Global markets slumped in suspense over today’s main events, with S&P 500 futures falling along with European and Asian shares as investors awaited the latest move in the U.S.-China trade war after the comment period deadline passed overnight, even as August payrolls data loomed later on Friday. A weaker dollar helped emerging-market equities snap seven days of declines while EM currencies also rose.

World shares limped toward their worst week in almost six months on Friday, with Asia carving out a 14-month trough as investors braced for a new salvo of Sino-U.S. tariffs. A Thursday slump in U.S. chip stocks and reports that President Trump had also weighed a trade feud with Japan dragged on tech-heavy Asia overnight, while Europe’s main bourses faded after an initial attempt push higher, with the Stoxx 600 index falling to session low, down 0.3% reversing gains of 0.2%, driven lower by banks and as travel stocks declined. The Europe STOXX 600 was set to end the week with a 2.3% loss, its worst weekly performance since the end of March. Emerging market stocks have lost even more, some 3%, while U.S. equity futures pointed to a softer open following a negative session in Asia as equities fell in Japan, South Korea and Australia, while those in China posted gains.

European banks dropped 1% after Dow Jones reported that China asked HNA Group to exit Deutsche Bank, and ING said its license to operate could be threatened because of information technology and working system problems. As a result, the European Bank Index dropped lowest since November 2016.

Core European bonds fell, while Italian bonds gained on optimism the government will stick to European Union budget-deficit rules. In fact, Italian bonds headed for the biggest weekly gain in almost three months after the country’s finance chief reassured investors that this month’s budget won’t breach European Union rules.

Chinese blue chips had managed their 0.5 percent bounce as beaten-down health care stocks found buyers after taking a savaging in recent months amid vaccine scandals. MSCI’s broadest index of Asia-Pacific shares outside Japan had still lost 0.3% though, having earlier reached its lowest since mid-July last year. The Nikkei shed 0.8 percent, undermined by a rising yen and reports U.S. President Donald Trump could be contemplating taking on Japan over trade.

Trader nerves have been frayed further after the public comment period for proposed tariffs on an additional $200 billion worth of Chinese imports passed. The tariffs could now go into effect at any moment, although there was no clear timetable. China has warned of retaliation if Washington launches any new measures. Australia’s dollar, often used in as play on China’s fortunes due to its huge metals exports there, hit a 2-1/2 year low early on it Europe.

“It is all linked to the trade comment period expiring and now we are wondering what the implementation plan is going to be and how China is going to respond,” Saxo Bank’s head of FX strategy John Hardy said. “The Aussie dollar of course is a proxy within G10 for that,” he added, also pointing to shares in mining giants such as BHP trading down near key technical levels.

There was a silver lining after the MSCI Emerging Market Index jumped 0.4%, on course to snap a 7-day losing streak after falling into a bear market earlier in the week. China had closed higher overnight despite the tariff feud and Turkey’s lira and South Africa’s rand and Argentina’s peso all looked relatively calm early on.

Other emerging markets were trying to steady after a punishing week, with Indonesia and the Philippines still badly scarred by fears of capital flight following crises in Argentina and Turkey and the rumbling U.S.-China trade strains.

“It seems unlikely the tariffs are not implemented as the U.S. administration believes that they are winning the trade war and will be in a stronger position to negotiate if they put more pressure on China,” JPMorgan analysts wrote in a note. “The tech sector was also very weak overnight, with a slide in Micron of almost 10 percent and further weakness in the Chinese Internet ADRs.”

Elsewhere in EM, Brazil’s stocks and currency jumped after presidential candidate Jair Bolsonaro was stabbed during a street rally as traders bet that the attack will wind up creating sympathy for the candidate and help propel him into the second round of voting.

The Turkish lira advanced for a third day and Turkish bonds rallied as an emerging-market currency rout showed signs of easing.

With the EM rout fading for now, traders returned to more familiar themes: trade tensions and central banks. The Thursday deadline for public comment on proposed U.S. tariff hikes on an additional $200 billion of Chinese imports came and went without any fresh announcement from Washington. Eyes now turn to the U.S. payrolls report for August which is expected to show a robust rise of 191,000 – in part as July was temporarily depressed by the closure of the Toys R Us chain that month – which investors will watch with particular attention following dovish comments by New York Fed President John Williams on Thursday.

