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Sleepy Overnight Session Interrupted By Chinese Market Turmoil

Another new week, another day with not much going on. So much, or rather little so, that in its daily wrap Citi starts off with the following: "Pop Art pioneer Andy Warhol, who once said “I like boring things”, would have been a huge fan of today’s session thus far. Though several events of note linger on the horizon for later this week, G10 is firmly on the beach as of this morning."

While it was indeed a generally quiet session (with Japan markets closed), US equity futures continued their run into record territory (ES up 0.1% to 2,458.50), and Europe fractionally lower, the early Monday focus was on the previously discussed turmoil for Chinese markets where despite a solid set of Chinese data small caps tumbled, selling off into the close after further warnings of regulatory scrutiny and deleveraging, and sending the ChiNext index of Chinese small caps down over 5% to the lowest level since January 2015.

European equity markets also weaker from the open, with the industrial sector underperforming after several Scandinavian companies fell heavily after earnings. Offsetting this was some early strength from mining stocks which lifted the FTSE 100 following the strong China indsutrial production and fixed investment data. Gilts rally, supporting bunds and USTs, unwinding Friday sell-off linked to rate-locking prior to expected corporate issuance, peripheral spreads also tighten. USD holds small overnight gains; NZD underperforms after dovish RBNZ comments overnight.

Benefiting from China's strong data, Bloomberg reports that zinc and iron ore were the biggest winners and precious metals joined the advance. However, the jump in miners failed to spur the Stoxx Europe 600 Index, however, which reversed an advance as a report showed June consumer prices in the euro area were unchanged from a month earlier at 1.3%, missing "whisper estimates." And while European data was largely in line with expectations, investors were reported to be locking in gains according to Bloomberg after a three-day rally and ahead of an ECB meeting this week.  Stoxx Europe 600 index down 0.1% at 10:20 a.m. in London, was little changed before data, index rose toward 50-DMA earlier in session, but failed to cross above it. With underlying inflation still relatively weak, all eyes on ECB’s meeting this week when the central bank is expected to "hold fire" and wait until September before slowing the pace of its bond-buying program. The dollar strengthened against almost all its G-10 peers and was poised to end a five-day losing streak. Treasury yields slipped.

Outside of China, Asian shares hit a 2-year high overnight. As discussed, the overnight action was entirely in China, where despite the strong GDP data the Shanghai Composite Index retreated 1.4% amid concerns over the implications of a weekend meeting where President Xi Jinping said the central bank would play a greater role in defending against risks. The kiwi fell after the deputy governor of New Zealand’s central bank said a lower currency would help rebalance growth. Japanese markets were closed for Marine Day. South Korea’s Kospi Index advanced to an all-time high.

Not surprisingly, complacency has returned with the Citi global risk aversion macro index back to its pre-crisis average.

In currencies, the Aussie dollar hit its highest level in over two years before it pulled back to $0.7813, while the Canadian dollar touched a one-year high before it settling at around C$1.2659. Britain's Sterling and the euro both eased against the dollar having jumped on Friday as officials from both sides prepared to for Brexit talks in Brussels. Specifically, the pound fell from a 10-month high against the dollar on concern that discord within the U.K. government is worsening before the nation starts the second round of Brexit negotiations with the European Union. Sterling snapped a three-day advance ahead of the talks that are likely to focus on protecting citizens’ rights, which has been a key sticking point so far, Bloomberg reports. The Chancellor of the Exchequer Philip Hammond exposed tensions within the British cabinet at the weekend by stating that transitional arrangements at the end of talks are likely to last a couple of years, far longer than the couple of months suggested by Trade Secretary Liam Fox.

In commodities, oil rose again following the Chinese data, extending gains made last week on signs of lower U.S. inventories and stronger demand. U.S. crude rose 0.3 percent to $46.66 a barrel, while global benchmark Brent added 0.3 percent to $49.07.  Gold gained too, rising to $1,229.90 an ounce in London, though it was copper that shone brightest of the metals as it climbed 1 percent to $5,983.50 a tonne, having earlier struck its highest since March 2.

"I'm still bullish on copper. The property backdrop is still good; China economy and industrial production numbers are still good. Orders are coming through from state grid," said analyst Dan Morgan at UBS in Sydney.

