Just when it seemed that the tenuous trade ceasefire between the US and China could result in more stable market sentiment, European stocks dropped -0.5% to session lows led by mining and autos, with S&P futures sliding as volume surged, joining Asia in the red after Reuters reported that China would ask the World Trade Organization for permission to impose trade sanctions on the U.S. rekindling fears over trade relations among the world’s two biggest economies.

The latest trade rumbling pushed the MSCI index of global stocks into the red, as Asian markets dropped for the ninth straight day. The MSCI index of Asia-Pacific shares ex-Japan eased 0.05 percent, but held just above last July’s lows.

There was a hint that China may do something earlier when the Shanghai Composite dipped 0.2 percent, with the index fading all gains set during the morning session. Chinese automakers were among the worst performers in Hong Kong after August sales dropped from a year earlier, adding to investor jitters about the vehicle market’s outlook. Local auto giant Geely Auto fell as much as 4.6% to lowest since June 2017.

After opening broadly higher, European shares were down on the day, with the Stoxx 600 sliding as much as 0.5%, while the Stoxx 600 basic resources index dropped 0.7%, entering a bear market down 20% from its June 6 peak, amid speculation that winter curbs on mills may be milder than had been expected, increasing the possibility of increased supply.

The pound initially rose to five-week highs against the dollar, hitting a high of $1.3087, after the European Union’s chief negotiator Michel Barnier said on Monday a Brexit deal was possible within weeks. Sterling had risen 0.8 percent on Monday.

For the second time in less than a week Barnier has signaled his desire to push ahead on the Brexit negotiations, less than seven months before the United Kingdom is slated to leave the European Union on March 29, 2019. “The Barnier headlines mean there’s a lower hurdle for getting a separation deal done by the end of the year, when the discussion about the future relationship can begin,” said CMC Markets analyst Michael Hewson.

However, after the Reuters China WTO report, cable – like all other risk assets – slumped as the dollar surged to session highs, while the euro gave up all earlier gains and hit a new day low of 1.1576 as US traders walked in.

As a result, emerging market currencies pared earlier gains with a broad index down near 16-month lows and the Indian rupee near a record trough of 72.455 per dollar, while their shares declined. Meanwhile, U.S. two-year Treasury yields held close to their highest level in a decade in the run-up to an anticipated Federal Reserve interest-rate hike this month.

Japan’s currency fell for a third day versus the dollar as Japanese shares rallied. Norway’s krone extended its advance after a business survey by the central bank confirmed the case for tighter monetary policy, starting with a hike next week.

“Weakness is set to remain a recurring theme amid global trade tensions, a broadly stronger dollar and prospects of higher U.S. interest rates,” said Lukman Otunuga, a research analyst at broker FXTM. “With turmoil in Turkey and Argentina triggering contagion fears, appetite for emerging market assets and currencies is likely to continue diminishing.”

In addition to ongoing trade skirmishes, the memory of summertime volatility and weakness in commodities also still provides plenty of reasons for caution as investors brace for meetings of central banks of Argentina, Turkey and Russia this week.

In the latest Brexit news, UK Conservative Party Brexiteers are said to have failed to reach an agreement on an alternate Brexit plan with one Eurosceptic close to the matter stating that the group was not a homogenous one per the FT. An earlier story in the Times had reported that Jacob Rees-Mogg believes that a no-deal Brexit would lift the UK economy by GBP 1.1trl over 15 years and that such a plan is preferable to PM May’s Chequers plan. Former UK Foreign Minister Johnson will continue to “throw rocks” at PM May’s Chequers plan ahead of the Tory conference but has no plans to launch an immediate leadership bid amid the fallout from his personal life, his close allies have claimed.

In geopolitics, the US conducted discussions with UK and France regarding potential Syria strikes. North Korean Leader Kim offered to dismantle nuclear weapons program within 2 years, according to reports citing US National Security Adviser Bolton.

In commodities, WTI held near $68 a barrel amid speculation whether hurricane Florence approaching the U.S. East Coast would disrupt supplies and drive prices higher. Argentina’s central bank is set to hold its key rate at 60 percent today — the highest in the world — and officials may signal some relief for the economy and the peso.

Economic data include JOLTS job openings, wholesale inventories and small business optimism survey.

