Summertime begets travel and that means scratchy radio music in the car – where in some parts of the country there are 2 times of music – Country and Western – even though it’s hard to tell them apart. Diversity doesn’t always seem so simple. The same is true in markets today as there seems to be a dual citizenship problem for Europe and the UK cynically started by someone that claims Scotch and German ancestry. Trump visit to the UK proved to be the event that shifted the risk sentiment overnight, with two statements moving markets – first that a US-UK trade deal may prove impossible with UK May’s Brexit plan along with his endorsement of Boris Johnson as a potential “great PM;” –and second another swipe at EU immigration policy. GBP and Gilts reflect this and that bleeds into EU bonds. China trade and M2 data also don’t help as its clear that the PBOC remains tight and that the shadow bank system is being further controlled hitting leverage just as trade reflects significantly less domestic demand. As for the rest of the day, the bid to the USD means trouble for risk even as equities hold big gains from Asia and Europe follows more modestly. The safe-haven signals of JPY and CHF seem at odds with Dr. Copper and other metals. Earnings in the US will be a key focus along with the Fed reaction functions after a week where risk-on holds despite trade fears. The biggest stories seem less important when its Friday and summer beckons. Watching 95.53 for more fireworks – though they may be more about France and the World Cup than the US and its independence.

Question for the Day: Are currencies going to revert to PPP, are stocks going to go for value? The most interesting stories for this Friday are about 2Q earnings and 3Q outlooks. The most underlooked and most important maybe about inflation at 6-year highs and the FOMC Powell comments yesterday and today foreshadowing his Congressional testimony next week. The role of US/China trade war escalation simmers rather than boils just like the US economy with 4% unemployment. The flows of money this last week are indicative of the summer being one of discontent rather than easy vacations and trying to fight the USD rise, particularly in EM. 

According to EPFR global data (as released by BoAML) Europe equity funds see outflows of $4.2b in the week to July 11, marking an 18th straight week of redemptions for the region’s stocks, off $34b since the start of 2018. Compare that to the US where equity funds saw $4.3bn inflows this week, to EM funds with outflows of $1.3bn – 8th week of outflows – and to Japan with $1.9bn in inflows. For asset allocations – watch bonds - IG bond funds record inflows $2.3b; HY bond funds have inflows of $0.5b; EM debt fund inflows are $0.9b. The momentum for US equities may rest on how earnings play out.

The more interesting story is how growth and inflation are hitting different nations – usually measured best by PPP models – but also caught in the simple Big Mac Index. This has been updated by the Economist and its worth the read into a long weekend of 3rd place play-offs and the French Bastille Day and another Japan Holiday Monday.

What Happened?

• China June Trade Surplus $41.6bn from $24.9bn – more than $27bn expected – largest in 6-months. The Jan-June surplus is $139.65bn – lowest in 4-years. Exports rise 5.7% m/m, 11.3% y/y to $126.74bn after 12.6% y/y - more than 10.2% y/y expected. Imports rise +1% m/m, 23.5% y/y s.a. to $175.13bn after +0.1% m/m, 20.9% y/y. On a non-adjusted basis, June imports rose 14.1% y/y – less than the 21.5% y/y expected.  For 1H 2018 exports rise 12.8% y/y to $1.17trn up from +8.5% y/y in 2017 first half. Imports rise 19.9% y/y to $1.03trn in 1H 2018. Exports to the US rose 12.6% to $42.61bn – new record – while imports from US rise 9.6% y/y to $13.65bn.

• China June M2 up 8% y/y after 8.3% y/y – less than 8.3% y/y expected. China new loans rise CNY1.84trn after CNY1.15trn – more than CNY1.6trn expected – second highest in 6 months. The total social financing (TSF) rose CNY1.18trn after CNY760.8bn – less than CNY1.5trn expected – but up from 22-month lows. Shadow banking continues to shrink under new regulations. Trust loans, entrusted loans, and undiscounted bankers' acceptances, together decreased CNY1.26 trillion in June, compared with a decrease of CNY264.8 billion in May. The record slow M2 growth in June was linked to a more standard use of bank capital with further deleveraging and stricter supervision. M1 rose to 6.6% from 6% similar to TSF – both underline the difficulty for corporate funding. The outstanding June CNY loans rose to 12.7% from 12.6% ytd in May while deposits fell to 8.4% from 8.4% ytd.

• German June wholesale prices up 0.5% m/m, 3.4% y/y after 0.8% m/m, 2.9% y/y – more than 0.4% m/m rise expected.  Oil and fuels up 2.1% m/m, grains/seeds -0.3% m/m, fruits/vegetables +4% m/m, ore/steel up 0.1% mm, data processing 0.3% m/m, food/beverages 0.6% m/m and TV/Electrical +0.1% m/m.
• Spain June final HICP 0.2% m/m, 2.3% y/y after 0.9% m/m, 2.1% y/y – as expected.  The national CPI up 0.3% m/m, 2.3% y/y after 2.1% y/y. Core CPI up 0.1% m/m, 1% y/y after 1.1% y/y.

Market Recap:

Equities: The US S&P500 futures are off 0.04% after a 0.87% gain yesterday. The Stoxx Europe is up 0.2% holding opening gains, while the MSCI Asia Pacific rebounded up 0.4% led by Japan, Taiwan, and Korea.

