It’s not exactly clear what prompted today’s dramatic U-turn reversal in overnight markets, but this morning stocks and futures around the globe are a sea of green with chipmakers and Asia-exposed stocks among the best performers, with some pointing the finger at Washington’s decision to temporarily ease trade restrictions imposed last week on China’s Huawei even though the move was largely procedural, while the trade-war driven turbulence that has dominated markets showed no signs of abating.

S&P and Nasdaq futures all traded in the green after the U.S. granted limited relief for consumers and carriers using Huawei Technologies, a day after the White House’s moves against the Chinese telecom giant battered stocks. The result has been the biggest monthly drop in the Semiconductor Index – which confounded so many with its oblivious levitation in the first 4 months of 2019 – as traders finally realized that pain is coming.

The overnight respite came after news on Monday that Washington allowed Huawei to purchase American-made goods to maintain existing networks and provide software updates to existing Huawei handsets until Aug. 19. What happens next is unclear.

“The Huawei extension is in some sense providing a relief rally as it eases the worst fears of market participants that we are drifting towards a fully-fledged trade war,” said Aberdeen Standard’s head of global strategy, Andrew Milligan.

Extension aside, an angry China continues to dig in, and overnight Beijing warned about “unwavering resolve” to fight U.S. “bullying,” saying it could retaliate after U.S. President Donald Trump blacklisted Huawei.

In Europe, the STOXX 600 edged higher, with Germany’s DAX rising 0.6%, while France’s CAC 40 climbed 0.2% in early trading, while tech firm lead the advance. Chipmakers Infineon and STMicro were up 1.4 to 3.5%, and the tech sector rising more than 1% after losing almost 3% on Monday. The autos and suppliers sector was another top gainer, up as much as 1.1%. In London, heavyweights HSBC, Prudential and Standard Chartered boosted the blue-chip index as markets on hopes if an easing in the trade tensions. Daimler got a boost after German newspaper Handelsblatt reported the company was looking to cut administration costs by 20%. Elsewhere, Italy’s biggest phone group Telecom Italia led gainers on the STOXX 600 after posting first-quarter earnings in-line with expectations and confirming its guidance for the next three years.

Chinese equities had the strongest gains in the Asian session, with the Shanghai Composite up 1.23% and the CSI300 index ended 1.35% higher, while their Japanese peers ended lower. Gains in heavyweight Samsung Electronics helped South Korea’s KOSPI stock index close up 0.3% as traders speculated the chip giant may benefit from Huawei’s need to shift away from American suppliers. Meanwhile, traders ignored the latest disastrous trade print from South Korea, which reported a -11.7% plunge in total exports and a 33% crash in chip exports, confirming that the trade war is only getting worse by the day.

Still, the situation remains fluid and just one hastily worded tweet threatens to collapse confidence. “Equity markets remain hostage to developments in the ongoing US-China trade battle,” said Rupert Thompson, head of research at Kingswood. “We still believe some kind of deal will eventually be reached – most likely at a Xi/Trump meeting at the G20 Summit in late June.”

Despite the overnight rebound in optimism, overall sentiment continues to deteriorate: “The world of G-10 believes that things get fixed. This is what economists tell them, and so they do not see a reason to panic,” said Sebastien Galy, senior macro strategist at Nordea Investment Funds SA in Luxembourg. “Volatility is set to stay, though it need not mean that equities are always to the downside,” pending clarity on U.S.-China talks before next month’s G-20 summit, he added.

In FX, cable fell below $1.27 for the first time since mid-January, hit by dollar strength and expectations that Prime Minister Theresa May will fail to persuade cabinet colleagues to back an amended version of her Brexit withdrawal deal. As Reuters notes, the pound slipped 0.2% to $1.2688 while against the euro it was down 0.14% to a new four-month low of 87.88 pence.

