The euro's surge to an almost two-year high put a cap on the global market rally in Friday's quiet session, with most major exchanges consolidating after a second strong week of gains. The MSCI Asia-Pacific index declined for first time in ten days while the European Stoxx 600 index was fractionally in the green as were US equity futures ahead of earnings reports from General Electric, Honeywell, Schlumberger and others. Oil gained with Brent flirting with $50, zinc rallied along with most base metals. European stocks are little changed, while Asian stocks decline with Tokyo shares falling for first time in three days.

Also overnight, AUD traders were caught wrongfooted for the second time in one week after the Aussie fell sharply following an unexpectedly dovish speech from RBA Deputy Governor Debelle, who said there’s no significance in the board’s neutral rate discussion, which earlier this week sent the Aussie surging. "No significance should be read into the fact the neutral rate was discussed at this particular meeting," Debelle said in text of speech. "Most meetings, the board allocates some time to discussing a policy-relevant issue in more detail, and on this occasion it was the neutral rate." In addition to the drop in AUDUSD, Australian sovereign yields all dropped 5-7 basis points in bull steepening move; three-year yield drops as much as nine basis points to 2.00% - the steepest decline since March on a closing basis. Kiwi rallied to highest since September 2016 on Finance Minister Joyce comments; yen little changed. S&P futures near unchanged. WTI crude holds near $47; Dalian iron ore falls 0.7%.

But most of the attention was on the EUR in the aftermath of Thursday's paradoxical Draghi press conference, which led to a "bipolar" market reaction, seen as dovish by rates while hawkish by FX.

Summarizing the market reaction, Yann Quelenn, a market strategist at Swissquote Bank said,“Draghi tried to talk the Euro down, even going so far as to suggest that ECB’s quantitative easing could be increased and prolonged. But the currency markets were not buying Draghi’s line, and neither are we. Available bonds are too scarce, and turn to a taper is too clear to disguise."

As a result, bonds jumped even as the euro headed for its strongest level against the dollar in almost two years on bets the European Central Bank will start tapering its stimulus program despite Draghi's sounding particularly dovish, with the greenback already under pressure from U.S. political developments. Yields on Italian bonds dropped...

... while the EUR surged to the highest since August of 2015, and is up 11% for 2017...

... while the US dollar dropped to the lowest since August amid growing political concerns after reports that U.S. special counsel Robert Mueller expanded his investigation of Trump less than a day after the president told the New York Times that any digging into his finances would cross a red line.

“Everything speaks in favor of further EUR appreciation -- increasing portfolio inflows, changing monetary policy, improved political risks,” according to Peter Kinsella, a London-based senior foreign-exchange and rates strategist at Commonwealth Bank of Australia. “It’s an armor-plated rally and it won’t stop”

Euro zone stock markets were modestly lower on the day, as some analysts against expressing concerns a stronger euro may do more to undermine growth going forward.

MSCI's gauge of stocks across the globe was steady after rising for a 10th straight session on Thursday, its longest such streak since February 2015. It has advanced around 3 percent in the latest rally. In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan, which has gained about 5 percent in the past two weeks, eased 0.2 percent, dragged down by a fall in material and financial shares. Japan's Nikkei dropped 0.2 percent.

"We can be pretty sure that when Draghi sat down for his press conference yesterday the last thing he expected to see was the euro hit its highest level in over two years and for equity markets to slide back," said CMC Markets analyst Michael Hewson. "The strength of the euro does appear to be acting as a bit of a headwind for European stocks as they look to close the week sharply lower, in contrast to the performance of UK and US stocks this week."

As of 6:10am ET, S&P500 futures were little-changed close to a record-high level as investors looked forward to a Federal Reserve meeting and manufacturing data next week.E-mini contracts were almost flat at 2,472.25 after the cash index ended Thursday within one point of its record-high close. Nasdaq 100 futures were also little-changed as the benchmark index climbed to all-time intraday highs for the second consecutive day. Contracts on the Dow Jones Industrial Average also held steady on Friday.European stocks are little changed, while Asian stocks decline with Tokyo shares falling for first time in three days.

In currencies, the Bloomberg Dollar Index was down 0.1 percent, in line for a weekly loss of 0.8 percent, at 10:41 a.m. in London, as the greenback weakened against most of its G-10 peers. The yen was up 0.2 percent at 111.71 per dollar. The euro climbed 0.1 percent to $1.1642 after reaching a 23-month high earlier in the session. The common currency has gained 1.6 percent this week, its second straight five-day advance.

In commodities, oil headed for a second weekly increase as U.S. crude inventories continued to shrink. West Texas Intermediate was 0.4 percent higher at $47.09 a barrel. Copper advanced 1.3 percent to $6,033 a ton, a four month high, leading a rally in industrial metals. Gold was poised for its first back-to-back weekly advance since June 2. Bullion for immediate delivery added 0.2 percent to $1,247.25 an ounce.

In rates, the yield on U.S. 10-year Treasuries fell two basis points to 2.24 percent. Benchmark yields in Germany dropped three basis points to 0.5 percent, down nine points this week. Yields in France dipped three basis points.

