A truce on one front doesn’t mean the war is over on another. This is the lesson from overnight as the EU/US agreement to talk about trade and stop the escalation of tariffs doesn’t extend to China. This is important because it cast some doubt on the storyline that Trump intends to back down on all other trade fronts and get to deals now.NAFTA being the key focus with C$ and MXN in play because of this. Other news appears to be more important – Saudi halting oil shipments because of attacks in the Red Sea, ECB meeting and expectations are for more clarity on the plan to wind down APP by year-end and some comments on re-investment, Facebook and its miss on earnings after hours, then there was the economic data all mixed with consumer confidence lower in Germany, higher in Italy and flat in France.

The details about confidence are important to read today with the hit from geopolitics high – trade tariffs being the most notable – and that means the bounce today after the ceasefire from Trump could lead to a bigger bounce back in Europe than many expected. This may bleed over to the US despite the small asset allocation shifts we have started to see with bonds beating stocks in the passive flows. The stories that matter ahead may still dominate all trading today and through month-end with ECB, BOJ, FOMC, BOE decisions all key.

The balancing act for markets is in the bounce back of stocks and financial conditions. A weaker USD, higher stock market and flat bonds won’t make for a dovish FOMC. Similarly, all eyes are on the ECB today with EUR undervalued by 10%, growth holding and the animal spirits returning. The relationship of the USD up and stocks down is going to be key today and worth watching as the chart suggests the currency front is not included in the trade ceasefire – watching 94.93 against 94.25 pivot (55-day) and 93.71 July 9 lows.

Question for the Day: Can the ECB really sound hawkish? The spread of rates is one reason for the EUR to trade below 1.20 in 2018, but the on going QE which is behind those rate spreads is more important and what Draghi says today about reinvestment of corporate bond roll-offs will matter. This is the story risk for today and its wrapped in a bullish bow with trade fears ebbing, growth and inflation fears returning.

What Happened?

• Australian 2Q import prices rise 3.2% q/q, 6% y/y after 2% q/q – more than 2.0% q/q expected – most since 1Q2014.  Export prices rose 1.9% q/q, 6.6% y/y after 4.9% q/q – also more than -1% q/q expected. The drop in A$ was a notable driver with energy up 13.7%, industrial machinery up 3.3% and appliances up 1.7%. Exports were higher on gas and oil but offset by iron ore. 
• Japan June Service PPI up 0.2% m/m, 1.2% y/y after -0.1% m/m, 1.0% y/y – with gains led by software and advertizing.  

• Korea 2Q GDP 0.7% q/q, 2.9% y/y after 1% q/q, 2.8% y/y – slightly less than 0.8% q/q, 3% y/y expected. Growth was supported by 4.5% rise in exports, up from 1.5% in 1Q, while imports slowed to +0.9% from 4% y/y. Both public and private spending slowed with government 4.8% y/y down from 5.8% y/y and private consumption 2.8% from 3.5% y/y. 
• German August GfK consumer confidence seen at 10.6 from 10.7 – weaker than 10.8 expected. It seems that the escalating trade conflict between the EU and the United States is so far only adversely affecting German consumers' economic expectations, which are suffering renewed significant losses and continuing their downward spiral. In contrast, both income expectations and the propensity to buy have so far remained unaffected by the conflict and maintain their already excellent level in July. Since the propensity to save has risen recently, the overall consumer climate shows a slight fall.

• French July consumer confidence steady at 97 – less than 98 expected. Major purchase intentions improve to -8 from -9 while unemployment concerns drop to 13 from 15. 
• Italian July consumer confidence 116.3 from 116.2 – as expected. The future outlook fell to 121 from 11.4 but the current climate bounced to 113.3 from 111.8. Personal climate improved to 107.8 from 107.1. Time to save rose to 137.4 from 132.9. While manufacturing morale was flat at 106.9 – slightly better than 106.5 drop expected – with business overall 105.4 from 105.5.Order books drop to -5.6 from -3.6 but production outlook 13.6 from 12.4.

Market Recap:

Equities: The S&P500 futures are off 0.19% after a 0.91% gain yesterday – focus is on tech with Facebook miss. The Stoxx Europe 600 rose 0.8% after opening up with trade deal hopes – MSCI Asia Pacific fell 0.2% with Korea up but China down.

• Japan Nikkei off 0.12% to 22,586.87
• Korea Kospi up 0.71% to 2,289.06
• Hong Kong Hang Seng off 0.48% to 28,78114
• China Shanghai Composite off 0.71% to 2,882.94
• Australia ASX off 0.06% to 6,337.60
• India NSE50 up 0.32% to 11,167.30
• UK FTSE so far flat at 7,657
• German DAX so far up 1.3% to 12,743
• French CAC40 so far up 0.75% to 5,466
• Italian FTSE so farup 0.9% to 21,751

Fixed Income: Steepeners dominated EU trading with focus on EU/US trade hopes, ECB expected to anchor short-end. US bonds rally a bit on tempered Asia session while core Europe suffers with 10Y German Bund yields up 2bps to 0.415%, France OATs up 2bps to 0.71% and UK Gilts up 1.5bps to 1.287%. Periphery mixed with Italy up 2.5bps to 2.695%, Spain up 1.5bps to 1.36%, Portugal off 0.5bps to 1.715% and Greece up 1bps to 3.805%.

