Perhaps due to a lack of further trade war escalation, it is a sea of green in risk assets as overnight global stocks pushed toward a six-month high following the biggest jump in Chinese stocks in over two years and an upbeat start for Europe followed Wall Street’s best close since January, with the S&P now just 22 points points away from breaching its all time high of 2,873 reached on January 26, as the dollar slipped against most currencies, Treasuries dipped and the Turkish Lira resumed its record drop.

After dropping near 2018 lows at the close on Monday, on Tuesday China’s Shanghai Composite led Asian markets higher, soared in today’s session, posting its biggest gain in two years on hopes for more policy support for investment and extending gains in late afternoon trading as investors snapped up stocks amid speculation that liquidity would be added to markets after reported approval of some retirement fund products. Rumors that Beijing would approve retirement fund products to invest funds served as an immediate upside catalyst as it brought the prospect of new funds entering the market, said Zhongtai Securities. The sharply upbeat mood lifted overnight as Chinese stocks rebounded 2.7% following a four-day selloff that had knocked them down about 6% .

Chinese sentiment was also boosted by an unexpected increase in Chinese FX reserves, which increased from $3.112TN in June to $3.118TN in July, defying expectations of a modest drop to $3.1TN. The rise in reserves helped squash speculation that the recent plunge in the Yuan had resulted in capital outflow (whether or not the data is accurate or credible is a different matter entirely), and as a result the Yuan jumped, with the USDCNH sliding 300 pips from 6.865 to 6.835, further boosting Asia’s risk-on mood.

China’s FX Regulator says cross-border capital flows and FX reserve levels will remain stable overall adding that financial assets price fluctuations and changes in non-dollar currencies led to the rise in FX reserves in July, while noting that the fluctuation of the Yuan has increased significantly.

Asian optimism spilled over into European trade, where miners were among the big gainers in the Stoxx Europe 600 Index as commodities climbed. London, Paris and Frankfurt followed by rising 0.6 to 0.9% as Europe’s investors cheered results from Italy’s biggest bank UniCredit and oil firms gained on the rise in crude prices.

Meanwhile, in the US, the S&P 500 closed at its highest level since Jan. 29 overnight, less than 1 percent from its record high hit earlier that month. The VIX closed at its lowest since Jan. 26, the VIXtermination event of February 5 largely forgotten. A surge in U.S. corporate earnings, accompanied by a record number of companies beating estimates driven by tax cuts has prompted the likes of Citi to upgrade their end-2018 and 2019 earnings forecasts.

SocGen’s FX strategist Kit Juckes summarized the mood simply as follows: “The Chinese have stabilized the yuan, the lira hasn’t been annihilated this morning so once the sharp FX moves have calmed down and as long as the (company) earnings are good, you have a more risk friendly environment.”

And speaking of currency markets, the big story was the decline in the dollar as investors unwound longs amid thin volumes in the majors, typical of summer trading conditions according to Bloomberg. The euro bounced to $1.1593 from a near six-week low despite a second day of disappointing German economic data, while Britain’s pound made back some ground after Brexit worries had pushed it to an 11-month low.

Turkey’s lira initially recovered 1.7% from Monday’s losses of more than 5% after a report by CNN Turk that Turkish officials would go to Washington to discuss the strained relations helped the rise; however gains were quickly reversed and the Lira has since resumed its unprecedented collapse, approaching record low levels, and which many speculate will eventually end in capital controls. Already struggling with inflation at 14-year highs near 16% and political pressure from the president on the central bank not to raise interest rates, the lira’s year-to-date losses are nearing 30 percent as jitters about foreign currency debt payments rise.

“Currently the impact of the lira’s slide is mostly contained within the country. But fears of a default will begin to increase if the currency keeps depreciating,” said Kota Hirayama, senior emerging markets economist at SMBC Nikko Securities. “Such a development could affect some European financial institutions,” he added.

On the Brexit front, overnight news reports suggested that PM May is losing support due to her Chequers plan and some see her departure as essential to salvaging the Brexit. UK PM May has been blamed for the disorganised preparations for a no-deal Brexit as businesses need to be advised on how to get ready for the possibility. Civil servants have been ordered to compile 70 “technical notices” by month-end to explain to businesses how to prepare for no-deal scenario. Meanwhile, the UK is said to see Brexit deal deadline pushing back to November as UK PM May resists the EU’s timetable for Brexit talks while she believes US President Trump may help her

In rates, treasuries held steady with a slightly flatter curve. Euro-area bonds traded mixed. RBA boosted Aussie longs after projecting higher inflation levels in the next two years. Curiously, rates on German bunds were pinned near their lowest levels in almost two weeks as concerns about global trade and turbulence in Italy continued to support demand for the least risky assets; and yet none of these concerns have spilled over to other risk assets.