In rates, the 10Y held steady at 2.31%, after dropping as much as 2.279% on Friday as the dollar inched 0.1% higher versus the yen to 112.635 yen. Eurozone govt bonds also barely budged, biding their time ahead of this week's European Central Bank meeting for the latest signals on how the central bank plans to scale back its ultra-loose monetary policy. The Bank of Japan too is expected to keep its ultra accommodative policy unchanged when it meets on Wednesday and Thursday. Germany's benchmark 10-year bond yield was at 0.52 percent - down from 18-month highs of 0.58 percent hit a week ago.

Today focus will also shift to earnings season, which will ramp up with the likes of Microsoft Corp. and Unilever set to report.

Top overnight news

  • Eurozone Jun. F CPI unrevised y/y: 1.3%; Core CPI unrevised 1.1%
  • U.K. Chancellor Hammond: transitional period on Brexit deal is likely to be “couple of years,” rather than “couple of months
  • Italian Finance Minister: Italy has exited the tunnel of crisis; government will soon revise growth estimates upward
  • China 2Q GDP 6.9% vs 6.8% est; Jun. Retail Sales 11.0% vs 10.6% est; Industrial Output 7.6% vs 6.5% est.
  • China weekend meeting on finance founds new panel, boosts PBOC
  • Turkish senior adviser: army is preparing for action against Kurdish-run region of Afrin on Syrian border; military buildup on the border is “serious"
  • China’s Growth Beats Amid Reforms; Trump’s Approval Rating Slumps; U.A.E. Orchestrated Qatar Attacks
  • China’s economy grew faster than expected in the second quarter, putting the nation on track to meet its growth target this year and giving backing to officials in their campaign to corral oncoming financial risk
  • President Donald Trump is planning to shake up his legal team and is also evaluating options for his communications shop as the FBI and congressional investigations into his campaign’s possible ties to Russia heat up
  • Senate Republicans anxiously awaiting a key analysis of their revised health bill have more time to wait, and debate on the controversial measure that had been expected this week will also be delayed following a medical scare involving one of its potential backers
  • Green Courte Partners, a private equity and real estate investment firm, is considering a sale of parking operator The Parking Spot
  • Amid a stalled turnaround, General Cable Corp. said it’s hired investment bank JPMorgan Chase & Co. to pursue a potential sale of the company
  • The European Central Bank is on track to unwind its stimulus next year but it’s likely to drag out the process, economists say
  • China plans to punish billionaire Wang Jianlin’s Dalian Wanda Group Co. for breaching the nation’s restrictions on overseas investments by cutting off funding and denying the conglomerate with necessary regulatory approvals

Market Snapshot

  • S&P 500 futures up 0.1% at 2,458.50
  • STOXX Europe 600 down 0.1% to 386.31
  • U.S. Dollar Index up 0.1% to 95.27
  • MXAP up 0.2% to 157.74
  • MXAPJ up 0.3% to 519.97
  • Nikkei up 0.09% to 20,118.86
  • Topix up 0.4% to 1,625.48
  • Hang Seng Index up 0.3% to 26,470.58
  • Shanghai Composite down 1.4% to 3,176.47
  • Sensex up 0.2% to 32,084.90
  • Australia S&P/ASX 200 down 0.2% to 5,755.47
  • Kospi up 0.4% to 2,425.10
  • German 10Y yield fell 1.2 bps to 0.585%
  • Euro down 0.2% to 1.1449 per US$
  • Brent Futures little changed at $48.90/bbl
  • Italian 10Y yield fell 4.1 bps to 1.994%
  • Spanish 10Y yield fell 2.9 bps to 1.622%
  • Gold spot up 0.1% to $1,230.30

Asia equity markets somewhat recovered from the early volatility in China to approach the close mostly higher after Friday's gains on Wall St. where the S&P 500 and DJIA printed fresh record highs, while better than expected Chinese data also provided support. The Asia-Pac region was spooked in early trade as the ChiNext board fell as much as 5% after a profit warning from its largest weighted stock Leshi which expects a net loss for H1. This led to similar declines in the Shenzhen Comp. (-1.7%) while the Shanghai Comp. (-0.1%) fell over 2% before better than expected GDP, Industrial Production and Retail Sales data provided much-needed relief. Finally, ASX 200 (-0.1%) was restricted by weakness in telecoms and financials, while Hang Seng (+0.6%) benefited from a firm liquidity injection by the PBoC, and Japanese markets were shut for Ocean Day holiday.