Bulletin Headline Summary from RanSquawk and Bloomberg

• RBA speakers temper AUD appreciation
• EU equities trade subdued following yesterday's volatility
• Germany and Turkey traded barbs over democratic values as relations between the NATO allies slumped to their lowest ebb of the postwar period.
• The International Monetary Fund agreed to a new conditional bailout for Greece, ending two years of speculation on whether it would join in another rescue and giving the seal of approval demanded by many of the country’s euro-area creditors.
• As Parliament breaks for the summer, Prime Minister Theresa May needs to come up with answers to the political drama unfolding at home and threatening her Brexit strategy as investors predict more trouble on the horizon for a country once seen as the stable counterpoint to European turmoil.
• Looking ahead, highlights include Canadian CPI

Market Snapshot

• S&P 500 futures rise 0.2% to 2475.20
• STOXX Europe 600 unchanged at 384.07
• MXAP down 0.2% to 159.13
• MXAPJ down 0.2% to 524.46
• Nikkei down 0.2% to 20,099.75
• Topix down 0.2% to 1,629.99
• Hang Seng Index down 0.1% to 26,706.09
• Shanghai Composite down 0.2% to 3,237.98
• Sensex up 0.04% to 31,918.38
• Australia S&P/ASX 200 down 0.7% to 5,722.84
• Kospi up 0.3% to 2,450.06
• EUR/USD: +0.1% to 1.1641
• USD/JPY: -0.2% at 111.71
• GBP/USD: +0.3% to 1.3005
• German 10Y yield fell 2.3 bps to 0.507%
• Italian 10Y yield fell 7.8 bps to 1.821%
• Spanish 10Y yield fell 4.4 bps to 1.441%
• Brent Futures up 0.7% to $49.62/bbl
• Gold spot up 0.3% to $1,247.58
• U.S. Dollar Index down 0.2% to 94.17

Top Overnight News

• Trump Inquires About Power to Pardon; Aussie Tumbles After RBA Comments; Power Struggle at Guggenheim
• Trump Removal of Mueller Likely Would Trigger Justice Purge
• Ten of the nation’s biggest lenders including JPMorgan Chase & Co. and Bank of America Corp. together made $30 billion last quarter, just a few hundred million short of the record in the second quarter of 2007
• Mario Draghi said policy makers are still waiting for inflation to catch up with the economic recovery as they put off discussions on winding back stimulus until after the summer
• President Donald Trump’s interview with the New York Times on stirred speculation he may consider firing Special Counsel Robert Mueller for investigating Trump’s business dealings as part of the Russia probe
• The International Monetary Fund agreed to a new conditional bailout for Greece, ending two years of speculation on whether it would join in another rescue and giving the seal of approval demanded by many of the country’s euro-area creditors
• OPEC and Russia’s plan to clear the global oil glut hasn’t worked as they hoped, but there’s little expectation the world’s largest producers will act more aggressively when they meet this weekend
• Investors may turn to equity at the expense of debt given he rolling five-year return on global stocks has outpaced government debt over the past three months as weighted by the standard deviation of gains
• ACS Studies Counterbid to Atlantia’s $19 Billion Abertis Offer
• Paysafe Gets 590p/Share Takeover Proposal from CVC, Blackstone
• Microsoft Regains Turnaround Momentum on Strong Cloud Growth
• EBay Rattles Investor Faith With Slow Merchandise Growth
• Visa’s Kelly Extends First-Year Win Streak as Outlook Raised
• Zinc’s Rally Set to Endure as Top Producer Predicts $3,000
• Google Says Russia Leads in State Requests to Remove Content
• Exxon to Challenge Treasury Finding It Violated Russia Sanctions
• Credit Suisse’s Once-Mighty Stocks Unit Withers Under Thiam
• Delta Wins Lease Deal for Air Terminal at New York’s LaGuardia

Asia equity markets traded marginally in the red, following the lacklustre close on Wall St. amid a slew of earnings releases which were ultimately mixed. ASX 200 underperformed, led by the soft resources, metals and energy sectors, whilst Nikkei 225 also traded in the red to conform to the tone in the region, as JPY's indecision during the session offered no direction for the currency. Elsewhere, Shanghai Comp. and Hang Seng both traded subdued, with the PBoC's increased open market operations of CNY 140bln failing to lift the Chinese bourses. Finally, 10yr JGBs trade marginally higher amid the cautiousness in the region, with the curve steepening as the super-long end underperforms. Participants also await the auction for 10yr, 20yr and 30yr government paper.

