After 7 consecutive drops in the Dow Jones, the Industrial average is set for an 8th decline with US equity futures modestly lower as risk-averse sentiment persists overnight, after U.S. stocks saw their biggest drop in four weeks amid a selloff in equities from Japan to Europe. Oil’s continued slide and recent plunge into a bear market, despite some stabilization this morning just south of $40, has finally rekindled global growth concerns, and is keeping a lid on bullishness. European stocks are little changed, while Asian stocks and S&P futures fall.

S&P 500 futures were 0.2% lower even with European equities little changed as HSBC Holdings Plc, Europe’s biggest bank, jumped after announcing a share buyback. Crude halted a two-day drop before an update on U.S. oil inventories, while gold was near its highest price since July 11. Industrial metals declined and the Malaysian ringgit and Turkish lira were some of the biggest losers among developing nations’ currencies.

"Investors are slowly realizing that with every spin of the central bank policy chamber the magazine is getting emptier," said Michael Hewson, chief market analyst at CMC Markets in London. "The larger concern here given recent market reaction to policy moves by central bankers is that policymakers are losing the confidence of investors," he said.

World stocks fell for a third straight day on Wednesday, depressed by growing nervousness surrounding central bank policy and the recent spike in world bond yields, amd the MSCI's global share index fell 0.5%, for its third straight decline, a run not seen since early June. Japan's Nikkei fell 1.9 percent on ongoing fears the BOJ is no longer on the side of the market and a lower yen.

European bank shares rebounded after two major earnings reports. Shares in European banks HSBC and Societe Generale rose as much as 5% after reporting second quarter earnings, a glimmer of light for the region's financials amid the recent gloom. HSBC reported earnings that missed expectations, however the bank rose rose the most since April after it announced a $2.5 billion stock buyback for this year and said it plans more share repurchases while keeping its dividend at the current level for the foreseeable future.

“The buyback signals HSBC’s strong capital position and should reassure investors of its ability to maintain the current 51-cent dividend,” Citigroup Inc. analysts led by Ronit Ghose wrote in a note to clients. So much for the theory that buybacks no longer push stocks higher.

However, the rebound in European banks failed to lift the broader European indexes as a rebound in banks amid positive earnings was offset by a slide in automakers. U.S. futures pointed to a softer open on Wall Street, down a modest 0.2% in the premarket.

“We have marked down our expectations for eurozone growth into 2017, as Brexit shock adds to preexisting downside risks from high political uncertainty, a less supportive fiscal stance and the risk of rising oil prices. But risks remain tilted to the downside: although we expect bank lending to the economy to expand, continued bank stress could challenge this view and weigh further on growth,” Deutsche Bank strategists including Marcos Arana write in note.

Earlier today we got the final print of European Service PMIs, most of which came in slightly better than the Flash estimate with the exception of Spain and Germany:

• Spain July Services PMI 54.1, prior 56
• Italy July Services PMI 52.0, prior 51.9
• France July Services PMI 50.5, prior 50.3
• Germany July Services PMI 54.4, prior 54.6
• Eurozone July Services PMI 52.9, prior 52.7

Asia stocks headed for their steepest drop in more than a month as oil’s selloff revived concerns over global growth and after Japan’s fiscal stimulus package fell short of what some investors had expected. All 10 sectors fall with financials, utilities underperforming and telcos, materials outperforming. It is no longer just Japan's disappointment that is pressuring risk but also the steep selloff in crude. “Lower oil prices seems to be impacting the risk sentiment negatively,” said Divya Devesh, a Singapore-based foreign-exchange strategist at Standard Chartered Plc. “If oil continues to decline it will be negative for emerging- market assets.”

The sharpest moves lately have been in sovereign bond markets where a sudden spike in yields stirred speculation that a multi-year bull run in prices might finally be nearing its end. However, this morning yields were little changed on the day, but still well up from recent lows following the shakeout in debt markets globally since the Bank of Japan's policy meeting last Friday and as eyes turn to the Bank of England on Thursday.