Top Asian News

  • China Weekend Meet on Finance Founds New Panel, Boosts PBOC
  • China Is Said to Punish Wanda for Breaching Investment Rules
  • China’s Stocks Slump Amid Regulatory Concern; Small Caps Plunge
  • China Insurers Jump as Policy Seen Helping Traditional Players
  • India Govt Cos to Invest $42b in 60m Tons/y West Coast Refinery
  • USD/INR 1-Mo Volatility Near Lowest Since 2008, Traders Cite RBI
  • One Country, Two Markets: Hong Kong Shares Jump Amid China Rout
  • Goldman Sees EM Slowdown Coming, Recommends Carry Over Stocks

European bourses pared its initial upside to trade marginally in the red through the morning, as summer, subdued trade has been evident. The Stoxx 600 sectors have followed in the indecision with IN outperforming in the FTSE, following the confirmation of Carolyn McCall as the new CEO. The energy sector also supports the indices, as WTI trades through 46.00/bbl. The strong Chinese data overnight has helped bolster the materials sector, up half a percent, as Anglo-American follow IN in the FTSE. Brexit concerns have re-emerged, with commentary from both Hammond and Fox. The latter stating that there are contingency plans across the UK government's departments in the scenario that no deal is reached. Fixed income markets opened with a slight bid across Europe, as the aforementioned concerns are clear. The curve has flattened we do approach the summer trading season: Germany 10/30 curve has flattened from 81.5bps to 73bps, France 10/30 from 107bps to 102.5bps, Italy 10/30 curve flatter from 115bps to 108bps and Spain 10/30 is also flatter from 134.5bps to 126/5bps.

Top European News

  • Souring U.K. Data May Put Paid to Pound’s Strength: Markets Live
  • Gilts’ Gain Helps Support Bunds; Unwinds in 20y UST, Data Show
  • Centrica May Sell Shares in New Gas Production Company
  • European Miners Lead Stock Gains After Boost From China GDP Data
  • John Wood, Tullow Oil, Morrison, Outokumpu Short Sellers Active
  • Boris Johnson: U.K. Govt Has Made a Serious Offer on Citizens
  • Eurofins Reports Potential Launch of New Sr EU500M Bond

In commodities, gold continues to recede near Friday's highs, following the poor CPI data out of the US. Gold has bolstered the precious metals all to trade in the green today, as markets do not seem too optimistic towards the continuing Brexit negotiation talks. The metal complex has also followed, trading in the green; buoyed Asian trade as the strong Chinese overnight figures have benefited not only China, but also Australasia.

In currencies, FX markets have felt the effect of slow summer conditions, with volatility not helped by the lack of tier one data due today. Much anticipation will be on the ECB later in the week, as central bank speech is light amid the pending decision as well as the Fed blackout period.

After the excitement of China’s data dump this morning there isn’t a
huge amount left over the course of the day with final June CPI report
for the Euro area and the July empire manufacturing print in the US the
only data of note

US Event Calendar

  • 8:30am: Empire Manufacturing, est. 15, prior 19.8

DB's Jim Reid concludes the overnight wrap

In my household there are two important dates this summer. One the birth of the twins and secondly the premier of the new series of Game of Thrones which occurred last night. It aired at 2am in the UK (and perhaps 3am in Europe) so I'll be very impressed if anyone outside of the US readers of this note (aired last night) have seen it yet. No spoilers please as we'll be watching tonight but I'd love to hear from anyone in Europe that got up in the middle of the night to watch it. Had the premier been a couple of months later then I'm sure being awake in the middle of the night wouldn't have been a problem!