Still, as we noted previously, Goldman analysts cautioned that: “Despite employment indicators pointing to another strong report, it is worth noting that there is a tendency for August payrolls to initially disappoint and then be revised up noticeably later.”

Just as important will be figures on U.S. wages where a rise above the 0.2 percent forecasted would likely boost the dollar and pressure Treasury prices.

The dollar could do with the lift, having lost out to the safe-haven yen and Swiss franc. It was changing hands at 110.70 yen after falling 0.7 percent on Thursday, the sharpest one-day loss in seven weeks. Part of the decline came after a Wall Street Journal columnist reported Trump had mused about starting a trade fight with Japan. The dollar also hit a four-month low on the franc around $0.9645. Against a basket of currencies, the dollar index nudged lower to 94.939 and was heading for a fourth weekly drop.

Elsewhere in G-10 FX, the pound was little changed on the day and headed for its first weekly loss since mid-August. The euro was a shade higher at $1.1645, while sterling idled at $1.2939 amid ongoing uncertainty over Brexit negotiations. The dollar dipped and Treasuries moved lower before the U.S. payroll report on Friday, which will offer clues on the labor market’s health, the state of wage inflation and the pace of future Fed rate hikes.

In commodities, WTI and Brent futures were marginally higher in early European trade thus far with the former hovering around the USD 68/bbl level. According to Reuters trade flow data, US imports of crude oil from Saudi Arabia in August and September are set to reach the highest 2-month level early of 2017, citing the relatively cheap prices as advantageous for US refiners. News flow remains light for the complex, however, next week will see the release of the EIA short-term energy outlook, OPEC’s monthly report and IEA’s oil market report. Elsewhere, spot gold trades flat as the yellow metal flirts with the USD 1200/oz level ahead of the release of key US jobs data later, while copper underperforms amid ongoing trade-related concerns.

Market Snapshot

• S&P 500 futures down 0.08% to 2,876.75
• STOXX Europe 600 down 0.1% to 373.05
• MXAP down 0.2% to 160.23
• MXAPJ down 0.2% to 515.81
• Nikkei down 0.8% to 22,307.06
• Topix down 0.5% to 1,684.31
• Hang Seng Index down 0.01% to 26,973.47
• Shanghai Composite up 0.4% to 2,702.30
• Sensex up 0.2% to 38,302.99
• Australia S&P/ASX 200 down 0.3% to 6,143.81
• Kospi down 0.3% to 2,281.58
• Brent Futures up 0.2% to $76.68/bbl
• Gold spot up 0.1% to $1,201.26
• U.S. Dollar Index down 0.1% to 94.91
• German 10Y yield rose 0.8 bps to 0.363%
• Euro up 0.2% to $1.1645
• Brent Futures up 0.2% to $76.68/bbl
• Italian 10Y yield rose 2.9 bps to 2.694%
• Spanish 10Y yield fell 0.7 bps to 1.442%

Top Headline News from Bloomberg

• President Trump described his good relations with Japanese leadership in a Thursday phone call but added “of course that will end as soon as I tell them how much they have to pay,” according to an opinion piece from Wall Street Journal’s James Freeman, who added that it seems that Trump is still bothered by the terms of U.S. trade with Japan
• Some of America’s most prominent technology companies and retailers made a last-minute push to convince President Donald Trump to reverse course on a plan to impose tariffs on $200 billion in Chinese imports
• The Federal Reserve shouldn’t hesitate to invert the yield curve if raising short-term interest rates above long-term yields becomes necessary to achieve the U.S. central bank’s targets, New York Fed President John Williams said
• President Donald Trump said he’d like to shut down the U.S. government to try to force congressional Democrats to fund a wall along the Mexican border, but likely won’t do it before the midterm elections
• Mario Draghi will only just manage to raise the European Central Bank’s interest rates before his term as president ends in October 2019 amid continued risks from U.S. tariffs and Italian politics, according to a Bloomberg survey of economists
• Nafta talks between the U.S. and Canada have seemed upbeat, but are not expected to lead to a deal this week, a Canadian government official said, speaking on condition of anonymity
• Germany’s industry is experiencing further signs of strain amid trade tensions between the U.S. and the European Union, with production unexpectedly declining for a second consecutive month
• Euro-area GDP increased 0.4 percent in the second quarter, matching an earlier estimate
• Sweden’s two traditional political blocs are running neck-and-neck ahead of Sunday’s election, with neither close to a majority amid growing support for the nationalist Sweden Democrats
• French President Emmanuel Macron is preparing for a showdown between supporters of liberal values and proponents of nationalism as he bids to rally support ahead of European elections in May

