When it comes to overnight stock market levitation, there are two catalysts: hopes of an “imminent” trade deal (this has been the case for the past year) and hopes for central bank easing (this has been the case for the past decade). Overnight, it was the latter that pushed US equity futures by another 7 points, sending the Emini just shy of 3,000, trading at 2,987 last, and Global stock markets broadly higher.

European markets opened higher after data showed a surprise rise in German exports and on expectations of stimulus by the ECB later this week, including even lower rates and a restart of asset purchases. The pan-European STOXX 600 index was fractionally higher just after 7:00 EDT, while the MSCI All Country World Index was up 0.05%.

Germany’s trade-sensitive DAX index rose 0.2% after data showed seasonally adjusted exports rose 0.7% in July. A Reuters poll of economists had pointed to a drop of 0.5%. The report was a much needed green shoot for an economy that is currently in a technical recession and amid gloomy data from major economies since Friday, which heightened expectations of stimulus from central banks

The strong German trade data came after the US reported that August jobs slowed more than expected, while data over the weekend from China showed the country’s exports unexpectedly shrank as shipments to the U.S. slowed.

“If all the currently proposed tariffs are implemented, we foresee that growth in the first half of next year will slow toward the brink of a recession,” said UBS chief investment officer, Mark Haefele, emphasizing a report we discussed last week.

Of course the worse the data, the better for stocks, and the prospect of central-bank support kept risk sentiment alive and well. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.2% and E-mini futures for the S&P 500 index rose 0.3%.

Asian stocks advanced, heading for a fourth day of gains, as China cut reserve ratios for banks and the country’s weak trade data fueled speculation for further easing. Most markets in the region were up, with Japan and China leading gains. Technology and industrial firms were among top performers. The Topix climbed 0.9% to a five-week high, led by electronics makers and pharmaceutical companies. Despite a downward revision to second-quarter growth, Japan’s economy is estimated to remain strong enough for an upcoming sales-tax hike. The Shanghai Composite Index closed 0.8% higher for a sixth day, with PetroChina and 360 Security Technology among the biggest boosts. India’s Sensex added 0.4%, driven by Housing Development Finance and Larsen & Toubro, as investors awaited more government stimulus

As a reminder, on Friday, China’s central bank cut reserve requirements for a seventh time since early 2018 to free funds for lending, while Fed Chairman Jerome Powell said the Fed would continue to “act as appropriate” to sustain U.S. economic expansion.

And while the European Central Bank is expected to cut rates this week, Euro-area bonds fell as investors showed less conviction that the Central Bank’s policy meeting Thursday will result in bold steps for more monetary stimulus. Longer-dated euro zone government bond yields ticked higher, with most yields up 3 to 4 basis points in early trade, while US 10Y yields rebounded from Friday’s plunge, trading around 1.60% last.

“There has been a tremendous rally in bonds and the central banks are the key determinant of what’s going to happen with the rates market,” Frances Hudson, global thematic strategist for multi-asset investing at Aberdeen Standard Investments, told Bloomberg TV. “With equities there is still an element of self-determination.”

Chinese sovereign bonds fell after the central bank disappointed investors by not rolling over maturing medium-term loans. The People’s Bank of China drained a net 56.5 billion yuan via monetary policy tools on Monday, selling 120 billion yuan of seven-day reverse repos, while 176.5 billion yuan of medium-term lending facility matured, Bloomberg reported. Paradoxically, that move came just one business day after the PBOC eased financial conditions, when it announced on Friday it was cutting the amount of cash banks must hold in reserve to the lowest since 2007, injecting liquidity into a domestic economy facing a slowdown and headwinds from the trade war with the U.S. “It seems like the PBOC is continuing its balancing act,” said Tommy Xie, economist at OCBC Banking Corp. in Singapore. “The inaction in MLF today to some extent offsets the impact of the RRR cut.”

Separately, data released on Sunday showed that exports decreased 1% in dollar terms from a year earlier in August as the trade war with the US is grinding China’s mercantilist apparatus to a crawl.

