One day after the the S&P500 bull market set a new duration record, at exactly 0.01 Washington Time on Thursday, the U.S. imposed tariffs of 25% on $16 billion worth of imports from China. At the same time, China said it opposes the latest U.S. tariffs and will retaliate tit-for-tat; and would also complain to the WTO. China targeted items include coal, medical instruments, cars and buses. Meanwhile, low-level trade talks held Wednesday are scheduled to continue Thursday with very modest hopes of resolving the trade tensions.

The renewed trade escalation, coupled with upbeat FOMC minutes which guaranteed a September rate hike (while warning on growing trade tensions), sent the dollar higher against all its G10 peers for the first day in six as investors awaited a meeting of global central bankers after the Federal Reserve signaled no change to its pace of monetary policy tightening.

UBS Wealth Management deputy UK CIO Caroline Simmons cited trade concerns as the reason for paring back an overweight on global equities to a very small position. “We’ve got trade conflicts, and sanctions, in Turkey and Russia, so there are a few things going on that we were a little nervous about,” Simmons said.

World stocks came under pressure on Thursday as new tariffs took effect in the U.S./China trade war and markets speculated about U.S. President Donald Trump’s position following legal rulings against two former advisers. US equity futures were flat and US Treasuries were generally unchanged as European stocks gained and Asian shares fell. The MSCI world equity index was 0.1% lower in early trading, while a rise across defensive sectors helped Europe’s Stoxx Europe 600 Index eek out modest gains while futures for the S&P 500 Index were little changed as investors continued to weigh Trump’s legal woes.

Cohen’s plea deal does not mean the president has been implicated in anything, press secretary Sarah Sanders said at a White House briefing, but the market was not convinced: “While the (legal issues) shouldn’t substantially alter the stock market landscape, money managers and analysts say the developments raise the likelihood of further turbulence ahead for Mr. Trump heading into the mid-term elections,” said James McGlew, Perth-based analyst at stockbroking firm Argonaut.

Earlier, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.2%. Hong Kong’s Hang Seng index stumbled 0.5 percent while Korean and Chinese stocks gained. The Chinese currency resumed its slump, with the offshore yuan falling to 6.88 around 6am EDT.

Central banks will again be in the spotlight as investors await comments from Fed chairman Jerome Powell later this week when he speaks at the meeting of policy makers in Jackson Hole, Wyoming. Familiar tensions remain in the background, however. Alongside Trump’s legal woes, traders must also digest the imposition of fresh tariffs between the U.S. and China in the midst of talks aimed at averting the worsening trade conflict.

“With economic data mostly cooperating with the Fed’s base message of continued rate increases driven by tight labor markets, above trend growth and bubbling inflation, it is unlikely that Powell will drastically stray from this message,” BNY Mellon strategists said in a note, adding that Powell may provide more details on the neutral rate, curve inversion and balance sheet process.

In currency markets, the euro briefly pared some losses after manufacturing and services data showed the region’s economy is still strong, but soon retraced the move. According to Markit, the Flash Eurozone PMI Composite Output Index rose modestly in August to 54.4 (from 54.3 in July) a 2-month high, however optimism about the future hit a two-year low among trade war uncertainty.

IHS Markit PMI™@IHSMarkitPMI

Flash Eurozone #PMI Composite Output Index at 54.4 in August (54.3 in July) 2-month high; Optimism hits two-year low http://ihsmark.it/32Yw50ih5o3

Commenting on the recent euro moves, Aviva Investors said that the common currency’s selloff now looks overdone, and the euro may recover on the prospect of stronger growth and reduced political risks in the region.

Elsewhere in FX, among the biggest currency losers were the South Africa’s rand, which slumped after a tweet from U.S. President Donald Trump fueled speculation of possible sanctions against the country…

… and the Australian dollar, which is under pressure as Prime Minister Malcolm Turnbull fights to keep his leadership. Australian shares also slipped 0.3% after several senior ministers tendered their resignations on Thursday and demanded a second vote on Prime Minister Malcolm Turnbull’s leadership. “The Aussie will weaken against the U.S. dollar and the pound because investors are underpricing rising domestic political risks as PM Turnbull’s challenger gains support”, Morgan Stanley analysts including Hans Redeker write in a note.

The Russian ruble initially gapped weaker after yesterday’s warning of outflows from Russian Economy Minister, before snapping higher after the Russian Central Bank canceled FX buying until end-Sept to “reduce volatility in financial markets.”

In rates, the US Treasury curve flattens led by the belly, while bunds edged lower after French and German PMI prints; interesting options activity observed by Bloomberg included a large buyer of deep OTM calls in OATs and BTPs.