Asia equity markets traded negative following a lacklustre lead from the US where continued weakness in tech and underperformance in energy dragged most US majors lower, while upcoming NFP jobs data and trade-related concerns added to the tentative tone. ASX 200 (-0.6%) and Nikkei 225 (-0.9%) were lower with nearly all sectors in Australia in the red and energy among the worst hit following the recent pullback in crude, while Tokyo stocks underperformed on a firmer currency and after US President Trump hinted that Japan could be next on the agenda. Conversely, Hang Seng (-0.9%) and Shanghai Comp. (-0.1%) initially outperformed despite the potential escalation in the trade dispute with the consultation period for the proposed tariffs on USD 200bln of Chinese imports now expired. Furthermore, China had declared it would retaliate against fresh tariffs and plans to take necessary countermeasures to support its companies, while the PBoC were also active today and injected CNY 176.5bln through its 1yr MLF. Chinese stocks then deteriorated heading into the tariff deadline to conform to the overall risk-averse tone and amid increases in money market rates which saw the Hong Kong overnight CNH HIBOR hit its highest level since late June. Finally, 10yr JGBs were marginally higher as they tracked the prior session’s gains in T-notes and with support seen amid the risk averse sentiment in the region, while today’s enhanced liquidity auction for 2yr-20yr JGBs also saw improved results across all metrics.

Top Asia News

• Philippine Central Bank Pledges ‘Strong’ Action on Inflation
• Hong Kong, China Stocks Wobble as U.S. Tariff Consultations End
• China End-Aug. Forex Reserves at $3.1097T; Est. $3.115T
• Deutsche Bank Top Holder HNA Is Said to Plan Exiting Its Stake

European equities trade slightly softer (Eurostoxx 50 -0.4%) following a negative read from Asia with sentiment dampened on trade concerns and ahead of the upcoming NFP data, while UK’s FTSE 100 is pressured by miners on the back of softer base metal prices. Sector wise, telecom names outperform as French listed Iliad (+5.7%) shares jumped higher on rumours of going private. The company decline to comment.. In stock specific news, IAG (-2.9%) is under the hammer after subsidiary BA said at least 380,000 customers credit card details have been compromised in a data theft.

Top European News

• Europe’s Stocks Finally Get Some Love With 1st Inflows in 26 Wks
• Iliad Shares Soar as Oddo Says Buyout Scenario Is Credible
• Steve Bannon’s Favorite Swedish Party Is Set to Upend Status Quo
• How Did Russia’s Gas Giant Get Beaten by Its Smaller Rival?

In FX, AUD was the marked G10 underperformer and main victim of ‘pending’ $200 bn Chinese import tariffs by the US, alongside the threat that President Trump turns his trade offensive towards Japan next. Having failed yet again to clearly overcome resistance around 0.7200 vs the Usd, reported bids from exporters and short covering or profit taking demand at 0.7150 has been severely tested and briefly breached before a relatively firm bounce, albeit amidst broader Greenback weakness, as the Aud continues to lose ground against its NZD antipodean peer with the cross down under 1.0900 – Kiwi holding towards the upper end of a 0.6560-95 range vs the Usd and not really reacting to comments from RBNZ Governor Orr last night. EUR – Conversely, the single currency is the major front-runner vs the Dollar and overcame a post-German data wobble in early EU trade to test offers around 1.1650, with some technical impetus derived as the headline pair held just above the 100 HMA (1.1607). Note also, more decent option expiry interest in the mix with 1 bn running off between 1.1635-50 at the NY cut. CAD/CHF/JPY – All pretty flat against the Usd, but retaining the bulk of gains made on Wednesday as the Loonie benefited from positive NAFTA talk via the US President and reaffirmation of gradual rate hike guidance by BoC’s Wilkins. Usd/Cad currently circa 1.3130 and awaiting Canadian jobs data alongside US NFP. The Franc is also on the firmer side of recent ranges around 0.9650 and its safe-haven counterpart, Jpy trades around a new pivot of 110.50 and bang in the middle of 1 bn option expiries at the 110.00 and 111.00 strikes. EM – So far so good, as regional currencies continue their comeback, led by the Try that has extended its rebound on renewed CBRT tightening expectations, with the Lira now over 6.5000 again vs the Usd. Similarly, the Rouble has been boosted by signals from the Central Bank that a rate hike could well be in the offing next Friday (just a day after the CBRT policy meeting) and Usd/Rub is back below 69.0000 in response, while Usd/Zar has retreated further towards 15.0000.

