While the summer doldrums continue, with little market-moving newsflow overnight and zombified volumes, US futures crept higher and European shares rose after EU PMIs printed modestly better than expected, while a return to dollar weakness pushed emerging markets higher, even if it failed to boost oil which as we noted last night was downgraded by Goldman on various fundamental reasons.

Commodity producers led gains in European equities and S&P 500 futures crept higher suggesting a green open. Even as markets swing between gains and losses, volatility across asset classes remained subdued, with a measure for U.S. stocks near a two-year low. Top news stories include: Bayer, Monsanto said to move closer to deal as talks advance, Google said to recruit web stars, Hulu for virtual reality push, Wal-Mart reviews Welspun records after target pulls sheets.

Perhaps the top story of the day is the ongoing dollar softness, which has promptly faded any residual Fischer/Dudley/Williams hawkishness and is back to Friday's lows. The US currency slid against all except two of its 16 major peers as market participants raise doubts that Yellen will build upon recent hawkish comments by Fed officials at her Jackson Hole speech this Friday. Cited by Bloomberg, traders in Europe and Lonaon said that real money names for once seem to share this view, as they have been actively selling the dollar this week.A report by a Fed staffer suggested that the Fed may have to unleash up to $4 trillion in QE if the US economy were to encounter a sharp recession.

As investors turn their attention to this week's main event, Yellen’s speech at an annual symposium in Jackson Hole, Wyoming, on Aug. 26, they are skeptical whether she will endorse comments from other Fed officials in the past week. The dollar capped its biggest two-day gain in a month on Monday as fed fund futures showed traders increased bets for an increase this year above 50 percent.There are “fluid expectations for Yellen’s Jackson Hole speech,” said Peter Rosenstreich, head of market strategy at Swissquote Bank SA, in Gland, Switzerland. “Hawkish comments last week and rally in yield caused traders to question their expectations for no hike in September. The data is improving but it’s still at a very soft level and there’s really no need for the Fed to tighten prematurely at this point.”

The euro-area economy maintained its momentum in August, with growth showing little sign of being curtailed by fallout from the U.K.’s Brexit vote as a composite Purchasing Managers Index for the 19-nation region posting its strongest expansion in seven months, rising for a second month to 53.3 from 53.2 in July. That was the best reading in seven months. The increase was driven by an improvement in services, while manufacturing activity slipped.

• Eurozone Aug. Flash Composite PMI 53.3; Est. 53.1

• Eurozone Aug. Flash Services PMI 53.1; Est. 52.8
• Eurozone Aug. Flash Manufacturing PMI 51.8; Est. 52
• Germany Aug. Flash Composite PMI 54.4; Est 55.1
• France Aug. Flash Composite PMI 51.6 Vs 50.1; Est 50.4

“The PMIs suggest that growth still is more robust in the service sector than in manufacturing – a phenomenon that can be observed in many regions and that goes hand in hand with slow growth of global goods trade,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen.

As a result, European shares advanced as commodity producers rebounded on higher metals prices while all 19 Stoxx 600 sectors rise with basic resources, retail outperforming and health care, oil & gas underperforming. 86% of Stoxx 600 members gain, 12% decline. “We’ve had a decent rebound, largely driven by the basic- resource sector and some decent data,” said Michael Hewson, a market analyst at CMC Markets in London. “Yesterday we saw a bit of a selloff, largely as a result of a decline in oil prices. Now we’re seeing some light buying on the back of some decent results from the housebuilding sector here in the U.K. and some fairly decent PMI data. There’s nothing really that came out this morning that would suggest that the rally we’ve seen thus far is under threat.”

In Asia, South Korea, Australia and Shanghai SSEC all gained, while Japan's Nikkei N225 went the other way, easing 0.6 percent as the yen ground higher on the dollar. A survey of Japanese manufacturing activity for August showed output rose for the first time in six months, but the improvement was marginal and investors fixed their focus on the Fed instead.

10-year U.S. Treasury yields ticked up to 1.55 percent after falling 4 basis points overnight. German Bund yields nudged up as well along with the rest of the euro zone and UK Gilts. Fed fund futures imply around a 24 percent chance of an easing in September, rising to around 50 percent by December. A quarter-point hike is not fully priced in until September 2017.

In commodity markets, oil remained under pressure after shedding 3 percent on Monday amid worries about burgeoning Chinese fuel exports, more Iraqi and Nigerian crude shipments and a rising U.S. oil rig count. Brent crude lost 25 cents to $48.96 a barrel. It hit a two-month high of $51.22 on Friday. U.S. crude futures fell 36 cents to $47.07, after the September contract expired on Monday at $47.05.

