After yesterday's intraday risk reversal, which sent S&P futures from session highs just before the European open, to lows following a day of news with more trade war developments and renewed Italian concerns, while the Dow closed down for 8 sessions in a row, tied for the longest losing streak since 1978, markets appear willing to put it all behind as they close out the week, with futures rising to 12 points to 2,765 and just shy of session highs, while the Dow finally appears poised to end its losing streak.

The optimism was broad-based with European stocks rising and unwind much of yesterday’s Daimler-led risk-off moves, as European manufacturing and services PMI data beat analysts’ expectations, with the composite posting the first monthly rebound after 3 months of declines, lifting the EUR above 1.16, and sparking a short squeeze.

• EU Markit Manufacturing Flash PMI 55.0 vs. Exp. 55.0 (Prev. 55.5)
• EU Markit Services Flash PMI 55.0 vs. Exp. 53.7 (Prev. 53.8)
• EU Markit Composite Flash PMI 54.8 vs. Exp. 53.9 (Prev. 54.1)

Flash Eurozone Composite Output #PMI rises to 54.8 (vs. 54.1 prev), signalling a regaining of momentum. However, manufacturing sector growth continues to slide, easing to an 18-month low. (55.0 vs. 55.5 prev). More: https://t.co/fM9kqRmPpy pic.twitter.com/xO6c0IlMdU

— Markit Economics (@MarkitEconomics) June 22, 2018

The EUR/USD levitation, however, was interrupted by news that the German SPD party was preparing for new elections knocked the common currency back.

As a result, European equity markets rallied from the open, with the bank sector supported by Italian bank M&A news; Greek stock and bond markets outperform after EFSF repayment extension plan is confirmed.  Automaker and supplier stocks were the only segment to decline among the broader 19-industry Stoxx Europe 600 Index amid lingering concerns about China’s plan for retaliatory tariffs on U.S.-made vehicles and regulators’ crackdowns on diesel emissions. Core fixed income edges lower given general positive environment.

Risk sentiment benefited from reports that some U.S. officials were trying to restart trade talks with China before President Trump’s tariffs come into effect next month, which in turn sent the Bloomberg dollar index dropping for a third day, extending its weekly decline to 0.3%, the biggest since mid-April, as stretched positioning dictates price action with longs taking profit amid deescalation of trade war concerns.

In Asia, declines in Japanese and Hong Kong equities were offset by advances in their Chinese and Korean counterparts as investors awaited developments. The Nikkei 225 (-0.8%) saw early underperformance amid recent JPY strength, while Australia's ASX 200 (-0.2%) bucked the trend for most the session amid strength in financials led by ANZ Bank which announced to double its share repurchase. Elsewhere, trade concerns continued to cloud over the Hang Seng (+0.2%) and Shanghai Comp. (+0.5%) from the open, although stocks then recovered as participants also digested another net weekly liquidity injection from the PBoC.

In FX, the dollar and yen both fell against their major peers as reports that some U.S. officials were trying to resume trade talks with China damped demand for haven assets; euro hit one- week high. The Australian dollar led G-10 advance, as an oil rally helped to insulate spot against cross related selling; New Zealand’s dollar also rose versus most Group-of-10 peers. Elsewhere, the pound was up against most of the G-10 group on continued buying after the Bank of England’s Chief Economist Andy Haldane supported a rate hike.

The weakening dollar provided respite to Asian currencies under pressure from growing concern there will be a full-blown trade war.

In rates, treasuries edged lower, along with bunds as Thursday’s risk-off trade is unwound following Greece debt deal; Italian bonds bounced reversing some of yesterday's losses.

Oil jumped ahead of the conclusion of OPEC's summit, where the cartel is expected to announce a net 600,000 barrel increase in production (1MM nominal), although it remains unclear if Iran will endorse the decision. WTI traded higher as OPEC near an agreement on an output increase. Initially, sources had suggested that ‘building [a] consensus [would] be a big challenge’ and ‘not all OPEC members [were] likely to accept the Ministerial Committee's proposal for an oil output increase of around 1mln BPD’. While source reports had also suggested that Iran were doubting a consensus could be reached a more collaborative tone was struck after last-minute talks and negotiations, with Iran stating that the meeting with the Saudi Oil Minister was positive. Following this, multiple oil ministers confirmed that a compromise deal including a higher Iran quota may be part of the agreement and the 1mln BPD increase was an overestimation. The real effect is to be 700k BPD as according to the Nigerian Energy Minister.