So as the battle for the seven Kingdoms intensifies, another slightly less epic battle is playing out around financial markets at the moment and that’s the one between inflation and central bankers. Friday's 4th successive US CPI miss relative to expectations was a frustration to many but the potential Fed dovishness it might imply helped herald a fresh record high in the S&P 500 (+0.47%), the Dow (+0.39%) and saw the Nasdaq (+0.61%) close within a whisker of its alltime high. So the recovery is complete in US equity markets after Draghi's Sinatra speech and the earlier tech sell-off. Although European markets had their best week for just over two months they still remain 2-3% off their highs perhaps held back by a more hawkish ECB and a stronger currency of late. The inflation vs. central bank battle continues in earnest this week with Europe and UK seeing inflation data today and tomorrow followed by the ECB meeting and press conference on Thursday.

Within the ECB the battle is perhaps between Draghi and the rest of the committee as the President was certainly more hawkish in Sintra on June 27th than he was when he spoke for the committee at the last meeting on June 8th. For this week's meeting DB highlights that the main point of interest is seeing how much authority Draghi has over the Governing Council. This will be judged by the strength of the signal at the press conference. According to our economists, the more that Draghi’s new “confidence, persistence, prudence” mantra makes it into the press statement, the more confident the market will be about the Council converging to Draghi’s more constructive view. DB expect Draghi to open the door to a September decision on QE without any pre-commitment.

So all to look forward to. In the meantime the week has already started with a bit of a bang following the latest data dump out of China as well as a number of China-related headlines over the weekend. Starting with the data, the latest June numbers were overall positive. Q2 GDP printed at 6.9% yoy unchanged versus Q1 but ahead of market expectations for 6.8% yoy. In addition, retail sales (+11.0% yoy vs. +10.6% expected; +10.7% previously) and industrial production (+7.6% yoy vs. +6.5% expected; +6.5% previously) both rose more than expected. Fixed asset investment held steady at +8.6% yoy, albeit one-tenth above consensus.

Chinese equity markets had initially sold off at the open ahead of the data. The Shanghai Comp, CSI 300 and Shenzhen were down was much as -2.60%, -2.30% and -4.50% respectively at one stage. That seemed to reflect weekend news about the investigation into a former Communist Party chief for violating party regulations, as well as the PBoC conference over the weekend where more prudent financial regulation was stressed (see more below). However, bourses have recovered somewhat following the data with the CSI 300 now flat, Shanghai Comp now -0.48% and Shenzhen -2.38%. The rest of Asia is largely firmer. The Nikkei (+0.09%), Hang Seng (+0.52%), Kospi (+0.36%) and ASX (+0.14%) are all up.

Back to that conference quickly. Our China economists note that a committee was set up to oversee regulatory issues in the financial sector which in our colleagues’ mind should help the coordination of the regulators in the long term but is unlikely to cause a visible change of policies in the short term. Our economists’ key takeaways were: (1) financial regulation may become more coordinated (2) the government aims to control financial risks without sacrificing growth (3) the effectiveness of the new institutional setup would depend on who will lead this committee and the PBoC (4) President Xi reiterated opening up of the financial sector and promoting RMB internationalization.

The remainder of the weekend newsflow has been fairly light. The FT is running  a story about how President Trump’s approval rating has fallen to 36% and down 6pts from April. On a related subject the CBO has also announced that it won’t release its verdict on the Republican health care bill today after Majority leader McConnell announced that he’s postponing plans to begin the Senate debate in the next few days.

Back to that US data on Friday. As noted above, the June inflation numbers disappointed with both headline (0.0% mom vs. +0.1% expected) and core (+0.1% mom vs. +0.2% expected) readings printing below expectations. That now puts the annual rates at +1.6% yoy (down three-tenths) and +1.7% yoy (unchanged) respectively. It’s worth noting also that the six-month annualized core rate is now down to +1.3%. The big driver for the core appeared to be declines in prices for airfares, apparel and new cars which offset higher prices for shelter and medical care. Following the disappointing data our US economists have now lowered their 2017 forecast for core inflation to 1.7% yoy.

That wasn’t all though with the June retail sales stats in the US also coming in a little disappointing. Headline retail sales fell -0.2% mom (vs. +0.1% expected) while both the core ex auto and gas (-0.1% mom vs. +0.4% expected) and control group (-0.1% mom vs. +0.3% expected) components also printed big misses. In addition, the University of Michigan consumer sentiment survey for July declined 2pts from June to 93.1 (vs. 95.0 expected) driven by and large by a fall in the expectations component to 80.2 (from 83.9). The current conditions index did however nudge up to 113.2 (+0.7pts). Interestingly, in contrast to what we saw in the June CPI report, both 1y and 5-10y inflation expectations actually nudged up one-tenth each to 2.7% and 2.6% respectively (the latter is actually the highest since January).

