Bulletin Headline Summary from RanSquawk

• European equities positive as auto names drive gains, on suggestions that US is ready to give car tariffs a break
• UK markets react to an upbeat Carney after the BoE chief suggests Q1 softness was largely due to weather
• Looking ahead, highlights include, US ADP, ISM non-MFG, DOEs, FOMC minutes, and ECB’s Weidmann and Mersch

With trade war between the US and China set to begin at midnight on Friday, the market is taking on a surprisingly relaxed attitude, and after S&P futures rose yesterday even as human traders were out on vacation, this morning S&P futures have continued their ascent and are back to where they were before the waterfall drop just before Tuesday's close when China announced it would prohibit Micron from temporarily selling chips in China.

And in advance of the grand trade war start, on Wednesday China Mofcom said China will respond if US implements tariffs, while Customs states that tariffs on US goods will immediately take effect after US tariffs on China are in place; however as China has said just this many times before, the market largely ignored this latest threat.

It wasn't just the US that was in a better mood this morning, but most European markets as well, if only for the time being.

The Stoxx Europe 600 was lifted by carmakers which rebounded on hopes of a cross-Atlantic tariff deal, after Handelsblatt reported the U.S. Ambassador to Germany told the country’s automakers he was asked by Washington to reach a solution between Berlin and Brussels on car tariffs. Specifically, Washington would support lowering car tariffs to zero for U.S. and European carmakers; the report added that the bosses of Volkswagen, Daimler, and BMW as well as the head of parts maker Continental were in attendance. While it was unclear if Germany would accept such a broad zero-tariff regime, the market took the news as an indication of a softening in Trump's stance, even though this is a verbatim replica of what Trump has already floated previously.

Elsewhere, recently battered Glencore Plc rose over 3% after announcing it’ll buy back as much as $1 billion of its shares, following the report earlier this week that it was being the target of a DOJ money-laundering probe.

Meanwhile, after the PBOC intervened verbally (and physically) in the yuan market on Tuesday, the Chinese currency barely budged - at least in the context of Tuesday's gargantuan, 1200 pip intraday move, and despite a sharply higher fixing in the onshore Yuan, one which was once again stronger than the Wall Street consensus, the freely traded offshore Yuan went nowhere as the currency appears to have flatlined for the time being.

The return of stability to the Yuan did not help Chinese stocks, however, where the equity bear market deepened, with the Shanghai gauge closing at its lowest level since March 2016, as traders braced for the imposition of U.S. tariffs on July 6. The index is now 23.2% off its January highs.

China's weakness dragged the MSCI Asia ex-Pac index lower by another 0.5% to 162.58 and pushed Japan's Nikkei down 0.8% to 21,546.99, Hong Kong's Hang Seng Index down 0.2%, and S. Korea's Kospi 0.4% lower to 2,257.55. Still, the losses was relatively more manageable than in the sharp rout seen in recent days.

Elsewhere in FX, the Bloomberg Dollar Spot Index headed for its third day of declines, having touched a three-week low, and has now wiped out half its gains following the ECB's unexpectedly dovish QE-taper-but-will-keep-rates-lower-for-longer announcement from mid-June.

The euro rose above $1.17 following hawkish rhetoric from ECB policymakers with Bloomberg reporting on Wednesday that some ECB policymakers are uneasy that investors aren’t betting on an interest-rate hike until December 2019, suggesting a move in September or October next year could be on the cards. The common currency was further boosted by Germany’s factory orders for the month of May surging 2.6% m/m, well above a forecast of 1.1% gain.

The pound held steady as U.K. Prime Minister Theresa May continues to seek backing for her vision of Brexit and after BOE’s Carney said tighter policy will be needed. The biggest gain versus the dollar was seen in the Swedish krona, boosted this week by hawkish central bank rhetoric according to which Sweden may hike rates before the end of the year.

In rates, U.S. Treasuries slipped alongside European counterparts. 10Y yields were 3bps higher at 2.86%, pushed the 2s10s spread from the flattest since 2007 after it hit 30bps on Tuesday. The yield on 10Y Germany bunds also rose three basis points to 0.34%, the highest in more than a week on the biggest increase in more than three weeks.

Brent crude fell as traders weigh tightening U.S. supplies against a pledge from Saudi Arabia to expand output. Emerging-market shares dropped for the eighth time in nine days, and developing-nation currencies nudged lower. Commodities, heavily exposed to international trade, fell. Iron ore futures in Singapore hit the lowest since May.