Overnight, the RBA kept its Cash Rate Target unchanged at record low 1.50% as expected and reiterated that it judged steady policy was consistent with growth and inflation targets, while it repeated that low rates are supporting the economy. RBA also stated that wage growth remains subdued which is likely to continue for a while and that it sees headline CPI to be lower than expected this year.

Anthony Barton@AntBarton89

RBA Statement Changes

In commodities, oil extended the previous day’s rally after the imposition of U.S. sanctions against major crude exporter Iran took effect on Tuesday. Brent crude oil futures shook off earlier weakness and were 0.33 percent higher at $73.99 a barrel. They had gained 0.75 percent on Monday after OPEC sources said Saudi production had unexpectedly fallen in July. The drop in the dollar helped metals, with copper rising 0.5% at $6,161.50 a tonne after retreating more than 1% the previous day. Gold, which is stuck near a one-year low, crawled 0.2% higher to $1,208.06 an ounce

Looking at today’s calendar, data include consumer credit. US earnings to look out for today include Emerson Electric (06:30 EDT), PPL Corp (07:40 EDT) and Walt Disney (16:05 EDT)

Market Snapshot

• S&P 500 futures up 0.3% to 2,857.00
• STOXX Europe 600 up 0.6% to 390.91
• MXAP up 0.8% to 166.36
• MXAPJ up 0.8% to 538.19
• Nikkei up 0.7% to 22,662.74
• Topix up 0.8% to 1,746.05
• Hang Seng Index up 1.5% to 28,248.88
• Shanghai Composite up 2.7% to 2,779.37
• Sensex up 0.07% to 37,719.71
• Australia S&P/ASX 200 down 0.3% to 6,253.94
• Kospi up 0.6% to 2,300.16
• German 10Y yield rose 1.3 bps to 0.402%
• Euro up 0.2% to $1.1578
• Italian 10Y yield fell 2.2 bps to 2.635%
• Spanish 10Y yield fell 0.3 bps to 1.395%
• Brent futures up 0.5% to $74.09/bbl
• Gold spot up 0.4% to $1,212.20
• U.S. Dollar Index down 0.2% to 95.20

Asian equity markets traded mostly higher following the positive performance in their US counterparts where the Nasdaq led the advances and the S&P 500 notched a 3rd consecutive gain to move to within 22 points from all-time highs. Nikkei 225 (+0.6%) was higher as focus remained on earnings with SoftBank and Rakuten among the top gainers in the index after both reported solid profit growth, while ASX 200 (-0.3%) lagged its regional peers with the index dragged by weakness in telecoms and miners. Elsewhere, Hang Seng (+1.5%) and Shanghai Comp. (+2.7%) were positive with property developers underpinned by strong guidance including Country Garden and Evergrande Real Estate, although price action was far from smooth with a bout of intraday volatility in Chinese bourses after the PBoC continued to withhold from liquidity operations and amid lingering trade uncertainty. Finally, 10yr JGBs were little changed with only minimal losses seen amid gains in stocks and as the Japanese 10yr yield remained above 0.11%, while participants the 10yr inflation-indexed bond auction also failed to spur demand as b/c and lowest accepted price declined from prior. China is to soon adopt policies to boost credit and investment, according to Chinese press reports.

Top Asian News

• BOJ Considered Raising Rates Before Tweaks, Reuters Says
• China Is Said to Push for Arbitrage Cap on London Stock Link
• China Stocks to Get Even Cheaper as Money Ball Favors Bonds
• China Foreign Exchange Reserves Rise Despite Weaker Yuan
• China Tower Giant IPO Leaves Hong Kong Retail Investors Cold

European equities trade firmly in the green (Eurostoxx 50 +0.8%), mimicking the performance seen on Wall St. and the AsiaPac session. Broad-based gains are seen across all sectors while the energy sector outperforms on oil price action. In terms of notable European earnings, Commerzbank (-2.0%) shares are lower post-results as the bank slightly adjusted their outlook due to “intense competition”, while Denmark’s Pandora (-16.5%) rests at the bottom of the Stoxx 600 following a guidance cut.