In commodities, WTI and Brent futures are marginally higher in early European trade thus far with the former hovering around the USD 68/bbl level. According to Reuters trade flow data, US imports of crude oil from Saudi Arabia in August and September are set to reach the highest 2-month level early of 2017, citing the relatively cheap prices as advantageous for US refiners. News flow remains light for the complex, however, next week will see the release of the EIA short-term energy outlook, OPEC’s monthly report and IEA’s oil market report. Elsewhere, spot gold trades flat as the yellow metal flirts with the USD 1200/oz level ahead of the release of key US jobs data later, while copper underperforms amid ongoing trade-related concerns.

US Event Calendar

• 8:30am: Change in Nonfarm Payrolls, est. 191,000, prior 157,000
• 8:30am: Unemployment Rate, est. 3.8%, prior 3.9%
• 8:30am: Underemployment Rate, prior 7.5%
• 8:30am: Average Hourly Earnings MoM, est. 0.2%, prior 0.3%; Average Hourly Earnings YoY, est. 2.7%, prior 2.7%
• 8:30am: Average Weekly Hours All Employees, est. 34.5, prior 34.5
• 8:30am: Labor Force Participation Rate, prior 62.9%

DB’s Jim Reid concludes the overnight wrap

So a week to go until the 10-year anniversary of the Lehman default weekend. Of more immediate interest is that today we welcome in another payrolls Friday. They’ve generally been a bit dull over the last 7 months after the excitement of the average hourly earnings (AHE) spike in the release from the first week of February. As you’ll no doubt remember this caused unparalleled chaos in volatility markets. Since then, this number has been relatively well behaved. For today, DB are a tenth above consensus for AHE at +0.3% mom which, if correct, would equal the post-crisis yoy high of +2.8%. We should continue to keep a very close eye on this number as when the labour market is as tight as it is, the risks are virtually all on the upside for wages. Beware of the seasonality that often makes August’s payroll number weaker than expected. This is why unemployment and AHE will likely be more instructive today. The full preview is at the end.

So as we approach the end of the first week of September it’s been one where the negativity baton has been passed from EM to US tech. Indeed, the big mover yesterday was the NASDAQ again which tumbled -0.91% and so takes the three-day loss to -2.30% this week. The NYSE FANG index was also down -1.65% which means the -5.37% sell-off in the three days this week is now the biggest three-day move since the big selloff at the end of July. A not-so insignificant $158bn of value has also been wiped from that index over the last three days.

Anyway, the moves also weighed on the S&P 500 (-0.37%), while the DOW ended up bucking the trend to close +0.08%. The recent weakness is clearly being driven largely by tech given the outperformance for the other bourses. That said the VIX did rise above 15 intra-day for only the second time over the last two months (close 14.65). Here in Europe, the STOXX 600 (-0.59%) closed lower for the third session in a row. The FTSE MIB (-0.27%), despite finishing lower, continues to outperform much of Europe this week; it is now up +1.27% on the week compared to the STOXX 600’s -2.35% drop. Bond markets were generally a sideshow, with yields a couple of basis points lower for Treasuries and Bunds. EM FX meanwhile ended last night a rather modest +0.16% and in the grand scheme of things has had two days of fairly stable moves (although equities have been a lot weaker). Indeed the Argentine Peso (+2.84%) and Turkish Lira (+0.28%) both strengthened for the second day in a row while even the South African Rand (+0.58%) was stronger. In fact, there’s only been 2 other days since the start of August that those three currencies have all finished the same day stronger. The Russian Ruble fell -1.43% after Prime Minister Medvedev said he hopes the Bank of Russia takes an “active position” to address high interest rates. The new head of the Bank of Russia’s monetary-policy department, Alexey Zabotkin, issued similar comments by saying that financial conditions are already tightening, and that this will be part of the discussion around any future rate moves. Sentiment was not helped by the UK and allies’ joint statement formally accusing Russia of using the nerve agent Novichok on British soil.

