It has been a session of two halves in which Emerging markets, Asian stocks and Chinese indexes all slumped in early trading followed by a rebound in European shares led by Italian markets over optimism about Rome’s budget process while US equity futures erased most of Friday’s losses as trade concerns appeared to fade after Trump failed to enact the anticipated $200BN in new Chinese import tariffs.

Ahead of the US open, world shares flirted with their longest run of declines since early 2016 on Monday, hit by rising anxiety about the U.S.-China trade war as traders braced for a potential escalation in the China-U.S. tariff row after Trump said on Friday he was ready to impose tariffs on virtually all Chinese imports into the United States, threatening duties on another $267 billion of goods in addition to the $200 billion already facing threatened tariffs. Meanwhile a sharp rise in average hourly earnings reported by the BLS on Friday bolstered bets on a higher dollar on expectations the Federal Reserve will keep raising U.S. interest rates.

“It’s more of the same, markets continue to be under pressure from a whole host of headwinds,” said GAM’s Investment Director of emerging market equities, Tim Love. He highlighted the latest fall in China’s yuan, which is now down almost 9% versus the dollar since April and asked “You are back to the highly politically charged question – is this currency manipulation or not?”

The previously profiled Chinese plunge-protecting “National Team” was nowhere to be found as equities sank in Shanghai and Hong Kong, with the latter’s benchmark index nearing bear-market territory amid trade concerns led by Apple suppliers amid concerns that trade war raise Apple product prices and hurt demand. Beijing once again warned of retaliation if Washington launches any new trade measures, but as Reuters notes China is running out of room to match US actions dollar-for-dollar, raising concern it would resort to other measures, such as weakening the yuan or taking action against U.S. companies – such as Apple – in China. Chinese shares were battered with the blue-chip index off 1.4%. The Shanghai Composite fell 1.2% and Hong Kong’s Hang Seng index shed 1.3% as the offshore yuan traded mixed.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.9% to the lowest since July 2017, extending losses from last week when it dropped 3.5 percent for its worst weekly showing since mid-March.

It was not all gloom in Asia as Japan’s Nikkei closed 0.3% higher after revised Q2 GDP data showed the world’s third-biggest economy grew at its fastest pace since 2016. This may change, however, after Trump also expressed displeasure about the large U.S. trade deficit with Japan. Stocks also climbed South Korea and were little changed in Australia.

Meanwhile, the emerging market rout continued, as EM stocks hit a fresh 14-month low amid turbulence in Argentina, Turkey, Brazil, Russia and South Africa, where currencies have been routed recently. The Australian dollar, a proxy for Chinese growth, hovered near its lowest in 2 1/2 years and was last at $0.7115 despite stronger than expected Chinese CPI and PPI data reported overnight (Chinese CPI Y/Y 2.3% vs. Exp. 2.2%, and Prev. 2.1%; Chinese PPI Y/Y 4.1% vs. Exp. 4.0% and Prev. 4.6%).

The Indian rupee hit a record low of 72.50 per dollar and Indonesia’s rupiah, Asia’s second-worst performer this year, weakened 0.4%, near an all-time low.

Also in EM, after a sharp rally on Friday ahead of the upcoming rate hike in Ankara, the Turkish Lira resumed its slide after Q2 GDP disappointed, sliding from a downward revised 7.3% in Q1 to 5.2% in the second quarter.

For now, there remains no end in sight for the EM rout as the rising dollar is set for more gains as the Fed tightening cycle is expected to continue well into 2019: “Given the latest comments from Trump, investors are likely to see the potential for further depreciation in EM currencies with the trade war cranking up yet another notch,” said Nick Twidale at Rakuten Securities Australia.

Worries about trade war and tariffs have led to the latest bout of emerging-market turmoil, which not only mars the outlook for global equities, but last week the contagion spread to U.S. stocks after Trump’s signaled that he’s ready to target a sum of goods more than all imports from China while the BLS showed a healthy – if even overheating – American labor market with signs of wage inflation that could clear the way for two more Federal Reserve interest rate hikes this year, and more into 2019.

“Defensive positioning is still warranted at the moment,” said Tribeca Investment Partners direct Sean Fenton on Bloomberg Television. On trade, “markets had some hope that as we got to that deadline there would be some concessions, but there’s really escalation.”