Elsewhere, the U.S. dollar advanced against most of its G-10 peers, with the Australian dollar seeing the biggest declines. The Aussie slid, wiping most of the previous day’s advance, after RBA Governor Philip Lowe said he’ll consider cutting interest rates at next month’s meeting to spur faster hiring, pushing the Aussie dollar lower half a percent to $0.6873. Most other G-10 currencies were range bound ahead of a slew of risk events this week, including minutes of the Federal Reserve’s latest meeting and a potential response from China. In EM, the outlier was the Turkish lira which stayed lower after the country’s central bank effectively lowered its main interest rate, undoing a limited tightening of policy

Oil prices edged higher on U.S.-Iran tensions and amid expectations that producer club OPEC will continue to withhold supply this year. Brent crude futures, the international benchmark for oil prices, were at $72.18 per barrel up 21 cents, or 0.3 percent, from their last close.

Expected data include existing home sales. AutoZone, Home Depot, and TJX are among companies reporting earnings.

Market Snapshot

• S&P 500 futures up 0.3% to 2,853.00
• MXAP down 0.3% to 153.91
• MXAPJ down 0.1% to 503.15
• Nikkei down 0.1% to 21,272.45
• Topix down 0.3% to 1,550.30
• Hang Seng Index down 0.5% to 27,657.24
• Shanghai Composite up 1.2% to 2,905.97
• Sensex down 0.6% to 39,127.68
• Australia S&P/ASX 200 up 0.4% to 6,500.14
• Kospi up 0.3% to 2,061.25
• STOXX Europe 600 up 0.4% to 379.09
• German 10Y yield unchanged at -0.087%
• Euro down 0.2% to $1.1144
• Italian 10Y yield rose 4.0 bps to 2.327%
• Spanish 10Y yield fell 0.4 bps to 0.88%
• Brent futures down 0.3% to $71.77/bbl
• Gold spot down 0.2% to $1,275.22
• U.S. Dollar Index up 0.2% to 98.11

Top Overnight News:

• China has warned about “unwavering resolve” to fight U.S. “bullying,” saying it could retaliate after U.S. President Donald Trump blacklisted Huawei. The U.S. restrictions on Chinese telecom giant Huawei threatens to snuff out a nascent recovery in semiconductor demand, a key driver of economic growth in technology powerhouses including South Korea and Taiwan
• Trade tensions have derailed the global economy, plunging it onto a low-growth track that’s clouded by risks, according to the OECD’s latest outlook. The report sticks to the gloomy tone long held by the Paris-based organization, which has warned that trade disruptions could ricochet throughout the world economy
• For overseas investors, a weaker Chinese currency is the latest factor making yuan-denominated assets less attractive. They’ve been selling mainland-listed stocks at a record pace and their demand for Chinese bonds has been relatively tepid
• Hong Kong is set to price its first ever green bond denominated in dollars on Tuesday, to become the second Asian government after Indonesia to raise such debt
• Angela Merkel is preparing for a clash with France as she pushes Germany’s most ambitious bid yet for a top European Union job. The German chancellor is focused on securing the presidency of the European Commission or the European Central Bank for one of her compatriots, according to officials with knowledge of her thinking

Asian stocks eventually traded mostly higher after the US provided temporary relief for Huawei, which helped the region shrug-off the negative lead from Wall St where the tech sector suffered the brunt of the ongoing trade uncertainty. ASX 200 (+0.4%) was initially weighed on by underperformance in the tech sector but then recovered on expectations for a rate cut next month and with strength in financials after APRA proposed amending guidance on mortgage lending which could raise the maximum borrowing capacity for individuals, while Nikkei 225 (-0.2%) was subdued and failed to benefit from a weaker currency. Hang Seng (-0.4%) and Shanghai Comp. (+1.3%) were higher with sentiment underpinned following a CNY 80bln liquidity injection by the PBoC and after the US provided some temporary relief for Huawei and other entities in order to maintain their existing networks. However, Huawei’s founder seemed less than impressed as he stated the US reprieve does not mean much for Huawei and that no one will be able to catch up with it on 5G technology for the next 2-3 years. Finally, 10yr JGBs were flat despite the lacklustre tone in Japan and after the BoJ’s Rinban announce for over JPY 1.2tln of JGBs also failed to spur prices.

