World stocks and US equity futures continued to rise on Thursday in thin trade amid relief that the latest U.S. and Chinese tariffs on were less harsh than feared despite concerns about next steps in the US-Sino trade war, helped by a dollar which slid to 3 week lows even as Treasury yields approaching their highest level this year.

The MSCI World index rose 0.2%, supported by gains in Europe and Asia, but Chinese equities dipped back in the red after a strong 2-day rally on expectations of government stimulus to limit the economic damage of new trade barriers and after reports that Beijing was planning to cut the average tariff rate it charges on imports from the majority of its trading partners as soon as next month. Japan’s Nikkei ended little changed, barely moving after a well-anticipated win by Japanese Prime Minister Shinzo Abe in a ruling party leadership vote.

In Europe, the Stoxx Europe 600 Index rose 0.2% led by the auto sector with the Stoxx 600 Automobiles & Parts index rising over 1.0%, the best-performing sector on wider European stock gauge; the seventh consecutive increase marked its best winning streak since Nov. 2017. Kepler Cheuvreux strategists raised the recommended exposure to autos back to neutral from underweight as they “envisage a series of late-year bounces within Europe’s depressed value universe in segments that have been largely abandoned by investors.”

In the US, S&P 500 E-mini futures were little changed following strong gains on Wall Street on Wednesday.

The yield on 10-year Treasuries, which on Wednesday touched its highest level since May 18, rose to 3.07% ahead of what is expected to be a hawkish Fed meeting next week.

The greenback remained weaker after a report said the U.S. and Canada are unlikely to reach a deal on Nafta in Washington this week, while the pound strengthened after August retail sales came in higher than expected.

In an otherwise quiet session, Markets watched the ongoing European Union summit where PM Theresa May appealed to fellow EU leaders on Wednesday to drop Brexit demands that she said could rip Britain apart.

After the initial knee-jerk negative reaction to the new tariffs announced by Washington and Beijing on Tuesday, markets have been speculating that an immediate escalation could be averted. To wit: President Trump has not made fresh threats that he would seek to extend tariffs to all Chinese imports. “Making forecasts on Trump is always a risk but it’s a fact that at the moment the escalation has taken a break,” said Anthilia Capital fund manager and strategist Giuseppe Sersale. Meanwhile, as reported yesterday, Chinese Premier Li Keqiang said this week he would not would not weaken the yuan to boost exports.

Ahead of the Fed meeting next week, other central banks topped the agenda, with Norway’s policymakers raising interest rates for the first time in seven years as the SNB kept deposit rates unchanged.  Despite the hike, the Norwegian crown slumped versus the euro the most in six months as the central bank lowered its policy rate forecasts. The crown fell 0.9 percent versus the euro to 9.5990.  The Swiss franc weakened after the SNB kept policy unchanged and maintained its “highly valued” description on the currency.

The rally in global stocks was accompanied a drop in demand for safe-haven assets, boosting U.S. bonds yields and sending the dollar lower while the Japanese yen has remained been under pressure. Volumes in currency trading were subdued as the dollar slipped to a three-week low: the Bloomberg Dollar Spot Index fell a second day to touch the lowest level this month while the 10-year yield was up 1 bps at 3.07%.

Risk-off trades stayed under pressure, with the Aussie and the Swedish krona rising a fourth day and as European stocks moved higher.

Elsewhere, emerging-market assets continued to rally off the lows seen earlier this month. In commodities, news of another drawdown in U.S. crude inventories and signs that OPEC may not raise output enough to compensate for the loss of Iranian exports hit by sanctions, lifted benchmark Brent crude 0.11 percent at $79.49. Base metals rose, buoyed by relief over trade and a shortage of the metal in top consumer China, with London Metal Exchange zinc hitting its fortnight before paring some gains and trade up 0.50 percent at $2,446 a tonne.

In geopolitical news, the US was said to be ready to immediately resume negotiations with North Korea on nuclear disarmament, while Secretary of State Pompeo said he invited his North Korean Foreign Minister Ri to talks in New York next week amid UN general assembly.

Expected data include jobless claims and existing home sales. Darden and Micron are among companies reporting earnings.

