It was a relatively quiet weekend out of China, where FX warfare has taken a back seat to evaluating the full damage from the Tianjin explosion which as we reported on Saturday has prompted the evacuation of a 3 km radius around the blast zone, and instead it was Japan that featured prominently in Sunday's headlines after its Q2 GDP tumbled by 1.6% (a number which would have been far worse had Japan used a correct deflator), and is now halfway to its fifth recession in the past 6 year, underscoring Abenomics complete success in desrtoying Japan's economy just to get a few rich people richer. Of course, economic disintegration is great news for stocks, and courtesy of the latest Yen collapse driven by the bad GDP data which has raised the likelihood of even more Japanese QE, the Nikkei closed 100 points, or 0.5% higher. 

Chinese stocks also rose by 0.7% to just shy of 4000 as a result of margin debt soaring once more, rising by $13 billion, and the longest streak in 2 months.  What else can one say about Chinese investors except that they sure learned their lesson.

And while markets are levitating around the globe, if not so much in the US for now where futures are just fractionally in the red, which we expect will change in the now patented volumeless levitation into the market open and then close, economies are grinding to a halt, as express by the price of WTI, which earlier today dropped to a fresh 6 year low below $42 after Iran said OPEC production may rise to a record after sanctions on the
country are lifted and as U.S. drilling activity increased, although the black gold has since recouped some of its losses following unconfirmed reports of an explosion in Kuwait's Shuaiba refinery.

Also confirming yet again just how clueless economists really are, is the following chart from the WSJ showing that at no point in the last 12 months did economists expect oil to drop as low as it is today.

At no point in the last 12 months have economists anticipated that oil could drop so low http://t.co/c3iLqVG4pg pic.twitter.com/ZpZyFWJiV8

— Real Time Economics (@WSJecon) August 16, 2015

A closer look at Asian equities reveals a mixed picture despite a positive Wall Street close on Friday amid light news flow. ASX 200 (+0.16 %) traded in positive territory following a bout of strong earnings, the Nikkei 225 (+0.49%) rose as participants shrugged off disappointing Q2 GDP figures as this increases calls for further measures by Japanese authorities. Chinese bourses began the week on the back foot after posting its strongest week of gains in 2-months, as the region was dragged lower by energy names. JGBs fell amid strength in equities coupled with the BoJ refraining from conducting its massive JGB purchase program. IMF forecasts China economic growth to slow to 6.8% in 2015 and 6.3% in 2016 but see more sustainable growth. There were also comments from PBoC's Jun that China is likely to hit its target of 7% growth.

Stocks in Europe failed to hold onto the opening best levels and heading into the North American session are seen mixed, with the FTSE-100 index under performing, as the ongoing commodity market rout continues to take its toll on energy and materials sectors. The consequent retreat in stocks, in part driven by the uncertainty over the future growth prospects in China, as evidenced by the latest IMF growth forecasts.

In terms of Greek related news flow, ECB's Coeure said rules that prohibit the buying of Greek bonds could be scrapped, while German Chancellor Merkel said there cannot be a Greek debt haircut but added there's room for an extension of Greek debt maturities.

EUR/GBP held onto the 50% retracement level of Aug 5th low to Aug 12th high in early European trade, before the upside traction by EUR/USD towards the sizeable 1.1100 option strike saw the cross stage a recovery back into minor positive territory. At the same time, GBP failed to benefit from somewhat hawkish comments by BoE's Forbes who said that a rate hike is needed 'well before' inflation reaches 2%, while departing BoE member Miles said that the case was building for a rise in Bank rate despite current low inflation.

More importantly, the EM currency war continues apace, as confirmed by headlines such as these:

• TAIWAN DOLLAR FALLS TO WEAKEST SINCE NOV. 2009
• INDIA'S RUPEE DROPS TO LOWEST LEVEL SINCE SEPT. 6, 2013.
• TURKISH LIRA DROPS TO RECORD 2.85 PER DOLLAR, DOWN 0.6% TODAY

Expect many more fireworks as everyone joins in the race to debase. Yes, here's looking at you Janet Yellen...

Commodity prices remained under pressure, with copper prices falling amid subdued sentiment towards growth prospects in China, while Japan also posted weak data. Elsewhere, Dalian iron ore prices fell nearly 1% as demand from Chinese steel mills are said to weaken. While analysts at Goldman Sachs expect iron ore to lose 30% over the forthcoming 18-months. Despite the bearish sentiment towards commodity complex, analysts at Morgan Stanley believe that the slump in commodities following China's devaluation may be overstated. Brent crude futures outperformed WTI following reports that an explosion has been witnessed at Kuwait's Shuaiba refinery, damage to the site is unclear.