Market Snapshot

• S&P 500 futures down 0.2% at 2,873.25
• STOXX Europe 600 down 0.1% to 375.05
• MXAP down 0.02% to 159.02
• MXAPJ down 0.3% to 508.66
• Nikkei up 1.3% to 22,664.69
• Topix up 0.7% to 1,698.91
• Hang Seng Index down 0.7% to 26,422.55
• Shanghai Composite down 0.2% to 2,664.80
• Sensex down 0.5% to 37,725.50
• Australia S&P/ASX 200 up 0.6% to 6,179.68
• Kospi down 0.2% to 2,283.20
• German 10Y yield rose 2.5 bps to 0.426%
• Euro up 0.3% to $1.1628
• Brent Futures up 0.9% to $78.06/bbl
• Italian 10Y yield fell 12.3 bps to 2.548%
• Spanish 10Y yield unchanged at 1.454%
• Brent Futures up 0.9% to $78.06/bbl
• Gold spot up 0.01% to $1,196.05
• U.S. Dollar Index down 0.1% to 95.01

Top Overnight News

• China is said to ask WTO for authorization to impose trade sanctions on U.S., citing U.S.’s non-compliance in 2017 trade dispute ruling, Reuters reports, citing a meeting agenda; China’s request relates to dumping dispute initiated in 2013, which China said at the time related to goods with an annual export value of $8.4b
• Italian Foreign Minister Enzo Moavero Milanesi says during Radio Capital interview that he doesn’t “expect a clash” between Italy and the EU over the budget if there is “enough flexibility” in the dialog
• Japan’s Deputy Prime Minister Taro Aso says no schedule has been decided for the next economic dialogue with U.S. at this point and that he still sees no need for a free trade agreement between the U.S. and Japan
• Hurricane Florence continued to move toward the U.S. East Coast, poised to become the strongest in almost 30 years to hit the Carolinas as more than one million people began fleeing the American coastline
• Brexit-backing lawmakers in Theresa May’s divided Conservative Party are gearing up for another fight with the prime minister, this time over how EU law will apply in Britain after it has left the bloc
• U.K. labor unions voted for a campaign against any Brexit deal reached by Prime Minister Theresa May that fails to address the needs of working people — with a referendum central to their strategy for the fight
• Australian business confidence slumped to a two-year low in August, a period marked by upheaval in the government that saw Malcolm Turnbull ousted as prime minister
• Oil held below $68 a barrel as investors assessed whether higher OPEC production can offset a potential global supply crunch sparked by sanctions on Iranian crude
• Russian prime minister Vladimir Putin urged policy makers to take a more “active position” in addressing borrowing costs that are still high relative to inflation

Asian equity markets traded mixed amid a similar performance in US where most majors finished positively as tariff concerns took a back seat with sentiment supported by news of the GOP releasing plans for a fresh round of tax cuts and as participants also focused on Brexit-related optimism. ASX 200 (+0.6%) was lifted by broad strength across telecoms, tech, energy and financials, while Nikkei 225 (+1.3%) outperformed amid currency moves and M&A news with Renesas to purchase US chipmaker IDT for over USD 6.7bln. Elsewhere, Shanghai Comp. (-0.2%) and Hang Seng (-0.7%) were choppy in which the latter flirted with bear market territory amid ongoing trade uncertainty and continued liquidity inaction by the PBoC. Finally, 10yr JGBs were relatively flat as focus centred on outperformance of riskier assets in Japan and as a mixed 30yr auction also failed to drive price action.

Top Asian News

• BOJ Seen Willing to Reduce Stocks Target If Buying Drops a Lot
• Singapore’s Builders Seen Facing Debt Troubles Amid Curbs
• Tencent Steps Up Share Buyback in First Repurchases 2014
• China’s Big Insurers Put Faith in Small-Cap Stocks Revival

European equities trade on the backfoot (Euro Stoxx 50 -0.5%) as losses in the continent accelerated amid rising trade tensions following reports China are to ask the WTO to authorise trade sanctions on the US. UK’s FTSE 100 is subdued by a firmer pound  as GBP/USD sits above 1.3000. Sectors are broadly in the red with material names hit the hardest. One to watch on the M&A front, UniCredit (-1.3%), source reports suggest that the company could consider a tie-up with BBVA (+0.2%) or ABN AMRO (+0.5%).

