In a generally quiet session ahead of today’s main event, the dollar dropped on Friday, set for its biggest weekly decline since March as traders prepared for a keynote speech by Fed chair Jerome Powell in Wyoming looking for hints on the direction of monetary policy, while global stocks were fractionally higher.

The MSCI All-Country World index was barely in the black, as markets in Europe edged higher led by banks followed a new report that UniCredit has retained Rothschild to purchase SocGen, while U.S. index futures were also higher after a mixed session in Asia as trade negotiations with China drew a blank.

In early Asia trading, stocks fell after U.S.-China trade talks ended without any progress and with “no further talk scheduled”. MSCI’s broadest index of Asia-Pacific shares outside Japan shed 0.2 percent; it was still up about 1 percent on the week. Hong Kong’s Hang Seng fell 0.4%, Australian stocks rose 0.05% after the country’s prime minister Malcolm Turnbull was kicked out, and South Korea’s KOSPI advanced half a percent. Japan’s Nikkei climbed 0.85 percent, helped by a weaker yen.

But the big story was again out of China, where after sliding in early trading, A-shares stocks jumped on Friday afternoon, erasing a morning drop, as financial shares led the advance. Analysts told Bloomberg the gains could be the result of purchases by the “national team,” i.e. state funds controlled by Beijing.

“Banks and financial stocks rising could be the result of national team buying,” said Wang Mingli, analyst at Guoyuan Securities in Shanghai. “We don’t see clear logic or a catalyst behind the inflow of cash today, so exterior ’stability’ considerations may be present,” added Wang Jun, analyst at Huachuang Securities in Beijing. And this is what the latest Chinese “stability” intervention in markets looked like:

China was also supported by the PBOC’s decision inject CNY 149bln through a 1yr Medium-term Lending Facility, a move meant to help with upcoming maturities of Local Government bonds.

Raw-materials suppliers led gains in the Stoxx Europe 600 Index as commodities prices rallied, particularly oil. The Europe STOXX 600 index rose 0.2%, boosted by banking names as a result of reports suggesting Unicredit (+0.7%) had hired Rothschild for a deal with SocGen (+1.2%). The gains in banking names are broad based, with the sector outperforming (Stoxx Europe 600 Banking Index +0.4%) and co.’s in the sector leading bourses.

Investors who were hoping for good news on global trade were disappointed after U.S. talks with China ended with no progress, increasing the likelihood that tit-for-tat tariffs will escalate and casting a shadow over the global-growth outlook. For now, however, the focus shifts back to Fed policy and Jerome Powell’s speech in a few hours at Jackson Hole. Where Powell stands on the pace of interest rate hikes will be scrutinized after minutes from the Fed’s most recent policy meeting indicated the central bank would tighten monetary policy soon.

“Global risk sentiment remains somewhat jittery ahead of Fed Chair Powell’s speech with U.S.-Sino trade talks failing to yield any immediate progress,” strategists at OCBC Bank wrote.

The Fed should raise rates further this year and probably next year as well, despite Trump’s opposition to tighter policy, Kansas City Fed President Esther George said in interviews aired on Thursday. Dallas Fed President Robert Kaplan said he sees 3-4 hikes in the next 9-12 months and stated he is comfortable with 4 hikes this year, while he also commented that officials will ignore political pressure or attacks and that he hopes Fed can get to the neutral rate without seeing a yield curve inversion.

“Any comments on current Fed policy will draw even more than the usual attention given recent and unprecedented criticism of the Fed by President Trump,” GAM chief economist Larry Hatheway told Bloomberg. “While Powell prefers to speak plainly and in non-technical terms, he may find reason to take a more guarded approach in order to avoid the appearance of open conflict with the Administration.”