Market Snapshot

• S&P 500 futures up 0.3% to 2187
• Stoxx 600 up 0.7% to 343
• FTSE 100 up 0.5% to 6863
• DAX up 0.8% to 10577
• German 10Yr yield up 1bp to -0.08%
• Italian 10Yr yield up 3bps to 1.14%
• Spanish 10Yr yield up 2bps to 0.95%
• S&P GSCI Index down 0.8% to 361.4
• MSCI Asia Pacific up less than 0.1% to 139
• Nikkei 225 down 0.6% to 16497
• Hang Seng up less than 0.1% to 22999
• Shanghai Composite up 0.2% to 3090
• S&P/ASX 200 up 0.7% to 5554
• US 10-yr yield up 2bps to 1.56%
• Dollar Index down 0.12% to 94.41
• WTI Crude futures down 1.3% to $46.79
• Brent Futures down 1.2% to $48.56
• Gold spot up less than 0.1% to $1,339
• Silver spot up 0.6% to $19.03

Global Headlines

• Bayer, Monsanto Said to Move Closer to Deal as Talks Advance: Companies said on track to reach agreement in next two weeks. CEOs said to meet several times, price differences narrowing
• Google Said to Recruit Web Stars, Hulu for Virtual Reality Push: Company to release Daydream virtual reality service in weeks. Google said to back games, short films with YouTube celebs
• VW Resolves Standoff With Supplier After All-Night Negotiations: Six plants in Germany suspended production as parts withheld. Supplier’s unprecedented reaction affected 27,700 VW workers
• The Giant of Tokyo’s Stock Market Reveals Its Investment Secrets: Japan pension fund is top owner of MUFG, Honda, many more
• China’s Best Bank Called a ‘Mirage’ Built on Murky Shadow Loans: Case of Bank of Tangshan highlights opaque financial risks across nation
• World Bank Said to Be Planning SDR Bond Sale Next Week in China: Notes are set to price on Aug. 31, people familiar say
• Wal-Mart Reviews Welspun Records After Target Pulls Sheets: Retailer says it’s looking at Welspun certification records. Stock slumps 36% in two days; market value below $1b

Looking at regional markets, Asian stocks trade mixed following the subdued lead from the US in which the energy sector was the laggard after crude prices fell around 3%. Nikkei 225 (-0.6%) was weighed on by a firmer JPY as USD/JPY approached 100.00 to the downside, although the index rebounded off its worst levels and briefly turned positive with movements in the currency the main catalyst for price-action. ASX 200 (+0.7%) outperformed with advances in the financial sector spearheading the index to near 1% gains. Chinese markets were mixed with the Shanghai Comp (+0.2%) led higher on talk of reduced costs for businesses, while the Hang Seng (flat) was flat following some lackluster earnings reports. 10yr JGBs traded higher amid a lack of risk-appetite in Japan, while today's 20yr auction also provided support after the tail in price narrowed and bid to cover increased from the prior month. Japanese Manufacturing PM! (Aug) M/M 49.6 (Prey. 49.3), 6th consecutive month of contraction. (Newswires) PBoC set CNY mid-point at 6.6586 (Prey. 6.6652) and injected CNY 100bIn via 7-day reverse repos. (Newswires)

Top Asian News

• The Giant of Tokyo’s Stock Market Reveals Its Investment Secrets: Japan pension fund is top owner of MUFG, Honda, many more
• China’s Best Bank Called a ‘Mirage’ Built on Murky Shadow Loans: Case of Bank of Tangshan highlights opaque financial risks across nation
• World Bank Said to Be Planning SDR Bond Sale Next Week in China: Notes are set to price on Aug. 31, people familiar say
• China Telecom Profit Beats Estimates on Increase in Subscribers: Co. added about 32m 4G subscribers in 1H
• Doosan Bobcat Said to Gauge Korea IPO Demand in Early September: Korea Exchange said last week it approved co.’s share sale

European equities have spent the session in the green (Euro Stoxx 50: +0.7%), with housing names among the best performers in the wake of Persimmon's earnings (+3.7%), while material names also outperform, to pare some of yesterday's losses. Separately on a stock specific note, automakers have been stealing the headlines, with Volkswagen (+2.3%) moving to session highs after making a deal with suppliers to end the recent suspension of production, while Renault (-1.6%) are among the worst performers after members of a state enquiry suggested a French government report omitted significant details of how Co.'s diesel cars were able to emit fewer emissions in official testing. Elsewhere, fixed income markets have seen another muted session of trade, with Bund futures continuing to hover around 167.50 and remain flat on the day, while the highlight may come later in the session in the form of the US 2-year note auction.