Market Snapshot

• S&P 500 futures up 0.1% to 2,918.25
• STOXX Europe 600 up 0.2% to 380.75
• MXAP up 0.2% to 164.39
• MXAPJ up 0.2% to 522.09
• Nikkei up 0.01% to 23,674.93
• Topix up 0.1% to 1,787.60
• Hang Seng Index up 0.3% to 27,477.67
• Shanghai Composite down 0.06% to 2,729.24
• Sensex down 0.5% to 37,121.22
• Australia S&P/ASX 200 down 0.3% to 6,169.50
• Kospi up 0.7% to 2,323.45
• German 10Y yield fell 0.2 bps to 0.485%
• Euro up 0.2% to $1.1700
• Italian 10Y yield rose 6.0 bps to 2.491%
• Spanish 10Y yield fell 1.7 bps to 1.51%
• Brent futures little changed at $79.35/bbl
• Gold spot down 0.1% to $1,202.38
• U.S. Dollar Index down 0.2% to 94.36

Top Overnight News from Bloomberg

• China is planning to cut the average tariff rates on imports from the majority of its trading partners as soon as next month, two people familiar with the matter said, in a move that will lower costs for consumers as a trade war with the U.S. deepens
• European and U.K. leaders exchanged warnings at a summit in Salzburg, that time is running out to seal an agreement on Brexit and offered no indication they can break the deadlock less than two months before the deal is due to be completed
• President Donald Trump plans to nominate Nellie Liang, a former Federal Reserve economist, to the central bank’s Board of Governors, the White House announced Wednesday
• New Zealand’s economy grew at the fastest pace in two years in the second quarter, prompting markets to pare bets on an interest-rate cut. The currency rose to a three-week high
• Liftoff may finally have arrived for yields in the world’s biggest debt market. That’s good news for the fast-money crowd that’s rarely been more bearishly positioned on 10-year Treasury futures
• Russia’s crude production has jumped to a new post-Soviet record as it prepares for talks with OPEC on further cooperation, according to a government official
• Iran said it will veto any OPEC decision that harms the Islamic Republic and warned that some oil producers are trying to create an alternative suppliers’ forum that supports U.S. policies hostile to the government in Tehran
• Raw materials are regaining their importance as a marker for where the emerging world is headed. That matters because they may help bolster prices if or when there’s a rebound
• Japanese Prime Minister Shinzo Abe won his third straight three-year term as head of the ruling Liberal Democratic Party on Thursday, taking him a step closer to becoming the country’s longest-serving premier.

Asia equity markets eventually traded mixed despite the early tailwind from US where strength in blue chip financials fuelled the outperformance in the DJIA and with the S&P 500 just about kept afloat by gains in materials and energy. ASX 200 (-0.2%) lagged after it fell short of the 6200 level and Nikkei 225 (+0.4%) extended on 8-month highs as participants awaited the LDP leadership vote where PM Abe and in turn Abenomics, are widely expected to be prolonged for another 3-year term. Elsewhere. Hang Seng (Unch.) and Shanghai Comp. (-0.1%) were choppy amid a lack of fresh drivers and after PBoC liquidity efforts still amounted to a net daily drain, while focus in Hong Kong was on Hong Kong’s 2nd largest tech IPO this year Meituan Dianping which rose around 7% on its debut. Finally, 10yr JGBs were marginally higher after prices found support ahead of the 150.00 level and which also coincided with a mild overnight recovery in T-notes, although price action was restricted amid a 20yr auction which showed weaker results across all metrics.

Top Asian News

• Meituan Rises on Debut in Hong Kong After $4.2 Billion IPO
• China Fintech Firm Soars as IPO Trade Frenzy Jumps to U.S
• Tencent Pact With Novartis Shows Big Pharma’s Ambitions in China
• Najib Faces 25 Charges Linked to $681 Million in 1MDB Case

Top European News

• Oaktree’s Marks Says U.K. Too Risky to Invest Due to Brexit: FT
• Five Star Demands Bold Italy Budget as Conte Frets on Investors
• U.K. August Retail Sales Unexpectedly Gain in Summer Heatwave
• Norway Raises Benchmark Rate for First Time in Seven Years

In FX markets, the greenback was lacklustre with the DXY stuck around the 94.50 level. This kept trade in EUR/USD uneventful and GBP/USD also struggled for direction amid a lack of progress and standstill following PM May’s Salzburg dinner address. Elsewhere, high-beta currencies held on to most their recent gains with AUD/USD flat and USD/CAD near a 1-month low, while NZD/USD outperformed after New Zealand GDP for Q2 topped estimates and grew at the fastest pace in 2 years.

