Continuing the early morning trend seen in recent days, US equity futures are little changed, following muted and lackluster European and Asian sessions, as investors treaded water on several outstanding trade issues, including Friday’s deadline for Canada to reach a deal to renew the Nafta deal, optimism over the U.S.-Mexico trade deal fading and a deadline for the next round of China-U.S. tariffs looming next week.

Overnight, futures got a modest boost after the Globe and Mail reported that after foreign minister Chrystia Freeland arrived in the US on Tuesday afternoon to engage in negotiations, Canada was ready to make concessions to the Trump administration on the country’s dairy market in exchange for compromises on other areas. According to the report, Canada would agree to change one rule that blocked American farmers from exporting ultrafiltered milk to Canada, and also offer U.S. a percentage of its dairy market; In return, Canada wants to keep Chapter 19, which allows the countries to challenge each others’ punitive duties at bi-national trade panels.

Meanwhile, ahead of the Friday deadline, the U.S. made it clear that the deadline for an agreement in principle is Friday, with no wiggle room, an official said. Despite U.S.-Mexico progress, key issues remain for Canada, although markets are betting a deal will be reached that includes Canada. Freeland struck a positive tone before and after, saying aspects of an accord struck without Canada at the table will help advance other issues. She said it will be an “important and constructive week” and that Canada was encouraged by progress made without them.

On another front of the global trade conflicts, analysts at JPMorgan noted the deadline for public comment on Trump’s increased tariffs on $200 billion of Chinese goods was less than a week away on Sept. 5.

“End-of-month flows could start to take hold into the end of the week, and combined with light news flow and the risk of impending trade war escalation could result in conviction remaining light,” JPM cautioned. The White House has said it wants to settle NAFTA before dealing with China, suggesting that trade disputes will run well into 2019.

The MSCI world equity index edged down 0.02% from the 5 1/2- month highs it hit after Mexico and the U.S. struck their deal.

“The market is quite right to say after the knee-jerk reaction higher in the Mexican peso and equities, a) there was remarkably little detail, and b) what is the state of Canada?” said Andrew Milligan, head of global strategy at Aberdeen Standard Investments. “It helps this rebound in risk assets we’re seeing after the Turkey and global EM related selloff in the first half of the month, but it is an erratic rally because we need a bit more fuel to the fire.”

U.S. stocks remain at an all-time high, while the rest of the world has been playing a gradual game of catch-up. However risks abound, from legal threats to President Trump’s administration and turmoil in emerging markets to ongoing trade tension between the world’s major economies.

“We don’t know where China is on this,” Informa Financial Intelligence strategist David Ader. “I tend to be more pessimistic that we are going to come away with trade deals that are going to make everybody satisfied, but we are trading headlines, we are trading the sensitivity to those headlines, so for the moment it looks good.”

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Sentiment in Europe was muted, with the Stoxx Europe 600 Index trading on the backfoot as national gauges in the region declined, while equities in the U.K., Italy and Spain underperformed. Spain’s IBEX dropped -1.0% following a downgrade of its second largest constituent, Inditex (-4.6%), subsequently weighing on the consumer discretionary sector. Energy names underperform, dragging down the likes of oil names such as Shell (-1.3%), in turn weighing on the UK’s FTSE 100.

Shares in Japan and Australia set the pace as the MSCI Asia Pacific Index climbed, though stocks in Shanghai dropped for a second day, following continued PBoC liquidity inaction (6th consecutive day of no new net liquidity injections) and amid a slew of earnings including 3 of China’s big 4 banks which all posted growth in profits.

After a choppy session for the underlying gauge on Tuesday, futures for the S&P 500 Index pointed to a slight gain at the open.

Turkey’s lira extended its slump to a third day as the central bank’s move to reintroduce borrowing limits for banks’ overnight transactions by doubling the banks’ borrowing limit at its interbank money market, failed to boost investor confidence. The dollar surged as much as 2% against the lira, which was again the worst performing emerging-market currency. The central bank said on Wednesday it is altering banks’ borrowing limits for overnight transactions, which effectively tightens liquidity by ending unrestricted funding it has offered since Aug. 13, however the market was disappointed as investors do not see policy makers’ approach to market pressure as a sustainable way to tackle double-digit inflation and a widening current-account deficit.

