The overnight market has been a repeat of yesterday's action, when following China's repeat 1.6% devaluation of the CNY (which was to be expected since the PBOC made it quite clear the fixing would be based off the market value, a value which continues plunging), the second biggest in history following Monday's 1.9% plunge, traders appeared stunned having believed the PBOC's lies that the devaluation was a one-off and as a result the E-Mini tumbled overnight, and is now 30 points lower from last night's PBOC fixing announcement, trading at around 2058, and far below the "magical" 200-DMA support line, which has now been solidly breached.

Perhaps the only saving grace right now is that the PBOC stepped in the last minutes of trading to prop up the yuan, or else today's bloodbath, not just across Asian FX as shown earlier, but in US and European equity markets would have been far, far worse. For Asia, however, it was too late: all major indices were firmly in the red, with the Nikkei 225 (-1.6%), ASX 200 (-1.7%) and Hang Seng (-2.4%) and Shanghai Comp. (-1.1%) pressured, which followed in tandem with US equity futures as the actions by the PBoC further added uncertainty and concerns of weak underlying Chinese growth. At the same time, JGBs gained 29 ticks amid a risk off tone.

But what was bad for stocks was delightful news for Treasurys, whose yields tumbled overnight, and at last check were trading just modestly off the overnight lows of 2.07%. We fully expect a 1-handle in the 10 Year within days. As RanSquawk notes, the latest move by the PBOC caused an uproar across various asset classes, with USTs now up over 1.5 points since Monday and stocks in Europe trading lower over 2% this morning amid fears of negative spill over effects. As a result, US inflation swap forward 5Y5Y rate now trades at the lowest since March while Euro 5-year/5-year inflation swap rate trades at its lowest since April 28. It's called "currency war" for a reason: the same reason it is also called "exporting deflation."

Looking at sectors, the exporters led the move lower in Europe and on the sector breakdown , the weakness was particularly evident across auto and luxury names. The move lower saw the DAX index break below the key 11,000 level, while the S&P e-mini future looks set to break the 200DMA line to the downside.

Focusing on FX, the USD index failed to benefit from the risk averse sentiment as lower yields, with USTs 10y yield breaking below its 200DMA yesterday, and the consequent flattening of the curve prompted realignment of market expectations with regards to potential rate hike. At the same time, FX managers recycling into EURs, together with the ongoing unwind of short carry trades (EUR/USD and EUR/CNY) see the major pair rallying to 1-month high, while EUR/CHF continued to consolidate above the key 200DMA line.

The commodity complex did see initial weakness on the back of the latest news from China, with the exception of gold which benefitted from a safe haven bid to trade higher on the day by around USD 10.00 and is now on track for its 5th straight day of gains . Away from gold, WTI crude futures initially extended losses having settled at its lowest level in 6-years despite the latest API crude report showing a 3rd consecutive drawdown. (-847K vs. Prey. -2400K), however the energy complex has retraced some of these losses this morning, with Brent and WTI trading above USD 49.00 and USD 43.00 respectively.

In Summary: European shares remain lower though are off intraday lows after the biggest two-day selloff in Asian currencies since 1998. The onshore yuan fell ~1.9%, Shanghai Composite down 1.1%.  The personal & household and autos sectors underperform and oil & gas, real estate outperform. Most European government bond yields fall, German bund yield drops to two-month low. The euro rises to a one-month high against the dollar. IEA sees oil glut enduring in 2016 after reaching 17-year high. Crude oil rises. U.K. unemployment in line with estimates, wage growth below. European industrial production below estimates. The French and Dutch markets are the worst-performing larger bourses, the U.K. the best. The euro is stronger against the dollar. Japanese 10yr bond yields fall; German yields decline. Commodities gain, with nickel, soybeans underperforming and WTI crude outperforming.