Meanwhile bond traders continue to clink to bets for two rate hikes by year-end as they brave turmoil in emerging markets, trade tensions and a U.S. president who openly pushed policy ideas on the central bank days before Powell speaks. While most question focus on what the Fed will do in 2019, it is unlikely that the “data-dependent” Powell will provide any detail that far in advance, especially with the FOMC Minutes making it clear that trade tensions pose a substantial threat to the pace of future rate hikes.

In the main political news overnight, Australia’s dollar climbed against all its G-10 peers, paring some of Thursday’s losses, after Treasurer Scott Morrison won a leadership ballot to become party leader and prime minister replacing Malcolm Turnbull, and ending a week of political turmoil; Morrison won 45 votes to 40 over right-wing populist Peter Dutton in a closed-door meeting of ruling Liberal party lawmakers.

The greenback fell sharply, giving up all gains from the past 24 hours, while the euro found support from German growth data; the solid performance in the three months through June has helped alleviate concerns that a slowdown in the first quarter would persist.

Elsewhere in FX, the Japanese yen held overnight weakness after weaker-than-expected domestic CPI showed that Kuroda’s 2.0% inflation target remains as elusive as ever:

• Japanese National CPI (Jul) 0.9% vs. Exp. 1.0% (Prev. 0.7%).
• Japanese National CPI Ex. Fresh Food (Jul) 0.8% vs. Exp. 0.9% (Prev. 0.8%)
• Japanese National CPI Ex. Fresh Food & Energy (Jul) 0.3% vs. Exp. 0.3% (Prev. 0.2%)

The Swedish krona erased an earlier decline after Riksbank Deputy Governor Kerstin af Jochnick said that the central bank’s rate path points to a hike toward year-end. New Zealand’s dollar recovered after sliding following comments by New Zealand Central Bank Governor Adrian Orr that the bank hasn’t ruled out cutting interest rates if needed to achieve its inflation target.

Attention as usual focused on any sharp moves in the yuan, and one emerged in mid-morning, when the USDCNH turned sharply lower amid little news, which in turn pushed the dollar down across rest of G-10.

In rates, US Treasuries were initially steady as investors awaited Powell’s scheduled comments at the Jackson Hole retreat later Friday; Treasuries later extended declines to new intra-day lows as the dollar came under pressure led by CNH strength, supporting equity gains. Italian BTP futures gapped higher at the open in reaction to Italian press report that Trump offered Italy PM Conte to help with buying BTPs at meeting 3 weeks ago, however the gains were quickly faded as there were no details on the plan and given the lack of executive power to enforce such an idea.

In commodities, oil was poised for its first weekly gain in 2 months after testing the 200-day moving average. WTI advanced amid prospect of tightening supplies from the U.S. to Iran. Both WTI and Brent up ~1.0% and extending gains above USD 68.00/BBL and USD 75.00/BBL respectively. This comes amid reports of continued strike action at Total’s North Sea oil and gas fields alongside a softer USD. In the metals scope gold is benefitting from a softer USD and is up 0.4% on the day, with the yellow metal set for a 0.3% gain for the week. Copper has pared early losses and is set for its first positive session in three, alongside the best week in four, as the construction material has shed-off trade concerns. Steel prices have seen a recovery (0.5%) as a fall in Chinese steel stocks has been noted, but is still set for it’s worst week in eight (-1.2%)

Expected data include durable goods orders. Foot Locker and Ubiquiti Networks are among companies reporting earnings

Market Snapshot

• S&P 500 futures up 0.2% to 2,863.25
• STOXX Europe 600 up 0.2% to 383.98
• MXAP up 0.06% to 163.27
• MXAPJ down 0.2% to 528.65
• Nikkei up 0.9% to 22,601.77
• Topix up 0.7% to 1,709.20
• Hang Seng Index down 0.4% to 27,671.87
• Shanghai Composite up 0.2% to 2,729.43
• Sensex down 0.2% to 38,266.64
• Australia S&P/ASX 200 up 0.05% to 6,247.33
• Kospi up 0.5% to 2,293.21
• German 10Y yield rose 0.2 bps to 0.341%
• Euro up 0.2% to $1.1566
• Brent Futures up 0.7% to $75.26/bbl
• Italian 10Y yield rose 2.7 bps to 2.816%
• Spanish 10Y yield unchanged at 1.372%
• Brent futures up 0.7% to $75.26/bbl
• Gold spot up 0.4% to $1,190.17
• U.S. Dollar Index down 0.2% to 95.49

