In a rerun of yesterday's overnight session, European indexes trade higher while US index futures were modestly in the green, set to propel the S&P 500 to new all time highs. Emerging Market dropped the most in three weeks alongside commodities, as today the market was predisposed hawkishly on a US rate hike ahead of Yellen's Friday speech, pushing the US dollar higher and oil resumed its pre "anonymous sources" headlines slide.

Meanwhile, the absolute lack of volatility continues. As DB points out, "in the S&P 500 we haven't had a +/- 1% or more day since July 8th. That’s 32 consecutive sessions which matches the run in August-September 2014. There’s some way to go to match the run of 62 consecutive sessions from April-July 2014 however." Lack of excitement is good for stocks, however, as the chart below shows.

While political and security concerns rippled through some developing nations, global sentiment has seesawed across asset groups as traders look toward Yellen’s speech in Jackson Hole, Wyoming, on Friday for clues on the timing of rate increases. At least three Fed officials have made hawkish remarks since the start of last week, though U.S. economic data remain mixed with figures on Tuesday showing a slowdown in manufacturing and strength in the housing market. A report on Wednesday is forecast to show sales of existing homes held close to a nine-year high.

In the absence of any market-moving news, all traders remained focused on Yellen's upcoming speech: “while political risks do matter, now it is all eyes on the Fed and Yellen,” said William Jackson, a London-based economist at Capital Economics Ltd. “That seems to be the biggest factor.” Daniel Weston, chief investment officer of Aimed Capital in Munich added that “Yellen’s comments are the focus. She may well signal there could be a rate hike next month, but equities should stay fairly solid, as that small upward change in interest rates won’t hugely hurt earnings.” 

Crude was lower by 1.7%, as euphoria from yesterday's Iran-related headlines evaporated after contrary to WSJ reports, Iran said it still hasn't decided whether it will attend the OPEC meeting in Algiers next month, while API reported crude oil inventories rose 4.5mm bbl, before more definitive EIA data later today.

The MSCI Emerging Markets Index dropped 0.9% as of 6:02 a.m. in New York, the most since Aug. 3 on a closing basis after Fed funds futures ended Tuesday showing a 54 percent chance of a U.S. interest-rate increase by December. The Borsa Istanbul 100 Index slid 1.9 percent, the most in a month, as Turkey began its first major offensive in Syria. The military started bombing Islamic State positions in the district of Jarablus in Syria’s Aleppo province Wednesday morning, according to the prime minister’s office.

The dollar rose against the euro and the Swiss franc. South Korea’s won weakened after North Korea conducted a missile test, while South Africa’s currency and bonds declined amid speculation the finance minister will be replaced. Signs of rising stockpiles sent oil and copper lower. 

The Stoxx Europe 600 Index reversed earlier losses to rise 0.4 percent after its biggest rally in more than two weeks. WPP Plc led a gauge of media companies to the biggest advance on the Stoxx 600. Shares jumped 6.1 percent after the world’s largest advertising company said profit rose 15 percent in the six months ended June 30 as a favorable currency translation more than offset Brexit’s drag on the British economy.  S&P 500 Index futures rose 0.1% to 2,187.25 in early trading. Stocks ended up 0.2% on Tuesday, paring gains that briefly sent the equity benchmark above its Aug. 15 record close. Commodity and energy producers fell the most, with Glencore Plc down 4.8 percent after reporting a plunge in first-half earnings.

Market Snapshot

• S&P 500 futures up less than 0.1% to 2185
• Stoxx 600 up 0.3% to 345
• FTSE 100 down 0.2% to 6857
• DAX up 0.2% to 10612
• German 10Yr yield up less than 1bp to -0.09%
• Italian 10Yr yield up less than 1bp to 1.12%
• Spanish 10Yr yield down less than 1bp to 0.93%
• S&P GSCI Index down 0.9% to 363.6
• MSCI Asia Pacific up less than 0.1% to 139
• Nikkei 225 up 0.6% to 16597
• Hang Seng down 0.8% to 22821
• Shanghai Composite down 0.1% to 3086
• S&P/ASX 200 up 0.1% to 5562
• US 10-yr yield unchanged at 1.55%
• Dollar Index down 0.03% to 94.51
• WTI Crude futures down 1.6% to $47.31
• Brent Futures down 1.3% to $49.33
• Gold spot up 0.2% to $1,340
• Silver spot up 0.5% to $18.91