Top Asian News

• Thai Growth Slumps to Weakest Since 2014 as Trade War Takes Toll
• Jokowi Declared Winner of Indonesia Vote as Rival Rejects Result
• Tencent’s $66 Billion Wipeout Bodes Ill for Hong Kong Stocks
• Turkey Central Bank Undoes Tightening, Brings Rate Down to 24%

Upbeat trade for European stocks so far [Eurostoxx 50 +0.7%] following on from a mostly positive Asia-Pac session wherein the two major Chinese bourses closed higher in excess of 1%. Sectors are all in the green although the defensive sectors are marginally lagging their peers. Chipmakers are bolstered by reports that the US government are to temporarily ease some trade restrictions imposed on Huawei, with STMicroelectronics (+3.7%), AMS (+4.0%) and Micro Focus (+3.1%) higher. In terms of individual stocks, Spanish listed DIA (+4.5%) opened higher in excess of 8% after Santander (+0.2%) agreed a financing deal with DIA to avoid insolvency proceedings. Meanwhile, Norsk Hydro (+5.2%) shares spiked higher after Brazil gave the company the green light for its Alunorte Alumina plant to reopen. Finally, Telecom Italia (+1.9%) shares jumped following optimistic earnings aftermarket yesterday.

Top European News

• May Faces Brexit Showdown as Ministers Jostle to Succeed Her
• Rees-Mogg Says He Won’t Back May’s Brexit Withdrawal Bill
• Germany Is Ready for a Fight as Merkel Targets EU’s Top Jobs

In FX, the Aussie is dragging its antipodean compatriot back down under after just a fleeting pop higher in wake of PM Morrison’s unexpected re-election, and the catalyst is a combination of dovish RBA minutes and rhetoric from Governor Lowe that have ramped up June rate cut expectations to over 90% per interbank pricing and around 75% in OIS terms. Aud/Usd is teetering just above last Friday’s 2019 low (0.6862) – discounting the so called ‘flash crash’ trough at 0.6743 from early January – and eyeing support at 0.6850 ahead of the 30 DMA (0.6845) and decent option expiry interest at 0.6800 (close to 1 bn). Meanwhile, Nzd/Usd is just a few pips over 0.6500 having breached the post-RBNZ cut and previous ytd base of 0.6525, as the Aud/Nzd cross holds between 1.0557-90. Next up for the Kiwi, NZ Q1 retail sales and the latest GDT auction.

• GBP – The Pound continues to depreciate awaiting further Brexit developments following the collapse of talks between the Conservative and Labour Parties and ahead of MV4 due early next month. On that note, today’s Cabinet meeting will provide more clues as to the level of support for and opposition to the WA after a narrower defeat at the 3rd HoC vote, with some suggestions that the tide has turned back against the proposal. Cable has now filled bids said to be sitting from 1.2710-15 and any psychological buying interest at 1.2700 to hit 1.2686 vs the mid-January trough at 1.2670 that came with the failure of MV1, while Eur/Gbp has tested resistance ahead of the 200 DMA circa 0.8790 or 1.1375 in Sterling terms.
• EUR/CHF/JPY – Also weaker vs a broadly firm Dollar as the DXY edges back above the 98.000 level to probe recent peaks and resistance spanning the 98.030-120 area ahead of this year’s high at 98.346. The single currency has slipped through bids that held on Monday at 1.1150, but not further towards support at 1.1135 or the 1.1112 ytd low, while the Franc is back on the 1.0100 pivot and Yen has retreated from its 100 HMA (109.80) to retest support at 110.31 (Fib and recent low).
• EM – Another day in the spotlight for the Lira as the Government and CBRT maintain efforts to curtail speculative flows and restore investor confidence in the face of more evidence that sentiment is weak on economic, fiscal, political and diplomatic grounds. Indeed, Turkish consumer morale has fallen sharply in May and Usd/Try has bottomed around 6.0000 yet again even though FX transaction settlements for non-corporate retail deals in Usd100k or above have been brought forward from spot to plus one day and the CBRT has reinstated 1 week repos and cut swap rates by 150 bp to 24%.