There was one bit of good news to come from the data on Friday though and that was the June industrial production reading which printed at a better than expected +0.4% mom (vs. +0.3% expected) while the May reading was also revised up one-tenth to +0.1%. For completeness, business inventories came in bang on the money at +0.3% mom. All told the Atlanta Fed revised down their Q2 GDP forecast on Friday following all that data to 2.4% from 2.6%. Over in markets, while equities surged to new highs, Treasury yields plummeted lower in the aftermath of the CPI report with the 10y touching 2.277% (down 6.7bps) and to the lowest this month, although interestingly did complete a near u-turn into the close to finish at 2.333% (down 1.3bps).That rebound appeared to be more technically driven than anything else. Bond markets in Europe were broadly down 1-6bps but also saw a similar bounceback into the close. The Dollar stayed lower however with the Dollar index finishing -0.60% and suffering its weakest day since June 27th. Against that we saw a decent rally in EM currencies with the likes of the South African Rand (+1.37%), Russian Ruble (+1.31%) and Polish Zloty (+1.08%) all up over 1%. Gold (+0.91%) also had its strongest day for a month a bit. It’s worth noting that the market pricing (based on Bloomberg’s calculator) for a rate hike by the Fed in September and December is down to 10% and 43% respectively (from 16% and 50% the day prior).

The other story for markets on Friday and which will likely be a growing theme in the weeks ahead was the start of US earnings season. On Friday all eyes were on the banks with JP Morgan, Citi and Wells Fargo all reporting Q2 results which were largely in line to slightly better than expected at both the revenue and earnings lines. As has been the theme in recent quarters however that was against a backdrop of market expectations which have been ramped down in recent weeks. Case in point being JP Morgan where consensus for Q2 EPS was $1.58 (vs. $1.71 reported) after being as high as $1.65 two months ago. Share prices for all 3 banks were anywhere from a half to one percent lower however (and in line with the wider sector) which partly reflects the soft CPI report and lower yields but also some of the more cautious outlook  commentary. Wells Fargo focused on weakness in lending volumes while JPM watered down its loan growth outlook and net interest income for the remainder of the year. CEO Jamie Dimon also had some choice words for the lack of policy progress in the US with the analyst call including some colourful language. Dimon added that “it’s almost an embarrassment being an American citizen travelling around the world” and referred to “political stupidity” in Washington.

To the week ahead now. After the excitement of China’s data dump this morning there isn’t a huge amount left over the course of the day with final June CPI report for the Euro area and the July empire manufacturing print in the US the only data of note. Tuesday is busy though and we kick off with China property prices data in the morning. In Europe we’ll get the ECB’s bank lending survey for Q2 followed by the  June CPI/RPI/PPI data docket in the UK before we end with the July ZEW survey in Germany. Over in the US tomorrow we’ll get the June import price index reading and July NAHB housing market index print. With nothing of note in Europe or Asia on Tuesday, the focus will be on the US with June housing starts and building permits data. Thursday kicks off in Japan where the overnight data includes the June trade data, but the bigger focus will be on the BoJ meeting outcome. During the European session we’ll get Germany PPI and UK retail sales, shortly before the ECB meeting just after midday. In the US on Thursday we’ll get initial jobless claims, Philly Fed business outlook and conference board’s leading index. It’s a quiet end to the week on Friday with UK public sector net borrowing data the only release of note.

With the Fed entering the blackout period there is no Fedspeak scheduled this week, while over at the ECB and BoE there are also no scheduled speakers. Other events to note however include the EU’s Barnier and UK’s David Davis meeting for a second round of Brexit talks, kicking off today. The inaugural meeting of the US China comprehensive economic dialogue on Wednesday in Washington where the first gathering is due to cover economic and trade issues between the two nations. Finally earnings season ramps up in the US with 69 S&P 500 companies due to report including Netlfix (Monday), Goldman Sachs, BofA, IBM,  Johnson & Johnson (Tuesday), Morgan Stanley (Wednesday), Microsoft, eBay (Thursday) and GE (Friday).