The daily see-saw pattern in capital markets continues and after yesterday's euphoric sprint higher on what the market misinterpreted as "conciliatory" remarks by China's president Xi, this morning global stocks and US equity futures are sharply lower on fears of imminent military action in Syria.

Europe's Stoxx 600 fell as much as 0.5%, trimming recent sharp gains, following a statement by the Russian ambassador to Lebanon that any US missiles - and the sources that fired them - will be shot down by Russia, while US futures took a sharp leg lower just after 6am ET.

Meanwhile, in an indication that a strike is imminent, we reported overnight that Europe's Eurocontrol air traffic agency asked airlines to apply caution on flights to the eastern Mediterranean region because of possible "imminent" air strikes in Syria over the next 72 hours. As a result, global markets are well in the red this morning, and sinking fast on fears how Russia could retaliate should the US stage another "wag the dog" exercise.

Earlier, trade in Asia was mixed with indexes in China and Hong Kong posting the biggest gains in that region as PBOC Governor Yi Gang offered more details on pledges to open the world’s second-biggest economy, and vowed China would not devalue the Yuan in response to trade war (more shortly). Australia's ASX 200 (-0.4%) failed to sustain mild opening gains as softer Australian consumer sentiment data and weaker than expected Chinese inflation figures clouded the upside seen in commodity-related sectors. Nikkei 225 (-0.5%) was also lacklustre with J Front the worst off amongst the retailers on expectations of weaker profits this year, while SoftBank outperformed on M&A hopes after reports its unit Sprint and T-Mobile renewed merger talks. Hang Seng (+0.5%) and Shanghai Comp. (+0.5%) were initially choppy as participants digested the miss on Chinese CPI and PPI data, although stocks gradually found some comfort from efforts by PBoC Governor Yi Gang to build upon the momentum from President Xi at the Boao forum in which the PBoC Governor talked about opening up and announced to increase stock connect quotas.

However today the favorable shift in trade wars was upstaged by the threat of a very real war in Syria, while investors await inflation data this morning at 830am ET for the next clue on the path for interest rates in the world’s biggest economy. Following yesterday's hot PPI print, markets are concerned that inflationary pressures could accelerate tightening, a move that could have ramifications across all assets as the synchronized growth story behind the global bull market shows signs of maturing.

Of note: today's CPI report will finally see the wireless cell phone services component anniversary and be removed from the Y/Y calculation. As a reminder, the disappointing slowdown in core CPI inflation last year was partially attributed to a one-off shock in wireless telephone services, which have up until now weighed on yoy inflation. In today's March release, that drag will roll off the calculation leading to a sharp improvement. As a result, consensus expected core CPI yoy inflation to jump to 2.1% from 1.8%.

However, not even CPI may be today's biggest mover in light of the renewed geopolitical stress around Syria. Overnight, President Donald Trump intensified preparations for a U.S. response to a suspected chemical weapons attack in the country, canceling a planned trip this weekend to South America. The potential air strike on Syria sets up the danger of a conflict between the U.S. and Russia, which disagrees that a chemical attack took place. Russian assets are already reeling from a series of fresh American sanctions. The ruble extended its slump and the country’s bonds and stocks retreated as investors continued to ditch holdings.

Predictably, most other assets acted in general risk-off fashion were Treasury yields dip back below 2.80%, 2s10s curve flattens for the fourth-straight day. JPY among best performers within G-10 FX, USD/JPY hovers near day lows and continues to test 50-DMA. German Bunds trimed earlier gains as market digests long-end German supply; Portuguese bonds underperform periphery peers as nation sells long 15Y debt via syndication. WTI crude climbs toward $66; spot gold hits one-week high. Aluminum is set for the biggest winning streak in almost 30 years amid sanctions.