Top Overnight News

• U.S. and China fail to make progress in trade talks; Chinese officials note possibility that no further negotiations can happen until after November mid-term elections
• New York State prosecutors have taken preliminary steps to open criminal investigations into President Donald Trump’s former lawyer, Michael Cohen, and possibly the president’s business, according to people familiar with the matter
• Candidates to become Europe’s next top banking watchdog could find that for all their competence, experience and political support, the trump card might be gender
• President Donald Trump told Italian Prime Minister Giuseppe Conte the U.S. is willing to help the country by buying government bonds next year as Italy seeks to refinance its debt, Corriere della Sera reported, citing three high-level Italian officials
• A government-appointed commission recommended against a proposal by Norway’s $1 trillion sovereign wealth fund to dump more than $40 billion in oil and gas stocks
• China removed limits on foreign holdings in domestic banks and asset management companies, formalizing a previously announced step toward opening its $40 trillion financial sector
• China Finance Minister Liu Kun says counter-strikes at the U.S. over trade will remain as targeted as possible to avoid harming businesses in China – whether Chinese or foreign, Reuters reports, citing interview.
• Japanese inflation failed to deliver an expected uptick in July, underscoring the persistent weakness in consumer prices that has forced the Bank of Japan to take an increasingly longer-term view of its mission to achieve 2% inflation

Asian equity markets traded mixed as the region digested the weak lead from Wall St, a lack of progress during US-China trade discussions and change of leadership in Australia. ASX 200 (+0.1%) traded choppy amid the tumultuous political climate, although sentiment later improved after Treasurer Morrison beat former Home Affairs Minister Dutton to become the PM. Elsewhere, Nikkei 225 (+0.8%) was underpinned by a weaker JPY, while Hang Seng (-0.4%) and Shanghai Comp. (+0.2%) were initially the worst performers following the stalemate at US-China trade talks and with the biggest movers amongst Hong Kong’s large caps also dictated by earnings, but the Shanghai Comp. reversed course close to end of trade, and ended the day up. Finally, 10yr JGBs were uneventful with demand subdued amid strength in Tokyo stocks, although downside was also stemmed by the BoJ’s presence in the market for JPY 950bln in 1yr-10yr JGBs and following softer than expected CPI data. PBoC refrained from reverse repos but later injected CNY 149bln through 1yr Medium-term Lending Facility. PBoC set CNY mid-point at 6.8710 (Prev. 6.8367)

Top Asian News

• Uber, Airbus Enlisted to Help Japan Develop Flying Cars
• China Ex- Billionaire Goes Missing, Sparking Rout in Casino Stock

European equites started the flat, with the FTSE MIB the outperforming bourse. This is being driven by banking names, and comes as a result of reports suggesting Unicredit (+0.7%) have hired Rothschild for a deal with SocGen (+1.2%). The gains in banking names are broad based, with the sector outperforming (Stoxx Europe 600 Banking Index +0.4%) and co.’s in the sector leading bourses such as: CAC (SocGen +1.2% & BNP Paribas +1.0%); FTSE MIB (Unicredit +0.7%); DAX (Commerzbank +0.9%); SMI (UBS +1.5%, Credit Suisse +0.9%); Shire (+2.4%) are leading the gains in the FTSE 100 as they received approval for a ground-breaking hereditary angioedema treatment.