Gold is up slightly heading in to the weeks end as the USD edges off of 11-month highs. Steel is set for the worst week in two months as the metal is eyeing losses once again on Friday. Copper is also set to fall on Friday as worries loom about falling Chinese demand due to trade concerns

Looking ahead, highlights include Canadian CPI and Retail Sales and the OPEC press conference. In the US, economic data include Markit manufacturing and Services PMI. CarMax and Blackberry are due to release results.

Market Snapshot

• S&P 500 futures up 0.4% to 2,763.50
• STOXX Europe 600 up 0.4% to 382.54
• MXAP up 0.02% to 169.06
• MXAPJ up 0.4% to 550.47
• Nikkei down 0.8% to 22,516.83
• Topix down 0.3% to 1,744.83
• Hang Seng Index up 0.2% to 29,338.70
• Shanghai Composite up 0.5% to 2,889.76
• Sensex up 0.2% to 35,516.79
• Australia S&P/ASX 200 down 0.1% to 6,225.23
• Kospi up 0.8% to 2,357.22
• Brent Futures up 1.4% to $74.05/bbl
• Gold spot up 0.1% to $1,268.56/oz
• U.S. Dollar Index down 0.3% to 94.61
• German 10Y yield rose 1.5 bps to 0.35%
• Euro up 0.4% to $1.1650
• Brent Futures up 1.4% to $74.05/bbl
• Italian 10Y yield rose 18.0 bps to 2.464%
• Spanish 10Y yield fell 1.5 bps to 1.321%

Top Overnight News

• International Monetary Fund Managing Director Christine Lagarde warned that financial markets could react violently to any fiscal loosening in large member states as the fund prepares for a mission to Italy.
• Some White House officials are trying to restart talks with China to avoid a trade war before U.S. tariffs on Chinese products take effect July 6, three people familiar with the plans said, setting up a battle with others in the administration who favor a harder line
• OPEC and its allies reached a preliminary agreement in the face of strong opposition from Iran to boost production by a theoretical 1 million barrels a day -- although the actual increase will be smaller as several countries are unable to raise output
• Greece’s euro-area creditors struck a landmark deal to ease repayment terms on some of the nation’s mountain of debt, clearing the way for the country to exit the lifeline that’s kept it afloat since 2010
• Economic momentum in the euro area unexpectedly picked up in June, although worrying signs persist for the common-currency region, IHS Markit said Friday
• Turkish President Recep Tayyip Erdogan seeks re-election on Sunday. But he risks running into a demographic wall, as he may struggle to win the young vote -- one reason why the upcoming vote could be the tightest he’s faced
• Greece’s euro-area creditors struck a landmark deal to ease repayment terms on some of the nation’s loans in an effort to ease its mountain of debt and clear the way for it to exit the lifeline that’s kept it afloat since 2010
• U.K. Chancellor of the Exchequer Philip Hammond said he’s no enemy of Brexit as he slammed European Union proposals for cross-border financial services after Britain leaves the bloc
• Nomura Holdings Inc. dismissed 28 sales and trading staff in the U.S., according to a person familiar with the matter

Asia stocks were somewhat mixed with the region cautious as trade concerns lingered and following a weak lead from Wall St where all major US indices closed negative and the DJIA declined for an 8th consecutive day to post its longest losing streak in over a year. As such, Nikkei 225 (-0.8%) saw early underperformance amid recent JPY strength, while ASX 200 (-0.2%) bucked the trend for most the session amid strength in financials led by ANZ Bank which announced to double its share repurchase. Elsewhere, trade concerns continued to cloud over the Hang Seng (+0.2%) and Shanghai Comp. (+0.5%) from the open, although stocks then recovered as participants also digested another net weekly liquidity injection from the PBoC. Finally, 10yr JGBs were relatively unchanged with prices sitting near 2-week highs, while the latest CPI data from Japan was largely ignored despite the headline being a tad firmer than expected as inflation remained far from the 2% price goal. In addition, today’s BoJ Rinban announcement also failed to spur demand as the central bank maintained all purchase amounts. PBoC injected CNY 40bln via 7-day reverse repos and CNY 30bln via 14-day reverse repos, for a net weekly injection of CNY 140bln vs. last week's CNY 240bln net injection.