While Japanese bonds steadied on Wednesday they have still suffered the worst sell-off in over three years as investors feared the BoJ was out of easing ammunition and might leave it to fiscal policy to stimulate the economy.  Bond bulls were worried the Bank of England might also under-deliver at its policy meeting on Thursday, putting the onus on debt-funded government spending to support growth.

"I would vote for no change in rates or QE (quantitative easing," former BoE policymaker Charles Goodhart told Reuters, adding that the Bank has effectively run out of policy ammunition and that further stimulus would be ineffective. "There's so much assumption that the Bank will cut rates that even though the effect of that will be minimal, they will do it, because not doing it would have an adverse effect on their credibility," he said. The 10-year UK gilt yield was unchanged at 0.80 percent and the comparable Bund yielded -0.4 percent, both up around 10 basis points so far this week.

Benchmark 10-year U.S. Treasuries were also little changed on the day at 1.54 percent US10YT=RR, and also up around 10 basis points this week, even though domestic data has generally been soft. The recent outbreak of weaker U.S. data has further pushed back expectations for when the Federal Reserve might hike rates -- the market is not fully priced for a move until well into 2018 -- and taken a heavy toll on the dollar.

In commodity markets, oil prices steadied in Asia but remained vulnerable to worries about a glut in both crude and refined product. Brent crude edged up 0.4% to $41.93 but remained near four-month lows reached on Wednesday. NYMEX crude rose 0.5% to $39.70 a barrel, but was still under the psychological $40 level.

Market Snapshot

• S&P 500 futures down 0.2% to 2148
• Stoxx 600 down 0.1% to 335
• FTSE 100 down 0.2% to 6634
• DAX down 0.3% to 10117
• German 10Yr yield down less than 1bp to -0.05%
• Italian 10Yr yield down less than 1bp to 1.21%
• Spanish 10Yr yield down less than 1bp to 1.07%
• S&P GSCI Index up 0.3% to 331.9
• MSCI Asia Pacific down 1.7% to 134
• Nikkei 225 down 1.9% to 16083
• Hang Seng down 1.8% to 21739
• Shanghai Composite up 0.2% to 2978
• S&P/ASX 200 down 1.4% to 5466
• US 10-yr yield down 2bps to 1.54%
• Dollar Index up 0.19% to 95.24
• WTI Crude futures up 0.7% to $39.80
• Brent Futures up 0.8% to $42.12
• Gold spot up less than 0.1% to $1,364
• Silver spot up less than 0.1% to $20.64

Top Global News

• Enbridge, Marathon Agree to Buy $2 Billion Bakken Pipe Stake: Deal follows startup of line connecting Chicago to Patoka hub
• Ford, GM U.S. Sales Miss Estimates With Honda Rare Bright Spot: Industry-wide sales rise 0.7% as incentives start to mount
• AIG Announces $3b Buyback as Asset Sales Boost Profit: Operating profit of 98 cents a share beats analyst estimates; AIG curtails event-driven, long-short bets in hedge fund retreat
• Uber’s Surrender And The Humbling of U.S. Tech Giants in China: Decision to throw in the towel in China holds lessons for Facebook, Apple and others still craving success in China
• Alphabet Joins $100b Technology Rush to Bond Market: Google parent sold $2b of bonds Tuesday
• Viacom Held Settlement Talks With National Amusements: CNBC/DJ: talks fell apart last week
• Oil Options Echo Citi-to-Merrill View of a Brief Bear Market: Decline into bear market to be short-lived, analysts say