There was little defensive positioning in Europe, however, as the Stoxx Europe 600 Index fluctuated in early trading before rebounding to session highs, up as much as 0.4%, driven higher by banks, utilities and telecom companies.

Europe’s rebound to Asia’s gloom was led by Milan, which jumped 1.5% following soothing comments on Italy’s upcoming budget by Economy Minister Giovanni Tria pushed down the country’s borrowing costs in the bond markets. “The Italian budget law should be more market friendly than initially feared from investors, leading to a narrowing bond spread versus Germany, while ‘it’s too early to celebrate,” according to comments to clients from Mediobanca Head of Equity Markets Antonio Guglielmi.

Stockholm also strengthened along with the Swedish crown amid broad short covering in Swedish assets after the nationalist Sweden Democrats gained less ground than expected in weekend elections. The Swedish crona rose about 0.6% against the euro to 10.43 crowns. The euro was up 0.1 percent against the dollar at $1.1566 after falling more than half a percent on Friday following the U.S. jobs data.

In currencies, the euro benefited from the dollar giving up earlier gains and as Italian bonds rallied, after the country’s Finance Minister Giovanni Tria said over the weekend the nation must cut its debt and keep the budget deficit in check.  The pound stayed near session highs after data showed the U.K. economy grew at the fastest pace in almost a year between May and July, as construction output rebounded and a heatwave boosted retail sales and services. The Norwegian krone rallied against all G-10 peers after better-than-forecast inflation data supported the case for further policy tightening, beyond a widely expected rate increase next week.

As noted above, a relief rally in Sweden’s krona lost steam as markets began to digest an inconclusive result in Sunday’s general election, even though an anti-establishment party didn’t advance as much as many had anticipated.

Meanwhile, the one currency everyone is watching closely, the US dollar, took a breather after it fell from an earlier high as markets awaited more detail on the escalation in the U.S. trade war with China. The Bloomberg Dollar Spot Index was little changed on Monday after earlier touching the highest since Wednesday.

“We still believe a trade war escalation won’t be positive for the USD, which has been buoyed by cyclical U.S. economic sentiment and related portfolio inflows,” wrote ING Grope’s FX strategist Viraj Patel. “These would go into reverse if the U.S. and China slap further tariffs on each other – and we prefer to play this via short USD/JPY positions.”

In commodities, Chinese weakness pressured copper which tumbled over 1.2% to solidify the 20% bear market drop it has seen already this year. Spot gold was lower at $1,193.01. Oil prices bucked the trend, after three straight days of losses. U.S. crude futures were up 44 cents at $68.20 per barrel and Brent crude futures added 52 cents to $77.35 a barrel.

In the latest Brexit developments, a draft Brexit plan proposed by Eurosceptics in the Conservative party includes significant tax cuts, a new military expeditionary and a domestic-built missile defence system, according to leaked documents, thus confirming expectations for the proposal of a Canada-style trade deal. This would go against the proposals made in the Chequer’s agreement, with the article suggesting that if the new proposals were rejected, Eurosecptics would prefer to leave with EU without a deal, on WTO terms. As a guide, Jacob Rees-Mogg is due to speak on Tuesday.

In central bank news, Fed’s Rosengren (non-voter, hawk) says strengthening economy will likely need mildly restrictive policy and he would not be surprised if Fed forecasts for neutral rate and rate path shift upwards, adds no need to quicken pace of hikes & inflation justifies continued hikes.

In geopolitical developments, US officials stated Syrian President Assad has approved gas attack in Idlib, while reports added that Trump has not decided whether to target Iranian or Russian forces aiding Assad. North Korea held a military parade for the 70th anniversary of its Foundation Day in which no ICBMs were displayed and North Korean Leader Kim refrained from delivering a speech.

On today’s calendar, we get consumer credit data for July; scheduled earnings include Casey’s General Stores and Sonos.