In the latest news surrounding the neverending Brexit saga, Theresa May is said to have asked Chancellor Hammond and Business Secretary Clarke to warn colleagues of the dangers in pressing for a hard Brexit at the meeting on Friday at Chequers. Elsewhere, there were also reports that ministers warned PM May not to sidestep controversial Brexit issues at the meeting amid concern focus on customs may neglect issues such as services sector and freedom of movement.

In the biggest central bank news overnight, Bloomberg reported that some ECB policymakers are said to be concerned regarding some investors’ expectations for a hike in end-2019 as they view this as too late, according to sources which also suggested that the door is open for possible rate move in September or October next year. The news sent the EUR higher and repriced rate hike expectations. Elsewhere, ECB's Praet says the uncertainty about the inflation outlook has been declining significantly, and the risk of deflation has vanished, there are grounds to be confident that the sustained convergence of inflation will continue in the period ahead. Added that the expectation is that policy rates will remain at their present levels at least through the summer of 2019 and, in any case, for as long as necessary

Also, overnight BoE Governor Carney said data gives him confidence that the soft UK economy in Q1 was largely due to weather and not economic climate; reiterating tighter monetary policy will be needed. Added that pay and domestic cost growth have continued to firm broadly as expected, widespread evidence that slack is largely used up. Meanwhile, BoJ Board Member Masai said it may take some time to reach to reach 2% price goal and that it is appropriate to continue with strong monetary easing in a persistent and sustainable manner. Furthermore, Masai also suggested that structural problems in the banking industry should be discussed independently from monetary easing.

Today's economic data include initial jobless claims, Markit PMI readings, but all attention will fall on the FOMC minutes, with traders scanning for hints of a dovish relent by the Fed after the recent repricing of a total of 4 rate hikes in 2018.

Market Snapshot

• S&P 500 futures up 0.4% to 2,724.00
• STOXX Europe 600 up 0.4% to 381.50
• MXAP down 0.5% to 162.58
• MXAPJ down 0.2% to 529.85
• Nikkei down 0.8% to 21,546.99
• Topix down 1% to 1,676.20
• Hang Seng Index down 0.2% to 28,182.09
• Shanghai Composite down 0.9% to 2,733.88
• Sensex down 0.05% to 35,626.24
• Australia S&P/ASX 200 up 0.5% to 6,215.52
• Kospi down 0.4% to 2,257.55
• German 10Y yield rose 2.9 bps to 0.334%
• Euro up 0.3% to $1.1687
• Brent Futures down 0.5% to $77.86/bbl
• Italian 10Y yield rose 1.8 bps to 2.388%
• Spanish 10Y yield rose 3.5 bps to 1.334%
• Brent Futures down 0.5% to $77.86/bbl
• Gold spot down 0.04% to $1,254.48
• U.S. Dollar Index down 0.1% to 94.40

Top Overnight News

• The U.S. imposition of tariffs on $34 billion of China’s exports will not only hurt China, but the U.S. itself and the rest of the world. That’s because $20 billion of those goods are produced by foreign companies, including American companies, Gao Feng, China’s Commerce Ministry spokesman said Thursday
• China’s proposed additional tariffs on U.S. goods will become effective "immediately" after the U.S. imposes its levies, according to a statement on General Administration of Customs Thursday
• U.K. Prime Minister Theresa May is fighting to win Cabinet backing for her Brexit plan as a compromise proposal that aimed to unite warring ministers was rejected by her chief negotiator -- Brexit Secretary David Davis
• Oil traded near $74 a barrel as investors weighed tightening U.S. supplies against a pledge from Saudi Arabia to expand output. Meanwhile, President Donald Trump lashed out at OPEC
• Investors from Japan have plowed record amounts into U.S. stocks, corporate bonds and agency-backed securities, pushing investments in those assets past $1 trillion for the first time ever this year. That’s a stark contrast to the big pullback from Treasuries, which has cut Japan’s holdings to a seven-year low
• Italy’s new government will have both tax cuts and a universal basic income in its very first budget to show financial markets the coalition isn’t backing down from its agenda, Finance Minister Giovanni Tria said. The sweeping economic program is aimed at proving to investors that the populist administration is serious about its mission
• Friday, July 6 is the date when the world’s two largest economies are due to slide deeper into a trade conflict that’s roiled markets and cast a shadow over the global growth outlook.
• Some European Central Bank policymakers are uneasy that investors aren’t betting on an interest-rate hike until December 2019, according to people familiar with the matter. A move in September or October next year is in the cards, the people said, even though the decision will be data dependent
• German factory orders surged in May, ending a string of declines and suggesting a much-awaited pick-up in growth momentum in Europe’s largest economy