“It’s yet more smoke and mirrors from the central bank,” said Nigel Rendell, an analyst at Medley Global Advisors LLC in London. “The change in banks’ overnight borrowing limits is aimed at trying to ease pressures on the banking system, rather than tackling Turkey’s underlying problem, which remains persistently high inflation.”

Turkish data on Wednesday showed an index of Turkish economic confidence fell to the lowest level since 2009 in August, while the trade deficit widened again.

The pound was little changed after a Bloomberg report the EU and UK are likely to push back the deadline for a Brexit deal by around one month to mid-November instead. Gilts were range-bound along with most European bonds as 10-year Treasury yields retreated further below 2.9 percent. The euro weakened after the Italian government was reported to be hoping for a new program of European Central Bank bond purchases to help protect the country’s debt.

Currencies vol eased after a turbulent few days, with the dollar index 0.1 percent firmer at 94.833 after touching a four-week low overnight. The dollar was supported by a now familiar pattern in EMFX: it was a mixed European session with emerging market FX and yuan weakness gradually gathering momentum to sour sentiment. USD was supported across the board, while USDCNH rises 0.4% to 6.83; TRY, ZAR and INR underperform in EMFX markets.

The Australian dollar dropped after one of the nation’s largest banks unexpectedly raised mortgage rates, raising concerns that higher costs will hurt the economy and delay any policy tightening. Sweden’s krona slid a fifth consecutive day against the euro to near yesterday’s nine-year low; risk reversals rally as some bet further pain for the currency is in store amid month-end flows and with a general election and Riksbank meeting looming next week.

After hitting a one-month high at $1.1733 overnight, the euro dropped 0.2% to touch a low of 1.1673 after La Stampa reported that the Italian government is to call on the ECB for a new round of QE while concerns over Italy’s budget continued to weight on the Euro. “We believe that Italy is headed on a collision course with the EU as the two meet to discuss Italy’s budget in September,” wrote Man Group portfolio managers in a note.

Despite recent weakness, emerging markets have had a strong recovery from the sharp selloff earlier this month. “On balance people are looking to buy EM assets but it would be foolish to say buy them all because there are still vulnerabilities in a sizeable number,” said Aberdeen Standard’s Milligan.

Peripheral bond markets outperformed on the day, with Italy’s 2-year bond yield falling to 1.249. Emerging market stocks were under renewed pressure, falling 0.2%.

In commodity markets, WTI breached its 100 DMA to the upside(at USD 68.69/bbl), while Brent reclaimed the USD 76/bbl level after it losing following a surprise build in API crude inventories last night. Recent gains in WTI and Brent followed comments from IEA’s Executive Director Birol, he sees oil markets tightening towards end-year, while citing strong demand. Elsewhere, gold was uneventful as the yellow metal tracks the USD, while Shanghai steel dropped for a sixth consecutive session following comments from Beijing’s state planner, warning the economy is facing increasing risks in the second half of the year.

Today’s data includes mortgage applications, the second Q2 GDP revision and pending home sales. Salesforce, Brown-Forman, Samsonite, and PVH are among companies reporting earnings.

Market Snapshot

• S&P 500 futures little changed at 2,901.25
• STOXX Europe 600 up 0.1% to 385.85
• MXAP up 0.3% to 166.82
• MXAPJ up 0.2% to 540.90
• Nikkei up 0.2% to 22,848.22
• Topix up 0.5% to 1,739.60
• Hang Seng Index up 0.2% to 28,416.44
• Shanghai Composite down 0.3% to 2,769.30
• Sensex down 0.2% to 38,834.24
• Australia S&P/ASX 200 up 0.8% to 6,352.24
• Kospi up 0.3% to 2,309.03
• German 10Y yield rose 0.2 bps to 0.382%
• Euro down 0.2% to $1.1673
• Italian 10Y yield rose 3.1 bps to 2.913%
• Spanish 10Y yield fell 0.6 bps to 1.449%
• Brent futures little changed at $75.97/bbl
• Gold spot up 0.2% to $1,203.85
• U.S. Dollar Index up 0.1% to 94.84