Market Snapshot

• S&P 500 futures up 0.3% to 2,882.25
• STOXX Europe 600 up 0.2% to 374.38
• MXAP down 0.5% to 159.33
• MXAPJ down 0.9% to 511.46
• Nikkei up 0.3% to 22,373.09
• Topix up 0.2% to 1,687.61
• Hang Seng Index down 1.3% to 26,613.42
• Shanghai Composite down 1.2% to 2,669.49
• Sensex down 0.8% to 38,082.31
• Australia S&P/ASX 200 down 0.03% to 6,141.70
• Kospi up 0.3% to 2,288.66
• German 10Y yield rose 1.3 bps to 0.4%
• Euro up 0.1% to $1.1564
• Italian 10Y yield fell 2.3 bps to 2.671%
• Spanish 10Y yield fell 0.9 bps to 1.452%
• Brent Futures up 1.3% to $77.82/bbl
• Gold spot down 0.2% to $1,194.60
• U.S. Dollar Index down 0.01% to 95.36

Top Global News

• Sweden may face weeks or even months of political gridlock after an inconclusive election result left the biggest Scandinavian economy without a clear candidate to form a government
• The Italian government knows it must cut its debt load and keep the budget deficit in check in order to promote growth and gradually implement its sweeping government spending program, Finance Minister Giovanni Tria said Sunday
• U.S. President Donald Trump doubled down on his threats to impose higher tariffs on China’s goods, saying he’s ready to tax all imports “at short notice”
• Fed’s Rosengren wants two more hikes this year. With unemployment low and likely to keep falling, and with inflation at the central bank’s 2 percent target and likely to rise, he said Saturday “I don’t see any reason why we wouldn’t continue to gradually increase rates”
• For President Donald Trump, the nightmare scenario if Democrats win control of the U.S. House would be the death of his legislative agenda, aggressive investigations of his inner circle, and potential impeachment
• Donald Trump’s defenders, led by Vice President Mike Pence, were out in force on Sunday following a turbulent week capped by the publication of an anonymous New York Times opinion piece savaging the president
• China’s consumer inflation rose for a third month in August while producer prices eased. Spreading swine fever, floods in a key vegetable-producing region and soaring rent in big cities all have economists concerned about rising inflation risks amid the slowing economy, although the consumer price index still remains well below the government ceiling of 3 percent
• The Bank of Japan made a clear commitment to keep interest rates low for an extended period in its decision at the July policy meeting, Governor Haruhiko Kuroda said in an interview with Shizuoka Shimbun, a newspaper

Asian equity markets began the week mostly subdued following the lacklustre performance on Wall St last Friday where sentiment was dampened after Trump doubled-down on his tariff threats against China, while participants also digested a slew of key data including US NFP, Chinese Trade Data and Japanese GDP. ASX 200 (Unch.) was flat as strength in tech and healthcare was counterbalanced by weakness in financials heading into a fresh round of grilling by the banking royal commission, while Nikkei 225 (+0.2%) was choppy amid similar indecision in the local currency and with mild support seen following a stronger than expected upward revision in the Final Annualized Q2 GDP data. Elsewhere, Hang Seng (-0.9%) and Shanghai Comp. (-0.6%) underperformed after further tariff threats from US President Trump and as participants digested mixed trade data in which Trade Balance and Exports missed expectations. Finally, 10yr JGBs were flat with price action subdued despite the indecisive risk tone and BoJ’s presence in the market for JPY 1.1tln in 1yr-10yr JGBs.

Top Asian News

• China Calls for Controlled ‘Tweaks’ to Current Monetary Policy
• Japan’s Ramped-Up Business Spending Fuels Faster GDP Growth
• Emerging-Market Rout Takes Aim at India Amid Widening Deficit
• India Govt Worried on Rupee Fall, Official Says

European equities are marginally higher (Eurostoxx 50 +0.4%) with Italy’s FTSE MIB outperforming its peers as the Italian banks benefit from recent BTP price action. Mediobanca (+7.0%), Banco BPM (+5.6%) and Intesa Sanpaolo (+5.0%) all stand at the top of the index. In terms of sectors, utility names outperform while underperformance is seen across material names due to the weaker base metal prices. In terms of individual stocks, Swiss listed Richemont (+1.4%) appointed a new Chief Executive after the company ran without a CEO for almost two years. Richemont also reported 5-month sale figures which dragged up rival watchmaker Swatch (+1.1%) in sympathy. Over in Italy, Leonardo (+4.7%) shares are higher after reports the company is in talks with other buyers for the remaining ATR planes tied in a EUR 1bln deal with Iran (which cannot be delivered due to sanctions)