In commodities, a relatively choppy session thus far in the energy complex as WTI (+0.8%) and Brent (+0.6%) futures have recently moved past the USD 63.50 and USD 72.20 levels to the upside, after a brief spell in negative territory on the day. News flow has been light in the sector ahead of tonight’s API crude inventories release with forecasts for a headline crude drawdown of 1.9mln barrels whilst distillates are expected to decline by 600k barrels. Turning to OPEC, following yesterday’s delay to the 25/26th June OPEC/OPEC+ meetings, Energy Intelligence notes that there are talks of a JMMC and JTC meeting on July 1st and 2nd ahead of an OPEC/OPEC+ meeting on July 3rd-4th. Nothing is yet confirmed. Elsewhere, Russian press noted that oil transit from Russian oil transit towards the EU has now resumed following the contaminated oil at the Ust-Luga port. In terms of metals, gold (-0.2%) prices remain subdued as the Dollar index gains more ground above 98.000. Meanwhile, copper prices are relatively flat amid the indecisive risk tone. Finally, aluminium futures (-1.5%) slump after a federal court in Brazil lifted a production embargo at Hydro’s Alunorte refinery which would see the a ramp-up in production from 50% to 75-80% within two months.

US Event Calendar

• 10am: Existing Home Sales, est. 5.35m, prior 5.21m; MoM, est. 2.69%, prior -4.9%
• 10:45am: Fed’s Evans Discusses Economy and Monetary Policy
• 12pm: Fed’s Rosengren Speaks to Economic Club of New York

DB’s Jim Reid concludes the overnight wrap

NO SPOILER ALERT!! So there is now a deep void in my life following the last Game of Thrones we watched last night. Seems very sad that I’ll never watch another episode. However on reflection although there have been 73 episodes this only represents around 3 full days of my life watching it. Considering I’ve been on the planet for around 16420 days then I’ve only spent 0.0000609% of my existence consuming it. So I’m hoping I’ll soon get over my loss and will instead find something else to obsess about. Today is World Day for Cultural Diversity and DB is encouraging staff to support this event by coming to work in traditional cultural outfits and making a charitable donation. I’m not sure if Surrey, England has a cultural dress of note (bowler hat?) so I’m thinking of celebrating the end of GoT by arriving in Dothraki cultural attire.

A bit like the void now filling our TV screens on Monday nights, it was eerily quiet in markets yesterday. That’s especially impressive considering all that’s happened in the last couple of weeks. The fallout from the Huawei ban was the main talking point, and the mood music continued to be negative with President Trump saying in an interview that he is “very happy” with how the trade confrontation with China is going. Tech underperformed with the NASDAQ dropping -1.46% and the Philly Semi-Conductor index -4.02%. For a bit of perspective the latter is now down -15.32% from the April highs – of which half has come in the last three sessions – which compares to only a -3.58% fall for the S&P 500 from the recent highs. Meanwhile, at a stock level Apple (-3.13%), Alphabet (-2.02%), Broadcom (-5.97%) and Qualcomm (-5.99%) were amongst some of the higher-profile casualties while the NYSE FANG index also got hit to the tune of -2.70% – although that only ranks third-worst in terms of one-day moves in the last five sessions. The chipmaking sector’s troubles were compounded by reports that the Federal Trade Commission is expanding its anti-trust probe into the sector, specifically investigating whether Broadcom abused its market dominant position.

In contrast the S&P 500 and DOW finished a much more measured -0.67% and -0.33% respectively while prior to this the STOXX 600 ended -1.06%. The DAX (-1.61%) got hit a bit more as Infineon (-4.80%) got caught up in the Huawei-ban crosshairs after the Nikkei reported that the company had also ceased shipments to Huawei following the announcement. The FTSE MIB (-2.68%) was also a notable underperformer, partly as a result of STMicroelectronics tumbling -9.15%, but also as Deputy PM Salvini reiterated that tax cuts would need to be financed with a higher deficit and by changing EU rules. BTPs actually held in relatively well all things considered, with 10y yields +4.0bps higher compared to a +1.8bps rise for Bunds. Treasuries closed a quiet session +2.3bps higher while the USD (-0.05%) was a shade weaker. Credit markets were also quiet with cash HY spreads -1.6bps tighter in aggregate, almost entirely driven by the -92bps tightening in Sprint’s HY bonds after the FCC Chairman announced that he plans to recommend approval for T-Mobile’s potential acquisition of Sprint.