Commodities were under pressure due to the rebound in the dollar, with gold also slumping on the outlook for higher American interest rates. Oil edged lower after surging on a U.S. government report that showed the biggest decline in crude inventories since late July.

Expected data today include jobless claims, PMIs, and home sales. Alibaba, Hormel, Autodesk, Gap, Intuit, and VMware are among companies reporting earnings.

Market Snapshot

• S&P 500 futures little changed at 2,861.75
• STOXX Europe 600 up 0.2% to 384.69
• MXAP down 0.3% to 163.60
• MXAPJ down 0.2% to 530.59
• Nikkei up 0.2% to 22,410.82
• Topix down 0.01% to 1,698.22
• Hang Seng Index down 0.5% to 27,790.46
• Shanghai Composite up 0.4% to 2,724.63
• Sensex up 0.1% to 38,328.35
• Australia S&P/ASX 200 down 0.3% to 6,244.37
• Kospi up 0.4% to 2,282.60
• German 10Y yield unchanged at 0.344%
• Euro down 0.4% to $1.1554
• Italian 10Y yield rose 7.2 bps to 2.789%
• Spanish 10Y yield fell 1.8 bps to 1.363%
• Brent futures down 0.5% to $74.41/bbl
• Gold spot down 0.7% to $1,187.34
• U.S. Dollar Index up 0.3% to 95.42

Top Overnight News from Bloomberg

• U.S. central bankers are ready to raise interest rates again so long as the economy stays healthy, according to a record of the Federal Reserve’s most recent policy meeting
• Australia’s Prime Minister Malcolm Turnbull said he would only step aside if his rivals gather enough signatures to show he no longer has control of the party. Turnbull declined to comment when asked who he would support if Dutton manages to force a leadership vote. Treasurer Scott Morrison — a Turnbull ally — is preparing to contest the ballot, Sky News reported
• U.S. tariffs of 25% on $16 billion worth of imports from China come into effect at 00:01 Washington time, according to a statement in the Federal Register. China opposes the latest U.S. tariffs and is forced to retaliate, commerce ministry says in a statement. Mid-level trade talks held Wednesday are scheduled to continue Thursday
• President Donald Trump denied using campaign funds as hush money for women who alleged past affairs with him, a day after federal prosecutors claimed some campaign officials were aware of the payments
• President Donald Trump’s plans to punish carmakers who produce vehicles outside the U.S. and sell them to Americans are hindering his administration’s efforts to close the deal on a new Nafta this month
• The U.K. government will publish the first in a series of no-deal Brexit notices on Thursday, advising business and consumers on how to cope should U.K. leaves the EU without an agreement. A second batch will be published in September. Most of the British public believes the U.K. will leave the European Union without a deal, with many planning to cut costs on everything from clothes to home extensions, a survey finds
• Michael Cohen’s mea culpa was notable partly because he fingered a host of executives and companies who he says also participated in the scheme. That signals that there’s a roster of people who could emerge as potential witnesses or targets in any ongoing investigation into campaign finance violations; Cohen’s payments are not illegal, Trump’s lawyer Rudy Giuliani says in a tweet
• ECB Governing Council member Jens Weidmann says in Berlin that it’s “time to begin exiting the very expansionary monetary policy and the non-standard measures, especially considering their possible side effects”
• Goldman Sachs Group Inc. is shutting two hedge funds run by people based in Asia, according to people with knowledge of the matter
• Foreign buyers led by Hong Kong billionaires and Korean securities firms spent more on the U.K. capital’s offices in the first half than in central Paris, Manhattan, Munich and Frankfurt combined. The weak pound is making London a bargain compared with cities in Europe, many of which have undergone their own property booms

Asia-Pac stock markets traded subdued with the region cautious amid political turmoil in Australia and as the 2nd round of Trump tariffs on China took effect. ASX 200 (-0.3%) was negative as a mega-storm brewed on the political front with PM Turnbull’s future in office highly doubtful after 3 cabinet members resigned including Finance Minister Cormann who advised the PM he no longer has party support, although losses in the index have been stemmed as participants reacted to a slew of earnings and with miners underpinned by recent strength in commodities. Elsewhere, Nikkei 225 (+0.2%) remained afloat on the back of a weaker JPY, while Shanghai Comp. (-0.3%) and Hang Seng (-0.8%) were jittery as the 2nd round of US tariffs on China took effect today and after the PBoC refrained from liquidity operations again. Finally, 10yr JGBs were relatively unchanged with only minimal gains seen from the cautious risk tone in the region and with demand also subdued amid weaker results at the enhanced liquidity auction for longer-dated bonds.