In currencies, the euro fell to a five-day low but recovered ground by 0820 GMT to trade 0.1% higher at $1.1036 as the dollar traded near a two-week low as the focus turned to whether the Federal Reserve will cut interest rates again this month. Aussie and kiwi both edged higher as Asian risk assets were boosted by some follow-through buying from China’s decision Friday to cut banks’ reserve ratios. The pound shrugged off earlier losses to rise to the highest level since July after the U.K. economy grew surprisingly fast in July, and after the latest defection from Prime Minister Boris Johnson’s Conservative party which will soothe fears Britain was facing a pre-Brexit recession.

In commodities, oil rose on expectations that Saudi Arabia, the world’s largest oil exporter, will continue to support output cuts by OPEC and other producers to prop up prices under new Energy Minister Prince Abdulaziz bin Salman.

Market Snapshot

• S&P 500 futures up 0.2% to 2,986.00
• STOXX Europe 600 down 0.06% to 386.91
• MXAP up 0.4% to 156.83
• MXAPJ up 0.3% to 507.72
• Nikkei up 0.6% to 21,318.42
• Topix up 0.9% to 1,551.11
• Hang Seng Index down 0.04% to 26,681.40
• Shanghai Composite up 0.8% to 3,024.74
• Sensex up 0.4% to 37,122.70
• Australia S&P/ASX 200 up 0.01% to 6,647.96
• Kospi up 0.5% to 2,019.55
• German 10Y yield rose 3.8 bps to -0.6%
• Euro up 0.06% to $1.1036
• Brent Futures up 0.4% to $61.78/bbl
• Italian 10Y yield fell 6.8 bps to 0.537%
• Spanish 10Y yield rose 3.0 bps to 0.203%
• Brent futures up 0.7% to $61.96/bbl
• Gold spot up 0.2% to $1,509.12
• U.S. Dollar Index little changed to 98.39

Top Overnight Headlines from Bloomberg

• Boris Johnson is refusing to back down and pushing on with his hardline Brexit strategy despite the risk of being taken to court. Johnson is in Dublin on Monday for talks with his Irish counterpart Leo Varadkar, who demanded “realistic, legally binding and workable” arrangements for the Irish border if an agreement is to be reached
• European Central Bank President Mario Draghi will test the composure of global policy makers this week as he unleashes a barrage of stimulus to shore up economic growth
• Apple Inc. and manufacturing partner Foxconn violated a Chinese labor rule by using too many temporary staff in the world’s largest iPhone factory, the companies confirmed following a report that also alleged harsh working conditions
• The contraction in China’s trade in August underscored what economists were already saying about the government’s stimulus efforts: they’re not yet enough to put a floor under the slowing economy
• Oil extended gains after Saudi Arabia ousted its long-time energy minister before an OPEC+ committee that monitors compliance with output cuts meets this week in Abu Dhabi

Asian equity markets traded mostly positively but with gains relatively mild as the region digested the latest developments from the world’s 2 largest economies including the PBoC RRR cut announcement, mostly weaker than expected Chinese trade data and US NFP. ASX 200 (U/C) was choppy as upside in tech was counterbalanced by continued weakness in gold miners and after soft Chinese trade data which showed a surprise drop in Exports, while Nikkei 225 (+0.5%) remained afloat after Final GDP figures for Q2 printed inline with estimates. Hang Seng (Unch.) and Shanghai Comp. (+0.8%) were mixed as the mainland reacted to the PBoC’s 50bps RRR cut and further targeted 100bps reduction for qualified banks which is expected to release CNY 900bln of liquidity, although advances were limited by the weak trade figures and with Hong Kong dampened after further violent protests over the weekend. Finally, 10yr JGBs were higher despite the mostly positive risk tone and reclaimed the 155.00 level, although prices later stalled amid mixed results in the enhanced liquidity auction for 2yr-20yr JGBs.