Market Snapshot

• S&P 500 futures down 0.5% to 2,642.00
• STOXX Europe 600 down 0.3% to 377.37
• MXAP down 0.03% to 174.34
• MXAPJ up 0.01% to 572.45
• Nikkei down 0.5% to 21,687.10
• Topix down 0.4% to 1,725.30
• Hang Seng Index up 0.6% to 30,897.71
• Shanghai Composite up 0.6% to 3,208.08
• Sensex up 0.2% to 33,959.93
• Australia S&P/ASX 200 down 0.5% to 5,828.68
• Kospi down 0.3% to 2,444.22
• German 10Y yield fell 1.1 bps to 0.505%
• Euro up 0.09% to $1.2367
• Italian 10Y yield rose 2.4 bps to 1.541%
• Spanish 10Y yield fell 0.8 bps to 1.254%
• Brent futures little changed at $71.01/bbl
• Gold spot up 0.3% to $1,343.48
• U.S. Dollar Index little changed at 89.56

Top Overnight News

• Coalition warplanes seen over Syria-Iraq border: Al Jazeera; Airlines warned to stay cautious on possible Syria air strikes; Kremlin says Syria situation is "tense," urges restraint
• President Trump intensified preparations for a U.S. response to a suspected chemical weapons attack in Syria, canceling a planned trip this weekend to South America and conferring with European allies on retaliatory steps
• Trump praised Xi Jinping’s “kind words” on trade after the Chinese leader on Tuesday reaffirmed pledges to open his nation’s banking and manufacturing sectors -- signaling an effort to defuse a trade war
• People’s Bank of China Governor Yi Gang gave more details on plans for a historic opening of the nation’s financial sector, following President Xi’s pledges a day earlier that helped ease trade tensions with the U.S.
• British businesses want to stick to European rules after Brexit, according to a sector-by-sector analysis of what companies need the U.K. to fight for in negotiations
• There’s renewed risk that U.S. Treasury’s twice-yearly foreign currency report due this month will name China an FX manipulator, JPMorgan analysts including Daniel Hui and Paul Meggyesi write
• The ECB disowned comments by policymaker Ewald Nowotny, who said the institution could lift its deposit rate alone when it starts raising borrowing costs
• People’s Bank of China Governor Yi Gang says more financial-sector opening will be realized by June 30, citing a range of items from limits on foreign insurers to easing foreign ownership caps on securities companies
• Saudi Arabia beat estranged neighbor Qatar to the bond market, raising $11 billion in the biggest dollar sale by an emerging-market sovereign this year

Asian equity markets traded mixed as sentiment settled down from the bullishness seen from President Xi Jinping’s conciliatory tone on Tuesday which resulted to a solid performance on Wall St, while attention turned to the geopolitical climate with a possible announcement on Syria said to be imminent. ASX 200 (-0.4%) failed to sustain mild opening gains as softer Australian consumer sentiment data and weaker than expected Chinese inflation figures clouded the upside seen in commodity-related sectors. Nikkei 225 (-0.5%) was also lackluster with J Front the worst off amongst the retailers on expectations of weaker profits this year, while SoftBank outperformed on M&A hopes after reports its unit Sprint and T-Mobile renewed merger talks. Hang Seng (+0.5%) and Shanghai Comp. (+0.5%) were initially choppy as participants digested the miss on Chinese CPI and PPI data, although stocks gradually found some comfort from efforts by PBoC Governor Yi Gang to build upon the momentum from President Xi at the Boao forum in which the PBoC Governor talked about opening up and announced to increase stock connect quotas. Finally, 10yr JGBs were flat as prices lacked direction amid an indecisive risk tone in the region, while the BoJ also kept the amounts of its Rinban announcement unchanged at just over JPY 1tln of JGBs in 1yr-10yr maturities.