Top European News

• A Guide to Sweden’s Next Government After Inconclusive Election
• U.K. Economy Posts Fastest Growth in Almost a Year on Services
• Blackstone Is Said to Ready Bid for Santander HQ: Confidencial
• Dignity Slips as Co-Op ‘Ups the Ante’ on Funeral Price War

In FX, we start with the DXY where volatile price action in the index and broad Dollar, between 95.570-297 parameters, as an early EU advance was quickly reversed amidst buy/sell orders in some pairings ahead of major technical levels, data and positioning for potentially pivotal events. AUD/GBP/EUR – Relatively firm within the G10 community, or to be precise all recovering well from bouts of downside pressure with the Aud finding support overnight around 0.7100, Cable bouncing firmly from circa 1.2900 and the single currency finding traction after reports of heavy buying at 1.1525 (just above 1.1518 technical support and stops said to be in place below 1.1520). Note also, a very big option expiry at the 1.1500 strike (2.1 bn) may have impacted price action as the headline pair rebounds towards 1.1600. CHF – The marked underperformer, and possibly due to official intervention following rallies through 0.9700 vs the Greenback and 1.1200 against the Eur. EM – Contrasting fortunes for regional currencies, with the Lira and Rand at opposite ends of the spectrum after Turkish Q2 GDP
slowed sharply and reports circulated that Lula could be behind an ANC plot to oust current SA President Ramaphosa.  Usd/Try is off recent lows and almost hit 6.5000 again, even though expectations are running high for aggressive CBRT action on Thursday, while Usd/Zar has retreated from 15.3000+ in contrast. Elsewhere, Usd/Rub is holding just below 70.0000 in the run up to Friday’s CBR policy meeting with markets also looking for a hike.

In commodities, WTI and Brent futures continue to edge higher in European trade with the former eyeing USD 68.50/bbl to the upside with recent gains in the complex attributed to ongoing hurricane season. NHC reported Florence continues to strengthen rapidly and is expected to become a major hurricane soon, the hurricane is expected to remain an extremely dangerous major hurricane as it is expected to hit land on Thursday. Traders will be also mindful of events in Libya where there has been a shooting incident at the NOC headquarters in Tripoli. Over in the North Sea, the Buzzard oilfield did not restart operations as planned over the weekend, operations should restart on Monday. Elsewhere, gold marginally nurses post-NFP losses as the greenback eases off highs, while copper is kept lacklustre by the ongoing trade concerns and underperformance in China.

US Event Calendar

• 3pm: Consumer Credit, est. $14.4b, prior $10.2b
• 12pm: Fed’s Bostic Discusses Economic Outlook

DB’s Jim Reid concludes the overnight wrap

The Swedish electorate yesterday pulled back from going too far to the right as the nationalistic anti-immigration Swedish Democrats didn’t do quite as well as feared in the run up to the elections. With 99.7% of the votes accounted for, they polled 17.6%, up from 12.9% at the last elections but as the various news outlets are suggesting overnight, short of the 20% that some of the polls had suggested. The ruling Social Democrats polled 28.4% – their worst results since 1908 but still making the party the largest single vote-getter. The centre-right Moderate party was second at 19.8% which makes for an uncertain outlook given that the two traditional party blocs are neck-and-neck.

Indeed, the current Red-Green government obtained 40.6% of the vote and the centre-right Alliance 40.3%. Therefore neither bloc can command a majority in Parliament with both sides previously rejecting any possibility of dealing with the Sweden Democrats. DB’s Robin Winkler noted this morning that a period of political deadlock is now likely with a realistic risk of early elections. So another incident of rising populism but not as an extreme a shift as thought last week. The Swedish Krona has been relatively well behaved overnight and is little changed versus either the Euro or Dollar.

The other main story has been Chinese CPI and PPI overnight. The former came in at 2.3% for August compared to expectations for 2.1%. That’s also the highest reading since February. PPI also came in a shade higher than expected at 4.1% (vs. 4.0% expected) albeit down from 4.6% in July. This data follows stronger than expected imports data over the weekend (20.0% yoy vs. 17.7% expected in dollar terms) with exports data largely in line at 9.8% yoy. A talking point however was China’s widening bilateral surplus with the US to a new record high.