Top Asian News

• Chinese Food Producers Have World’s Richest Valuations
• Chinese Automobile Sales Decline for 14th Time in 15 Months
• Nissan CEO Saikawa Says Ready to Resign Once Successor Is Found
• Towngas China Surges Most in a Decade as Citi Predicts Takeover

Major European indices are mixed this morning but overall little changed [Euro Stoxx 50 +0.1%], as markets struggle for clear direction amidst a relatively quiet schedule and no further updates to the US-China trade situation. Unsurprisingly, sectors are painting a similar picture this morning though the energy sector outperforms amidst strength in the broader complex. In terms of individual movers, ProSiebensat (+5.5%) lead the Stoxx 600 after being upgraded to buy at UBS and the Co. stating they are to remain focused on their free-to-air business. At the other end of the spectrum are ThyssenKrupp (-2.3%) after the Co’s CEO states he would prefer a minority stake sale in their elevator division which has the potential to be valued at over EUR 15bln. Elsewhere, Lloyds (-0.4%) are slightly subdued after suspending their GBP 1.75bln share buyback scheme due to a substantial inflow of PPI claims, as such the Co. need to make an incremental charge of GBP 1.2-1.8bln on top of their prior Q3 provisions.

Top European News

• Italy Prepares to Tap Debt Market Just as Europe Demand Stutters
• Ireland’s Bonds Seen Increasingly Risky as Brexit Nears Endgame
• Thyssenkrupp CEO Said to Prefer Minority Sale for Elevators

In FX, Pound Sterling survived and bout of selling pressure that pushed Cable down through 1.2250 and Eur/Gbp up above 0.9000, but was already recouping and reversing gains before a raft of UK releases that beat expectations across the board. This raised eyebrows and speculation about some being privy to the numbers or nature of the data beforehand, but others also pointed to the fact that the bill ensuring another Brexit extension rather than now deal is due to receive Royal Assent later today and reports that PM Johnson may have conceded that he may have to accept another 3 months if he fails to strike an accord with the EU before October 31. Meanwhile, opening remarks from his meeting with Irish PM Varadkar were largely upbeat and confident on the subject of resolving the Irish border backstop, including alternatives to the current WA proposal as he claimed there are many prospective options, but not for public consumption. In response and/or follow-through from the aforementioned encouraging data, Cable cleared 1.2300 more convincingly on its way over the 55 DMA (1.2328) and above last Friday’s post-NFP high (1.2338) to circa 1.2360, while Eur/Gbp reversed through the big figure and 0.8950, eyeing 0.8900 next.

• AUD/NZD/NOK/CAD – The Antipodean Dollars have extended recovery gains vs their US counterpart in wake of the latest PBoC RRR cuts, a sub-forecast rise in US payrolls and despite Chinese trade data revealing an unexpected decline in exports. Aud/Usd has now advanced towards 0.6870 and Nzd/Usd is approaching 0.6450 as the Aud/Nzd cross pivots 1.0650. Elsewhere, strong Norwegian GDP for the month of July and firm oil prices are underpinning the Nok as it rebounds through 9.9000 vs a steady Eur overall, while the Cad is inching closer to resistance ahead of 1.3150 against its US rival on the back of Canada’s labour report and a bumper jump in the jobs tally.
• EUR/JPY – Both narrowly mixed vs the Greenback around 1.1025 and 107.00 respectively, and well flanked by heavy option expiry interest as 1.8 bn rolls off at 1.1000 and 1 bn at 1.1050 in Eur/Usd, while 1.5 bn, 1.3 bn and 1.3 bn are layered in Usd/Jpy from 106.50-60, through 106.85-95 to 107.25-30. Note also, the Euro and Yen are not deriving much from the Buck indirectly as the DXY trades within a tight 98.512-309 band.
• CHF – The G10 laggard as the Franc retreats from its post-NFP peaks towards 0.9900 again and Eur/Chf climbs towards the top of a 1.0930-1.0890 range amidst firmer risk sentiment overall and expectations that the SNB will respond to likely stimulus from the ECB this week and Fed next week at its September Quarterly Policy review.
• EM – The Lira continues to underperform or hand back recovery gains following more dovish prompting from Turkish President Erdogan ahead of this month’s CBRT policy convene where forecasts range from 225-275 bp worth of easing after the significantly bigger than anticipated -425 bp in July. Usd/Try is back above 5.7300 in contrast to Usd/Zar that is now under 14.7500 irrespective of more warnings from the ratings agencies about aid for SA’s power company Eskom and S&P advising caution when restructuring the firm’s bonds.