Top Overnight News

• The current October deadline to finalize Brexit divorce terms may be extended as the U.K. and EU now aim for the middle of November at the latest, according to people familiar with the discussions
• Italy might be relying on the hope of a new round of government-bond purchases by the European Central Bank to shield its public debt from financial speculation and the threats of a rating downgrade
• Canada’s foreign minister has rejoined Nafta talks as a U.S. deadline looms this Friday to reach a deal to renew the pact as a three-country agreement
• Indians have deposited almost all the currency notes made illegal by Prime Minister Narendra Modi in 2016, the central bank said in a report after a count that lasted nearly two years
• Thailand’s central bank is under no immediate pressure to raise interest rates like emerging-market peers elsewhere given the nation’s solid buffers and relatively strong currency, Governor Veerathai Santiprabhob said

Asia-Pac stocks traded mixed following the unconvincing performance on Wall Street whereby the majors somewhat flatlined in which the S&P 500 and Nasdaq Comp. just about eked fresh record highs. ASX 200 (+0.8%) and Nikkei 225 (+0.2%) were positive with Australia led higher by resilience in financials and as earnings dominated news flow, while the Japanese benchmark was supported by mild JPY weakness and briefly reclaimed the 22900 level. Conversely, Shanghai Comp. (-0.3%) was negative and Hang Seng (+0.2%) traded indecisive following continued PBoC liquidity inaction and amid a slew of earnings including 3 of China’s big 4 banks which all posted growth in profits. Finally, 10yr JGBs were lower amid the heightened risk appetite in Japan and following a relatively paltry Rinban announcement by the BoJ. PBoC skipped open market operations and are net neutral on the day. PBoC set CNY mid-point at 6.8072 (Prev. 6.8052)

Top Asian News

• China Traders Sell Record Hong Kong Stocks as Tencent Stings
• Tencent-Backed EV Maker Seeks Valuation Above $8 Billion in IPO
• Bank of Thailand Chief Sees No ‘Imminent’ Need for Rate Hike
• Toyota Said to Target Tripling China Output Over Next Decade
• Westpac First Big Australian Lender to Raise Mortgage Rates

European equities trade on the backfoot (Eurostoxx 50 -0.5%) with underperformance in Spain’s IBEX (-1.0%) following a downgrade of its second largest constituents, Inditex (-4.6%), subsequently weighing on the consumer discretionary sector. Energy names underperform, dragging down the likes of oil names such as Shell (-1.3%), in turn weighing on the FTSE 100 (-0.8%), while industrial names benefit from the decline in oil and base metal prices. In terms of individual movers, RTL group (+5.0%) flew to the top of the Stoxx 600 after reporting strong earnings.

Top European News

• Italy Reportedly May Reach Out to ECB on New Bond Purchase Plan
• Orban and Salvini Seek to Rally Europe’s Anti-Immigrant Forces
• Pernod Ricard Raises Guidance Amid Gains on China, India
• Norwegian Leaders Pledge Budget Restraint to Avoid Krone Gains

In FX, the dollar index and broad Dollar continue to consolidate off recent lows on the back of Monday’s upbeat US consumer confidence survey that sparked short covering, and ahead of today’s 2nd look at Q2 GDP that is expected to confirm strong growth. However, a wider than forecast advance trade balance for July could adversely impact, while at least one month end rebalancing model indicates a strong Usd sell signal. DXY currently nearer the upper end of a 94.890-685 range. EUR – The single currency remains capped below 1.1700 vs the Greenback having relinquished big figure-plus status yesterday amidst offers between 1.1725-30 and with decent option expiry interest at the 1.1675 strike (1.4 bn) weighing.  EM – The Lira and Rand continue to bear the brunt of the currency run and capital flight for all the well know reasons, with Usd/Try up towards 6.4000 after only fleeting respite via the CBRT doubling the overnight lending limit for banks, while Usd/Zar has rebounded further to 14.4000 following the partial withdrawal or suspension for more consideration of the ANC land appropriation bill.