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Looking at regional markets, we start in Asia where Asia traded negative following US losses, after oil once again weighed on equities with WTI crude below USD 40/bbl and the DJIA posting its 7th consecutive losing streak. A firmer JPY attributed to the pessimism regarding the Japanese stimulus package led Nikkei 225 (-1.9%) into negative territory, while ASX 200 (-1.4%) was pressured by weakness in energy names and financials after yesterday's RBA rate cut. Chinese markets were mixed amid conflicting Caixin Composite and Services PMI data with the Hang Seng (-1.8%) catching up with yesterday's losses after its market closure, while the Shanghai Comp (+0.3%) is positive following rate-cut rhetoric from the NDRC. 10yr JGBs found some reprieve from its recent slump amid the risk-averse sentiment in Japan which boosted demand for the paper, whilst the BoJ entered the market for a total of JPY 750b1n in government debt. BoJ Minutes from June 15th-16th meeting stated that Japan's economy remains on its moderate recovery trend and that exports and output had been sluggish, due mainly to EM slowdown. Minutes also stated that the BoJ will check risks and add additional measures if needed. (BoJ) Note that the minutes' release is from two meetings ago and thus are out of date.

Top Asian News

• Didi, SoftBank Said to Lead $600 Million-Plus Round for Grab: Round could close as early as this week
• China Said to Plan Index Futures Revival After Volumes Drop:Government has sought to balance control with free markets
• Australia Cuts Rates to Record Low to Spur Inflation, Employment: Central bank lowers cash rate to 1.5% as economists expected
• Japan Fiscal Plan Gives $45 Billion Spending Boost for This Year: Abe seeks to prop up economy after BOJ keeps action minimal
• Mr. Yen Sees Rally Toward 90 per Dollar Spurring Intervention: Japan’s currency could break 100 this month, Sakakibara says
• Nidec Agrees to Pay $1.2 Billion for Assets of Emerson Electric: Buyer to pay cash, expects to close deal in 3Q
• Honda Profit Exceeds Estimates as Sales Climb in U.S., China: Sales in China spurred by a cut in purchase tax on some models
• Philippine Telephone Net Drops 33% on Rocket Internet Loss: Dividend payout target cut to 60% of core income from 75%

European equities have spent much of the morning oscillating between gains and losses, trading largely unchanged by mid-morning (Euro Stoxx: +0.05%). In terms of a sector breakdown, financials have been outperforming amid the slew of firm's earnings from the likes of SocGen (+4.5%), Credit Agricole (+2.6%), HSBC (+3.7%) and ING (+8.5%). While the final revisions for Eurozone Services which have fared better than expectations have somewhat lifted sentiment. Bunds have traded relatively sideways with prices flat on the day after the volatility seen during yesterday's sessions, with some modest curve steepening in German paper during today's session. As such, much of the price action stemmed from JGBs after a reprieve overnight.

Top European News

• Standard Chartered 1H Profit Falls 46% on Revenue Drop: 1H adj. pretax misses ests.
• HSBC Tempers Dividend Outlook, Plans Buyback as Profit Drops: ROE target dropped amid economic, political uncertainties
• SocGen Profit Rises on Visa Gain, Lower Loan-Loss Provisions: Bank’s CET1 ratio unchanged in quarter at 11.1 percent
• ING’s Profit Surges on Lending Growth and Lower Provisions: Net income more than triples in second three months of 2016
• U.K. Bank Voice Warns of London’s Status Shrinking After Brexit: Britain should foster closer links to emerging markets, China
• Rio Tinto Posts Worst Profit Since 2004 as New CEO Starts: ron ore, aluminum average prices dropped 14% in first half
• Continental Sees 2H U.K. Car Demand Drop on Brexit: Company expects 2% rise in Europe car production in 2016
• VW Warns of Plunge in China Industry Sales If Tax Cut Lapses: Co. posted record first-half deliveries in China
• ECB’s Bond Buying Boosts Parts of the Market It Can’t Even Touch: Companies in Portugal take advantage of search for yield
• Bank of England Picks Stimulus Tools on Eve of ‘Super Thursday’: At meetings on Wednesday, officials are finalizing plans to stave off a Brexit-related slowdown