Top Asian News

• Sinopharm Loses $2.7 Billion in Value After Shock Profit Warning
• Flood of Junk Issuance Raises Risks in China’s Bond Market
• Walmart Is Said Favored Over Amazon to Buy India’s Top E- tailer
• Saudi Arabia Raises $11 Billion in Biggest EM Bond of 2018

Equities began the day trading slightly lower (Stoxx 600 -0.2%) with the risk-on sentiment seen in yesterday’s trade not being echoed early on. This comes to fruition despite the revelations from Chinese president Xi mentioning a preference to implement auto tariff cuts as soon as possible (this relating to a possible reduction on import taxes on autos by half from 25% currently). Market sentiment is largely being guided by increased tensions in Syria amid potentially imminent military action by the US. This follows on from overnight news of increased air traffic over Syrian airspace and condemnation from the international community. EU equity sector performance has largely been driven by company-specific news with Deutsche Telekom (+4%) driving the telecoms sector higher (+0.7%) as T-Mobile, a company in which they own 64% of shares, has restarted deal talks with Sprint. Elsewhere, Tesco are seen higher (+6.2%) amid encouraging earnings, whilst Hammerson shares are seen lower (-1.9%) post the rejection of a revised proposal from Klepierre for GBP 3.65/share and finally, CHR Hansen also lag their peers (-4%) amid a miss on earnings.

Top European News

• U.K. Manufacturing Output Falls for First Time in Almost a Year
• Macron Delays French Budget Effort as Growth Narrows Deficit
• ECB Dismisses Nowotny Comments on Rate Increase as Personal View
• Hammerson Rejects Improved $7.2 Billion Bid From Klepierre
• Asos Falls as U.K. Online Fashion Retailer Plans More Spending

In FX, the DXY remains narrowly mixed against G10 peers, but the Index looks prone to another downturn and test of near-term chart support ahead of 89.000, with the late March low around 89.250 an obvious target. Optimism surrounding US-China trade negotiations have been somewhat neutralized or even negated by the Syrian situation. However, the Dollar could receive a reprieve from upcoming headline inflation data and or FOMC minutes. Several factors appear to have lifted GBP ahead of data with market observers still noting the bullish April seasonal element (even though the weather is still far from favorable), and of course Tuesday’s promptings from BoE hawk McCafferty. Reports suggesting an olive branch offered by chief EU Brexit negotiator Barnier may also be impacting as Cable climbed above 1.4200 and tested the next tech resistance zone 1.4215-25 (above the 10 DMA). Note, contacts reported selling in EUR/GBP from 0.8710 down to 0.8703 in the run up to the 9.30BST releases but in the event, buyers were thwarted by weak output numbers vs an encouraging smaller trade shortfall. Renowned safe-havens have diverged yet again, as USD/JPY continues to hug 107.00 amidst option expiry interest at the strike, but with a more offered tone on the aforementioned geopolitical jitters. Conversely, USD/CHF is back up near 0.9600 vs circa 0.9550 at one stage, while EUR/CHF has rallied to fresh post-SNB floor removal highs around 1.1880, with M&A related flows perhaps impacting alongside more official activity, according to others. EUR is edging more gains towards 1.2400, but hampered by offers ahead of the next big figure and also wary of decent expiries between 1.2345-60 (1.8bn).

In commodities, WTI and Brent crude futures trade relatively flat following yesterday’s circa 3.7% gains. Downside was initially seen in the wake of last night’s unexpected build in the API inventories (+1.758mln vs. Exp. -0.200mln) with comments from the Iranian oil minster stating that USD 60/bbl is a good price for oil given current conditions with USD 70/bbl too high a level. Note, the comments appear to be at odds with reports yesterday suggesting that Saudi are to seek an oil price of around USD 80/bbl. However, losses were short-lived with traders mindful of any geopolitical developments with US military officials saying that the US is ready to attack Syria upon orders from President Trump which could come at any time. In metals markets, spot gold has benefitted from the modest risk aversion seen in markets thus far with the slightly softer USD also giving prices a helping hand. Elsewhere, copper was initially firmer overnight alongside early gains in Chinese metals amid restocking demand and expectations of increased construction activity in the upcoming month before staging a retreat. Finally, iron ore prices were seen lower overnight amid concerns over steel margins, whilst aluminum is once again seen higher in London trade as the fallout from Russian sanctions continues to guide price action.

