Despite last Friday’s sharp risk rebound after a WSJ report that the US and China are hoping to end the ongoing trade dispute with a November summit, the overnight session started off with risk largely subdued and on the back foot with US futures unchanged ahead of Friday’s Jackson Hole meeting (and FOMC and ECB minutes) and ahead of the Aug. 23 U.S. tariff deadline on Chinese products, while Chinese stocks slumped despite a 120BN yuan net liquidity injection by the PBOC and a sharp bounce in the Yuan, prompting even more concerns about the inability of Chinese stocks to stage a rebound.

Then, out of the blue Chinese A-shares surged just before 2am ET, with the Shanghai Composite spiking into the last hour of local trading and closing up 1.1% at session highs just below 2,700, an action that was closely reminiscent to countless “national team” interventions…

… and sure enough, Bloomberg reported that it was China’s state-backed funds, or the so-called “national team”, that purchased blue-chip stocks last on Monday to support the A-share market, citing people familiar with the matter. As an amusing justification, the Bloomberg sources said that the “national team bought shares with an aim to stabilize market, not to push up stock prices” even though that’s precisely what happened.

The intervention had an immediate effect and as one Bloomberg commentator put it, “everything in markets is looking much brighter than it was a couple of hours ago, after a late turnaround in China shares helped drag up indexes around the world. Indian equities are surging to another record high and even beaten-down Indonesian shares have soared.”

The Chinese market manipulation was so forceful, it sent S&P futures spiking from session lows, promptly pushing them to overnight highs.

And after trading in the red just a few hours earlier, the rest of the world promptly turned green. And all it took was China throwing in the towel on no further market manipulation, and giving algos hope that Beijing is now once again actively micromanaging the stock market.

The rebound in Chinese stocks also pushed miners and industrial metals higher, helping the Stoxx Europe 600 Index rise in thin volumes. And while China’s artificial move higher was enough to lead to green closes across most of China, Japan’s Nikkei225 bucked the trend.

In FX, the dollar firmed after two days of declines and the 10-year Treasury yield was little changed. The onshore yuan climbed after the People’s Bank of China strengthened its reference rate by the most in more than two weeks to 6.8718 (vs an average estimate of 6.7842), sending the CNY up 0.48% to strongest since Aug. 10, at 6.8536. Despite the onshore yuan strength, the offshore CNH fell 0.34% to 6.86 per dollar, snapping two days of gains.

The euro slipped for the first time in 4 days, with its gradual slide continuing as London traders came into the market; the common currency failed to move above Friday’s high as demand during the Asian session wasn’t enough to tackle with leveraged supply.

The Japanese yen dipped 0.1% to 110.66 per dollar while the New Zealand dollar declined on selling against the Aussie as regional macro funds add to existing AUDNZD longs; both Australia and New Zealand’s dollars earlier slipped as speculators added to their short positions ahead of the Aug. 23 U.S. tariff deadline on Chinese products.

The pound was little changed after The Telegraph reported that the U.K. government has stepped up preparations for a “no-deal” Brexit.

In other news, as the WSJ reported earlier the Trump administration rejected an effort by Turkey to tie the release of a U.S. pastor to relief for a Turkish bank facing U.S. fines, just days after Turkey’s credit rating was cut further into junk Friday by S&P and Moody’s. Furthermore, shots were fired at the U.S. Embassy in Ankara from a car around 5am Turkish time, CNNTurk website reports. The news sent the lira sliding against the dollar, with the TRY the worst performing EM currency against the USD to start the week. Turkish markets are closed for most of this week, which may mean low trading volumes and sharper currency swings than usual.