Top European News

• Norway Wealth Fund Should Keep Oil Stocks, Commission Recommends
• UniCredit Working With Rothschild’s Bouton on SocGen Deal: MF
• Ceconomy Buyout of Fnac Darty Is Said to Be Stalled by Dispute
• ECB Is Said to Prefer Woman to Head Powerful Banking Watchdog

In FX, we start with AUD where there was some calm after the political storm, and a positive market response (so far) to the prospect of former Treasurer Morrison taking over from Turnbull as leader of the Liberal Party and PM. Indeed, Aud/Usd has bounced firmly from circa 0.7235-40 lows to around 0.7290 and eyeing hefty option expiry interest just above at 0.7305 (1.4 bn), while the Aud/NZD cross is back up near 1.0950 having only just held above 1.0900 amidst the unfolding drama overnight. However, the Kiwi has also caught a bid on the more stable situation down under to retest 0.6650 vs its US peer. The SEK was another major outperformer and gainer, but largely due to Riksbank commentary via Af Jochnick noting inflation rising and nearing target, above forecast Q2 growth and the rate path indicating an October hike. She also acknowledged that recent Krona weakness should underpin price pressures ahead, and on the note Swedish PPI data for July picked up pace from the previous month. Eur/Sek down to 10.5260 from 10.5815 at one stage, with 10.5000 the obvious objective. EM – The Rub and Zar continue to rebound and are on course to end a turbulent week in better shape than other regional currencies (such as the Try and Brl) still suffering from multiple bearish/negative factors, like sanctions, diplomatic tensions, tariffs, on top of domestic political, economic and fiscal issues. Meanwhile, after no material progress in US-China trade talks, the Yuan is back on the wane and the PBoC has resumed its rising mid-point fixing trend. EUR/GBP – Also firmer vs the Greenback, but within recent ranges as the DXY pivots around 95.500 awaiting Fed chair Powell and a raft of other FOMC members all attending the Jackson Hole Symposium. However, the single currency remains capped ahead of 1.1600 and within proximity of decent expiries from 1.1545-55 (1.2 bn), while Cable is back within 1.2800-50 parameters amidst no Brexit progress on the 20% outstanding and make or break sticking points between the UK and EU. Hence, the Eur/Gbp cross remains above 0.9000, albeit not breaching major technical resistance in the 0.9030-35 area.

In commodities, WTI crude advanced, heading for the first weekly gain in two months, amid prospect of tightening supplies from the U.S. to Iran. Both WTI and Brent up ~1.0% and extending gains above USD 68.00/BBL and USD 75.00/BBL respectively. This comes amid reports of continued strike action at Total’s (FP FP) North Sea oil and gas fields alongside a softer USD. In the metals scope gold is benefitting from a softer USD and is up 0.4% on the day, with the yellow metal set for a 0.3% gain for the week. Copper has pared early losses and is set for its first positive session in three, alongside the best week in four, as the construction material has shed-off trade concerns. Steel prices have seen a recovery (0.5%) as a fall in Chinese steel stocks has been noted, but is still set for it’s worst week in eight (-1.2%)

US Event Calendar

• 8:30am: Durable Goods Orders, est. -1.0%, prior 0.8%; Durables Ex Transportation, est. 0.5%, prior 0.2%
• 8:30am: Cap Goods Orders Nondef Ex Air, est. 0.5%, prior 0.2%; Cap Goods Ship Nondef Ex Air, est. 0.3%, prior 0.7%

Looking ahead to today, apart from Chair Powell’s speech, there are other scheduled speakers including BOE’s Haldane as well as various professors from US universities. On the data front, the final reading of second quarter German GDP will print at 7:00am London, followed by US durable and capital goods orders for July due at 13:30 London. The July PPI for Spain and July finance loans for housing in the UK are also due.