Top Asian News

• Sharp Is Raising as Much as 216 Billion Yen in Share Sale
• Mahathir Says Ringgit’s Fair Value Is Same as Asia-Crisis Peg
• What’s Wrong With Asian Stocks? Theories From Goldman and Others
• Barclays Sees Rupee Suffering Worse Rout Than in Taper Tantrum
• Hong Kong Dollar Strength Seen to Ease When Xiaomi Boost Fades

European bourses are largely higher (Eurostoxx 50 +0.8%) with bank stocks leading the gains on Friday, as fears over Italian Euroscepticism ease, as Borghi reiterates there is no intention to leave the Euro Zone. The energy sector was dragging on equities as OPEC accord tensions pressured the sector but bounced on a deal nearing closure. The SMI is currently the outperforming bourse whilst the DAX underperforms as trade concerns linger over German auto names and pressure on the index. French company-specific news dominates newswires, with the French Government saying they have no intention of breaking up EDF (flat) into a nuclear and non-nuclear unit, as well as Airbus (+1.5%) on a positive note being circulated from JP Morgan.

Top European News

• Euro Area Growth Unexpectedly Quickens as Slowdown Risks Persist
• Greece’s Creditors Agree to Landmark Debt Deal as Payments Eased
• Jooste Profited From Steinhoff Land Deal in 2007, Filings Show
• Citadel Securities Has Swaps-Trading Bonanza in Italy Chaos
• As U.S. Alliances Fray, Russia Courts New Customers for Missiles
• Deutsche Bank Defendant Defies Prosecutors in Paschi Trial

In FX, the EUR has continued its firm rebound from post-Fed and especially ECB policy meeting lows, with upbeat preliminary PMIs for June providing additional momentum to extend recovery gains beyond 1.1600 vs the Usd and briefly challenging the 21 DMA around 1.1670. However, offers layered between there and 1.1700 are capping further upside for now, and reports that Germany’s SPD are preparing for an election also undermined the single currency. AUD/NZD: The major beneficiaries a pre-OPEC squeeze in oil prices and broad Greenback retracement in wake of yesterday’s disappointing US data (Philly Fed survey in particular), as the former regains 0.7400 and looks to close above a chart pivot circa 0.7413, while the latter is hovering around 0.6900. GBP: Building on post-BoE gains with Cable testing 1.3300 for a near 2 big figure bounce from worst levels in the run-up to Thursday’s MPC policy revelations, but also meeting some technical resistance ahead of its 21 DMA (1.3310). CAD - Consolidating above 1.3300 against its US counterpart and eyeing crude ahead of OPEC like the antipodean dollars and other commodity currencies, but also looking towards Canadian CPI and retail sales data for independent impetus ahead of next week’s BoC outlook report. DXY - Finding some support around 94.500, but off fresh ytd peaks some 100 ticks higher on the aforementioned worse-than forecast US releases and decent recoveries in rival trading partners.

In commodities, oil trades higher as OPEC near an agreement on an output increase. Initially, sources had suggested that ‘building [a] consensus [would] be a big challenge’ and ‘not all OPEC members [were] likely to accept the Ministerial Committee's proposal for an oil output increase of around 1mln BPD’. Whilst source reports had also suggested that Iran were doubting a consensus could be reached a more collaborative tone was struck after last-minute talks and negotiations, with Iran stating that the meeting with the Saudi Oil Minister was positive. Following this, multiple oil ministers confirmed that a compromise deal including a higher Iran quota may be part of the agreement and the 1mln BPD increase was an overestimation. The real effect is to be 700k BPD as according to the Nigerian Energy Minister. Libyan oil ports had exacerbated the rise in oil, with a further storage tank catching fire due to domestic conflicts. However, Libya’s NOC has confirmed Ras Lanuf and Es Sider are under the control of Libya’s National Army, with fires now all extinguished. Gold is up slightly heading in to the weeks end as the USD edges off of 11 month highs. Steel is set for the worst week in two months as the metal is eyeing losses once again on Friday. Copper is also set to fall on Friday as worries loom about falling Chinese demand due to trade concerns.

Looking at the day ahead, the big data highlight is the release of the flash June PMIs around the world. In Europe and the US we'll receive the manufacturing, services and composite prints. Away from that, the final Q1 GDP revisions will be made in France. The Oil market will also be in focus with the OPEC meeting in Vienna (continuing into Saturday).

US Event Calendar

• 9:45am: Markit US Manufacturing PMI, est. 56.1, prior 56.4
• 9:45am: Markit US Services PMI, est. 56.5, prior 56.8
• 9:45am: Markit US Composite PMI, prior 56.6

DB's Jim Reid concludes the overnight wrap

Happy Friday. I hope you didn’t notice the morning being slightly darker in the northern hemisphere today. These are those rare weeks where I go to bed in bright light and wake up in it too. Sadly this doesn’t last long. In a few weeks, it’ll be totally dark getting up to write this!