In FX, the Bloomberg Dollar Spot Index climbed 0.2 percent from a five-week low reached on Tuesday and the U.S. currency advanced versus all but one of its 16 major peers. The greenback has been under pressure as wagers that the Federal Reserve will increase interest rates this year faded in recent weeks.The yen weakened 0.3 percent to 101.21 per dollar, after touching 100.68 on Tuesday, its strongest level since July 11. The Japanese government’s plan incorporates 13.5 trillion yen of fiscal measures -- including 7.5 trillion yen in new spending starting this year, and 6 trillion yen in low-cost loans. “After all the build-up, it’s a disappointment,” Shane Oliver, a global investment strategist at AMP Capital Investors Ltd. in Sydney, which manages more than $110 billion, said by phone. The MSCI Emerging Markets Currency Index slipped 0.3 percent, with the ringgit slumping 0.7 percent, the most in two weeks. South Korea’s won fell for a second day from the highest in more than a year.

In commodities, West Texas Intermediate crude added 0.6 percent to $39.76 a barrel, after falling 5 percent over the past two sessions. “The decline is not totally unexpected, but the speed and severity of the fall has been a surprise,” said Daniel Hynes, senior commodity strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “Disruptions tightened the market during the second quarter and the sustainability of those was always going to be relatively short lived. There are still relatively high inventories but the market is approaching a balance.”U.S. oil inventories dropped by 1.34 million barrels and gasoline stockpiles fell, the American Petroleum Institute was said to have reported. Government data out Wednesday is forecast to show crude and motor fuel supplies decreased. Gold for immediate delivery was little changed at $1,364.25 an ounce, holding near a three-week high. Zinc fell 1 percent, while aluminum, copper and nickel all dropped more than 0.3 percent. Noble Group Ltd., the embattled commodities trader raising about $500 million in a rights issue, received a query from the Singapore exchange over trading of its shares after the stock lost as much as 15 percent.

Looking at today’s calendar, along with the ADP print and ISM non-manufacturing, the final PMI’s (services and composite) are also due out. Earnings will continue to be a big focus for markets too. 30 S&P 500 companies are set to report including Time Warner before the open and Prudential and MetLife after the close.

* * *

Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities struggle to find firm direction, while financials lead the way amid positive earnings from SocGen, Credit Agricole and ING.
• UK Services PMI confirms 1st contraction in 43 months ahead of tomorrow's key BoE meeting.
• Looking ahead, highlights include US ADP, Services PMI, ISM Non Mfg & Composite PMI, as well as comments from Fed's Evan.
• Treasuries rally on long-end, global equities mixed and WTI crude rises but remains under $40/barrel; U.S. Treasury’s August refunding announcement at 8:30am ET; decision on 2-month bill introduction isn’t expected.
• The record-setting global bond market rally is coming undone. The average yield on bonds in Bank of America Corp.’s G-7 Government Index climbed to 0.58%, the highest level in five weeks. The move is a rebound from the record low of 0.45% set in July
• Japanese government bonds’ steepest tumble in more than three years is feeding speculation that central-bank easing is nearing its limits
• China’s futures exchange is planning to relax the restrictions on stock-index contracts that sparked a 99% plunge in trading and heightened concern over the government’s intervention in markets, according to people familiar with the matter
• With investment opportunities sparse amid China’s weakest economic expansion in a quarter century, Chinese firms reported an 18% jump in cash holdings during their latest quarter, the biggest increase in six years
• China sold 35.8 billion yuan ($5.4 billion) 10-year sovereign bonds at 2.74%, the lowest cost since at least 2004 as concern over the nation’s growth prospects boosted demand for havens
• American International Group reduced bets on event-driven and long-short strategies as the insurer scaled back hedge fund investments
• Six years of austerity are being reviewed by U.K. Prime Minister Theresa May’s government amid signs the decision to quit the European Union is propelling the economy toward its first contraction since 2009
• Societe Generale jumped after France’s second-largest bank reported second-quarter profit that beat analyst estimates, capping a string of positive results for the country’s lenders
• ING Groep NV rose the most in six months after the Dutch lender said second-quarter profit more than tripled, benefiting from a boost in lending income and lower provisions for loan losses