Top European News

• VW Resolves Standoff With Supplier After All-Night Negotiations: Six plants in Germany suspended production as parts withheld. Supplier’s unprecedented reaction affected 27,700 VW workers
• Schneider Said to Weigh Sale of Agriculture Data Service DTN: French company said to speak with potential sale advisers. Euromoney, others have previously shown interest in the unit
• UniCredit Jumps as PZU CEO Reported to Discuss Pekao Takeover: PZU CEO Krupinski will fly to Milan for talks, Dziennik says. UniCredit has been seeking to sell assets to boost capital

In FX, the Bloomberg Dollar Spot Index lost 0.1 percent as of 6 a.m. in New York, after jumping 0.6 percent over the previous two trading days. South Korea’s won led gains among the 16 major currencies, jumping 1 percent versus the greenback. The yen appreciated 0.1 percent to 100.22 per dollar. “The U.S. dollar may have pulled back on hopes that the Jackson Hole symposium may focus on lower-for-longer type of policy rather than the need to imminently tighten policy,” said Vishnu Varathan, a senior economist at Mizuho Bank Ltd. in Singapore. “But in the run-up to Jackson Hole we do expect markets to be hyper-sensitive on U.S. policy hints, real or perceived, and so the U.S. dollar and U.S. yields will be volatile.” The New Zealand dollar surged as much as 1 percent after central bank Governor Graeme Wheeler said that while he intends to lower interest rates further to revive inflation, a series of rapid cuts is not justified. The South African rand was the next biggest gainer, appreciating 0.4 percent.

The commodity complex remains in focus, with WTI and Brent futures residing in close proximity to USD 47 and USD 49 respectively after the downside seen during yesterday's session. Separately, the precious metals complex benefited from the aforementioned USD softness early in the session, but the likes of gold and silver have failed to sustain these gains and now trade relatively flat on the session. Goldman Sachs maintained its USD 45-50/bbl estimate for Brent crude through to summer next year and added that an OPEC freeze and the USD is not sufficient to support oil further. GS added that an OPEC freeze with some non-OPEC nations could be self-defeating because it would mean that prices could rise and enable other producers to ramp up supply.

On the event calendar today, we’ll also get the flash manufacturing PMI (expected to decline to 52.6 from 52.9) along with the Richmond Fed’s manufacturing survey for this month. New home sales data in July will also be released where sales are expected to have declined -2% mom. Away from the data the ECB’s Coeure, Lane and Smets are due to speak at a panel discussion later this morning in Geneva on alternative proposals for fundamentally improving the pre-crisis policy frameworks in the Euro area.

Bulletin Headline Summary From RanSquawk and Bloomberg

• European equities enter the North American crossover in positive territory in what has been a quiet session once again and Eurozone PMIs dissipating some fears of a post-Brexit slowdown
• USD has been a key focus in FX markets as participants continue to question how committed Fed Chair Yellen will be at the Jackson hole speech on Friday
• Looking ahead, highlights include Turkish & Hungarian Interest Rate Decisions, US manufacturing PMIs, New Home Sales, APIs, ECB's Coeure, Fed Discount Minutes and a US 2yr Note Auction
• Treasuries slip overnight, though remain in ranges, amid higher equities after Markit eurozone composite PMI rose for a second month to 53.3 from 53.2 in July; Treasury to sell $26b 2Y notes at 1pm ET, WI 0.765% vs 0.760% last month.
• The Fed is facing two big questions related to interest rates — one short-term and one long-term — and it’s important to understand that policy makers approach them separately
• Companies across Japan have a new name in their top 10 shareholder lists: the world’s largest pension fund as the $1.3t GPIF is top owner of Mitsubishi UFJ Financial Group Inc., Honda Motor Co. and at least 119 other Tokyo-listed firms
• As China’s sovereign bond yields tumble to decade-lows, investors are piling into the most defensive part of the stock market in search of returns
• China will further open its economic borders to investors from abroad in a move intended to counter sliding confidence in the outlook for the world’s second-largest economy
• Negotiations between Bayer AG and Monsanto Co. are advancing toward a deal after the companies made progress on issues including the purchase price and termination fee, people familiar with the matter said.

US Event Calendar

• 9:45am: Markit US Manufacturing PMI, Aug P, est. 52.6 (prior 52.9)
• 10:00am: Richmond Fed Manufacturing Index, Aug., est. 6 (prior 10)
• 10:00am: New Home Sales, July, est. 580k (prior 592k); New Home Sales m/m, July, est. -2.0% (prior 3.5%)

DB's Jim Reid concludes the overnight wrap

August this year is proving to be very different to last year where risk assets were being routed following the fallout from the shock PBoC devaluation. In fact glancing back to the EMR on this day last year the Shanghai Comp was in the midst of a huge three-day slump in which the index capitulated 19%. Twelve months on and markets have rarely been this quiet. A little bit of to and fro from Fed speakers has at least caused some excitement but in general markets have had very little to feed off since earnings season wrapped up.