• Japan Nikkei up 1.85% to 22,597.35
• Korea Kospi up 1.13% to 2,310.90
• Hong Kong Hang Seng up 0.16% to 28,525.44
• China Shanghai Composite off 0.22% to 2,831.55
• Australia ASX up 0.03% to 6,351.90
• India NSE50 off 0.04% to 11,018.90
• UK FTSE so far up 0.45% to 7,685
• German DAX so far up 0.25% to 12,524
• French CAC40 so far up 0.40% to 5,427
• Italian FTSE so far up 0.5% to 21,898

Fixed Income: Holding bid with some pointing to Trump UK/EU comments as the cause. Long end periphery bonds rally – flattening curves. Also grabbing headlines, Germany delaying Greek’s final bailout payment. Focus next will be on Fitch Spain rating and DBRS on Italy after the close with Fitch on Turkey ratings the bigger risk. Core EU bonds are bid despite equities – UK Gilt 10-year yields off 3.5bps to 1.245%, German Bunds off 3bps to 0.32%, French OATs off 2.5bps to 0.607%, while periphery mixed – Italy off 4bps to 2.575%, Spain off 2.5bps to 1.255%, Portugal off 1.5bps to 1.717%, and Greece off 3bps to 3.80%.

• US Bonds bid with focus on FOMC reaction functions, trade and tame CPI – 2Y off 0.5bps to 2.582%, 5Y off 0.8bps to 2.739%, 10Y off 0.7bps to 2.838% and 30Y off 1bps to 2.936%.
• Japan JGBs stuck with mixed views – US trade/BOJ focus.  10Y steady at 0.04% - up 1bps on the week.  BOJ rinban unchanged with Y410bn in 5-10Y, Y190bn in 10-25Y and Y70bn in 25+Y. 
• Australian bonds holding pattern, focus on US/China trade still – 3Y up 1bps to 2.06%, 10Y flat at 2.63%.
• China PBOC net drains CNY20bn on the day, CNY90bn on the week after it injects CNY188.5bn via Medium-term lending facilities (MLF) at 3.3%. Money market rates were mixed with 7-day up 1bps to 2.65% and O/N off 1bp to 2.447%. 10Y bond yields fell 2.5bps to 3.485%

Foreign Exchange: The US dollar index up 0.3% to 95.16 and up 1% on the week but still stuck with 94.48 support then 55-day m.a. base at 93.92 against 95.53 100-week resistance than the new target of 96.62 June 28, 2017 highs.  In Asia EM FX, USD bid – TWD off 0.1% to 30.56 with bonds up for 10th day, INR flat at 68.495, KRW off 0.9% to 1131.90. In EMEA, USD mixed - RUB off 0.15% to 62.305, still up 1% on the week despite oil drop. ZAR off 0.3% to 13.337, TRY up 0.1% to 4.8490.

• EUR: 1.1630 off 0.7%. Range1.1613 – 1.1675 with focus on 1.16 pivot for 1.1520-40 retests with rates/flows driving
• JPY: 112.55 flat. Range 112.42-112.80 with 112.87 pivotal resistance against 111.50 base with EUR/JPY 130.95 off 0.3%.
• GBP: 1.3130 off 0.6%. Range 1.3103-1.3207 with focus on 1.31 for 1.2980 and 1.30 barrier test with EUR/GBP .8855 up 0.25%.
• AUD: .7385 off 0.3%. Range .7368-.7422 with focus on metals, China and spreads. NZD .6735 off 0.6% - hit a bit harder on crosses.
• CAD: 1.3190 up 0.4%. Range 1.3152-1.3209 with focus on 1.3050-1.33 still – oil/rates and crosses driving.
• CHF: 1.0055 up 0.3%. Range 1.0015-1.0067 with EUR/CHF 1.1690 off 0.1% to 
• CNY: 6.6727 fixed almost unchanged from 6.6726, CNY gains 0.15% to 6.6580 from 6.6679 Thursday close into London, now off 0.45% to 6.7035.  CNY off 0.4% to 6.72.

Commodities: Oil lower, Gold lower, copper lower off 0.65% to $2.8015.

• Oil: $70.14 off 0.3%. Range $69.84-$70.42. WTI watching 55-day again at $68.40 with $71.13 July 9 lows first big resistance. Brent $73.98 off 0.6% - watching 100-day at $72.19 as base with $74.55 and $75.10 yesterdays high as resistance. The oil markets shrugged off US inventories and focused on Libya supply, OPEC differences with UAE/Iran letter ignored last night. Technical hit from trade story still stings.
• Gold: $1241 off 0.5%. Range $1240-$1247. Gold in trouble with US back over 95 index and rates holding - $1235 and $1206 next levels with $1250 resistance. Silver off 0.9% to $15.809, Platinum off 1.2% to $832 and Palladium off 1.05% to $941.60.

Conclusions: Will bank earnings be the tie-breaker? Risk-on week runs into Friday the 13th and big bank earnings reports for 2Q. The shape of the curve and FOMC hikes started many on the regional bank buying spree that dominated much of the 1H2018 but yesterday saw a notable reversal and big banks are the focus today. Today may herald the shift in value vs. growth for equities. But it also could just be Friday in the summer and like a tree falling in the forest, no one hears it.

Since earnings are projected to be higher than in years past, while share prices have stayed flat or declined, the big four U.S. banks now trade at lower price/earnings valuations.

Economic Calendar:

• 0830 am US June import prices 0.6%m/m, 4.3% y/y p 0.1% m/m, 4.3% y/y e / exports 0.6% m/m, 4.9% y/y p 0.3% m/m, 5.7% y/y e
• 1000 am US July preliminary Michigan Consumer Sentiment 98.2p 98.3e
• 1230 pm Atlanta Fed Bostic speech