In summary: European stocks rise with euro falling vs dollar. U.S. equity index futures fall, with Asian stocks also declining. Gold, silver gain with corn and wheat while copper, cotton decline. WTI crude dropped as much as 2%.  Yields on European 10-year notes fall, with those on Greek, Spanish, Italian bonds falling most. French, Italian bourses outperform in Europe, with FTSE 100 underperforming. U.S. Empire manufacturing, net TIC flows, NAHB housing market index due later.

Market Wrap

• S&P 500 futures down 0.1% to 2087
• Stoxx 600 up 0.4% to 387.7
• US 10Yr yield down 3bps to 2.17%
• German 10Yr yield down 3bps to 0.63%
• MSCI Asia Pacific down 0.4% to 137.8
• Gold spot up 0.2% to $1117.4/oz
• Eurostoxx 50 +0.5%, FTSE 100 -0.3%, CAC 40 +0.5%, DAX +0.4%, IBEX +0.3%, FTSEMIB +0.4%, SMI +0.3%
  Asian stocks fall with the Shenzhen Composite outperforming and the Taiex underperforming; MSCI Asia Pacific down 0.4% to 137.8
• Nikkei 225 up 0.5%, Hang Seng down 0.6%, Kospi down 0.8%, Shanghai Composite up 0.7%, ASX up 0.2%, Sensex down 0.5%
• Cargill to Buy Ewos for EU1.35b, Enter Salmon Market
• Goldman Said to Buy $150m Minority Stake in Piramal Realty: WSJ
• Euro down 0.29% to $1.1077
• Dollar Index up 0.32% to 96.83
• Italian 10Yr yield down 5bps to 1.77%
• Spanish 10Yr yield down 4bps to 1.97%
• French 10Yr yield down 4bps to 0.94%
• S&P GSCI Index down 0.8% to 362
• Brent Futures down 1.5% to $48.5/bbl, WTI Futures down 1.9% to $41.7/bbl
• LME 3m Copper down 0.7% to $5131/MT
• LME 3m Nickel up 0.3% to $10630/MT
• Wheat futures up 0.2% to 512.8 USd/bu

Bulletin headline summary from Bloomberg

• Treasuries gain overnight, volumes light amid summer holidays; data this week include consumer prices and FOMC minutes, both on Wednesday.
• Oil resumed its decline, with futures sliding as much as 2%, as Iran said OPEC production may rise to a record after sanctions on the country are lifted and as U.S. drilling activity increased.
• Senior Greek bank bonds tumbled after Eurogroup President Dijsselbloem said on Friday depositors will be shielded from any losses resulting from the restructuring of the nation’s financial system
• Merkel said she’s confident the IMF will join Greece’s third bailout and signaled willingness to consider debt relief to help make it happen
• China’s economy is growing more slowly than official data suggests and below potential, a Bloomberg survey indicates, helping explain why policy makers have stepped up stimulus and the move to boost exports with a weaker yuan
• China is planning to unveil a plan as early as this week to overhaul the way state-run companies operate and are regulated, according to people familiar with the matter
• Sovereign 10Y bond yields mostly lower. Asian, Europeanstocks mixed, U.S. equity-index futures decline.Crude oil and copper lower, gold gains

US economic calendar

• 8:30am: Empire Manufacturing, Aug., est. 4.5 (prior 3.86)
• 10:00am: NAHB Housing Market Index, Aug., est. 61 (prior 60)
• 2:00pm: Net Long-term TIC Flows, June (prior $93b)
• Total Net TIC Flows, June (prior $115b)

DB's Jim Reid concludes the overnight wrap

In 18 years time we'll reach our 'china anniversary' which is the only way I could think to link this into the most important story running at the moment. It's been a quiet overnight session but it feels to us that the full ramifications of last week's China move will take time to reverberate and might actually be out of China's hand. For all their talk on Thursday last week about keeping the Yuan 'basically stable' and it being 'groundless' to talk of a 10% devaluation they have set off a chain of events around the world. They are continuing to try to ease fears with the PBoC's chief economist and ex-DB economist Jun Ma yesterday suggesting that China has "no intention or need to participate in a currency war". Well that might depend on how Europe, Japan, the rest of Asia and even the Fed respond to the move. If they ease policy further or in the Fed's case keep policy looser than it would have been then China's exchange rate may naturally appreciate again which may encourage further depreciations periodically at their daily fix. So maybe they've now lit the touchpaper and we'll see how others react.

Overnight the PBoC made little change (+0.01%) to the Yuan fix, resulting in a modest fall for the onshore Yuan (-0.06%) but a slight strengthening for the more freely traded offshore Yuan (+0.18%). In a note on Friday, DB’s Zhiwei Zhang believes that this round of rapid RMB depreciation has come to an end. On the back of the moves however, Zhiwei has updated his USD/CNY forecasts and now expects the exchange rate to be around 6.5 by the end of 2015 (from 6.3) and 6.9 by the end of 2016 (from 6.5) but with high volatilities expected in both direction. Despite the expectation of depreciation in the currency however, Zhiwei does not think this alone will generate a visible impact on exports or overall growth and continues to forecast one more interest rate cut this year, as well as an RRR cut this year and next.