The main story over the last 24 hours has probably been the abrupt end to the recent rally for Oil with WTI (-3.46%) ending its run of seven consecutive daily gains. It barely caused a dent in US equity markets though with the S&P 500 ending -0.06% despite energy stocks coming under pressure. In fact the S&P 500 has now gone 31 consecutive sessions with daily moves up or down of less than 1% and in that time has traded in just a 61pt range.

Today we get the August flash PMI’s in Europe which should give markets something to focus on however. This will give us another important post-Brexit indicator which so far have been pretty resilient. Remember that the Euro area composite PMI actually edged up 0.1pts to 53.2 in July. Market expectations today is for the composite to stay pretty much unchanged (consensus forecast is 53.1) with the same said for both the manufacturing and services surveys. We’ll also get the readings for Germany and France with the manufacturing survey data for the UK, Spain and Italy coming next week and services data the week after.

Also out today is more data in the UK with the August CBI industrial trends orders and selling prices survey. Current market expectations are for the industrial orders data to deteriorate further. Later this afternoon we’ll also get the latest Euro area consumer confidence reading. So all that to look forward to today.

This morning in Asia it’s been yet another mixed start in markets. In Japan the Nikkei (+0.05%) and Topix (+0.04%) are little changed despite the Nikkei manufacturing PMI for Japan improving 0.3pts to 49.6 this month in the flash reading. The Hang Seng (-0.30%) is lower however while there have been gains for the Shanghai Comp (+0.47%), Kospi (+0.20%) and ASX (+0.84%). Sovereign bond markets are generally stronger while in FX Markets most emerging market currencies are up slightly. The other data out in Asia this morning came in China where the MNI business indicator for August fell 1.2pts to 54.3.
Moving on. Following on from the Fed Vice-Chair Fischer’s comments over the weekend, the initial reaction in the US Dollar was to rally with the index up as much as half a percent as we went to print yesterday. However that rally faded as the day progressed with the index eventually finishing unchanged. Treasuries followed a similar path. 2y and 10y yields were up as much as +3.2bps and +2.0bps respectively, but then unwound and actually rallied into the close, finishing -0.8bps and -3.6bps lower respectively.

The probability of a Fed rate hike by December ended up unchanged at 51% although pricing for September did actually nudge up slightly to 24% from 22%. It was the move in Oil which probably got the most attention though with that decline for WTI the largest since August 1st. The fingers of blame were pointed at increased expectations of more supply out of Iraq and also the news that a cease-fire was declared in the Niger Delta region, although this was also being met with some caution. Meanwhile metal markets were also a touch softer yesterday which weighed on commodity names in Europe. The Stoxx 600 closed +0.09% after initially climbing +0.90%.

With little in the way of economic data yesterday there was some focus on the informal European leaders meeting between Merkel, Hollande, and Renzi, intended to show their commitment to the EU post Brexit. According to the FT the leaders discussed forgoing a common plan to bolster Europe’s economy and also security, while the talks were also supposedly seen as a show of support for Renzi from Merkel ahead of the upcoming constitutional reform referendum in Italy.

Staying in Europe the latest ECB CSPP numbers were out yesterday. Impressively, given that it covers mid-August, they upped their purchases from a €250mn daily run rate the week before to €321mn this past week. The average daily number since the program started in June is around €350mn with July and Augusts’ purchases probably healthier than most would have expected given the holiday season. At this rate the €17.8bn total purchased so far is only within 2-3 weeks of exceeding the total ABS purchases of €20.3bn made since that program started in November 2014.

Looking at the day ahead, this morning in Europe the main focus will likely be on the aforementioned flash PMI’s for August, along with the UK CBI trends orders data for this month. As highlighted we’ll also receive the August consumer confidence reading for the Euro area in the afternoon where expectations are for a very modest improvement to -7.7 from -7.9. Meanwhile in the US we’ll also get the flash manufacturing PMI (expected to decline to 52.6 from 52.9) along with the Richmond Fed’s manufacturing survey for this month. New home sales data in July will also be released where sales are expected to have declined -2% mom. Away from the data the ECB’s Coeure, Lane and Smets are due to speak at a panel discussion later this morning in Geneva on alternative proposals for fundamentally improving the pre-crisis policy frameworks in the Euro area.