Market Wrap

• U.S. mortgage applications, monthly budget statement, JOLT job openings due later.
• S&P 500 futures down 1.1% to 2056.1
• Stoxx 600 down 2.2% to 384.8
• US 10Yr yield down 6bps to 2.08%
• German 10Yr yield down 2bps to 0.61%
• MSCI Asia Pacific down 1.5% to 137.9
• Gold spot up 0.8% to $1117.3/oz
• All 19 Stoxx 600 sectors rise; oil & gas, real estate outperform, personal & household, autos underperform
• 2.8% of Stoxx 600 members gain, 96.8% decline
• Eurostoxx 50 -2.6%, FTSE 100 -1.4%, CAC 40 -2.8%, DAX -2.4%, IBEX -1.9%, FTSEMIB -2.4%, SMI -1.9%
• Asian stocks fall with the Kospi outperforming and the Hang Seng underperforming; MSCI Asia Pacific down 1.5% to 137.9
• Nikkei 225 down 1.6%, Hang Seng down 2.4%, Kospi down 0.6%, Shanghai Composite down 1.1%, ASX down 1.7%, Sensex down 1.2%
• 0 out of 10 sectors rise with health care, utilities outperforming and materials, financials underperforming
• Pearson to Sell Economist Stake for $731m to Exit News
• Euro up 0.78% to $1.1128
• Dollar Index down 0.71% to 96.6
• Italian 10Yr yield down 1bps to 1.78%
• Spanish 10Yr yield down 2bps to 1.92%
• French 10Yr yield down 1bps to 0.92%
• S&P GSCI Index up 0.8% to 370
• Brent Futures up 0.9% to $49.6/bbl, WTI Futures up 1.2% to $43.6/bbl
• LME 3m Copper little changed at $5123.5/MT
• LME 3m Nickel down 1.4% to $10600/MT
• Wheat futures up 0.2% to 513.3 USd/bu

Bulletin headline summary from RanSquawk and Bloomberg

• Risk averse sentiment dominates the price action, as the PBOC weakens the CNY fix for the 2nd consecutive day, causing an uproar in financial markets
• The USD index failed to benefit from the risk averse sentiment, as lower yields, with Videos USTs 10y yield breaking below its 200DMA yesterday and the consequent flattening of the curve prompted realignment of market expectations with regards to potential rate hike
• Going forward, market participants will get to digest the release of the latest US JOLTs report and the weekly DOE data. In terms of earnings, the focus will be on Cisco and Macy's.
• Treasury yields dropped overnight led by long-end as China’s currency devaluation sparks FTQ flows and drives equities lower; this week’s U.S. Treasury auctions continue with $24b 10Y, WI 2.095% vs. 2.225% in July.
• China’s yuan led the biggest two-day selloff in Asian currencies since 1997, fueling concern that financial-market volatility will curb global economic growth
• Bill Gross says a weakening Chinese yuan will bring slower inflation worldwide and the nation’s move to devalue its currency is also fueling demand for dollar- denominated assets
• While the PBOC followed through on a pledge to align its fixing more closely with the previous close, people familiar with the matter said authorities intervened to support the currency and told banks to limit some companies’ dollar purchases
• China’s industrial production, investment and retail data all trailed analysts’ estimates, putting additional downward pressure on an already weakening currency
• The weakest corporate borrowers are finding the days of free-flowing credit quickly evaporating as the $39.6 billion of junk-rated bonds and loans issued since July is the least since the summer of 2008, according to data compiled by Bloomberg
• Greece’s third bailout risks being held up by German lawmakers just as the Greek government submits a new raft of proposals to its parliament, throwing into jeopardy a timeline that aims to get cash to the country
• $750m IG and $1.8b HY priced yesterday. BofAML Corporate Master Index OAS widens +1 to new YTD wide 162; YTD low 129. High Yield Master II OAS +16 to 567, new YTD wide; YTD low 438
• Sovereign 10Y bond yields lower. Asian, European stocks drop, U.S. equity-index futures lower. Crude oil, cooper and gold rise

US Event Calendar

• 7:00am: MBA Mortgage Applications, Aug. 7 (prior 4.7%)
• 8:30am: Fed’s Dudley speaks in Rochester, N.Y.
• 10:00am: JOLTS Job Openings, June, est. 5.35m (prior 5.363m)
• 2:00pm: Monthly Budget Statement, July, est. -$138b (prior -$94.6b)

DB's Jim Reid completes the overnight recap

So a bit late, but the reason I think this could be a big deal is because it may mark the point where the global currency wars move from being friendly to being more antagonistic. Clearly the China moves so far are minor but do seem to mark a change in strategy which is the important point. So far the global currency war has been relatively benign because in my opinion the two main protagonists - namely Japan and the Euro-Area - can point to genuine reasons why they needed to do something to arrest years of growth under-performance. With China it'll be hard for the international community to have the same sympathy for a country that is struggling to migrate from a high single digit growth rate to one supposedly around or just beneath 7% - but on official stats still faster than virtually any country in the world.