Asian equity markets were cautious from the open ahead of this week’s key risk events and following the US holiday closure, with sentiment later deteriorating as focus turned to the looming July 6th tariffs. Nikkei 225 (-0.8%) initially struggled for direction and remained at the whim of the currency before trade war fears eventually took its toll, while ASX 200 (+0.5%) bucked the trend with upside led by strength in telecoms and the heavily-weighted financials sector. Elsewhere, Hang Seng (-0.2%) and Shanghai Comp. (-0.9%) began choppy after the PBoC skipped open market operations for a net liquidity drain of CNY 140bln which coincided with its previously announced targeted RRR cut taking effect, before trade concerns and fears of a full-blown trade war proved to be the deciding factor. Finally, 10yr JGBs saw mild gains and approached closer to the 151.00 level, with the late support seen as risk sentiment soured on tariff fears and which also followed firmer demand in the 30yr auction. PBoC skipped open market operations for a net daily drain of CNY 140bln, although its previously announced targeted RRR cut took effect from today, which is said to release CNY 700bln of funds. PBoC set CNY mid-point at 6.6180 (Prev. 6.6595)

Top Asian News

• Top Manager Sticks With Samsung Before Results, Defying Analysts
• Philippines CPI Smashes Forecasts in ‘Setback’ for Espenilla
• Beauty Turns Ugly: Cosmetic Stock Implodes After Leading World
• China Says U.S. ’Fully’ Understands its Stance over Trade

Automotive names are driving European stocks higher after reports of compromises being close on auto tariffs, with a reduction in tariffs being touted. As such the DAX is outperforming on the back of strength in index heavy-weights Daimler (+3.9%), Volkswagen (+4.3%), BMW (+5.2%) and Continental (+2.8%), with traders eyeing the 100DMA of 12,515 on the upside, currently trading at 12,454. Peugeot (+3.3%) and Michelin (+3.0%) are also driving the CAC, with the bourse breaking through its 100DMA and approaching its 200DMA of 5,374. Further support is offered to the French index after Sodexo (+6.7%) reported positive sales figures. Associated British Foods (-4.6%) reported uninspiring earnings, and have increased concerns over their sugar business not meeting profit targets. This is pressuring consumer staples (-0.5%) which is currently the worst performing sector. The materials sector is outperforming on the back of mining names (FTSE 350 mining index +1.9%) moving in sympathy with Glencore (+3.3%) post announcement of a USD 1bln share repurchase. Linde (+1.3%) have said that a sale of Praxair’s European gas businesses will allow for a merger clearance by the  European Commission. Praxair have agreed to sell their assets to Taiyo Nippon Sanso

Top European News

• Italy to Start Sweeping Economic Program With Upcoming Budget
• Euro-Area Bonds Decline on Conviction ECB May Raise Rates Sooner
• SBM Slumps as Brazil Decision Keeps Company From Largest Market
• Primark Sticks to Cautious U.S. Expansion Plans as Sales Gain

In FX, The EUR currency has extended gains vs the Usd through the 1.1700 handle and first heavy expiry option hedges at the strike (2.3 bn today, and a further 1.7 bn on Friday), albeit briefly, in wake of latest ECB sources claiming market expectations for an end 2019 rate hike would be too late, and with perhaps some added momentum from upbeat German data (industrial orders). Eur/Jpy also boosted by M&A-related flows, but capped around 129.50 and just ahead of its 55 DMA (129.54). GBP/CAD/CHF/JPY - All relative stable vs the Greenback, with Cable building a firmer base above 1.3200, but not able to clear 1.3250 and its 21 DMA just above ahead of a speech from BoE Governor Carney and the next big Brexit event (Chequers on Friday). In the event the MPC head was positive on growth and the inflation outlook, lifting near-term rate hike expectations and the Gbp through the aforementioned psychological and technical resistance levels albeit briefly. The Loonie is essentially stuck around 1.3150, Franc equally tight within 0.9940-10 bounds and hardly responding to inline Swiss CPI data (albeit weaker vs the Eur circa 1.1600), while the Jpy hugs 110.50 eyeing decent expiries between there and 110.60 (1 bn). SEK - Onward and upward for the Krona, and latest catalyst comes in the form of strong Swedish data (industrial output), with further gains vs the Eur that is strong in its own right, as mentioned earlier – Eur/Sek inching close towards 10.2000.