Greece is about to exit its bailout, a symbolic move past the debt crisis that exploded eight years ago. On the trade war front, Chinese and U.S. negotiators are drawing a road map for talks, which could lead to meetings between U.S. President Trump and Chinese President Xi Jinping in November, according to the WSJ. The euro is down 0.2% at $1.1413. Its recent drop to one-year lows on the back of the Turkish crisis is a silver lining for European earnings

China’s intervention also impacted the rates market as bunds unwound some of their early decline, while BTPs hold gains as risk sentiment turned positive following the “rally” in Chinese equities. The German 10y yield steady at 0.31%; Spain 10y -4bps to 1.41%; Italy 10y -4bps to 3.09%. Meanwhile, Treasury futures rebound following a couple of block trades which weigh on the 10y sector. The 10Y yield dipped less than 1bp to 2.8569%.

With Q2 earnings season now over, investors will be closely watching this week’s Jackson Hole symposium for clues on whether the Fed will delay or stop its rate hiking approach, (full preview here), and to see if central bankers can bring back stability after the recent bout of emerging market-led volatility. Additionally, traders will watch for any potential complications ahead and after the Aug. 23 U.S. tariff deadline on Chinese products.

In the latest Brexit news, the UK government is to publish no-deal advice on Thursday, notices will include advice for businesses, citizens and public bodies. Thursday will also see UK Brexit Secretary Raab making a speech in Westminster to outline plans in the case of a no-deal Brexit. UK Cabinet papers showed plans for EU migrants to be given the right to stay in UK in the event of a no-deal amid worries of potential labour shortages. UK Tory Brexiteer Jacob Rees-Mogg warned PM May that Eurosceptics will block her plans unless they are changed, while the group are also reported to be devising an alternative proposal to PM May’s Brexit plans.

In other news, ECB’s Weidmann stated that monetary policy normalization is foreseeable following the latest decisions and that interest rates will increase as a result, although the process will be gradual.

Italy’s populist government are drawing up a plan of up to EUR 80bln to rebuild the country’s rundown infrastructure after the Genoa bridge collapse. Italy’s Deputy PM Salvini said all funds raised for infrastructure will be invested. The Italian cabinet undersecretary Giorgetti has indicated he wanted the ECB to continue buying fresh bonds, including Italian government debt, under its QE program.

In commodities, WTI and Brent trade mixed, with the former eyeing USD 66/bbl to the upside while the latter straddling above USD 72.00/bbl. News flow for crude was light over the weekend, although Iran expressed opposition to Saudi Arabia’s willingness to make up for any shortfall that could arise from US sanctions, in which it told OPEC that no country is allowed to take over the share of other members for production and exports of oil under any circumstances. Elsewhere, gold (+0.3%) is in the green as it crawls closer to the USD 1190/oz level. London copper rose 1% this morning as hopes for US-Sino trade talks buoyed risk appetite after reports suggested China and Washington are to hold low-level trade talks on August 21st and 22nd, ahead of the new US tariffs on USD 16bln of Chinese goods take effect.

There is nothing on the US economic calendar today; the Fed’s Raphael Bostic is scheduled to speak on the U.S. economic outlook. Estee Lauder is among the handful of companies reporting earnings.

Market Snapshot

  • S&P 500 futures up 0.2% to 2,858.50
  • STOXX Europe 600 up 0.7% to 383.61
  • MXAP up 0.4% to 162.77
  • MXAPJ up 0.9% to 526.62
  • Nikkei down 0.3% to 22,199.00
  • Topix down 0.3% to 1,692.15
  • Hang Seng Index up 1.4% to 27,598.02
  • Shanghai Composite up 1.1% to 2,698.47
  • Sensex up 0.9% to 38,301.39
  • Australia S&P/ASX 200 up 0.09% to 6,344.99
  • Kospi up 0.04% to 2,247.88
  • Brent futures up 0.5% to $72.17/bbl
  • German 10Y yield rose 1.1 bps to 0.316%
  • Euro down 0.2% to $1.1413
  • Italian 10Y yield rose 0.4 bps to 2.848%
  • Spanish 10Y yield fell 1.6 bps to 1.433%
  • Gold spot up 0.4% to $1,188.46
  • U.S. Dollar Index up 0.2% to 96.28