In Commodities, Brent and WTI prices are firmer this morning, with both WTI and Brent having successfully surpassed the USD 57.00/bbl and USD 62.00/bbl marks at best thus far. Nothing too fresh in the way of fundamental news flow this morning, but weekend reports showed that Saudi Energy Minister Al Falih has been replaced by Prince Abdulaziz; PVM indicate that no changed is to be expected in the current strategy of OPEC and if anything this may strengthen their resolve to balance markets. Other energy minister comments from Secretary General Barkindo that the JMMC could debate potential new production targets, meeting is scheduled for September 12th. The complex may have derived some support this morning from renewed geopolitical tensions via Iran, who have told the IAEA that they intend to produce enriched uranium with advanced centrifuges and as such would breach the nuclear deals imposed ban. Although, gold has failed to generate too much in the way of support from these comments with the yellow metal little changed on the day and still holding above the USD 1500/oz mark going into a critical week for markets courtesy of the ECB on Thursday. Separately, China’s Iron imports increased 6% YY to their highest since January 2018, which ING note is due to increasing shipments from Australia and amidst a recovery in Brazilian exports.

US Event Calendar

• 3pm: Consumer Credit, est. $16.0b, prior $14.6b

DB’s Jim Reid concludes the overnight wrap

I hope you had a good weekend. We had a joint 4th birthday and house warming party and after having 50 plus toddlers creating havoc I think it might be easier to just get the builders back in and start again with the refurb rather than tidy up. This weekend might go down as the one where Maisie lost all sense of reality though as every parent brought her a present. She now has a room full of gifts ahead of her actual birthday next week. Also given we invited 50 kids I’m worried that we’ll get invited back to around 50 4th birthday parties over the next year. There goes my weekly game of golf… and my savings!!

If last week was back to school with a bang with Brexit and a bond market sell-off the highlights, this coming week has plenty more potential ‘boom’ moments. The ECB on Thursday will be hard to top but today’s trip to Dublin from UK PM Johnson and the subsequent election vote later in Parliament (highly likely to be defeated) will be fascinating and in data terms the highlights are US CPI (Thursday) and Friday’s US retail sales and UoM consumer confidence which last month fell to the lowest since October 2016.

With regards to the ECB, this will be President Draghi’s penultimate press conference before his term comes to an end. Our economists expect the ECB to cut interest rates by 10bps at Thursday’s policy meeting. They also anticipate a new system of reserve tiering, where some subset of reserves are exempted from the cost of negative interest rates, plus an enhanced version of forward guidance.While a shift to a symmetric inflation target or to a price level target would almost certainly be too radical for them to consider without a deeper policy review, they are likely to commit to some form of “lower for longer” rate guidance. There are also risks that they cut by more than 10bps, given the apparent lack of pushback by hawkish members of the Governing Council against a rate cut. There was more public pushback over the last few weeks against asset purchases, so that may be harder to agree on. Our economists nevertheless think a €30 billion per month purchase program is possible, though they could also see a more generous form of TLTROs if the ECB wants to focus on credit easing instead of measures that may flatten the curve. Their full preview is available here .

Staying with our economists views, on Friday, Matt Luzzetti and the US econ team updated their economic forecasts to reflect the latest trade news (full note here ). Though they had included a trade war escalation in their forecasts, the current conflict has exceeded their expectations and they now expect growth to slow more sharply. They forecast Q4/Q4 GDP growth of 1.9% and 1.8% for this year and next, down from 2.0% and 2.2%. As a result, they expect unemployment to rise a bit to 4.3% next year which will translate to below-target inflation for the next several quarters. To combat this, they add another 50bps of Fed rate cuts to their expectations; they now see 100bps of cuts over the next several months, including cuts at the September, October, December, and January meetings. The most interesting comment in the piece is that they believe trade developments have neared a tipping point. Their baseline expects that data and risk assets will weaken enough over the coming months to pull the US administration back from further escalations. If not though they think a mild recession is possible and taking the Fed Funds rate to zero.