Top European News

• U.K. Wages Climb More Than Forecast in Tight Labor Market
• Barnier Sees Deal as Brexiteers Brace for Fight: Brexit Bulletin
• Partners Group Jumps as Fees Drive Another Beat on Earnings
• Norway Plans Seismic Study of Russia Maritime Border Area: DN

In FX, it’s a dead heat between the single currency and Sterling in terms of gains relative to the Dollar and other rival currencies, with the former buoyed by more promises from the Italian Government to adhere to the EU budget limits, and the latter still riding high on rising Brexit deal expectations. Eur/Usd gained momentum above 1.1600 after several failed attempts, but faded just ahead of 1.1650 and subsequently slipped back below the figure, as Eur/Gbp pivots around 0.8900 and Cable tests chart resistance around 1.3083-85 that stands in the way of 1.3100. Note, the Pound got a further fleeting boost from above forecast UK wage data over sub-consensus jobs readings on balance, but then slumped aggressively to just under 1.3000 amidst various reports about 1.3100 barrier defence offers in decent size, stops, technical selling and even ‘fat finger’ trades (in spot and futures) before some calm was restored.  SEK/NOK – The Scandi crowns are not slipping too far from recent peaks vs the Eur or Usd, as the Riksbank maintains a broadly upbeat tone, albeit after adjusted rate hike guidance last week, and the latest Norges Bank regional survey reveals a robust outlook for output following strength in the latest quarter. EM – Somewhat out of the limelight for once, but far from out of sight and clawing back more losses vs a generally soft Usd, with the underperforming Rub also firmer even though sanctions loom and the Russian Government continues to urge the CBR to hold fire on rate hikes. Rouble now pivoting 70.0000 vs circa 70.8400 at one stage on Monday.

In commodities, WTI and Brent futures trade marginally higher with the latter dipping below USD 78/bbl in recent trade. Participants will be closely monitoring hurricane developments in the Atlantic with Hurricane Florence prompting mandatory evacuations in the southern East Coast in the US as it nears a category 5 strength. Russian Energy Minister Novak stated overnight that OPEC and allies are to discuss cooperation after 2018 in Algeria while adding OPEC+ members may sign a new long-term cooperation deal in December. Traders will also keep an eye on the latest API crude inventory figures released later today. Elsewhere, Gold pared back earlier gains, currently trading flat, while copper takes a breather from recent losses.

On today’s calendar, we’ll get the July JOLTS survey and July wholesale inventories and trade sales numbers. Away from the data Italy’s Finance Minister Giovanni Tria is due to speak this morning (10.50am BST) at an event in Rome while the ECB’s Nouy is due to speak in at the European Parliament. The Argentina Central Bank meeting is also due, although no change in policy is expected. European Parliament is also due to debate today about possible sanctions against Hungary while Russia President Putin is due to meet China President Xi Jinping at the Eastern Economic Forum.

US Event Calendar

• 10am: JOLTS Job Openings, est. 6,675, prior 6,662
• 10am: Wholesale Inventories MoM, est. 0.65%, prior 0.7%
• 10am: Wholesale Trade Sales MoM, est. 0.1%, prior -0.1%

DB’s Jim Reid concludes the overnight wrap

Markets have generally started the week in a better mood than last week. Last night the S&P 500 and NASDAQ snapped four days of consecutive losses last week to end +0.19% and +0.27% respectively. The NYFANG edged +0.17% to snap a six day losing streak, while prior to this in Europe the STOXX 600 (+0.47%) also climbed by the most in a difficult two weeks.

To be fair EM behaving itself, Brexit headlines more positive, and trade headlines (certainly with the US and EU as you’ll see below) being more upbeat helped but it was the European periphery which really drove things. Indeed the FTSE MIB (+2.30%) and Greek Athex (+2.51%) rallied by the most since 11 June and 1 June, respectively, while the IBEX (+1.09%) and Portugal General (+0.84%) also saw steep legs higher. The weekend comments from Italy’s Finance Minister Giovanni Tria which we noted yesterday as well as Greek PM Alexis Tsipras announcing a package of tax relief measures over the weekend appeared to be the catalysts with banks also a beneficiary. European Banks rallied +1.55% for the biggest gain in 34 trading days with the peripheral banks making up eight of the top ten biggest movers. It was a similar story in bonds with BTPs 12.5bps lower in yield at 2.902% and taking them to the lowest since August 9th while 10yr yields in Greece, Portugal and Spain were 9.3bps, 1.9bps and 1.0bp lower respectively. Treasuries rallied a paltry 0.8bps and traded in a range of 2.0bps on the day, the second tightest of the year, while Bund yields rose a rather dull 1.4bps. So Italy was the main mover in govies. As you’ll see at the end Tria speaks again just before lunch today so one to keep an eye on.