Top Overnight News

  • Business economists are sounding some sour notes about Trump administration policies, from trade to immigration to the budget, while expecting the short-term boost to growth from Republican tax cuts to lessen over time
  • Venezuelan President Nicolas Maduro carried out one of the greatest currency devaluations in history over the weekend — a 95% plunge that will test the capacity of an already beleaguered population to stomach even more pain
  • The U.K. will recognize some EU regulations in the event of a no-deal Brexit to ensure continued access to medicines, car parts and chemicals, the Telegraph reported, citing government papers
  • U.S. economy will be hit many times harder than the rest of the world by an escalating global trade war, according the chief executive officer of A.P. Moller-Maersk
  • Trump administration has rejected an effort by Turkey to tie the release of a U.S. pastor with relief for a Turkish bank facing U.S. fines, Wall Street Journal reports, citing an unidentified senior White House official
  • By shutting banks off from borrowing at the benchmark 17.75% repo rate and forcing them to turn to the overnight lending rate, Turkey’s policy makers have effectively enacted a 150bp hike within a week
  • Qatar and Turkish central banks sign currency swap agreement, Qatar central bank says on website
  • Italian Cabinet Undersecretary Giancarlo Giorgetti said he hopes the ECB’s quantitative-easing program will be extended to help protect the country from speculators
  • Britain will give EU migrants a unilateral right to stay in the U.K. in the event of a no-deal Brexit, Telegraph reports, citing seen leaked Cabinet papers

Asian equity markets were mostly higher but with gains contained as the region struggled for direction due to a lack of fresh catalysts and as earnings dominated news flow. ASX 200 (+0.1%) traded positive but with price action kept in a tight range as strength in miners was counterbalanced by weakness in the largest weighted financials sector and consumer staples following disappointing results from Woolworths, while Nikkei 225 (-0.3%) underperformed amid a firmer currency and as some analysts even suggested stealth tapering after the BoJ refrained from buying stocks for 2 days last week. Elsewhere, Hang Seng (+1.4%) and Shanghai Comp. (+1.1%) traded higher but with sentiment in the mainland bourse flimsy as it swung from gains and losses, however the bulls eventually took the upper hand following another firm liquidity effort by the PBoC and continued hopes regarding trade talks. Finally, 10yr JGBs were initially uneventful amid a similar tone across asset classes and a lack of BoJ presence in the bond market, although prices gradually edged higher throughout the session amid the underperformance of stocks in Tokyo which helped 10yr JGBs break above resistance around the 150.50 level.

Top Asian News

  • Thailand’s Economy Grows More Than Forecast in Second Quarter
  • Veerathai: Thailand Awaiting Right Timing to Consider Rate Hike
  • In Potential Challenge to Army, Pakistan Seeks India Talks
  • Holcim Indonesia Soars as Sale Is Said to Attract Asian Tycoons

European equities kick started the week higher by 0.2% to 0.3% before gains accelerated (Eurostoxx 50 +0.8%) as sentiment improved across the region amid the latest US-China trade developments. On Friday, it was reported US and China have a plotted road map to resolve trade disputes by November. In terms of sectors, material names are outperforming on the back of firmer base metals price actions. Antofagasta (+2.2%) shares are higher after also reporting optimistic numbers while reaffirming CapEx guidance. Elsewhere, Atlantia (-9.0%) shares continue take a beating, the latest reports suggesting the Italian government has begun revoking Autostrade’s licence, also casting doubt over an initial offer of EUR 500mln for compensation and building work from Atlantia.