Turning to Brexit, events are expected to continue to journey into the unknown this week. A vote in the House of Commons to hold an election will likely get defeated today with the opposition parties trying to force Mr Johnson into asking the EU for an extension. The weekend papers were full of talk about the government working out whether they could sidestep the law with the Sunday Times reporting that the PM wants to even use the Supreme Court as an option. There was also talk of a PM resignation as one option being considered and even talk of the PM actively disobeying the law and perhaps facing a potential prison sentence if he does. As for the polls, after a torrid time in Westminster for the PM last week and over the weekend with another cabinet and party resignation, the Conservation Party have generally maintained their lead (between 3 and 14pts lead over 6 polls) but one poll suggested that if Brexit didn’t happen by October 31st then the lead would reverse and Labour would take a 2 point lead. This highlights why the opposition are gambling on denying an election this side of that date. The polls also show that hard tactics in Westminster are not necessarily damaging the governments support. However, the collateral damage to the party is significant so it’s high stakes for everyone.

Turning to Asia, over the weekend we got China’s August trade data with the trade balance reportedly standing at $34.8bn (vs. $44.3bn expected) primarily due to exports declining unexpectedly(-1.0% yoy vs. +2.2% yoy expected) while imports fell -5.6% yoy (vs. -6.4% yoy expected). In terms of trade with the US, exports stood at $37.3bn (-16.0% yoy) while imports stood at $10.4bn (-22.2% yoy) bringing the trade balance to $26.7bn (-13.2% yoy). Meanwhile, in Japan, this morning the final Q2 annualized GDP growth rate came in line with expectations and 0.5pp lower than the initial read at +1.3% qoq.

Although China’s trade data was soft, Friday’s RRR cut by the PBoC has helped equity markets to post modest gains this morning with the Shanghai Comp (+0.36%) and CSI 300 (+0.27%) both up. The Kospi (+0.45%) and Nikkei (+0.67%) have also risen while the Hang Seng (-0.08%) is struggling for traction a little. Meanwhile, futures on the S&P 500 are up +0.20% and WTI oil prices are up +1.11% following the news that Saudi Arabia has replaced its long-time energy minister before an OPEC+ committee meeting this week in Abu Dhabi.

As for markets on Friday, the two big risk events passed without really rocking the boat. The August jobs report showed a slightly weaker-than-expected headline number at 130,000, plus downward revisions of 20,000 to the previous two months. However, wage growth was stronger than expected at +0.4% mom and +3.2% yoy. So a bit of a wash, though yields did fall several basis points from their earlier highs. Separately, Fed Chair Powell spoke in Switzerland, the last official communication before the Fed’s media blackout period before their September 18 meeting. He said the latest payrolls report is consistent with a good economic outlook, but highlighted “significant risks.” That basically confirmed expectations for a 25bps cut later this month.

The S&P 500 ended the week +1.79% higher (+0.09% Friday), while the DOW posted a similar gain of +1.49% (+0.25% Friday). The NASDAQ gained +1.76% on the week, but lagged on Friday (-0.17%) as large-cap tech firms were hit by new reports of antitrust investigations. The NYFANG index ended +2.19% on the week (-0.72% Friday). European equities outperformed, with STOXX 600 and DAX up +2.02% and +2.11% (+0.32% and +0.54% Friday) respectively. Bank stocks were helped by higher rates, with indexes of European and US bank shares up +3.93% and +1.74% (+0.01% and -0.42% Friday).

The move in yields wasn’t eye-watering outside of a big move on Thursday, but it was still the biggest weekly selloff in eight weeks for the major benchmarks. Bunds, treasuries, and gilts ended +6.2bps, +6.4bps, and +2.7bps (-4.4bps, +0.02bps, and -9.4bps Friday) respectively. Front-end US rates increased less, with the 2-year yield up +3.6bps (+1.4bps Friday), taking the 2y10y yield curve back into positive territory after last month’s brief inversion. It ended +2.8bps steeper at 1.4bps (-1.5bps Friday). The dollar weakened -0.91% (-0.41% Friday), while EMs outperformed, with an index of EM currencies gaining +1.36% (+0.21% Friday). Credit yields were tighter in the US, with HY cash spreads -12bps narrower (-5bps Friday), though they widened in Europe by +9bps (+6bps Friday). US IG spreads traded flat, despite the largest week of issuance on record. Staying with credit on Friday Craig published a piece on US HY where he highlights the quite amazing statistic that is 2019 YTD is the only year where by HY has returned at least 10% but BBs have outperformed CCCs, both in total and excess return terms. The note touches on some of the reasons why and looks at whether the CCC/BB is a reliable leading indicator.