Top Asian News

• Xiaomi’s Rally Fizzles as Ebbing Margins Outweigh Solid Growth
• San Miguel Seeks $2.67 Billion in Sale of Food-Unit Shares
• Japan’s Auto Stocks Drop Before Next Round of U.S.-China Tariffs
• Indonesia Wants Foreigners to Own Less of Its Bonds in Long Run
• Women, Notably Non-Moms, Need Not Apply in Hong Kong: Job Study

European equities are largely mixed and trading without direction amidst the fresh US-China tariff action. The IT sector is mimicking the outperformance seen on Wall Street and is currently the leading sector. Ryanair (+6.6%) is currently leading the gains in the Stoxx 600 (alongside Sunrise amid an upgrade in EBITDA guidance) as the co. reached an agreement with the Irish pilots union after 22 hours of deliberation. Individual equity losses in Europe are driven by the general weakness in the EM scope, which is weighing on companies with exposure to the affected countries, such as Deutsche Bank (-2.3%) and Raiffeisen Bank (-3.05%), while Continental (-2.7%) fails to recover from yesterday’s losses.

Top European News

• Euro-Area Growth Stays Strong as ECB Plans to Ease Stimulus
• Ryanair Reaches Deal With Irish Pilots, Sending Stock Higher
• U.K.’s Raab Wants Business as Usual After a ‘No Deal’ Brexit
• Brexit-Bound London Beats Global Rivals to Real Estate Cash

In FX, FOMC minutes have given the flagging DXY a fillip, along with indirect props from rival currencies that are succumbing to more selling pressure due to specific/independent bearish factors. Thus, the index and Dollar overall have rebounded, with the former reclaiming 95.000+ status and almost up to 95.500 again. AUD – No respite for the Aud that is back on the rack after a fleeting rebound to around 0.7350 vs its US counterpart and sub-0.7300 on the latest political machinations down under. Indeed, the Aud is also extending losses relative to the NZD, with the cross down towards 1.0900 even though the Kiwi is back below 0.6700 vs the USD. EM – The usual suspects are being flogged again, but with the Rub and Zar really seeing the brunt of investor angst on US sanctions – Rouble and Rand both around 1% or more weaker vs the Greenback. Elsewhere, Usd/Cnh firmer after reports of Chinese banks selling Yuan vs Dollars on a forward basis and an uptick in the Cny fix after some retracement of late from the PBoC.

Commodities are pressured amid the recent dollar strength after the FOMC minutes cemented rate hike expectations. WTI and Brent Oct’ 18 futures trade lower by 0.2% and 0.4% respectively after the US benchmark rose over 3% yesterday. News flow has been light for the complex thus far, however, it is worth noting the ongoing trade disputes may potentially dampen global demand. Meanwhile, sources initially reported the Saudi Aramco IPO listing has been halted, but Saudi Energy Minister later denied these reports. Elsewhere, precious and base metals also feel the effect of the aforementioned dollar strength with gold below USD 1190/oz.

Looking at the day ahead, we’ll get the latest set of PMI data in the US, as well as the June FHFA house price index, 2Q house price purchase index, July new home sales and August Kansas City Fed manufacturing activity index. Away from data, Intuit, HP and Alibaba will reports their earnings.

US Event Calendar

• 8:30am: Initial Jobless Claims, est. 215,000, prior 212,000; Continuing Claims, est. 1.73m, prior 1.72m
• 9am: FHFA House Price Index MoM, est. 0.3%, prior 0.2%; House Price Purchase Index QoQ, prior 1.7%
• 9:45am: Bloomberg Consumer Comfort, prior 58.9
• 9:45am: Markit US Manufacturing PMI, est. 55, prior 55.3;
  • Markit US Services PMI, est. 55.8, prior 56
  • Markit US Composite PMI, prior 55.7
• 10am: New Home Sales, est. 645,000, prior 631,000; New Home Sales MoM, est. 2.22%, prior -5.3%
• 11am: Kansas City Fed Manf. Activity, est. 22.5, prior 23
• 8pm: Fed Hosts Annual Jackson Hole Central Banking Symposium

DB’s Jim Reid concludes the overnight wrap

The interesting thing about markets over the last 24 hours is that, despite all the furore surrounding the legal dramas in Washington – with markets and news outlets across the board now speculating about how close this gets to the Presidency – markets and especially risk assets have shrugged their collective shoulders for now. Plenty of discussion but no conviction yet as to what this means. Indeed it’s not clear whether further legal problems for the administration would distract from or increase focus on fighting a trade war.