Top European News

• U.K. House Prices Rose to Record High in July, Halifax Says
• Salvini Slaps at Spain for Immigration That’s Run Out of Control
• Arsenal Owner Kroenke to Buy Usmanov’s Stake in Soccer Club
• Ex-Comedian Expects to Get Mandate to Form Slovenian Government

In FX, AUD was the clear G10 front-runner on several supportive factors, as Aud/Usd regains a firmer foothold above 0.7400 to print a marginal new August high (0.7437) having held in above chart support in the interim, and the Aud/Nzd cross trades above 1.1000  to expose 1.1025 resistance again. No lasting drag on the Aud from the latest RBA policy meeting and statement that was essentially a repeat of the previous version and several before that, with the ongoing mantra that rates are appropriate at current levels and are likely to remain apt for some time to come given the slow evolution of inflation and wage growth. CAD/EUR – The Loonie is next best major performer vs the Usd, albeit only just eclipsing the single currency and Kiwi as the Greenback loses some momentum across the board (DXY around 95.200 vs 95.500+ yesterday) EMs also off recent lows). Usd/Cad is back below 1.3000 and eyeing strong support at 1.2961 (100 DMA) before 1.2950, while Eur/Usd has bounced a bit further from Monday’s 1.1530 multi-week base towards 1.1600, but not quite testing the big figure, yet. EM – As noted, some respite for regional currencies after a dip in the Cny mid-point fixing and more efforts by Turkey to arrest the Lira’s slide alongside reports that mediation with the US has been successful to a degree. Usd/Try around 5.2400 vs 5.4250 at the new/latest all time low).

In commodities, WTI and Brent are showing mild gains as the futures hold onto the USD 69.00/bbl and USD 74.00/bbl handles respectively. US reimposed the first round of sanctions against Iran which will cover the auto sector, gold and key metals, while crude sanctions are not expected until November. Oil traders will be looking out for the latest API Inventory numbers released later today. In the metals complex, spot gold is prints fresh highs for the day, moving in-step with USD action, while London copper edged higher amid ongoing concerns revolving around Chile’s Escondida mine, the world’s largest copper mine. In the latest developments, BHP is said to seek a 5-day mediation by Chile’s government in contract discussions to avoid a strike at the copper mine, while there were also reports the union at the copper mine was preparing a strike contingency plan as it awaited the final response from the company. Of note: on Monday, Escondida copper workers union said half of members have voted in which around 80% voted to reject the final contract offer. Kuwait stopped operations at Shuwaikh and Shuaiba ports while also stopping navigation at the Doha port due to bad weather

Looking at the day ahead, in Europe we’ll get the June trade balance, current account balance and industrial production data for Germany (3.0% yoy expected) along with the June trade balance and current account balance data for France. House price data for the UK for July will also be out. In the US the June JOLTS job openings and consumer credit data are due out. China’s July foreign reserves data is also scheduled to be released at some stage. Walt Disney will also release earnings.

US Event Calendar

• 10am: JOLTS Job Openings, est. 6,625, prior 6,638
• 3pm: Consumer Credit, est. $15.0b, prior $24.6b

DB’s Jim Reid concludes the overnight wrap

It hasn’t really been a 24 hours where there was much need to try to manipulate the weather as there wasn’t really a lot going on to encourage much activity. Having said that the S&P 500 (+0.35%) closed higher for the third day and is now at the highest level since Jan. 26th and only 22.5 points (or 0.8%) off the all-time highs. In fact it’s only closed higher on two days in history – both in January this year. Meanwhile the VIX returned to the lowest level since late Jan. at 11.27.  For the US market it’s almost as if the last 6 months hasn’t happened and we’ve been transported back to the hours just before everything changed after the rogue AHE print in the payroll report on February 2nd. As an aside the Stoxx 600 is down -1.23% from the day prior to that payroll print 6 months ago (S&P 500 +1.01%) and China’s Shanghai Comp. index is down -21.52% over the same period.

This morning in Asia, equities are nudging higher with the Nikkei (+0.61%), Kospi (+0.24%) and Hang Seng (+0.96%) all up while the Shanghai Comp. (+1.43%) is leading the gains. There has been some talk that the gap between the index’s earnings yields and 5y AAA rated corporate bond yields are the highest since March 2016. As for data, Japanese workers’ June real wages rose at the fastest pace in 21 years as it jumped +2.8% yoy (vs. 0.9% expected). Our Japanese economists noted there were large positive contributions from overtime pay and bonuses, but regular wages are also holding steady at relatively high levels of 1.3% while real wages are also rising. Meanwhile Reuters cited unnamed sources which noted that the BoJ had considered hiking rates twice this year before market volatility in Jan/Feb and weaker inflation data derailed the plan, which in part suggests that BoJ policy can be fluid and data dependent. Further the article noted the policy tweaks introduced in the July meeting was partly aimed at appeasing the two sides who were concerned about prolonged stimulus efforts and others who were opposed to a quick exit.