Even with the steady overnight fix, there’s been further weakness across the Asia FX space again with the Malaysian Ringgit (-0.62%) and Indonesian Rupiah (-0.65%) in particular suffering a sell off, the former in particular extending a slump which saw it plummet nearly 4% last week. There was plenty of concern in the weekend press about the Ringgit and the country's dwindling reserves. Parallels to 1997/8 are being drawn. Capital controls were introduced in 1998 after a 30% FX decline. We are at 24% declines over the last year.

Looking at the rest of market moves this morning, Chinese equity markets have started the week on the back foot with the Shanghai Comp (-0.12%) and CSI 300 (-0.46%) both down at the midday break (although paring earlier heavy losses), while the Hang Seng (-0.99%) and Kospi (-0.38%) have also declined this morning. The ASX is +0.38% while the Nikkei has risen 0.20% after Japan, although soft, reported a slightly better than expected preliminary Q2 GDP report (-0.4% qoq vs. -0.5% expected), resulting in an annualized 1.6% yoy contraction (vs. -1.8% expected). Elsewhere, in the commodity space WTI (-1.41%) and Brent (-1.32%) have tumbled in early trading not helped by the latest Baker Hughes data showing an increase in the number of operating rigs in the US last week for the fourth straight week.

After the choppiness in markets for most of last week, Friday’s trading saw a much calmer session for the most part after the PBoC’s much more muted move in the fix, resulting in a 0.11% gain for the Yuan and halting the three-day selloff. European equities finished a tad lower after some softer than expected GDP reports while US equity markets firmed slightly, supported in some part by Greece headlines confirming Eurogroup approval of a third bailout program which filtered through in the late afternoon. The S&P 500 closed up 0.39% along with gains for the Dow (+0.40%) and Nasdaq  (+0.29%), while in Europe we saw the Stoxx 600 (-0.12%) and DAX (-0.27%) finish a touch weaker. Despite some weakness in energy stocks, it was actually a relatively more benign day of price action in the commodity complex with Brent (-0.89%) and WTI (+0.64%) mixed, Gold (0.00%) ending unchanged, Copper (-0.39%) slightly lower and Aluminum (+0.41%) a tad higher.

US rates markets saw yields tick up slightly in the afternoon session as the US data flow rolled in, although again the price action was reasonably muted. The benchmark 10y yield finished 1.2bps higher at 2.199%, while 2y yields closed up 1.4bps to 0.724%. The Dollar had a much more choppy session however, with the Dollar index firming +0.08% at the close. On the inflation front, July PPI rose +0.2% mom in July (and ahead of market expectations of +0.1%) but saw the annualized rate tick lower to -0.8% yoy (from -0.7%). The core firmed greater than expected (+0.3% mom vs. +0.1% expected), but again the annualized rate nudged down, declining two-tenths to +0.6% yoy. Industrial production (+0.6% mom vs. +0.3% expected) and manufacturing production (+0.8% mom vs. +0.4% expected) were both stronger than expected in July, however both saw downward revisions to prior month reports while capacity utilization was in-line with expectations at 78%. Finally, the first reading of the University of Michigan consumer sentiment reading declined a fairly modest 0.2pts from July to 92.9 (vs. 93.5 expected) with the expectations reading in particular dropping 0.3pts to 83.8 after forecasts for a rise to 85.0. Despite the slight nudge up in yields, the probability of a Fed rate move edged down slightly at Friday’s close to 48% from 50%, a range it’s hovered in since last Wednesday. That’s in stark contrast to the latest WSJ survey which shows 82% of economists surveyed expect the Fed to liftoff in September, unchanged on last month and up from 72% in June.

European data flow on Friday was centered on the various Q2 GDP reports. There was some modest disappointment in the Euro area reading which came in slightly below expectations for the quarter (+0.3% qoq vs. +0.4% expected), although it was enough to see the annualized rate nudge up to 1.2% yoy and the highest since Q3 2011. Regionally we saw quarterly misses out of Germany (+0.4% qoq vs. +0.5% expected), France (0.0% qoq vs. +0.2% expected) and Italy (+0.2% qoq vs. +0.3% expected) although annual rates nudged up slightly for each country. Meanwhile, there was no change to the final July CPI report at +0.2% yoy for the headline and +1.0% yoy for the core.

With the Eurogroup approval of Greece’s €86bn bailout deal, focus will likely turn to the Bundestag vote this week where it’s expected that, although legislative approval is highly certain, German Chancellor Merkel is likely to run into dissent from fellow lawmakers.

Ahead of this and over the weekend, Merkel has expressed that she is confident that the IMF will join Greece’s third bailout program, signaling in the process that she is ready to discuss debt relief and specifically ‘leeway on the extension of maturities on interest rates’.