So the key here is whether this is part of a series of moves from China or perhaps more importantly whether the market or its trading partners think it is. However the big positive for financial assets (at some point) is that it surely must influence the Fed to some degree and other central banks for that matter. A full blown China devaluation would surely stop the Fed dead in their tracks and the even threat of it may slow them down. The probability of a September US hike went down from 48% before the announcement (and 54% late Monday) to 40% currently. So one has to balance the risk of a destabilising currency war with the extra global liquidity it would bring. Net net we still think the global financial system is incredibly fragile and essentially being artificially propped up by mass liquidity. This view hasn't changed yet but the risk of something more destabilising depends on China's likely follow-through. As you'll see below our economists are relatively sanguine about the scale of further moves in the currency but anything like this involves risks.

Before we look at this, how have we reacted so far this morning? The headlines are dominated again by a material shift in the Yuan fix at the open this morning. The fix was set at 6.3306, a 1.6% devaluation versus the previous days fix and a 0.1% discount to yesterday’s closing level. The Yuan (-1.62%) has plummeted as a result and is on course for its biggest two-day drop (-3.48%) since 1994. The offshore Renminbi meanwhile is down 2.46% in trading this morning. We’ve seen another selloff in FX markets in Asia as a result with the Aussie Dollar (-0.84%), Korean Won (-1.25%), Taiwanese Dollar (-2.25%) and Indonesian Rupiah (-1.57%) a few of the notable movers while the Malaysian Ringgit (-1.38%) has fallen to the lowest level since 1998. We’ve also seen the first sign of a reaction from a Central Bank to China’s moves, with the State Bank of Vietnam this morning announcing a widening in the trading band of its own currency, citing the PBoC action as the reason.

Meanwhile, in reaction to the moves the IMF has this morning said that ‘greater exchange rate flexibility is important for China’ and that the economy can and should aim to achieve an effectively floating exchange rate system in two to three years. This came after the PBoC stated that the currency exchange rate fluctuation is ‘normal and should be treated objectively’ and that the daily fixing price will ‘gradually move towards stability’.
Elsewhere, 10y Treasuries have dropped a further 6bps this morning while equity bourses in Asia have sold off. The Nikkei (-1.70%) is lower, not helped by a soft PPI print while the Hang Seng (-1.75%), Kospi (-1.87%) and ASX (-1.74%) have extended moves lower. The Shanghai Comp (-0.45%) and Shenzhen (-0.36%) are again trading with little obvious direction as we head into the midday break while credit indices in Asia, Australia and Japan are generally 2-3bps wider.

Writing in a note yesterday, our China Chief Economist Zhiwei Zhang said that, in his view, the Chinese government had already sent a clear signal to the market on July 24th when it announced a set of policies to boost trade, including a statement to allow more flexibility in the exchange rate and so as a result he’d already expected some depreciation in the Yuan to occur. Zhiwei sees the move as a positive step towards a more market orientated exchange rate policy framework but doubts the government will allow depreciation of more than 10% in the next 12 months, expecting volatility on both sides. Zhiwei has reiterated his CNY forecast of 6.5 by the end of 2016 but acknowledges that the risks are balanced towards more depreciation (albeit less than 10%). Crucial in his mind for the government is the avoidance now of sharp capital outflows. In that sense he thinks we may see some volatility in the fixing and CNY spot market, as the government may want to avoid any built-up expectations of the CNY becoming a one-way trade. Despite yesterday’s move, Zhiwei has reiterated his growth and policy outlook, expecting GDP to grow at 7.0% in Q3 and 7.2% in Q4 as well as one rate cut and one RRR cut for the rest of the year (most probably Q3).