Overnight trade continues to dominate the headlines with China’s ambassador to the EU, Zhang Ming, suggesting that China could retaliate against the US after the move to blacklist Huawei. He said “This is wrong behaviour, so there will be a necessary response,” while adding, “Chinese companies’ legitimate rights and interests are being undermined, so the Chinese government will not sit idly by.” Meanwhile, the People’s Daily in China published a commentary today saying that repeated misjudgement by the US could produce grave consequences while adding that attempts to impede the historical progress of the great rejuvenation of the Chinese nation will be like “a mantis trying to stop a car with its arms.” Sounds very Game of Thrones! This morning in Asia markets are largely trading up with advances led by Chinese markets with the CSI (+1.80%), Shanghai Comp (+1.52%) and Shenzhen Comp (+1.92%) all up over 1% . The Nikkei (+0.06%) is also edging into positive territory after erasing earlier losses alongside the Hang Seng (+0.22%) and Kospi (+0.94%). Samsung shares are up +4.04% this morning on the possibility that the company could potentially receive orders diverted from China and the US after the US blacklist of Huawei. For some context Huawei’s 4.125% ’26 USD bonds are trading down -0.14pts overnight at 95.4 having traded at a cash price of 98.6 just last Wednesday. Elsewhere, the Australian dollar is trading weak (-0.38%) this morning as the RBA Governor Lowe said that the board will consider a rate cut in June. Futures on the S&P 500 are up +0.43%.

Overnight we also heard from the Fed Chair Powell that the $1.2tn market in leveraged corporate loans doesn’t represent a current threat to the financial system. He added that it looks a lot like the mortgage industry in the run-up to the subprime crisis but that US regulators are watching closely this time around and the financial system is better shielded. However, he pointed to mutual funds as potentially troubling participants in today’s leveraged loan market while adding that a downturn might encourage investors to redeem much faster than the funds can sell off the loans. Currently, mutual funds are holding $224bn of leveraged loans (per Bloomberg).

In other Fed speak from yesterday, Bostic repeated that he does not see a rate move more likely in one direction that the other – a message he’s been running with a while for now. He also said that companies are “expressing concern they are reaching limits of how much they can hold off on raising prices due to tariffs” and that he does not expect the economy to grow as fast this year relative to last year. Meanwhile, St. Louis Fed President and known dove Bullard said that he wants to examine yield curve targeting as a policy option, and also said that if inflation remains around its current level of 1.6% yoy, “I’ll get more aggressive in pushing the FOMC to lower rates.” Finally, Vice Chair Clarida and NY Fed President Williams spoke at an event, and though most of their remarks were unchanged from previous speeches, they both did emphasize the low level of NAIRU at around 3.5%, suggesting little pressure to hike rates further unless and until unemployment moves lower.

It was a quiet day in terms of economic data, but the Chicago Fed’s national activity index fell to -0.45 for April, from an upwardly-revised March reading of 0.05. A negative value indicates below-average growth. In Europe, the only release was German PPI data, which showed a +0.5% mom rise in prices versus expectations for +0.3%. That was the fastest pace since January 2017. Away from the data, the Bundesbank released new economic projections which forecast German growth to stagnate this quarter after a strong Q1, in line with DB’s house view.

To the day ahead now, which is a very quiet one for data with the May CBI survey in the UK and April existing home sales report in the US due out. The latest OECD economic outlook will be released while over at the Fed we’re due to hear from Evans at 3.45pm BST and Rosengren at 5pm BST. The ECB’s Guindos and Visco are also due to make comments while the BoE’s Carney testifies to Parliament’s Treasury Committee about the May inflation report this morning.