In commodities, Oil prices were down with WTI languishing around the USD 74 level after US President Trump reiterated his position on Twitter overnight vs. OPEC of prices being too high. This was reversed in later trade, however, with WTI positive and Brent negative on the day as traders look ahead to today’s holiday-delayed DoE inventory report. In the metals scope Gold is pulling back after hitting one week high in yesterdays trade of USD 1,261/oz, currently at USD 1,253/oz. Base metals are slipping as the threat of a trade war looms, with zinc and nickel sulking around one-year lows. Copper is also being hit by these worries, with the bellwether metal down 2.8% in Shanghai.

Looking at the day ahead, the main focus will likely be the release of the FOMC meeting minutes for the June 13th policy meeting. We also get the final June services and composite PMIs due along with the June ISM non-manufacturing, and June ADP employment change reading. The latest weekly initial jobless claims data will also be due. Away from that, BoE Governor Mark Carney is due to speak at an event in Newcastle while the ECB's Mersch and Nowotny along with Bundesbank President Jens Weidmann will also be speaking at different times at the Central Bank of Austria's annual conference.

US Event Calendar

• 7:30am: Challenger Job Cuts YoY, prior -4.8%
• 8:15am: ADP Employment Change, est. 190,000, prior 178,000
• 8:30am: Initial Jobless Claims, est. 225,000, prior 227,000; Continuing Claims, est. 1.72m, prior 1.71m
• 9:45am: Bloomberg Consumer Comfort, prior 57.3
• 9:45am: Markit US Services PMI, est. 56.5, prior 56.5; Composite PMI, prior 56
• 10am: ISM Non-Manf. Composite, est. 58.3, prior 58.6
• 2pm: FOMC Meeting Minutes

DB's Jim Reid concludes the overnight wrap

Just as you thought it was safe to leave the office in Europe last night and relax knowing that nothing was going to happen in the US due to the holiday, along comes a Bloomberg news story after 6pm in Frankfurt suggesting that “some ECB policymakers are uneasy that investors aren’t betting on an interest-rate hike until December 2019”. It was a big headline but as DB’s Mark Wall pointed out the article really only hinted that September and October were thought to be mispriced. DB’s George Saravelos also made the point that markets had probably gone too far the other way in terms of not pricing the first 20bps hike until March 2020. He also made the valid point that we were reaching the limits of divergence between ECB and Fed policy expectations. If the ECB market pricing is right, it’s probably because the world is struggling (e.g. major Italy problems or a full trade war) and the Fed will have to pause. If the Fed is correct, the ECB will likely have to move earlier or more than currently priced. Overall Mark Wall still thinks the first 20bp deposit rate hike/25bp refi rate hike will be in September 2019. The Euro jumped 25c on the story but it happened too late to impact bond yields.

This morning in Asia, markets are trading lower with the Nikkei (-1.0%), Kospi (-0.69%), Hang Seng (-0.87%) and Shanghai Comp. (-0.88%) all down and losses accelerating from the open. Meanwhile, the Yuan is weaker for the first time in three days (-0.1%) and the euro is little changed. In Japan, BOJ board member Masai echoed similar messages as his peers, noting that “it’s appropriate to continue with strong monetary easing in a persistent and sustainable manner…”  and that it may take “some time” to achieve the bank’s 2% price stability goal. Now turning to some trade headlines. In Europe, the Handelsblatt reported that the US ambassador Grenell told a group of German car industry leaders that the US government was seeking talks with the EU with a proposal that would reduce tariffs to zero for US and EU car makers. Although a potential obstacle is that the EU is not allowed under global rules to reduce its 10% tariff on American cars unless the union does so for all the WTO members or via other bilateral accords. Notably, the FT reported yesterday that the EU is studying whether it’s feasible to negotiate a deal with other big car exporters such as the US, Japan, and South Korea which would lower tariffs to “agreed levels for a specified set of products as part of a plurilateral agreement” without including the entire membership of the WTO. So it seems lots bubbling along behind the scenes.