Top European News

  • A $76 Billion Fund’s Growing Bet Shows Normal Is a Long Way Off
  • BOE’s Unanimous Rate Hike Has Economists Projecting Two in 2019
  • Italy to Revoke Autostrade Concession Despite Company Aid Offer
  • Benettons Go From Preachers to Pariahs After Genoa Disaster
  • Italy’s Salvini Is Unaware of New Law Plan to End Concessions

In FX, the broad Dollar and DXY is mildly firmer, but well within established ranges and G10 pairs are narrowly mixed even though risk appetite suggests that a degree of divergence between traditional safe-havens and high beta currencies would better reflect the overall tone. Hence, the index is relatively lacklustre within 96.300-010 bounds awaiting firmer direction and impulses that could arrive later this week via US-China trade talks, FOMC minutes and/or Jackson Hole. In EM, the TRY is back under pressure after S&P’s downgrade and no FX Depo auction today, with comments from President Erdogan largely shrugged off or arguably undermining the Lira if anything, although the US rejecting Turkey’s offer to release Pastor Brunson in exchange for bank aid is probably more of a negative factor. Usd/Try back near 6.1000, in contrast to Usd/Rub around 67.0000 in wke of Fitch affirming Russia and Usd/Zar sub-14.5000 in consolidation after last week’s Rand slump and ahead of SA inflation data and the beginning of testimonies for the capture inquest. NZD/EUR/JPY – Highlighting the rather indifferent and conflicting start to the week, the Kiwi, single currency and Jpy are all underperforming at the base of the major pecking order, with the former just about retaining 0.6600+ status, Eur/Usd still struggling to extend rebounds above 1.1400 (topping out ahead of the 200 HMA at 1.1458) and Usd/Jpy continuing to pivot around 110.50 (albeit Eur/Jpy also capped circa 126.50 and under its 200 HMA of 126.82).

In commodities, WTI (Unch) and Brent (+0.4%) trade mixed, with the former eyeing USD 66/bbl to the upside while the latter straddling above USD 72.00/bbl. News flow for crude was light over the weekend, although Iran expressed opposition to Saudi Arabia’s willingness to make up for any shortfall that could arise from US sanctions, in which it told OPEC that no country is allowed to take over the share of other members for production and exports of oil under any circumstances. Elsewhere, gold (+0.3%) is in the green as it crawls closer to the USD 1190/oz level. London copper rose 1% this morning as hopes for US-Sino trade talks buoyed risk appetite after reports suggested China and Washington are to hold low-level trade talks on August 21st and 22nd, ahead of the new US tariffs on USD 16bln of Chinese goods take effect. UK union confirmed the offshore oil & gas platform strike has begun at the three platforms Alwyn, Elgin and Dunbar. China are said to have shifted to Iranian tankers to keep oil flowing amid US sanctions.

US Event Calendar

  • 11am: Fed’s Bostic Speaks on U.S. Economic Outlook in Tennessee

DB’s Jim Reid concludes the overnight wrap

This is a good opportunity to recap where markets stand with regards to Turkey after a turbulent 10 days. After markets closed on Friday, both S&P and Moody’s cut Turkey’s credit rating deeper into HY territory (to B+ and Ba3 respectively), citing the weaker currency, current account deficit, and high inflation as the principle risks. S&P also said that they forecast a recession next year. Meanwhile on Sunday, Qatar’s central bank said that it has signed a currency swap agreement with Turkey’s central bank to provide liquidity and support to help financial stability. This morning in Asia the Lira is chopping and changing either side of flat but has just spiked back into positive territory as we type and follows the -3.15% fall on Friday.

After the dramatic price action in Turkish assets 10 days ago, it’s worth recapping how domestic assets performed last week. It felt like they rebounded well to the previous Friday’s capitulation but the reality was that the Lira opened down nearly 12% last Monday and although it rallied hard after this over the week, as a whole the Lira ‘only’ rose +6.45%. Elsewhere Government bond yields traded mostly flat on the week, with 10-year USD and local yields down 3 and 1  basis point, respectively. Local yields are still over 10 percentage points higher this year though, and 5-year CDS spreads rose 63 basis points on the week to a new nineyear high. So with the Lira consolidating the market seems to be pricing some stabilisation in the external position for now, but the risk of a full-scale crisis is still elevated with asset prices at these levels. This week we could easily see some big spikes on any new news due to thin markets as Turkey has public holidays from Tuesday to Friday.