Commodities traded higher in which WTI crude futures extended on the prior day’s strength despite the narrower than expected draw in DoE headline inventories as it still showed a decline in inventories as opposed to the surprise API build. Elsewhere, gold prices saw modest gains amid a lacklustre greenback and silver eyed weekly high, while copper also conformed to the mild upside in the complex.
On today’s calendar, the early focus should once again be on the UK with August retail sales data due to be released. This afternoon in the US there’s a steady stream of largely second tier releases including the September Philly Fed PMI, weekly initial jobless claims, August leading index and August existing home sales. The advanced September consumer confidence print for the euro area is also out this afternoon. Away from that we’ve got the second and final day of the informal EU leaders meeting in Salzburg, while the Bundesbank’s Weidmann and ECB’s Praet are slated to speak. Finance Ministers in the euro area are also due to meet and discuss Greece, the EMU and budgets ahead of the next eurogroup meeting.

US Event Calendar

• 8:30am: Philadelphia Fed Business Outlook, est. 18, prior 11.9
• 8:30am: Initial Jobless Claims, est. 210,000, prior 204,000; Continuing Claims, est. 1.71m, prior 1.7m
• 10am: Existing Home Sales, est. 5.36m, prior 5.34m; Existing Home Sales MoM, est. 0.37%, prior -0.7%
• 12pm: Household Change in Net Worth, prior $1.03t

DB’s Jim Reid concludes the overnight wrap

Yesterday brought about a fairly bumper inflation report out of the UK which added to the quiet but notable fixed income sell-off of late. Indeed, on an otherwise quiet day for newsflow the highlight was the stronger-than-expected +2.1% yoy August core U.K. CPI print, an increase of two-tenths from July and also beating expectations for a small decline to +1.8%. Headline inflation also rose two-tenths to +2.7% yoy (vs. +2.4% expected) while RPI (+3.5% yoy vs. +3.2% expected) also came in higher than expected. Big climbs in prices for recreation, transport and furniture and clothing were blamed for the jump.

10 year Gilts ended last night 4.0bps higher at 1.606% and are now at the highest since February 15th. Yields are also up an impressive 38.4bps from the August lows of 1.223% all of a sudden. Meanwhile 10y Treasuries ended yesterday 0.7bps higher following a bit of a rally back into the close but have consolidated above 3% for the second day – as a reminder the last time that happened was back in May and we’ve only closed above 3% for 12 days this year and 13 days since July 2011. So, these are elevated levels relative to the last several years. 10y Bunds are also back to the highest since May after rising another 0.7bps yesterday and so taking the move since mid-August to +18.4bps. The rest of Europe was also broadly 1-2bps higher and even BTPs sold off +6.3bps following another day of headline leaks (more on that shortly).

So, some impressive moves for bonds of late but the MOVE index (Treasury volatility) – which closed yesterday 0.83pts higher at 48.8 – is still hovering around its YTD lows (closing low being the 45.3 level in July with the YTD average 53.3). In the February and May sell-offs we climbed above 70 and 60 respectively. So it’s been a fairly orderly sell-off for bonds of late.

Elsewhere it was a fairly directionless day for equities. The STOXX 600 closed +0.33% in Europe but was playing some catch up to the Wall Street gains from the previous evening, while in the US the S&P 500 limped to a +0.13% gain but was slightly held back by another down-day for the NASDAQ (-0.08%) which continues to dictate the tempo across the pond. Gains for banks and large-cap industrials nevertheless supported the DOW (+0.61%). EM FX (+0.60%) continues to edge higher with the asset class all of a sudden up on six of the last seven sessions. Overnight in Asia we’ve seen a similarly directionless session.