* * *

US Event Calendar

• 7am: MBA Mortgage Applications, July 29 (prior -11.2%)
• 8:15am: ADP Employment Change, July, est. 170k (prior 172k)
• 9:45am: Markit US Services PMI, July F, est. 51 (prior 50.9)
• 10am: ISM Non-Manufacturing Composite, July, est. 55.9 (prior 56.5)
• 10:30am: DOE Energy Inventories

DB's Jim Reid completes the overnight wrap

The week so far in markets is going to age people if it carries on like it has. Oil has consolidated in bear market territory, 10yr JGB’s saw a 48hour 25bps swing and nearly traded back above zero at one point yesterday for the first time since March 16th, the Yen has busted up against 100 vs. the USD for the first time since November 2013, Euro Bank Stocks are already -5.10% this week, the Dow (-0.49%) was down for its 7th day in a row yesterday and the S&P 500 (-0.64%) closed at its lowest level since July 13th. According to CNN, Donald Trump even confirmed that he’s sold out of equities yesterday and that there are ‘very scary scenarios’ ahead for investors!

Making sense of all this it’s worth tackling this one-by-one. Starting with Japan, outside of a weak JGB auction yesterday and disappointment from the BoJ at the end of last week, after we went to print yesterday we got confirmation from the Japanese government for a fiscal stimulus package totalling ¥28tn. That was as expected but it was the details that the market focused on and generally it was underwhelmed. Indeed our Japan economist note that it is the size of the second supplementary budget for FY2016 which is important and they estimate that the addition to final demand would be ¥1tn at most during FY2016 and ¥2tn at most during FY17. More details on all this can be found in the attached report. 

There’s been little relief for Japanese equities this morning with the Nikkei and Topix -1.53% and -1.95% respectively. JGB yields are slightly lower if anything (10y 1bp lower) and the Yen is roughly unchanged.

Meanwhile, weakness for European banks continues to dominate the wires with Friday’s reasonably sanguine stress tests now quickly becoming a distant memory. Yesterday Commerzbank’s share price closed -9.2% after the bank painted a gloomier view for profits over the remainder of the year relative to the guidance given in April. The other notable piece of news for the sector was the report in Italian press Messaggero suggesting that Unicredit (which tumbled -7.2%) may be considering a €7-8bn capital increase, underscoring investor and analyst fears that more is needed for Italian banks. Staying with banks, it was interesting to note yesterday the rare decoupling between Bund yields and bank equities which was also evident on Monday. 10y Bund yields finished up 6.2bps yesterday (at -0.040%) which compares to that big slide for bank equities. Since the start of the year we’ve highlighted the very close correlation between declining bond yields (to zero and below) and bank equities. Indeed since the start of the year through to the end of July, 10y Bund yields dropped from 0.626% to -0.119% (a move of 75bps) while the Stoxx 600 banks index has a total return of -24.3% in the same time. However in the two days of August so far, 10y Bund yields are 8.3bps higher and bank equities have returned -5.10%. An interesting dynamic to keep an eye on.

Speaking of a break down in correlations, it’s also interesting to see that in contrast to what we saw in January and February, the recent leg lower for Oil into a bear market has had a much more marginal impact on US HY energy spreads so far compared to what we got six months ago. Indeed in the time that WTI Oil has tumbled 23% from the June 8th highs, US HY energy spreads are remarkably just 4bps wider (to Monday’s close of 793bps). There has been some signs of weakness in the last couple weeks however as spreads have widened nearly 70bps from the July tights. However, compare that to the 30% or so slide in Oil from the end of 2015 to the February lows, US HY energy spreads blew out 550bps to a wide mark of 1932bps.

Staying with credit, yesterday we published a Credit Bites looking at the latest quarterly senior loan officer survey we discussed in yesterday's EMR. We update the charts looking at the correlation between the net tightening of C&I lending standards and default rates and also the correlation between the US yield curve and the C&I survey. Given the yield curve is a lead indicator it points to further quarters of net tightening ahead. We also look at the weakness in bank stocks on both side of the Atlantic and speculate as to whether this will also help tighten lending standards over the next year. Overall we'd argue that recent trends are still supportive of our late cycle view, particularly in the US. The question of how late and when this should start to change our constructive view on credit markets is the main question over the coming months.