Commodities traded higher, WTI futures breached its 100 DMA to the upside(at USD 68.69/bbl), while Brent reclaimed the USD 76/bbl level after it losing following a surprise build in API crude inventories last night. The recent gains in WTI and Brent followed comments from IEA’s Executive Director Birol, he sees oil markets tightening towards end-year, while citing strong demand, Venezuela’s falling output and unstable production including in the Middle East. Traders will be eyeing the EIA weekly crude stocks due later today, expected to print a draw of 686K barrels; according to a Reuters poll. Elsewhere, gold is uneventful as the yellow metal tracks the USD, while Shanghai steel dropped for a sixth consecutive session following comments from Beijing’s state planner, warning the economy is facing increasing risks in the second half of the year. However, some analysts believe steel prices will be supported by production curbs as Beijing tries to limit pollution.

Looking ahead to today, much of the focus will be on the second revision to Q2 GDP in the US. In Europe, September consumer confidence data in Germany and the second revision to Q2 GDP for France are due. Also due in the US is July pending home sales data and the latest weekly mortgage applications data. Away from this the EU Trade Commissioner Malmstrom is scheduled to speak at an international trade event in Stockholm. Today is also the deadline for when prosecutors for President Trump’s former campaign manager Paul Manafort must decide whether or not to retry him for ten unresolved counts.

Looking ahead to today, much of the focus will be on the second revision to Q2 GDP in the US. In Europe, September consumer confidence data in Germany and the second revision to Q2 GDP for France are due. Also due in the US is July pending home sales data and the latest weekly mortgage applications data. Today is also the deadline for when prosecutors for President Trump’s former campaign manager Paul Manafort must decide whether or not to retry him for ten unresolved counts.

US Event Calendar

• 7am: MBA Mortgage Applications, prior 4.2%
• 8:30am: GDP Annualized QoQ, est. 4.0%, prior 4.1%
  • Personal Consumption, est. 3.9%, prior 4.0%
  • Core PCE QoQ, est. 2.0%, prior 2.0%
• 10am: Pending Home Sales MoM, est. 0.25%, prior 0.9%
• 10am: Pending Home Sales NSA YoY, est. -2.5%, prior -4.0%

DB’s Jim Reid concludes the overnight wrap

Last night the S&P 500 crawled to a 0.03% gain and a fresh all-time high while the DOW and Nasdaq ended +0.06% and +0.15%, respectively. The ranges on these three were the 7th, 4th, and 4th smallest of the year so it wasn’t the most exciting of sessions. Here in Europe, August has really been a month of two halves for equities with the initial Turkey pain giving way to a decent rebound although yesterday was a bit of pause for breath with the Stoxx 600 closing -0.03% following a late dip into the red at the close. That said, it’s still up +1.78% from the intra-month lows. The DAX also ended -0.09% although the periphery was more sluggish with the FTSE MIB (-0.85%) in particular underperforming. BTPs (+3.2bps) also sold off for the fifth straight session and the spread to Bunds is all of a sudden, at 280bps, back near the May wides with 10yr yields now at YTD and four year highs. Early headlines in the Italian press quoting Italian deputy premier Di Maio as saying that Italy may breach the deficit limit in 2019 if investments and reforms needed to boost growth require doing so appeared to be the early catalyst although the comments were then seemingly contradicted later in the day by Finance Minister Tria saying that Italy has no such plans. Clearly this back and forth has plenty of room to run as we edge closer and closer to the budget date so headlines like this will become much more frequent and important for markets. Alongside Italy, Turkey is the other main sovereign concern for markets at the moment and after a quiet few days due to a long holiday last week, the Lira continues to edge progressively lower again, falling -4.49% over the past two days, although it is c0.2% stronger this morning in the Asia session.

Away from the Lira, other EM currencies were pressured yesterday with the Argentine and Mexican Pesos shedding -1.68% and -1.69%, respectively (more on Mexico below). G10 currencies were mixed, with the safe-haven Swiss Franc (+0.37%) leading gains versus the dollar on potential safe haven flows. The pound bounced around gaining 0.31% before retracing to close -0.15% weaker as investors digested the news that Bank of England Governor Mark Carney has been asked to stay on through 2020, past his current end-date of 2019. The Treasury denied the reports and the Bank of England declined to comment. One to watch moving forward.