US Event Calendar

• 7am: MBA Mortgage Applications, prior -3.3%
• 8:30am: U.S. CPI Ex Food and Energy MoM, March, est. 0.2%, prior 0.2%
  • U.S. CPI YoY, March, est. 2.4%, prior 2.2%; CPI Ex Food and Energy YoY, March, est. 2.1%, prior 1.8%
• 8:30am: U.S. Real Avg Weekly Earnings YoY, March, no est., prior 0.6%;
• 10:30am: DOE U.S. Crude Oil Inventories, April 6, est. -1.25m, prior -4.62m
• 2pm: U.S. Monthly Budget Statement, March, est. -186b, prior -215b

DB's Jim Reid concludes the overnight wrap

Despite battling more crosswinds than the Liverpool defensive line in the first half last night, markets have certainly kicked off the week in a much better mood. US CPI is the next hurdle today. Consensus is for a 0.0% mom headline print and +0.2% mom core print. This will be the 30th consecutive month where the consensus for the core is +0.2% so that is no real surprise. As a reminder, only 16 of the past 29 readings have matched consensus however since 2017 that falls to just 5 out of 14 and of the 9 misses 7 have been below expectations.

Our US economists also expect a +0.2% reading (+0.17% unrounded) and in year-over-year terms that would mean a rise to +2.1%, breaching 2% for the first time since February 2017. Our colleagues note that the plunge in the wireless telephone service component in March 2017 will finally drop out of the calculation, accounting for about two-thirds of the rise in year-over-year core CPI. The week’s positivity to date seems to be down to the more conciliatory trade chatter of late. After China President Xi’s speech early yesterday morning, stories emerged suggesting that although talks between US and China had stalled, the latter had signalled a willingness to narrow the trade deficit by $50bn, while President Trump noted “very thankful for President Xi’s kind words on tariffs and automobiles barriers…we’ll make great progress together”. Elsewhere, White House trade advisor Peter Navarro also said that the US and China were moving in a ”measured way” to address China’s unfair trade practices. That generally softer rhetoric meant that the S&P 500 eventually closed last night up +1.67% and in fact you have to go back to the first week of March to find the last time that the S&P 500 started the week with two days of gains. The index has also turned in five days of gains in the last six sessions all of a sudden. The Dow (+1.79%) and Nasdaq (+2.07%) were similarly strong while in Europe, key bourses closed up +0.83% to +1.11%.

This morning in Asia, markets are trading mixed and little changed. The Nikkei (-0.25%) and Kospi (-0.12%) are down while the Hang Seng (+0.75%) and Shanghai Comp. (+0.90%) are up modestly. At the Boao Forum, the PBOC Governor Yi flagged more steps to further open up China’s economy such as introducing a Shanghai-London stock connect within a year, allow more foreign investments in the financial sector while deposit and lending rates will be more market determined. He added that the central bank will not devalue the Yuan to deal with the US trade issues. Datawise, China's March CPI and PPI slowed mom and were both below expectations at 2.1% yoy (vs. 2.6% expected) and 3.1% yoy (vs. 3.3% expected) respectively, while Japan’s March PPI was slightly above market (2.1% yoy vs. 2% expected).

So while the US-China trade war has dictated markets recently, we couldn’t help but notice that this month marks the 106th consecutive monthly expansion for the US economy. In a Macro Bites report we published yesterday, we noted that this makes it the joint second longest expansion on record based on data going back to 1854. By July 2019 this will be the longest expansion on record assuming we get that far. The note shows that the last four cycles have been extraordinarily long which we believe is due to the a secular super-cycle decline in inflation since the early 1980s allowing looser policy, and a continued, structural and large rise in debt levels from the same point which has helped expand the economy over and above where it would have been without it. In the report, we also look at three very simplistic ways of looking at when this cycle could end. In a nutshell, two methods suggest a range between H2 2019 and H2 2020 and the third is not yet giving a recessionary signal but it is getting closer to do doing so. We also include some thoughts on this from our US economists.