Top Global Headlines:

• Pfizer to Buy Antibiotics From AstraZeneca for $725 Million: U.K. drugmaker to get up to $850 million if certain goals met. Deal gives Pfizer Zavicefta for drug-resistant infections
• Lockheed’s F-35 Still Falls Short, Pentagon’s Chief Tester Says: Fighter is ‘on a path toward failing to deliver,’ Gilmore says. Memo came a week after Air Force declared its version ready
• South Africa finance minister Gordhan has taken legal advice on letter received from special police unit
• At BlackRock, even a 40% gain can’t save ETFs from the trash; in spite of their strong performance they’re just not that popular with investors
• Germany 2Q final GDP in-line with ests. at +0.4% (q/q) and +1.8% (y/y)
• Norway June unemployment rate higher than expected at 4.8% vs 4.7% prev. and est.
• July BBA loans for house purchase fell to lowest level since January 2015; BBA says “the data does not currently suggest borrowing patterns have been significantly affected by the Brexit vote, but it is still early days”
• Glencore Widens Debt Plan to Weather Rout After Worst Profit: Trader and miner wants to cut debt to as low as $16.5 billion. Stock price has doubled this year after 70% slump last year
• Exxon’s Pacific Partner Sees LNG ‘Revolution’ Among Buyers: LNG buyers use glut to recalibrate future contracts: Botten. Company to start new supply contract negotiations next year

* * *

Looking at Asian markets, stocks outside Japan fell as Hong Kong shares retreated and investors grew cautious before Federal Reserve Chair Janet Yellen’s speech this week. Japanese equities gained as exporters rallied. “While recent U.S. data has been mixed, the base case for the Fed is probably to increase rates in the absence of any compelling reason not to,” Michael McCarthy, chief market strategist in Sydney at CMC Markets, told Bloomberg. “The Fed is aware that there’s a substantial risk that if economic conditions deteriorate, they have very little room to move. Given this, the central bank wants to normalize rates as soon as they can.” 5 out of 10 sectors fall with tech, staples underperforming and consumer, health care outperforming.

Top Asian News

• PetroChina Posts Smallest Half-Year Profit on Oil’s Meltdown: China’s biggest producer able to overcome first- quarter loss. Domestic crude output fell 4.2% to 385.3 million barrels
• PBOC Adds Funds in 14-Day Reverse Repos First Time in Six Months: Benchmark seven-day money rate rises to highest since March
• China’s Postal Bank Said to Seek Approval for $8 Billion IPO: Lender moves closer to world’s biggest share sale this year
• Credit Suisse Asia Markets Bankers Said to Plan Macro Hedge Fund: Kiely, Firth to start cross-asset fund under Rafiki Capital
• Qantas Pays First Dividend Since 2009 After Record Profit: Underlying profit rises 57% to A$1.53 billion in year to June
• North Korea Successfully Launches Ballistic Missile From Sub: Japan protests over missile that flew ~500 km toward nation

In Europe, equities traded relatively flat this morning (DAX +0.2%) despite the early morning drop with the FTSE 100 (-0.05%) the initial laggard due to Glencore earnings (-4.5%), the Co. reported a 13% drop in underlying earnings for the first six months of the year and as such dragging the whole materials sector lower. Fixed income price action have been particularly muted this morning, as has been the case during European mornings throughout the week, also of note we saw this week's most significant European auction in the form of the Buba's Bobl auction, which saw a b/c of 1.4, higher than the previous.