Leading the way is the Kospi (+1.03%) seemingly after US Secretary of State Mike Pompeo indicated last night in a statement that the US was seeking a new round of talks with North Korea with the end goal of denuclearizing North Korea by the end of  President Trump’s first term. Elsewhere the Nikkei (+0.19%) is higher for the fifth consecutive session (the LDP leadership decision should be out just as this hits your email with Abe widely considered to be re-elected), while the Hang Seng (-0.02%), ASX (-0.19%) and Shanghai Comp (-0.12%) are all in the red.

Futures in the US are broadly flat and bond markets in Asia also quiet. The other news worth flagging overnight is from the Fed with Bloomberg reporting that President Trump is planning on nominating former Fed economist and financial stability expert Nellie Liang to the Board of Governors and policy setting Open Market Committee. As we go into print headlines on Bloomberg have also just come through suggesting that China is planning to cut the average tariff rate that it charges on imports from the majority of its trading partners as soon as next month, two people familiar with the matter said.

Back to yesterday, where outside of the UK inflation data the other story which caught some attention was the Times  reporting that PM Theresa May was preparing to reject Michel Barnier’s improved Brexit offer surrounding the Irish border issue. After trading as high at $1.3215 (+0.51%) post the CPI data, the Pound fell to a low of $1.3099 (-0.38%) following that story. It then rallied back before additional Brexit headlines pressured it lower again. The second round of negative headlines were from the EU’s Juncker who said they were still “far away” from a Brexit deal and Irish PM Varadkar who said that negotiations are no closer to conclusion than they were in March. The pound ended the day broadly flat. As a reminder, the EU leaders meeting continues in Salzburg again today so worth watching out for any closing headlines.

Meanwhile in Italy the daily budget headlines yesterday consisted of Corriere della Sera reporting that Deputy PM Di Maio was calling for an increase in the deficit to 2.5% of GDP. Di Maio was quoted as saying that “we will have to rely on a little bit of extra deficit, so that we’ll be able to stimulate growth, which will help us cut the debt ratio of GDP in the long run”. Since then PM Conte, on the sidelines of the EU summit, has said that Italy’s budget deficit won’t exceed 2% next year. While we’re on Italy, it’s worth noting that our European economists published a report yesterday entitled “Rome vs Brussels”. They warn that the market is becoming too complacent about the upcoming budget and particularly the degree of tension after the publication which could reveal something about Rome/Brussels relations. This in turn could affect how the market perceives the hurdles to ESM support (and OMT, if necessary). See the link here for those interested.

As far as the latest trade developments are concerned, there wasn’t much to report yesterday with the focus instead turning to NAFTA with Bloomberg headlines once again hitting the wires in the afternoon suggesting that a USCanada deal is unlikely to be reached this week. Speaking of trade, it’s worth highlighting a note from our FX team yesterday which focuses on the “winners” from the US-China trade war using micro-level trade data to assess the scope for US consumers to swap Chinese products for imports from the rest of the world. It was interesting to see Europe as a potential beneficiary. See the link to the report here .

Elsewhere, some influential central bankers made speeches yesterday but did not signal any market-moving changes in policy. ECB President Draghi used a speech in Berlin to call for deeper European integration, especially with regards to a common fiscal backstop and deeper financial and capital markets integration. BoE Chief Economist Haldane defended forward guidance, saying it has effectively signalled interest rate hikes to consumers and businesses, even if it was not precise enough to satisfy financial market participants.

Finally, on the data front, US housing activity was generally strong. Housing starts increased 9.2% mom in August, though building permits fell -5.7%. This might reflect some catch-up after activity had been depressed earlier in the summer from wildfires. The Atlanta Fed GDPNow model showed a slight increase in its estimate of third quarter residential investment, but their headline GDP forecast remained steady at 4.4% qoq saar, which would be the fifth-highest pace since the financial crisis.

In terms of what to watch out for today, the early focus should once again be on the UK with August retail sales data due to be released. This afternoon in the US there’s a steady stream of largely second tier releases including the September Philly Fed PMI, weekly initial jobless claims, August leading index and August existing home sales. The advanced September consumer confidence print for the euro area is also out this afternoon. Away from that we’ve got the second and final day of the informal EU leaders meeting in Salzburg, while the Bundesbank’s Weidmann and ECB’s Praet are slated to speak. Finance Ministers in the euro area are also due to meet and discuss Greece, the EMU and budgets ahead of the next eurogroup meeting.