Back to yesterday, bond markets were a bit weaker across the board (UST 10y +2.2bp; Bunds +1bp; Gilts flat) in part due to comments from the ECB’s Nowotny. Speaking to Reuters, the Governing Council member said that the ECB could lift the deposit rate by 20bps to -0.2% as a first step of normalizing rates. This attracted a bit of attention in part due to the debate between whether or not the ECB might hike by 10bps as a first step (which market pricing suggested so). So it was taken a bit hawkishly although we would note that Nowotny is a known hawk and he also didn’t suggest a change in sequencing, while the bigger focus for the Council right now is when to signal the end of QE. The Euro also rallied as much as +0.46% on the news before closing last night +0.28%, while the US dollar index weakened for the third consecutive day (-0.28%).

Over in equities, most sectors were up in the S&P, with gains led by energy, tech and telco stocks. In telco, Sprint and T-mobile’s share price jumped +17.1% and +5.7% respectively after the WSJ reported the two have restarted merger talks. In commodities, WTI oil and Brent both jumped c3.4%, with Brent above $70/bbl for the first time since mid-2015 ($71.04/bbl), as trade tensions eased and Saudi Arabia noted an aspiration target of $80/bbl oil price ahead of Aramco’s 2019 IPO. DB’s commodities team remain reasonably bullish on oil and expect a phase of largely balanced markets owing to healthy demand growth, combined with OPEC discipline absorbing a resurgence in US tight oil. Their forecasts for Brent have been upgraded by 3-7% over the next three years (Link).

Away from the markets, the BOE’s McCafferty noted the bank shouldn’t delay its next rate hike and there are “potential modest upside risks to the forecasts” for inflation. He added that there’s no slack left in the labor market and wages could climb faster than expected. Elsewhere on Brexit, the EC President Tusk reiterated his disappointment on the UK’s choice to leave the EU, while also indicating his main near-term focus will be on Brexit “damage control” where Ireland would be at the “center” of those efforts. Over in France, the Finance ministry has upgraded its 2018 and 2019 GDP growth forecasts to 2% and 1.9% respectively, up from 1.7% for both years, in part due to the better than expected economic recovery.

Turning to house prices. The IMF has looked at 44 cities around the globe and noted that in recent decades, “house price around the world have shown a growing tendency to move in the same direction at the same time”, in part due to unusually low rates around the world, more active institutional investors, wealthy individuals in search of safe places to invest as well as coordinated movements in the real economy. In terms of the average annual real house price growth from 2013-17, the top 6 cities include: Shanghai, Auckland, Sydney, Budapest, Istanbul and London, while prices at Moscow and Rome have declined and are the worst performing cities.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the March PPI was above market at 0.3% mom (vs. 0.2% expected) and 2.7% yoy (vs. 2.6% expected), boosted by higher healthcare and food costs. In the detail, our US economists noted a solid 0.15% mom rise in healthcare prices, leaving annual growth at 2.5% yoy, which is the highest since 2010 and bodes well for the March healthcare PCE print. The March NFIB small business optimism index fell 2.9pts mom to a still solid level of 104.7 (vs. 107 expected), albeit marking the lowest reading since October. Firms were generally less upbeat about the economy but the net percentage of firms planning rises in selling prices rose to a ten-year high.

In Europe, the February IP for France and Italy were both below expectations. France’s IP rose 1.2% mom (vs. 1.4% expected), lifting annual growth to 4.0% yoy. However, most of that growth was due to an 11.3% mom rebound in energy production. Elsewhere, Italy’s IP was -0.5% mom (vs. 0.8% expected). In the UK, the March BRC like for like sales was better than expected at 1.4% yoy (vs. -0.3% expected), partly due to a lift in spending on food.

In Asia, our China economists have revised up their 2018 GDP growth forecast on China to 6.6% from 6.3%, with the main reason being a surprising rebound in the property market and land sales. Growth is expected to be strong at 6.7% and 6.6% in Q1 and Q2, respectively, but they have kept their 2019 and 2020 forecast unchanged at 6.3%.

Looking at the day ahead, In Europe, we will get the March Bank of France industry sentiment print and February trade and industrial production data in the UK. In the US the big highlight is the March CPI report, while later in the evening we'll get the March monthly budget statement and latest FOMC meeting minutes.