Top European News

• VW’s Crippling Supplier Feud Shows Limits of Penny Pinching: German carmaker to compensate supplier to end production halt. Labor leaders also resist making workers bear brunt of crisis
• UBS Joined by Peers to Promote Blockchain-Backed Digital Cash: UBS joined by ICAP, Deutsche Bank, Santander, BNY Mellon. Banks are trying to speed transactions that can take days

In FX, the Bloomberg Dollar Spot Index held a three-day gain after futures traders priced in an increased probability of a rate increase by December. The JPMorgan Chase & Co. gauge of currency price swings was at 10.22, matching the highest since July 26 on a closing-market basis. MSCI Emerging Markets Currency Index fell 0.7 percent. The won weakened 0.6 percent versus the dollar after North Korea test-launched a ballistic missile from a submarine off its east coast. The rand fell to a three-week low after a news website said that South Africa’s Finance Minister Pravin Gordhan had been summoned to report to police on Thursday, signaling a deepening rift between Gordhan and President Jacob Zuma.

In commodities, WTI fell 1.7% to $47.30 a barrel in New York after API figures showed inventories increased by 4.46 million barrels last week. It rallied 2.2 percent in the last session after Reuters cited unidentified sources in OPEC and the oil industry as saying that Iran is sending “positive signals” it may support joint action to bolster the market. Copper slid 0.5 percent to a six-week low after inventories tracked by the London Metal Exchange climbed to the highest level since January. Jiangxi Copper Co., China’s biggest producer, said Wednesday that prices may soon bottom out given looser monetary policies adopted by countries to stimulate growth.

* * *

Bulletin Headline Summary from RanSquawk and Bloomberg

• FTSE 100 is the main laggard in Europe as losses in the mining sector drag the index lower
• GBP strength pushes GBP/USD to the highest level in 3 weeks.
• Looking ahead, highlights include weekly DoE crude oil inventories, US Existing Home Sales and Earnings from HP

US Event Calendar

• 7:00am: MBA Mortgage Applications, Aug. 19 (prior -4%)
• 9:00am: House Price Purchase Index q/q, 2Q (prior 1.3%)
• 9:00am: FHFA House Price Index m/m, June, est. 0.3% (prior 0.2%)
• 10:00am: Existing Home Sales, July, est. 5.51m (prior 5.57m); Existing Home Sales m/m, July, est. -1.1% (prior 1.1%)

DB's Jim Reid concludes the overnight wrap

If you want an idea of how dull things are then Bloomberg published a good chart last night showing that the monthly trading range in 10 year US Treasuries is so far in August the lowest for 10 years. It’s impressive given that Fed speakers have recently been doing their best to persuade the market that they are close to raising rates from a point where expectations were very low at the start of the month. Obviously post Yellen at Jackson Hole on Friday, yields could fluctuate more aggressively but so far the month has been pretty dull. Indeed in the S&P 500 we haven't had a +/- 1% or more day since July 8th. That’s 32 consecutive sessions which matches the run in August-September 2014. There’s some way to go to match the run of 62 consecutive sessions from April-July 2014 however.

With markets in a bit of a sit and wait mode ahead of Yellen, yesterday our Global Economic Perspective’s team published their latest piece in which they take a look at the outlook for the neutral fed funds rate. In their view it is an issue that is likely to garner considerable attention during the Jackson Hole symposium and with the rate at persistently near or at record low levels it has drawn intensifying scrutiny from key Fed officials. In the report they derive projections of the future path for the neutral fed funds rate based on various economic scenarios using framework based on Laubach and Willliams methodology. Their findings reveal that there are three key implications that are potentially crucial for the Fed outlook. Firstly, if US real GDP growth averages about 2% as the Fed and most other forecasters expect, the real neutral fed funds rate is unlikely to rise significantly over at least the next several years and it is also likely to remain below the Fed’s long-term projection of 1% over this time frame. Consequently, a rising neutral rate is unlikely to be a key driving force for near-term rate increases, contrary to Fed forecasts and commentary. Over the longer-term, in the absence of shocks to the economy, the real neutral rate would likely approach the Fed’s long-run estimate of 1% if economic growth remains around 2%. But the high persistence of the neutral rate implies that the convergence toward 1% is likely to be very gradual, taking many years. If instead real GDP growth slows persistently below 1.5%, the real neutral rate is likely to remain stuck at around 0%.