Indeed an early -0.24% intraday decline was as bad as it got for the S&P 500 yesterday, and the index retraced its losses to close only -0.04% lower by the end of play with even the Fed minutes barely creating much impact. The Dow  and Nasdaq finished -0.34% and +0.38% while in Europe, markets were largely flat to slightly higher. The VIX also fell back into the low 12s, closing at 12.25 (-0.61 on the day) while 10y Treasury yields finished 1.1bps lower and traded in  a fairly unexciting 2.9bps range throughout the day. The USD was a bit more volatile but to be fair this is all relative. The Dollar index ended -0.12% – the sixth decline in a row – but with a range (-0.47%) which was still well below the average YTD (0.60%).

Commodity markets rallied, with Brent crude oil advancing +3.07% yesterday and the energy sector leading the S&P 500 with a +1.20% gain – its strongest move in over a month. Oil prices have been boosted by the dollar’s recent softness, with the DXY index down 1.70% over the last two weeks, but also by supportive data from the US yesterday. US crude inventories fell by 5.8 million barrels last week, almost completely retracing the previous week’s surprise inventory build.

Back to markets and despite the political headwinds, with the US economy still firing on all cylinders and earnings season breaking records, it’s clear that US markets are choosing to focus more on the strong fundamentals rather than the political and macro risks. Target and Lowes announced better-than-expected results yesterday, boosting the S&P 500 retail subsector to a fresh all-time high. Over 81% of companies have beaten earnings estimates this season, which is  the highest percentage based on data we have back to 1998. So an impressive season and a theme that keeps on rising to the surface above the more negative noise elsewhere.

Staying with the US, the FOMC minutes last night broadly met expectations. They did not move markets and supported the existing policy path of raising rates steadily. The discussion of the economic outlook was slightly more balanced than previously, as downside risks from trade, housing, and emerging markets have intensified somewhat. FOMC members seem to broadly agree that another interest rate hike will be warranted soon paving the way for a September hike (Bloomberg implied odds at 92%). The committee debated some other potentially relevant topics – e.g. the yield curve, balance sheet policy, the counter-cyclical buffer, and slow wage growth – but the minutes did not reveal any consensus conclusions. These topics are nevertheless likely to resurface later this year.

Yesterday’s economic calendar was light, but the US data may have underlined the FOMC’s concern around the housing sector’s outlook. Existing home sales declined to 5.34 million in July, its slowest pace since February 2016. Mortgage applications rose a robust 4.2%, but our US economists continue to expect the housing sector to weigh slightly on growth over the next few quarters. In Europe, markets traded sideways amid very low liquidity. Benchmark indexes in Germany, France, and the UK experienced trading volumes 21.7%, 19.2%, and 22.2% lower than the 100-day average, respectively. Italy saw even thinner activity, with volumes 36.1% lower than average, and was the only major Eurozone country to post a selloff (-0.40%) yesterday. Italian 10-year bond yields rose 7.4 bps, underperforming Germany and the rest of peripheral Europe.

In Asia this morning, sentiment is a bit mixed with the Nikkei up +0.17% as the Yen weakens, while the Kospi (-0.04%), Hang Seng (-0.72%) and Shanghai Comp. (-0.34%) are down as we type. Meanwhile the US dollar index has nudged up for the first time in seven days (+0.3%) with gains against most currencies while futures on the S&P are pointing to a softer start.

It’s hard to see politics dissipating from our screens today with the US and China now imposing the latest tit-for-tat protectionist measures, specifically tariffs of 25% on $16bn of imports from both sides. Meetings between the two sides seemingly failed to yield tangible improvements yesterday, but remember that discussions are still ongoing about potential tariffs by the US on as much as $200bn of Chinese imports from as soon as September 6th. Meanwhile the  latest on NAFTA appears that the US and Mexico are close to a deal, with the Mexican Chief negotiator Mr Seade indicating that “we might close this, not in a matter of hours, but these days. We still have next week”. Elsewhere the US Commerce Secretary Ross also said “…I think a deal is very likely within reach in the very, very near future”.

Today we’ve also got some important economic data with the global flash August PMIs due out. Early this morning we already received Japan’s manufacturing reading which edged up 0.2pt from last month to 52.5. Over the next couple of hours we’ll get manufacturing, services and composite prints in core Europe and then the same for the US this  afternoon. In Europe the consensus is for a small 0.2pt rise in the composite to 54.5 led by both the manufacturing and services sectors. In the US the market is however expecting a modest 0.3pt decline in the manufacturing print (to 55.0) and 0.2pt fall for the services print to 55.8.

Away from the PMIs and looking at the day ahead. In Europe, we will get the latest ECB monetary policy minutes, August business and manufacturing confidence and production outlook for France along with the survey of industrial investment for France and advance August consumer confidence for the euro area. In the US, we get the June FHFA house price index, 2Q house price purchase index, July new home sales and August Kansas City Fed manufacturing  activity index. Away from data, Intuit, HP and Alibaba will reports their earnings.