Overnight the generally risk off tone has continued into Asia once again. Japan is leading the way in terms of underperformance (Nikkei -1.18%) not helped by a WSJ article which came out late last night suggesting that President Trump may turn his focus on trade tariffs over to Japan. Elsewhere the Hang Seng (-0.86%), Shanghai Comp (-0.13%), Kospi (-0.62%) and ASX (-0.63%) are also lower capping a tough week for the region. Coming back to trade there hasn’t been any news overnight post the deadline passing for the public comment period although there is a story on Bloomberg suggesting that some of the big US tech companies have made a big pushback to the proposed $200bn of tariffs on China. So we’ll see what today brings. NAFTA could also be in the spotlight after Canada’s Foreign Minister Chrystia Freeland said that a deal is unlikely this week but talks remain upbeat.

Coming back to yesterday which was a busy day for data but there were a couple of prints which stood out in the US. The first was the latest weekly initial jobless claims reading which at 203k (vs. 213k expected) marked a new cycle low and in fact the lowest since 1969. The second was the August ISM nonmanufacturing reading which backed up the manufacturing print earlier in the week by coming in at a much stronger than expected 58.5 (vs. 56.8 expected) – a jump of 2.8pts from July and so reversing much of the sharp decline that month. The details showed that the majority of significant components rose too, with the exception of prices. So further evidence that GDP growth isn’t showing signs of abating just yet.

In Europe, German manufacturing orders fell -0.9% in July, a big miss versus the expected +1.8% expansion. The fall was mostly attributable to a big drop in external orders from outside the Eurozone, suggesting some potential softening in external demand. Risks around Italy, trade, and EMs may also be contributing to uncertainty and may be weighing on business spending plans. In Switzerland, second quarter GDP printed at a very robust +3.4% yoy, exceeding expectations for +2.4%. This represents the strongest pace of growth since 2010, and the Swiss Franc rallied +0.75% versus the Euro to its strongest level in over a year. Apart from data, focus yesterday was on a speech by new NY Fed President John Williams (formerly of the San Francisco Fed). He broadly confirmed the house view for Fed policy and the economy. He downplayed the relevance of a flattening or inverted yield curve as a recession signal, assuming other asset prices maintain their positive signals. He described the outlook as “a bit of a Goldilocks economy from a policy maker point of view” and said that “we don’t feel the need to raise interest rates more quickly.” This supports DB’s expectations for two more rate hikes this year and four more in 2019. Williams also downplayed the risks to the US economy from stresses in emerging markets, “but we need to be on top of that.” Separately, Chicago Fed President Evans repeated his hawkish view that rates should proceed to neutral, or even a bit further. This is a big change from an FOMC member who used to be among the most dovish, but didn’t move markets. Separately, the Canadian dollar appreciated as much as +0.52% versus the US dollar after Deputy Governor Wilkins said that the Bank of Canada considered dropping their commitment to a “gradual approach” to rate hikes, which could signal a potential acceleration in the pace of hikes beyond the currently-discounted path of one per quarter. Food for thought internationally.

As for what to look forward to today the aforementioned US employment report dominates the agenda. Consensus is for a 191k payrolls reading which follows a much softer than expected 157k last month. Our US economists are slightly more cautious and have pegged a 185k forecast which is more conservative than their models imply largely because payrolls have missed consensus in the month of August for seven consecutive years which is a fairly telling stat. Indeed the average miss is 46k in the last seven Augusts. To be fair that probably dampens the importance of today’s data but the earnings numbers will still be a big focus.

The market is expecting a +0.2% mom average hourly earnings number which should be enough to keep the annual rate at +2.7% yoy. As mentioned earlier our economists actually expect a slightly stronger +0.3% earnings print which would push the annual rate up a tenth to +2.8% and just slightly behind September 2017’s hurricane-distorted post-recession high. Meanwhile our colleagues expect the unemployment rate to hold steady at 3.9% although the market expects a one-tenth fall to 3.8%.

Elsewhere, shortly after this hits your screens we’ll get July trade and industrial production data out of Germany followed shortly by the same in France. A couple of hours later we then get the final Q2 GDP revisions for the Euro area although the market isn’t expecting any changes from the +0.4% qoq advanced estimate. In the US all eyes will be on the aforementioned  August employment report while at some stage today we’ll also get August foreign reserves data out of  China. Meanwhile it’s a busy day for Fedspeak with Rosengren, Mester and Kaplan all on the cards. It’s worth noting that an informal meeting of EU economic and financial affairs ministers will also kick off today and continue into Saturday.