DB’s Jim Reid concludes the overnight wrap

The last 36 hours or so feels like a microcosm of how markets have gone about their business this year. A flurry of political drama related headlines, stress over tit-for-tat tariffs, solid but unspectacular PMIs, and markets which continue to trudge along. Yesterday was clearly impacted by well below average volumes, with the S&P 500 (-0.17%), DOW (-0.30%) and NASDAQ (-0.13%) all finishing on the softer side. It wasn’t much more exciting in Europe where the Stoxx 600 closed -0.17%. Bunds and Treasuries also ended with moves of less than 0.5bps although the 2s10s Treasury curve hit a fresh cyclical low of 20.9bps which is lower than Japan for the first time since November 2007. Quite a landmark moment.

Meanwhile the USD (+0.55%) finally rose for the first time in seven sessions which didn’t seem to help EM currencies with the added distraction of Mr Trump tweeting that he had instructed Secretary of State Mike Pompeo to “closely study the South Africa land and farm seizures and expropriations and the large scale killing of farmers.” In response the Rand fell -1.71%, though Wednesday’s inflation print at 5.1% did not help sentiment either. Elsewhere, the Brazilian Real (-1.74%) continued to lead losses in EM as investors positioned ahead of this autumn’s election. The Real is now within 1.5% of its weakest-ever level. The Hungarian Forint and Turkish Lira also weakened -1.02% and -1.19% versus the dollar, respectively.

While politics may have preoccupied the market for most of this week, the focus for the next couple of days may well turn back to monetary policy with the Fed’s annual Jackson Hole symposium due to kick off today and continue into the weekend. As a reminder, the topic of this year’s conference is the rather vague “Changing Market Structure and Implications for Monetary Policy” and Fed Chair Powell is due to speak this afternoon at 15.00pm London time  on the even more vague “Monetary Policy in a Changing Economy”. While the title of Powell’s speech gives few clues away, our US economists believe that he is unlikely to move market expectations in either a more hawkish or dovish direction. That said, he could discuss some market relevant topics, including: uncertainty around estimates of the natural rate of unemployment; the potentially flatter Philips curve; the outlook for inflation; the ongoing balance sheet runoff process; changes to how monetary policy is implemented by the Open Markets Desk (i.e. floor versus corridor system); macroprudential regulatory adjustments (e.g. countercyclical capital buffer, or CCyB); or changes to the Fed’s monetary policy framework (e.g. price level targeting). So worth keeping an eye on.

This morning in Asia, markets are trading mixed with the Nikkei (+0.69%) and Kospi (+0.15%) both up while the Hang Seng (-0.69%) and Shanghai Comp. (-0.35%) are down as we type. Elsewhere on trade, the latest talks between the US and China seems to have yielded little material progress, although China’s Commerce ministry indicated the two  countries had “constructive, honest” talks on trade issues and both parties will keep dialogue open. Meanwhile China has removed the foreign ownership limits in its banks and asset managers, consistent with prior commitments by President Xi. Datawise, Japan’s July CPI was slightly softer than expectations and remains well below the BoJ’s target. The core CPI (ex-fresh food) was flat mom at 0.8% yoy (vs. 0.9% expected) while the stricter CPI measure (ex-fresh food and energy) rose one-tenth mom to an in line print of 0.3% yoy.

Back to the PMIs. In Europe the composite reading of 54.4 was a shade lower than expected (54.5) mainly due to a half point fall in the manufacturing print to 54.6 (vs. 55.2 expected). That’s the lowest reading for the manufacturing component since November 2016 but the broader composite continues to be supported by the services sector where the PMI rose 0.2pts to an in-line 54.4 reading. As far as pricing pressure was concerned, the survey revealed that “although input cost and selling price inflation rates remained among the highest seen over the past seven years, both cooled to three-month lows”. Output prices were also reported as easing in both manufacturing and services, and signs of capacity constraints (delivery times, backlogs of work) also declined.