Returning to bonds, while BTPs were weaker, Bunds traded flat but Treasuries (+3.4bps) were softer. The latter was seemingly impacted by the steady stream of data out in the US yesterday. The biggest headline grabber was the  August consumer confidence print which came in at a bumper and much better-thanexpected 133.4 (vs. 126.6 expected). That marked a jump of 5.5pts from July and is the highest reading since October 2000 with the present conditions gauge also jumping to the highest since December 2000. The August Richmond Fed index also printed at a better than expected 24 (vs. 17 expected) and jumped 4pts from July so the first two survey reports for the US this August are certainly looking rosy. July wholesale inventories increased 0.7% mom for the eighth consecutive month of positive growth, the longest streak since 2014-2015. June home prices rose 6.31%, continuing the recent trend and confounding predictions that the recent tax reform law would depress home prices by making the mortgage payment deduction less attractive.

In Europe, M3 money supply growth was weaker than expected in July, decelerating to 4.0% yoy from 4.5%. The series can be volatile, so our economists prefer to look at the credit side of the accounts, which continue to look robust. The credit impulse (the second derivative of lending) was 1.5% of GDP in July, a slight acceleration over last month and consistent with GDP growth of 2.0%. So another signal of healthy, above trend growth even though we’ve decelerated a fair amount this year.

Elsewhere, after posting a decent gain on Monday post the positive trade agreement news over the weekend, the Mexican Peso (-1.69%) gave up most of its gains again yesterday, perhaps reflecting the lack of detail in the deal. Speaking of trade, with the Mexico deal now out of the way there is some suggestion that the US might turn its attention back to trade talks with China although President Trump’s economic advisor Larry Kudlow suggested that talks are still seemingly stalled, saying that “we’ve never heard anything positive out of China” and “meetings have come to nothing” in comments on Fox News yesterday.

Turning to Asia this morning, equities are nudging higher with the Nikkei (+0.45%), Kospi (+0.22%) and Hang Seng (+0.23%) all up while Chinese bourses are down c0.4% as we type. In the US, the Treasury Secretary Mnuchin said he is “not at all concerned” about the flattening yield curve while noting that Fed Chair Powell as a “phenomenal” leader. Meanwhile the US Senate has voted 69-26 in favour of Columbia University professor – Richard Clarida being the Fed’s new Vice Chair. Elsewhere the Globe and Mail cited unnamed sources that Canada is ready to make concessions to the US on its domestic dairy market in exchange for compromises on other areas as part of the NAFTA talks. Back in the UK, Bloomberg reported the EU and UK are likely to push back the deadline for a Brexit deal by around one month to mid-November instead.

Away from data, the BoJ board member Hitoshi Suzuki sounded an alarm over the side effects of BoJ’s easing policy saying the BoJ may find that the cumulative side effects of its easing policy will get out of control if it simply waits for them to emerge. He also said, ”if they materialize at some point in the future, there’s a risk that it’ll be difficult for us to respond well, or that it will be too late to respond at all.”

Before looking at the day ahead, yesterday our European economists published a note looking at what they believe should be the main five themes shaping Europe into year-end and setting up for 2019. The themes highlighted by the team are (1) the sustainability of economic growth, (2) trade war, (3) market volatility, (4) core inflation, (5) ECB. With regards to growth, the team expect modestly above-trend growth to continue, with a gradually slowing underlying trend as capacity erodes. The costs from the trade war become more material if auto tariffs are implemented while market volatility stems most likely from Turkey and Italy, with the latter the biggest risk. Core inflation should lift modestly into year-end in our colleagues’ view which should help set up the ECB for a rate hike in September 2019.

Looking ahead to today, much of the focus will be on the second revision to Q2 GDP in the US. In Europe, September consumer confidence data in Germany and the second revision to Q2 GDP for France are due. Also due in the US is July pending home sales data and the latest weekly mortgage applications data. Away from this the EU Trade Commissioner Malmstrom is scheduled to speak at an international trade event in Stockholm. Today is also the deadline for when prosecutors for President Trump’s former campaign manager Paul Manafort must decide whether or not to retry him for ten unresolved counts.