In terms of markets yesterday, while dull, the overall tone was at least more positive compared to Monday. This was particularly the case in Europe where the Stoxx 600 (+0.93%) had its strongest day in over two weeks. Financials appeared to be at the heart of it with the Stoxx 600 Banks index rising +2.38% which is the most since July 14th. The robust PMI readings helped (we’ll touch on those shortly) while Italian Banks had a better day somewhat boosted by a +6.63% rally for Unicredit after Polish press reported that the Bank is looking to weigh a sale of its stake in Bank Pekao. Across the pond the S&P 500 edged up a more modest +0.20% after initially looking at the 2016 highs before paring back a little.

Oil is probably the one market consistently generating headlines at the moment. Yesterday WTI rebounded +1.46% although at one stage did rally nearly 4% off the intraday lows following a report on Reuters suggesting that Iran was becoming more willing to support OPEC action to prop up the market. As we’ve highlighted before there was no shortage of headlines in the build up to the last OPEC meeting so this comes as little surprise and as we noted earlier this week our expectation is that a coordinated output freeze will have little meaningful fundamental impact anyway. Elsewhere fixed income markets ended up little changed yesterday. The USD was flat for the second consecutive day while Treasuries also paused for breath with yields little changed.

Refreshing our screens this morning WTI Oil (-1.10%) has given up more of yesterday’s gains following the latest US inventory data. That appears to have taken some momentum out of markets in Asia this morning with the Hang Seng (-0.99%), Shanghai Comp (-0.20%) and Kospi (-0.35%) in particular in the red. The Nikkei (+0.50%) is up with the Yen a touch weaker. The ASX (+0.20%) has also edged slightly higher following a raft of corporate earnings reports this morning while sovereign bond markets are little changed. On the whole though newsflow is again pretty quiet in the Asia session.

Moving on. Data-wise the big focus yesterday were the Europe PMI’s. The overall feeling was one that was relatively positive. The Euro area composite PMI edged up 0.1pts to 53.3 (vs. 53.1 expected) which is actually the highest since January although the reading has consistently sat at or around 53 since then. Services were a standout (+0.2pts to 53.1 vs. 52.8 expected) while the manufacturing reading faded 0.2pts to 51.8 (vs. 52.0 expected). Across countries there was a reasonable positive services surprise in France which offset a slightly softer services reading in Germany. Our European economists highlighted that the data also implies a slight improvement on average in the periphery. Importantly though the data signals ongoing resilience of the domestic Euro area economy, particularly post Brexit. Our colleagues also highlight that the data points to GDP growth of between 0.3% and 0.4% qoq in Q3 which is broadly in line with their forecast.

Away from this in the UK the latest CBI trends orders data weakened 1pt to -5 although that was a little better than the -10 expected by the market. Meanwhile the flash August consumer confidence reading for the Euro softened 0.6pts to -8.5 and is now at the lowest since April. Economic data in the US was a much more mixed bag. Manufacturing data in particular disappointed with the flash manufacturing PMI in August dropping 0.8pts to 52.1 (vs. 52.6 expected) and the Richmond Fed manufacturing survey weakening 21pts to -11 (vs. +6 expected). It’s worth noting that while that’s the weakest reading since January 2013, the series does have a tendency to be extremely volatile. The better news came in the housing sector where new home sales surged to a near nine-year high of 654k annualized after rising +12.4% mom in July (vs. -2.0% expected).

Looking at the day ahead, this morning in Europe we’re kicking off in Germany where shortly after this goes to print we’ll get the final revision to Q2 GDP (expected to stay unchanged at +0.4% qoq). We’ll also get the various components of the growth report. This afternoon in the US it’s relatively quiet with only the June FHFA house price index reading and July existing home sales data. Glencore is among the companies due to report earnings.