At a country level the composite reading for France rose a solid 0.7pts to 55.1 (vs. 54.6 expected) while Germany also surprised to the upside, jumping an identical 0.7pts to 55.7 (vs. 55.1 expected). The latter was driven by the services sector with the manufacturing actually sliding more than expected, albeit at still robust levels. What yesterday’s data did imply is bit of softer read through for the periphery to the tune of about 0.8pts in the view of our economists. That being said, the broad level data still points to a solid +0.5% qoq growth in Q3 for the Euro area. As for the US, the PMIs yesterday largely continued the trend of some moderately weaker readings from recent survey data. The composite fell 0.7pts to 55.0 with both the manufacturing (-0.8pts to 54.5; 55.0 expected) and services (-0.8pts to 55.2; 55.8 expected) down more than expected. Interestingly the survey did reveal that “inflationary pressures moderated in August, reflecting the least marked rise in average cost burden since the start of 2018”. As far as the other data was concerned yesterday, last week’s initial jobless claims declined by 2,000 to 210,000 and continuing claims printed at 1,727,000. Both series remain near their recent cyclical lows and not far away from their all-time lows. The FHFA House  Price Index for June rose 0.2% versus 0.3% expected, and new home sales declined slightly in July. We continue to expect the housing sector to weigh slightly on growth for the next few quarters, but the risks are skewed to the downside so this trend bears watching.

Away from the data, there appeared to be some recycling of headlines yesterday suggesting that German Chancellor Merkel was not going to push for a German ECB President. That would seemingly take Bundesbank President Weidmann out of the race which also implies that there is no obvious favourite for Draghi’s successor. The European Commission President job also needs to be addressed with the Juncker’s current term ending in October next year – the same as Draghi’s – with Handelsblatt reporting that Merkel favoured a German for the Commission President role.

Speaking of the ECB, the minutes yesterday from the latest policy meeting didn’t appear to throw up any real curveballs and indeed they confirmed that “members widely expressed satisfaction that the communication of the June seems to ratify current market pricing which does not include a rate hike until autumn 2019. The minutes did cite the “risk of persistent heightened financial market volatility,” which could be a veiled reference to the situation in Italy.

In other European political news, the UK released its plans in the event that no Brexit deal is reached, causing some negative sentiment around the pound which depreciated -0.74% versus the dollar yesterday. However, there was nothing particularly new in the releases and we continue to expect the Withdrawal Agreement for the UK’s exit from the EU to be resolved by the end of the year, even if it requires a “fudge” around certain details of the future relationship. Separately, Italian Deputy Prime Minister Di Maio from Five Star said that Italy would suspend EU funding next year if leaders could not reach an agreement to divvy up migrants and ease the burden on Italy. Di Maio is known as a more combative voice in the government, but the rhetoric marginally raises the chances of confrontation with the EU over the budget over the next few weeks.

Finally there were more Fed speak on rates and yield curve yesterday. The Fed’s George told Bloomberg TV that “based on what I see today, I think two more rate hikes (this year) could be appropriate” along with several more next year was  the Fed move rates back to a neutral setting of around 3%. Conversely the more dovish Fed’s Kaplan noted that “…to get to a neutral level (on rates), I think that means we need to be raising rates 3 or 4 times over the next 9 to 12 months” and then reassess based on incoming data. Meanwhile he noted the flattening yield curve “…it’s something that I’ll be watching. So I’m hopeful we can get to neutral without creating an inverted yield curve”. Elsewhere the Fed’s Bostic noted “the yield curve gives us important and useful information….but it is only one signal among many that we use…” whilst adding that “correlation does not imply causality. This is a particularly important point to keep in mind when
discussing the yield curve”.

Looking ahead to today, apart from Chair Powell’s speech, there are other scheduled speakers including BOE’s Haldane as well as various professors from US universities. On the data front, the final reading of second quarter German GDP will print at 7:00am London, followed by US durable and capital goods orders for July due at 13:30 London. The July PPI for Spain and July finance loans for housing in the UK are also due.