This morning in Asia, markets are trading mixed with the Hang Seng (+0.90%), Kospi (+0.09%) and Shanghai Comp. (+0.10%) modestly up while the Nikkei is down -0.15%. Meanwhile the Chinese Yuan is c0.4% up and on track to be stronger for the third day while futures on the S&P are marginally down. Elsewhere the US congress appears on track to avoid a potential government shutdown next month as White House Budget Director Mulvaney told Fox News Sunday that “all signs are good that we’re going to actually get some spending bills passed before the end of the fiscal year”.

Turning to this week’s highlights now. Datawise it’s relatively sparse with the flash PMIs across the globe on Thursday being the focal point. Elsewhere the minutes from the recent Fed and ECB meetings will be released on Wednesday and Thursday respectively and to cap off the week we have the annual Jackson Hole central banking symposium as we move into this coming weekend with Mr Powell speaking on Friday. Occasionally this get-together offers up the signalling of a major policy shift but there’s no indication that it will this year but it is still worth watching nevertheless. We would also expect to see plenty of headlines as we approach the restarting of US/China trade talks towards the end of the month.

Ahead of this in US trading on Friday, markets were trading pretty flat amid thin summer volumes until the WSJ reported that the US and China are making progress on trade negotiations. The headlines did not contain any substantive details, but did suggest that negotiators aim for a meeting between Trump and Xi in November. Risk assets received a boost, with the S&P 500 and Dow Jones indexes closing 0.33% and 0.43% higher, respectively. The offshore yuan also appreciated 0.39% against the dollar in response, while US fixed income sold off slightly on the news, with 10-year Treasury yields retracing a 2.4 bps intraday rally to close 0.6 bps lower and CDX IG tightened 1.2 bps off their intraday wide. Brent crude oil rallied 0.56% but still lost 1.35% on the week, and it remains 9.58% lower since the end of June.

European markets had already closed before the risk-positive move accelerated into the New York close, with 10-year German bund yields rallying 1.3 basis points and peripheral spreads widening slightly. Italy 10-year yields ticked 0.4 bps higher and were 12.9bps wider on the week. The Euro Stoxx index retreated -0.10%, with banks shedding -0.76%.

On the subject of Italy, it doesn’t feel like we’ve heard the last of last week’s bridge tragedy. The political and budget consequences are still resonating. One side impact has been in credit markets. Indeed on Friday, Michal in my team published a report “Macro Credit Sensitivity to the Atlantia Risk”, exploring the impact of the sudden idiosyncratic stress in the Atlantia/Autostrade credit on relevant bond and CDS indices, including macro credit curves and the magnitude of  a potential fallen-angel technical pressure. He notes that there is also some uncertainty about the reaction of the ECB given this is a CSPP-eligible credit with 14 Atlantia/Autostrade bonds in the CSPP portfolio and the ECB’s history of selling the distressed Steinhoff bond. You can download the full report here.

Back to Friday and economic data was mostly strong, with the July US leading indicator up 0.6% mom, a rate only exceeded three times in the last four years. The leading indicator correlates with industrial production, and signals healthy growth in the third quarter. Separately, the August University of Michigan consumer sentiment index surprisingly fell to its lowest level since last September. Consumers notably downgraded their assessments of buying conditions of durable goods, vehicles, and houses, citing higher prices. While not necessarily positive for the consumer spending outlook, the survey could signal growing inflation pressures as the US economy continues to grow above potential. Following the above, the NY Fed’s estimate of 3Q GDP edged down to 2.4% saar (vs. 2.6% previous). In Europe, the July current account balance printed at €23.5 billion, marginally higher than June. Final July CPI was confirmed at 2.1% yoy headline and 1.1% yoy core

Today, in Europe, we get Germany’s July PPI in the morning along with release of the June construction output for the euro area. There are no data releases of note in the US. Away from data, the Fed’s Bostic will speak on the U.S.  economic outlook in Tennessee.

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