So what has this slightly darker day got in store for us. Given the current nervousness on trade and growth at the moment there will be a lot of interest in today’s flash PMIs, especially in Europe. This morning in Asia we’ve already had the manufacturing PMI in Japan with the reading coming in at 53.1 compared to 52.8 in May. Later this morning we’ll get the data from Europe. The consensus for the composite Euro area reading is 53.9. As a reminder May printed at 54.1 which was the lowest since November 2016. The small drop is expected to be as a result of the manufacturing sector (55.0 versus 55.5 previously) while the services sector is expected to hold steady at 53.8. Germany’s composite is expected to stay at 53.4 and France’s also to hold at 54.2 (although both are expected to show further deterioration in the manufacturing sector). For the US this afternoon both the manufacturing and services readings are expected to fall a modest 0.3pts to 56.1 and 56.5 respectively.

We’ll also see the OPEC meeting today, so all eyes on how much supply they’ll add to the market. Ahead of this, overnight Bloomberg noted OPEC ministers have reached a preliminary agreement to boost production by a theoretical 1m barrels a day, although Saudi Arabia’s energy minister noted this number is “nominal, as the actual effect will be something less because not every country can respond”, so the real production increase may be c600k barrels a day. Notably with Iran’s oil minister walking out of the meeting and telling reporters that “it was not a good meeting”, we may have to wait until Saturday to see whether this proposal will be formally ratified. For now, WTI oil is up c1% this morning.

Elsewhere in Asia, markets are mixed but little changed with the Nikkei (-1.0%) and Hang Seng (-0.27%) both lower while the Kospi (+0.19%) and Shanghai Comp. (+0.35%) are up modestly as we type. Datawise, Japan’s May core CPI was steady mom and in line at 0.7% yoy. Meanwhile, China’s Commerce Ministry said it will impose anti-dumping tariffs on imported styrene from the US, South Korea and Taiwan – ranging from 3.8% to 55.7% and taking effect from 23  June.

China’s import of the chemical from the US is not huge ($4bn worth last year) and the potential for higher tariffs has been flagged back in February, but the announcement does come at a somewhat sensitive time which could add to the trade tensions. Elsewhere, all of the 35 largest US banks have passed the first part of the Fed’s annual stress test, suggesting they have enough capital to withstand an extreme recession. Reuters noted that next week’s tests are the ones to watch as they’ll likely be tougher and the results will be used to determine whether the Fed approves or denies banks’ capital plans.

Yesterday was a slightly odd day as markets started to step up their focus on the impact of the potential trade war on a day where there was actually some hope that there was still a chance of a near-term de-escalation. Daimler’s profit warning from Wednesday night which we reported yesterday was the catalyst even if the link to trade in their warning was perhaps exaggerated. Meanwhile, Italy had a bad day due to the appointment of two eurosceptic in key parliamentary posts with a sales tax on US internet companies adding to the risk off. In truth Daimler’s issues (shares -4.90%) also included diesel and emissions problems so the trade element may have been slightly exaggerated especially as tariffs haven’t come in yet for them.

At a macro level, China was reported by MNI as engaging with the U.S. to de-escalate the Trade War. The story quoted “a source with knowledge of the matter” saying that China trade officials have approached US officials in order to find ways to minimize punitive tariffs on China. It went on to say that China and US are making last-minute efforts to avert the tariffs’ implementation (the $34bn from July 6th). Note that this is not to do with the additional $200bn Mr Trump highlighted on Monday. Meanwhile, Bloomberg also cited that some White House officials are trying to restart talks with China too. Having said that, Wilbur Ross’s comments suggested less diplomacy around the corner. He said that “If it really does get to be a big war, we have many more bullets than any of these other countries”.

On Italy, the Senate selected economist Alberto Bagnai as head of the finance committee. He has written two books calling for the monetary union to be dismantled. I read the review of one of the books on Amazon and it said: “As serious as Euroscepticism can get”. This was from a guy called Billy! The role of head of the budget committee in the lower house was given to Claudio Borghi who is an economic adviser for the League party and one that has been involved in the mini-bots discussion which as a reminder started the serious sell-off a month ago. Italian 2 and 10yr yields rose +26.9bp and +18.1bp respectively while the 10y Bunds / BTPs spread also rose 22bp to 239bp.

Elsewhere the US Supreme Court announced that it will allow states and local government to start collecting sales taxes from internet retailers that don't currently charge. Wayfair Inc. initially dropped -9.5% following the court decision but pared back losses to close -1.6% after the company said it doesn’t expect “any noticeable impact”. Other online retailers also pared back declines as investors considered whether the additional taxes would materially shift consumers’ buying behavior, in part as the States were already collecting c75% of the potential taxes from online purchases as per the Government Accountability Office. In the end, eBay (-3.2%) and Amazon (-1.1%) both fell while bricks and mortar retailers were in demand yesterday (Walmart +0.7%; Best Buy Co. +1.8%).