Meanwhile both the US and China plan to implement higher tariffs on each other from tomorrow ($34bn worth of goods), but despite the 12 hour time zone head start for Beijing, China’s Ministry of Finance clarified yesterday that “we will never fire the first shot and will not implement tariffs ahead of the US”. This morning, China’s Commerce Ministry spokesman Gao reiterated that China will have to fight back if the US goes ahead and impose the tariffs.

Following on with the trade theme, Chancellor Merkel warned the Germany parliament of the potential fallout from a trade conflict with the US, noting that tariffs on EU cars would be “much more serious” than levies on steel. Notably, she seems to prefer negotiations as “it’s worth every effort to try to defuse this conflict, so it doesn’t turn into a war”, but also added that “…it takes two sides to do that”. Looking ahead, the German Economy Minister Altmaier is scheduled to meet with his French counterpart next Wednesday to discuss next steps.

Over in the US, today’s FOMC minutes should be of particular interest, especially with the Powell led-Fed growing more comfortable with inflation moving back to target, as the latest data has shown. In terms of what to look out for, our US economists believe that discussion regarding trade developments and the flattening yield curve will be of note given recent comments by Fed officials. Regarding the former, many policymakers have mentioned this as a key risk to their outlook. As Powell acknowledged in both his press conference and his Sintra appearance, there are rising anecdotal reports of concern about trade from the Fed’s business contacts. Other Fed policymakers have also echoed this sentiment.

The flattening yield curve has elicited differing views among policymakers, with some Fed officials such as Chair Powell, Governor Brainard and NY Fed Williams downplaying its significance, while other regional Fed presidents have voiced concerns. It is possible we will see some discussion on the Fed’s balance sheet policy given that interest on excess reserves (IOER) was raised five bps less than the target range for the policy rate. Out economists, however, doubt the Fed is contemplating any imminent changes to the pace of balance sheet roll off at present. We shall find out more soon.

As for European markets yesterday, the Stoxx 600 edged up +0.06% on muted trading volumes with gains in telco stocks broadly offset by tech (-1.18%) which was weighed down by the prior day’s news that US chipmaker Micron Technology
was temporarily banned by a Chinese court from selling in China due to a patent dispute. Across the region, the DAX and FTSE both dipped c0.3% while Spain’s IBEX rose +1.0%, as a rally in Telefonica lifted the index higher (shares +2.5%).

Meanwhile Sterling rose +0.28% vs. the dollar after the UK’s June services PMI rose to an eight-month high and also beat consensus expectations. Government bonds softened a little with 10y bond yields up 1-3bp across the region (Bunds +1.1bp; Italy +2bp) while Gilts underperformed following the stronger services PMI print (+3.4bp). In commodities, both LME Zinc (-3.19%) and Copper (-1.62%) fell near one year lows while precious metals nudged up c0.3% (Gold +0.18%; Silver +0.40%).

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In Europe, the final readings of the June composite PMIs were stronger than expected. Both the Euro area’s services and composite PMI were revised up, to 55.2 (+0.2pt) and 54.9 (+0.1pt), respectively. In the details, most of the upward revisions came from Germany, with its composite PMI revised up 0.6pt to 54.8 while France’s print was downwardly revised by 0.6pt to 55. The UK’s services PMI rose 1.1pt mom to an eight-month high of 55.1 (vs. 54.0 expected) while its’ composite PMI also beat at 55.2 (vs. 54.5). The survey also showed the fastest pick up in new work in 13 months while Markit noted these figures suggests UK economic growth has doubled to 0.4ppt in 2Q following a weak 1Q that was weighed down by harsh weather. Meanwhile Italy’s June service and composite PMIs were also above expectations, at 54.3 (vs. 53.3 expected) and 53.9 (vs. 53.2) respectively.

Looking at the day ahead, the main focus will likely be the release of the FOMC meeting minutes for the June 13th policy meeting. In terms of data, the only release of note in Europe is May factory orders data in Germany. In the US it's a little busier with final June services and composite PMIs due along with the June ISM non-manufacturing, and June ADP employment change reading. The latest weekly initial jobless claims data will also be due. Away from that, BoE Governor Mark Carney is due to speak at an event in Newcastle while the ECB's Mersch and Nowotny along with Bundesbank President Jens Weidmann will also be speaking at different times at the Central Bank of Austria's annual conference.