We'll get a few additional clues as to whether our late cycle thesis is correct by the week in the form of the payroll report. Ahead of this today sees the ADP appetiser where we'll see if any trend can be observed. A reminder that DB's Joe LaVorgna is expecting a below consensus 150k on Friday (vs. 180k consensus) which is broadly in line with the 3-month trailing average. The 2014 and 2015 average was 229k and 251k respectively. The consensus for ADP today is 170k and the 3month average is currently 163k. In 2014 and 2015 this series averaged 234k and 207k respectively. We’ll also get the non-manufacturing ISM survey this afternoon covering the July month which DB is expecting to print at 56.0 versus the market at 55.9 (June was 56.5). The employment component here is also worth keeping an eye on ahead of payrolls although it’s worth noting that the correlation of this component to payrolls is higher over a longer time period, rather than a reliable single monthly gauge.
Quickly looking at the rest of Asia this morning, China aside it’s been another fairly weak start across much of the region. Having stayed closed yesterday the Hang Seng (-1.73%) has reopened heavily in the red, while the Kospi (-0.70%) and ASX (-1.04%) are also down. The Shanghai Comp (+0.20%) is a touch higher despite the Caixin services PMI weakening last month (-1pt to 51.7). Oil has recouped about half a percent, while US equity index futures are marginally in the red.

In terms of the data yesterday, there wasn’t too much to take out of the June personal income and spending data in the US. Personal income rose a slightly lower than expected +0.2% mom (vs. +0.3% expected) while personal spending (+0.4% vs. +0.3% expected) was a touch higher than expected. The PCE deflator rose +0.1% mom (vs. +0.2% expected) to leave the YoY rate unchanged at +0.9% while the PCE was in line at +0.1% mom and +1.6% yoy. Later in the evening we got the latest vehicle sales numbers which came in higher than expected. Total vehicle sales rose to an annualized rate of 17.8m saar in July from 16.6m, while expectations had been for 17.3m. US auto equities had been particularly weak leading into that data yesterday after GM and Ford had earlier reported declines in light vehicle sales. 10y Treasury yields climbed higher yesterday (+3.4bps) although that more reflected the weakness in foreign sovereign bond markets and also a deluge of corporate supply including Monday’s bumper deal from Microsoft and also Alphabet’s offering yesterday.

Before we wrap up, yesterday Michal from my team published an update on the ECB's Corporate Sector Purchase Programme (CSPP). Firstly, he reviewed the pace of primary and secondary-market purchases so far, providing a list of corporate bonds currently owned by the ECB/Eurosystem. The pace of total purchases has been in line with our forecast of €5+bn per month on average but the strength of secondary-market buying has surprised on the upside. Secondly, he looked at the apparent primary market picks and pans, noting that some new issues that appear CSPP-eligible have not been bought even if the ECB does not own any bonds from the issuers yet. We point out that despite a modest amount of primary purchases, the ECB has bought 8% of the amount of newly issued CSPP-eligible bonds. Thirdly, we provide an update on the performance of CSPP-eligible, non-bank ineligible and bank senior bonds in light of our recently revised CSPP strategy. As published last week, we no longer see value in being overweight CSPP-eligible bonds and underweight bank bonds, hence our move to market-neutral weights. Email Michal.Jezek@db.com if you didn't receive a copy.

Looking at today’s calendar, this morning in Europe we’ll get the confirmation of the July PMI’s when the services and composite readings get released. We’ll also get a first look at the data for the periphery, while away from that Euro area retail sales for June will get released. In the US this afternoon, along with the ADP print and ISM non-manufacturing, the final PMI’s (services and composite) are also due out. Earnings will continue to be a big focus for markets too. 30 S&P 500 companies are set to report including Time Warner before the open and Prudential and MetLife after the close. In European there are more banks due to report including Unicredit, ING Group and Societe Generale.