Taking a look back at the impact of the move yesterday, the Yuan eventually finished the session 1.86% weaker versus the Dollar at 6.325. Like this morning, the initial pain was felt in the more China-sensitive currencies as we saw the Aussie Dollar (-1.47%), NZ Dollar (-1.25%), Korean Won (-1.36%) and Taiwanese Dollar (-1.27%) amongst others, tumble in the aftermath. There was a general feeling of uncertainty for the most part and the move by the PBoC clearly rattled markets resulting in a risk-off session yesterday. Equity markets on both sides of the pond fell, highlighted by the S&P 500 (-0.96%), Dow (-1.21%), Stoxx 600 (-1.55%) and DAX (-2.68%). The decline for Apple (-5.15%) in particular highlighted the effect of the move at the micro level and for those companies with significant revenue exposure in China with luxury goods makers the other notable names to retreat yesterday. Meanwhile, credit markets also came under reasonable pressure with CDX IG 1.5bps wider in the US and Main (+2.5bps) and Crossover (+10bps) leaking wider through the European session.

The moves in the equity markets yesterday were probably slightly better than expected in light of the tumbles in the Oil complex yesterday. Energy stocks (-0.19%) were a notable outperformer in the S&P 500 despite WTI falling -4.18% and closer to 5% from the intraday high to close at $43.08/bbl – the lowest settlement price now since March 2009 but still not quite at the intraday low of $42.03/bbl we saw back in mid-March. There was a similar fall for Brent (-2.44%) while industrial metals were hard hit with Aluminum (-1.95%), Copper (-3.47%), Zinc (-3.99%) and Nickel (-3.54%) suffering heavy losses. It was the sovereign bond market which benefited from yesterday’s moves meanwhile. With the poorer sentiment driving the weakness in risk assets, along with more pressure in the Oil space, 10y Treasury yields fell 8.6bps lower to 2.142%

(2.08% as we go to print) and to the lowest yield level since May 29th. 2y (-4.8bps) and 30y (-8.7bps) yields also moved lower while across the Fed Funds contracts we saw 2.5bps and 6.5bps taken off the Dec15 and Dec16 contracts to 0.315% and 0.980% respectively. It was a similar story in Europe where we saw 10y Bund yields close 6.6bps lower at 0.630% and the peripherals declining similar amounts.

Of relatively passing interest, all things considered, was yesterday’s data. In the US we saw a slight uptick in the NFIB small business optimism survey to 95.4, a rise of 0.3pts as expected. Nonfarm productivity for Q2 rebounded +1.3% qoq saar (vs. +1.6% expected) during the quarter after some weakness in the prior two quarters. Unit labour costs for the quarter were higher than expected (+0.5% qoq saar vs. 0.0% expected). Meanwhile the June reading for wholesale inventories was solid (+0.9% mom vs. +0.4% expected) and the highest monthly increase since April last year. Trade sales for the month (+0.1% mom vs. +0.5% expected) were more disappointing however. Over in Europe and specifically in Germany, the August ZEW survey reading made for a mixed bag also with the current situations reading rising a better than expected 1.8pts to 65.7 (vs. 64.2 expected), but with the expectations print declining 4.7pts to 25.0 after expectations of a modest rise to 31.9. That latest leg lower marks a fifth consecutive monthly decline from the high print of 54.8 in March, a signal perhaps that the concerns around the commodity slump and China have overshadowed the progress in Greece for now.

On this subject, having dominated headlines for much of this year it seems Greece reached an accord yesterday on a €85bn deal with its creditors. The agreement paves the way for the parliamentary approval process to begin and a tentative Eurogroup finance ministers meeting scheduled for Friday with a €3.2bn ECB repayment due by August 20th. According to Ekathimerini, a draft of the memorandum says the deal has 35 measures which must be passed immediately with more measures to follow in October. Political pressure, most notably in Germany, is still appearing to play a factor however with Bloomberg reporting that the deal risks being held up by German lawmakers seeking more time to dig through the details and not rush any decision.

Taking a look at the day’s calendar now. Kicking off the European data flow this morning will be the UK where we get various June employment indicators including the unemployment rate and average weekly earnings, before we get industrial production data for the Euro area. Over in the US this afternoon there will be some focus on the June JOLTS job openings report with the hiring and quits rate both of interest while the July monthly budget statement is also due. The Fed’s Dudley speaking this afternoon (1.30pm BST) will also be worth keeping an eye on.