• Italy sold E3.25bn of linkers at lower rates and lower demand – E2bn of 2Y Mar 2020 CTZ at 0.647% with 1.61 cover – previously 0.917% with 1.88 cover – and E1.25bn of 10Y 1.3% May 2028 BTPei at 1.55% with 1.64 cover – previously 1.28% with 2.22 cover. 
• US Bonds are bid with focus on 7Y and data next – 2Y off 0.8bps to 2.66%, 5Y off 1.5bps to 2.84%, 10Y off 1.3bps to 2.962%, 30Y off 1.5bps to 3.088%. 
• Japan JGBs sold on BOJ speculation, curve steepens – 10Y up 2bps to 0.085% - touched 0.1% early first time in 12-months. 2Y sale was weaker than expected with price 100.425 below the 100.44 expected. The MOF sold Y1.809trn of 2Y JGBs at -0.117% with 4.375 cover – previously -0.128% with 4.884 cover. 
• Australian bonds see bull steepening with focus on China and 2Q terms of trade – 3Y off 2bps to 2.09% and 10Y flat at 2.68%. 
• China PBOC skips open market operations, net drains CNY70bn on the day. Money market rates fell with 7-day off 2bps to 2.636% and O/N off 3bps to 2.301%. Bond yields 10Y fell 3bps to 3.535%. 

Foreign Exchange: The US dollar index is up 0.2% to 94.27– flirts with 94.26 55-day and watching 93.71 as key base against 94.93 resistance. The Asia EM FX was USD mixed – KRW up 0.6% to 1119, TWD up 0.2% to 30.573, but INR off 0.1% to 68.655, PHP off 0.1% to 53.435, MYR off 0.2% to 4.0645. In EMEA, USD bid – RUB off 0.3% to 62.987, ZAR off 0.45% to 13.164, TRY off 0.7% to 4.8215.

• EUR: 1.1710 off 0.15%. Range 1.1706-1.1744 with focus on upside but with ECB expected to remain dovish 1.1650-1.1790 keys. 
• JPY: 110.80 off 0.15%. Range 110.59-111.04 with EUR/JPY 129.75 off 0.25%. Focus on BOJ next week and US rates/policy with 110.50 vs. 111.40. 
• GBP: 1.3185 flat. Range 1.3175-1.3213 with EUR/GBP .8880 off 0.1% - going nowhere fast with 1.30-1.33 holding. 
• AUD: .7425 off 0.3%. Range .7421-.7463 with NZD .6820 off 0.25%. All about China and trade still with .7350-.7480 key for A$. 
• CAD: 1.3035 off 0.1%. Range 1.3025-1.3050 with risk for NAFTA upside driving 1.2880 talk and rates benign – watching oil, crosses. 
• CHF: .9930 up 0.15%. Range .9903-.9938 with EUR/CHF 1.1630 flat. Like JPY stuck with 1.00 pivot..
• CNY: 6.7662 fixed 0.56% stronger from 6.8040, trades stronger to 6.7338 early from 6.7784 closing butnow weaker to 6.7950 off 0.2% in London with CNH same at 6.7980.CNY accounts for 1.81% of world currency payments in June, according to data from Swift Global Payments, compared with 1.88% in May

Commodities: Oil mixed, Gold down, Copper up 0.25% to 2.8390, Iron Ore off 0.3% in China Dalian futures.

• Oil: $69.35 up 0.1%. Range $69.04-$69.74. WTI watching $70.60 July 13 highs, then $71.13 July 9 lows as resistance against $68.20 July 25 lows. Brent up 0.65% to $74.41 - watching $75.73 55-day for breakouts with $75.29 20-day and $75.26 July 16 highs first aginst $73.48 yesterday’s low as support. Mix of US trade deal/US inventories/Saudi attacks driving. 
• Gold: $1228.30 off 0.25%. Range $1227-$1234. Watching $1236.6 for a breakout with $1260 targets after that while bears remain hoping for $1204.60 test. Silver off 0.4% to $15.551, Platinum off 0.45% to $840.55, Palladium off $938.75

Economic Calendar:

• 0830 am US weekly jobless claims 207k p 215k e
• 0830 am US July wholesale inventories 0.6%p 0.5%e
• 0830 am US June goods trade deficit $64.8bn p $67bn e
• 0830 am US June durable goods orders -0.6%p +2.5%e /ex-trans -0.3%p +0.3%e
• 0830 am ECB Draghi press conference
• 0100 pm US 7Y note $25bn auction