Following all that markets in Asia have kicked off the week fairly mixed. China is actually the notable underperformer with the Shanghai Comp down -0.63% while the Hang Seng is -0.89%. That compares to modest gains for the Nikkei (+0.36%), Kospi (+0.20%) and ASX (+0.04%). Futures in the US are slightly higher while bond markets have been fairly quiet. It’s worth also noting the weekend newsflow out of Italy where Finance Minister Tria was quoted as saying on the sidelines of the Ambrosetti Forum that “it makes no sense to seek two or three billion euros of extra deficit if we than have to pay three of four billion more due to higher yields”. He also added that all cabinet members are “fully aware of that”.

Looking forward now, we’re coming into a 10-day stretch of big central meetings culminating in the Fed and the BoJ next week. This week ‘Super Thursday’ sees the ECB, BoE and CBT policy meetings as well as another monthly US CPI release which will be very interesting in light of the AHE beat in Friday’s employment report. It is also worth keeping an eye out for the Argentinian and Russian central bank meetings tomorrow and Friday respectively given the recent EM fall out and their sensitivity to it. The ECB is expected to announce the phasing out of purchases at the end of the year this week and the Turkish CB is expected to hike the one-week repo rate by 300bps to 20.75%. Our house view is that the CBT raises the repo rate to 22% while also returning back to full funding from the policy rate. See the following report here ( link ) for a deep-dive into Turkey and our views going forward. Ahead of this Turkey’s Q2 GDP print today should be a big focus with the consensus expectation for a big drop from +7.4% yoy to +5.3% yoy.

The big news from Friday was that after 7 months of relative calm, average hourly earnings in the US employment report finally picked up where it left off in the early February report (+0.4% mom vs. +0.2% expected and +2.9% yoy – the
highest since 2009. Payrolls 201k vs 190k expected). Bond markets received a jolt with 10-year and 2-year Treasuries selling off 6.7bps and 7.0bps, respectively, while sovereign yields in Europe rose around 2-4bps. The exception was Italy, where BTPs rallied another 2.4 bps to take their weekly gain to 20.1 bps.

US equities (S&P 500 – 0.22%) surrendered intraday gains after trade-related headlines returned. President Trump told reporters that, after implementing tariffs on $200bn of Chinese imports, he stands ready to expand the tariffs to another $267bn of goods, which would presumably cover just about all imports from China. The $200bn tranche of tariffs is still pending, but the comment period has closed and they could be implemented imminently with Trump saying specifically that they could come “at short notice”. On the week the S&P 500 (-1.03%) and DOW (-0.19%) were a bit lower, although more pain was concentrated in the tech sector with the NASDAQ down -2.55%.

In other markets last week, the dollar snapped a three-week losing streak to gain +0.24%, while the euro fell -0.21% and the yen traded flat. EMs remained under pressure, with the EM currency index trading -1.18%, its 6th consecutive week without gaining although we did have a better second half of the week. The Turkish Lira appreciated +2.52%, but most other EM currencies lost ground on the week, led by the South African Rand (-3.53%) and Russian Ruble (-3.39%). EM equities also underperformed, shedding -3.12% on the week, while Brent crude oil fell -0.82%. In Europe, the Stoxx 600 fell -2.34%, with most countries’ indexes lower except Italy, which outperformed this week to gain +0.88%. Bourses across Asia fell last week as well, with the Hang Seng (-3.28%), KOSPI (-1.78%), and Nikkei (-2.44%) all trading lower.

It’s a busy start to the week today. In Europe we’ll get the August Bank of France industry sentiment print while in the UK data due out includes the July trade balance, July industrial and manufacturing production, and the July GDP reading. The September Sentix investor confidence print for the Euro area is also due in the morning while it’s also worth keeping an eye on Turkey’s Q2 GDP print. In the US, the only data release is July consumer credit. Away from that the Fed’s Bostic will be speaking on the economic outlook. EU Chief Brexit Negotiator Michel Barnier is also due to speak at the Bled Strategic Forum while EU and US Trade Chiefs Cecilia Malmstrom and Robert Lighthizer are scheduled to meet. Russia President Putin is also due to meet Japan PM Abe.