registered earlier in the season. This represents a slight positive surprise relative to consensus expectations for the companies that have reported, which is a good result, given that the sharp deterioration in Euro area growth momentum in Q2 pointed to the risk of a downside surprise. Consensus expects EPS growth to end the earnings season at 2% and then to accelerate to 10% in Q3. Energy, financials and consumer discretionary continue to provide the largest boosts to index-level earnings growth. See the link for the full report. Staying with equities Friday saw a reasonably decent end to the week. Much of the session was spent debating who might make the next move in the  US-China report in the afternoon. July headline payrolls came in at a well below market 157k (vs. 193 expected). However that was offset by a cumulative 59k in upward revisions to prior months. The more significant average hourly earnings reading didn’t throw up any surprises at +0.3% mom (matching consensus) although a small downward revision to June caused the annual reading to moderate slightly to +2.70% from +2.74%. One notable aspect of the report was the drop in the U-6 unemployment rate to 7.5% – a fall of three-tenths – and to the lowest level since May 2001. This came despite participation holding steady so clearly speaks to how tight the labour market is.

The S&P 500 ended +0.46% post that report while the NASDAQ also edged up +0.12%. In Europe the Stoxx 600 closed +0.65% to pare back the five-day loss to less than a percent. Treasuries were well bid for much of the day with the employment data doing little to change that. 2y and 10y yields ended 2.0bps and 3.7bps lower respectively while yields across Europe were broadly 2-5bps lower. Interestingly Bunds actually rallied 5.4bps which appeared to be more to do with safe haven flow after BTPs initially moved sharply higher in yield early on. Indeed 2y BTPs were as much as 40bps higher in the early morning but rallied back to finish slightly lower in yield by the end of play. 10 year yields were 20bps
wider by 9am BST but also rallied all the way back to close just 1bps higher. The initial selloff was all driven by anxiety around the first round of Budget talks which concluded on Friday evening.

The budget negotiations will rest on whether Finance Minister Giovanni Tria can control the spending plans of the new administration. Tria has previously pledged to keep the deficit within the EU’s limit of 3% of GDP and said in a statement after the meeting that the plans are within this. PM Conte said after the meeting (which included Tria, Deputy Premier and Five Star Movement leader Luigi Di Maio, Foreign Minister Enzo Moavero, Europe Minister Paolo Savona and Cabinet Undersecretary Giancarlo Giorgetti) that “We have agreed on the economic and financial planning that will be presented in September,” Apparently there is a follow up budget meeting on Wednesday so we’ll see if the rhetoric continues to be relatively tame.

Elsewhere over the weekend, UK Trade Secretary Liam Fox suggested the chance of a no-deal Brexit was as high as 60% due to the intransigence of the EU. For us this seems to be part of a wider tactic by the British Government to show  they’re willing to tolerate a no-deal scenario in order to strengthen their negotiating hand. So not one to be totally alarmed about at the moment but lots of fraught discussions to come.

As for other snippets back on Friday, the June trade balance reading in the US came in broadly as expected with a deficit of $46.3bn. Interestingly there was a big miss for the ISM non-manufacturing for July at 55.7 (vs. 58.6 expected) – a fall of 3.4pts from June. The details were similarly eye catching. New orders fell the most in 2 years (57.0 from 63.2) and business activity the most since the GFC (56.5 from 63.9). Employment (56.1 from 53.6) and prices paid (63.4 from 60.7) were sharply higher however so the overall read-through including the commentary wasn’t quite so negative.

Meanwhile the remaining PMIs were also out on Friday. In Europe the Eurozone services was revised down 0.2pts to 54.2 leaving the composite at 54.3 and down 0.6pts from June. The UK’s composite was confirmed at a weaker than expected 53.6 (vs. 54.9 expected) not helped by a soft services print (53.5 vs. 54.7 expected – down from 55.1 in June) while in the US the services reading was revised down 0.2pts to 56.0, leaving the composite at 55.7.

It’s a quiet start to the week for data today. In Europe, we get June factory orders and the July construction PMI for Germany along with July new car registrations for the UK and the August Sentix investor confidence survey reading for the Eurozone. There is nothing of note in the US, while in China the Q2 current account balance reading will be out at some stage. It’s worth noting that the first phase of the restoration of US economic sanctions on Iran are also scheduled to take effect from Monday. HSBC, SoftBank and UniCredit are all due to release earnings.