With all this, it was a risk-off day (S&P 500 -0.63%) with the Dow (-0.80%) down for the 8th day in a row. The last 8-day negative run was March 2017 but there’s only been 1 other outside of that (2011) since the GFC. The last 9-day slump was back in 1978 so we’ll see if today matches that! Back in Europe, the DAX was weighed down by car marker stocks (-1.44%) while Italy’s FTSEMIB led the decline following the political changes mentioned earlier (-2.02%). Meanwhile, credit spreads widened with Main and Crossover up 2.8bp and 6.5bp respectively. Elsewhere, core government bonds were also boosted by the risk off tone (UST10y yields -4.2bp; Bunds -4.2bp) while other peripherals underperformed along with Italy (Spain +7.3bp; Portugal +4.6bp).

Gilts (-2bps) were caught in the crossfire between the risk off and a hawkish BoE meeting yesterday. The MPC’s decision to keep cash rates steady was widely expected, but it was slightly surprising that BoE’s Chief Economist Haldane dissented for the first time since 2014 and voted for a rate hike at yesterday’s meeting (vote of 6-3). The minutes indicated that the Bank regards recent data as consistent with its judgment that the very weak GDP growth reported in Q1 will prove temporary and that “all members agreed that the domestic labor market had remained strong, and there was widespread evidence that slack was largely used up. Pay and domestic cost growth had continued to firm broadly as expected”. Following the meeting, the Bloomberg implied odds of a rate hike in August jumped +20ppt to 56% while Sterling also reversed an earlier drop to end +0.52% higher against the dollar. It’s also worth highlighting that the MPC voted to change guidance on when they will consider reducing the stock of debt purchased in QE – from until the BoE rate reached 2% to 1.5%. Later in the day, it was also announced that the BoE will get an extra £1.2bn capital injection to allow the Bank to respond more immediately to any new financial crisis.

Ahead of Turkey’s election for this Sunday, DB’s Kubilay Ozturk noted that in its inaugural dual elections, Turkey will be voting to elect 600 members to the National Assembly and a new President. The latest polls point to the AKP +MHP alliance winning a majority in the Parliament and Erdogan retaining his Presidential mandate in the second round. That said, Kubilay highlights that momentum behind the opposition has picked up since mid-May, pointing to a non-negligible possibility of non-AKP majority in the Parliament confronted with an Erdogan Presidency. Another possibility is full opposition victory in both elections, which seems a low likelihood event, based on current poll data. History suggests markets favor political clarity following the ballot, as manifested in the knee-jerk reaction after the June 2015 (negative) and the November 2015 (positive) elections. Secondly, markets also look for clarity in macro policy outlook, depending on starting conditions. Dissipation of political uncertainty and advent of policy clarity are necessary but not sufficient. A sustainable rally requires accommodative global conditions, too. See his report for more details.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the macro data was broadly softer than expectations. The June Philly Fed business index fell 14.5pts mom to 19.9 (vs. 29  expected) - the lowest level since November 2016. In the details, the new orders index dropped from the May reading which was at a 45 year high (-22.7pts mom to 17.9), while both the prices paid and prices received indices moderated a little but remained at elevated levels. Meanwhile, firms reported order backlogs were diminishing and were less upbeat about business prospects in the next six months. The May CB leading index was also below market (0.2% mom vs. 0.4% expected) while the April FHFA house price index was up 0.1% mom (vs. 0.5% expected), leading to annual growth of 6.4% yoy. Elsewhere, the weekly initial jobless claims (218k vs. 220k expected) and continuing claims (1,723k vs. 1,710k expected) were broadly in line and remain at low levels, suggesting further tightening of labor market conditions.

The Euro area’s June consumer confidence index was below consensus at -0.5 (vs. 0) but still resilient considering the 10y average reading was -13. France’s June manufacturing confidence index was steady mom and above market at 110 (vs. 108 expected) while the business confidence reading was in line at 106. Over in the UK, the May public sector net borrowing (ex-banking groups) was lower than expected at £5bn (vs. £6.3bn).

Looking at the day ahead, the big data highlight is the release of the flash June PMIs around the world. In Europe and the US we'll receive the manufacturing, services and composite prints. Away from that, the final Q1 GDP revisions will be made in France. The Oil market will also be in focus with the OPEC meeting in Vienna (continuing into Saturday).