Elsewhere there has not been much tangible developments on trade, but Reuters noted that the official Chinese Daily newspaper wrote this morning that the US’s belief that a fall in Chinese equities was a sign of the US winning the trade war was in fact “wishful thinking”. Elsewhere yesterday the ECB’s Nowotny told the Der Standard that he supports a “faster” normalisation of monetary policy and added that “a slow increase” in rates would not harm the EU economy. Now turning to other market performance from yesterday. In Europe, equities were broadly weaker on light volumes with the Stoxx 600 (-0.13%) weighed down by materials and financials stocks, as the latter was impacted by a softer than expected results from HSBC (-1.01%). Across the region, the DAX (-0.14%) and CAC (-0.03%) dipped while the FTSE edged up +0.06%. Over in the US, the S&P reversed earlier declines to close +0.35% while the Nasdaq rose for the fifth straight day (+0.61%). The stronger overall performance was partly due to gains in energy stocks and Berkshire Hathaway’s above market results (+2.34%), while Facebook also climbed +4.45% following a WSJ report which suggested the company is seeking deeper relationships with banks as part of an overall effort to offer new services to its users.

Meanwhile core government bonds were firmer across the board with 10y yields on Bunds (-1.8bp), Gilts (-2.6bp) and OATs (-2.4bp) all down. Treasuries nudged -1bp lower to the lowest since July 20th while the 2s10s also flattened -1.3bp to 29.3bp. Following on with the yield curve theme, our US economists believes the spot yield curve is inadequate for identifying future recession risks.

They’ve used a principal component analysis (PCA) and show that the yield curve is currently signalling low recession odds over the next year, at around 10%. Overall, their analysis reinforces their view that a more complete signal from asset prices suggests that recession risks are low over the coming year, supporting a continuation of the Fed’s gradual rate hikes. However, recession risks do rise more appreciably two and three years ahead. Refer to their note for details.

Turning to currencies, the US dollar index firmed +0.21% while Sterling fell -0.44% to a fresh 11-month low, in part reflecting Trade Secretary Fox’s weekend forecast that there was a 60% chance of the UK not reaching a Brexit deal with the EU. Notably yesterday a spokesman for PM May (James Slack) reiterated that “we continue to believe that the most likely outcome is reaching a good deal (with the EU)…” Elsewhere the Turkish Lira dropped -4.89% to a fresh record low despite the central bank’s move to tweak reserve requirements lower and inject liquidity into the banking sector yesterday. This morning, the Lira is rebounding c1% but is still down around -39% versus the Dollar on a calendar YTD basis.

Over in commodities, WTI oil rose +0.76% following Bloomberg reports of Saudi Arabia production cuts and labour strikes resuming in the North sea, which have likely added to concerns of tightening oil supply.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the latest Fed’s quarterly Senior Loan Officer survey indicated that banks have kept lending standards on commercial real estate (CRE) and auto loans broadly unchanged while standards on commercial and industrial (C&I) loans and mortgages were eased. Notably a “moderate” share of banks tightened standards on credit card loans. In terms of lending demand, banks reported stronger demand for C&I loans by small firms, but total demand was weaker for CRE loans and mortgages.

Over in Germany, the June factory orders fell more than expected at -4% mom (vs. -0.5%) and were down -0.8% yoy (vs. 3.4% expected) – the first annual decline since July 2016. DB’s Stefan Schneider noted it was an across the board decline with foreign demand weaker than domestic demand. Notably more concerning was the 4.7% drop in capital goods, which he believes should be seen as evidence that the uncertainty related to the current tariffs dispute is hitting investment spending. Meanwhile the Euro area’s August Sentix investor confidence index rose 2.6pt from July to an above market print of 14.7 (vs. 13.4 expected).

Looking at the day ahead, in Europe we’ll get the June trade balance, current account balance and industrial production data for Germany (3.0% yoy expected) along with the June trade balance and current account balance data for France. House price data for the UK for July will also be out. In the US the June JOLTS job openings and consumer credit data are due out. China’s July foreign reserves data is also scheduled to be released at some stage. Walt Disney will also release earnings.