As noted at the top, helping risk sentiment at the margin were some of the headlines out of the meeting between Robert Lighthizer – the US Trade Representative – and Cecilia Malmstrom – the EU Commissioner for Trade. A press release from the USTR confirmed the meeting – which was scheduled as part of improving trade relations – as being “constructive” and that the two representatives will meet again at the end of this month to continue talks. The statement went as far as saying that professional staff will next month “hold further discussions on identifying and reducing tariff and non-tariff barriers to
trade”. So some potentially positive developments and at the least suggesting that the trade war between the US and Europe is on hold for now.

Meanwhile the main focus in FX yesterday, rather than EM, was instead the decent rally for Sterling which bounced following some of the latest Brexit newsflow. Last night the Pound closed up +0.82% versus the Dollar and is back to the highest since August 1st. EU Chief Brexit Negotiator Michel Barnier said, at a press conference in Slovenia, that it was “realistic” and “possible” to get a Brexit deal done by the end of November. Comments from Barnier have been getting incrementally more positive towards a deal being reached so it wasn’t a great surprise to see these headlines. As for timing a possible one-off summit on November 13th now appears most likely for a deal with two EU summits prior to this (one next week and one in October). That move for Sterling meant the FTSE 100 (+0.02%) was the relative underperformer yesterday in equities.

This morning in Asia the positive tone has for the most part continued in markets. The Nikkei (+1.20%) in particular has surged higher helped partly by a weaker Yen, while the Hang Seng (+0.07%) is holding firm despite being on the edge of entering a bear market, and the Shanghai Comp (+0.30%) and ASX (+0.61%) are also firmer. US equity futures are also pointing towards another positive open while bonds and FX have otherwise been fairly quiet. That reflects a mostly non-eventful overnight session for news however the FT is reporting that Mexico is open to moving ahead with signing a bilateral trade deal with the US should Canada not reach a deal on NAFTA. Meanwhile, Japan’s Deputy Prime Minsiter Taro Aso said that no schedule has been decided for the next economic dialogue with US at this point while adding that he still sees no need for a free trade agreement between the U.S. and Japan.

In other news, it wasn’t a particularly busy day for data yesterday with most of the focus also on the UK. The new monthly reading of GDP (started earlier this year) showed that real GDP grew +0.3% mom in July, matching the fastest pace since 2016 and eclipsing consensus forecasts for +0.1% mom. Trade data was positive and industrial production was slightly softer than expected, suggesting that the strong performance was driven by domestic demand. With the market pricing less than one hike per year – the pace that Carney endorsed after the last inflation report – this strong data should support the case for additional rate hikes, though the pound remains more sensitive to Brexit headlines for now.

Away from the UK data, second quarter Turkey GDP printed soft at +5.2% yoy, down from +7.3% in Q1. Fiscal policy has turned less supportive, financial conditions have tightened, the services sector slowed, and construction came to almost a full stop. The latest data in Q3 point to a hard landing, as the 41% YTD Lira depreciation takes its toll. We now expect 2018 and 2019 growth at 3.1% and 1.5%.

As for today’s calendar then, shortly after this hits your email we’ll get Q2 payrolls data in France followed later on by July and August employment data in the UK including earnings and the unemployment rate – both are expected to hold steady. In Germany we’ll get the September ZEW survey where expectations are for broadly no change in either expectations or the current situations gauge. In the US, we’ll get the August NFIB small business optimism reading later this morning, while this afternoon we’ll get the July JOLTS survey and July wholesale inventories and trade sales numbers. Away from the data Italy’s Finance Minister Giovanni Tria is due to speak this morning (10.50am BST) at an event in Rome while the ECB’s Nouy is due to speak in at the European Parliament. The Argentina Central Bank meeting is also due tonight, although no change in policy is expected. European Parliament is also due to debate today about possible sanctions against Hungary while Russia President Putin is due to meet China President Xi Jinping at the Eastern Economic Forum.