Top Asian News

• HNA Group’s Dealings With U.S. Travel Startup to Be Probed
• OZ Minerals Says CFO Luke Anderson to Leave Co. in September
• Bank Indonesia Says Rate Review Delayed by Swearing-in Ceremony
• RBA’s Aussie Dollar Rollercoaster Shows Dilemma for Global Peers
• Reliance to Give One Free Share for Each Held After 8-Year Gap
• Huhtamaki Shares Fall as Indian Tax Reform Hits Demand
• China Artificial Intelligence Bid Seeks $59 Billion Industry
• AAC Drops Most in 7 Years as Jefferies Cites Revenue Warning

European equity markets trade mixed amid currency influence. Subdued trade has been evident, following yesterday's ECB press conference, with EU bourses trading range bound for the morning. The FTSE out-performs as it benefits from the weaker GBP. Telecoms out-perform as earnings continue to dictate the state of play, following a strong report from T-Mobile US being followed by a beat for Vodafone. Fixed Income markets have been led by bunds, with the latest ECB survey being responsible for a second round of bidding in German paper. The survey cut the inflation forecast by 0.10% for 2017 — 2019, with the statement stating that risks are still tilted to the downside.

Top European News

• U.K. Government Borrowing Jumps as Inflation Boosts Debt Costs
• Landis+Gyr Trades Below Offer in Largest Swiss IPO Since 2006
• European Banks’ 2Q Likely to Be Better Than U.S. Peers: HSBC
• SKF CEO Says Electric Cars May Hurt Part of Bearing Business
• ECB: Professional Forecasters Cut Inflation Outlook Through 2019
• Siemens Slams Brakes on Russia After Turbines Spotted in Crimea
• Hochtief Slumps as ACS Mulling Abertis Bid Lowers Buyout Chance
• Swatch’s Strong Forecast Bolsters Decision to Keep Workers

In currencies, RBA Deputy Governor Debelle stated no automatic reason to conform to recent hikes abroad. New Zealand Finance Minister Joyce stated NZ firms are coping well with NZD at current levels, added NZD reflects strong NZ economy. FX markets have slowed this morning, as FX traders seem non-excitant following yesterday's volatility. The price action largely came overnight from the antipodeans. Comments from New Zealand's Finance Minister Joyce stated that NZ firms are coping well with NZD at current levels further adding that a strong NZD reflects strong NZ economy and he is unperturbed by NZD strength. NZD/AUD broke through 0.94 as bulls arrived, consolidating just below at 0.9390, a firm break of this level could see a test of 0.9480. Further, Aussie weakness aided the NZD/AUD push, as RBA Deputy Governor Debelle stated that there is no automatic reason to conform to recent hikes abroad.

In commodities, precious metals have continued their bullish grind, spurred by the Trump reports yesterday. Gold looks toward 1250.00, as July's recovery continues. Oil continues to struggle to find any real direction, however, WTI's July 43.65 upward trendline continues to provide support, WTI bulls would need to see a firm break of 48.50 to indicate a change in momentum.

No economic data is scheduled in the US.

DB's Jim Reid concludes the overnight wrap

Good practise today for the arrival of the twins as a late night work dinner coupled with waking 45 minutes before my already early alarm has left me feeling decidedly sleep deprived. It was an interesting macro dinner with 26 clients and DB representatives including our own CEO. The consensus from clients seemed to be that the carry trade would survive the summer but with question marks about what happens once both the ECB and the Fed start their imminent balance sheet changes. There was plenty of optimism on Europe with the Euro seen as likely to appreciate further with perhaps that appreciation eventually being therisk to growth. On the other hand there was plenty of negativity on the UK with Brexit seen as a potential disaster for the economy, Gilts and Sterling. I'm not quite so sure on the Brexit impact but there is certainly huge execution risk. Curveballs that could derail the short-term carry party were that Mr Trump might decide to turn to the delicate geo-political issues (e.g. North Korea) to divert attention away from the legislative challenges and also that the upcoming debt ceiling deadline around October could be really interesting. The latter being another test of Mr Trump's relationship with Congress. Finally on the dinner, one client remarked that this was the first of such gatherings in a long time where nobody had really mentioned buying very historically cheap volatility. That he thought might be a sign that now might be the time.

So an interesting night and given that it occurred on an important Draghi day it was interesting that there wasn't much discussion on what he said at his press conference. All the talk yesterday leading into the event was on whether or not we would get an affirmation of the hawkish signals made in Sintra last month. In the end it felt like Draghi was checking in for his summer holiday, not pulling back from the Sintra sentiments but also not wanting to rock the boat with new info and risk being called back from hols to deal with a disturbed market in illiquid conditions. In fairness it wasn’t a completely damp squib and wethought our European chief economist Mark Wall summed it up nicely with a “two steps forward, one step back” conclusion. Mark noted a few dovish elements from the meeting including the unchanged language on inflation in the press statement, the fact that the committees have not yet been tasked with studying the policy options, the use of Praet’s more cautious “patience” watchword, the technical reinterpretation of the word “reflation” he used in Sintra, and once again the confidence in the flexibility of the asset purchase programme which in Mark’s mind is a hint that if it needs to continue it can.

On the other hand, Draghi appeared fairly undeterred by the post-Sintra tightening of markets which seemed to give the green light for the Euro to surge another 1% yesterday and break-through 1.160 for the first time since August 2015. Govies chopped around but the range for core markets wasn’t particularly ground breaking. 10y Bunds traded as high at 0.557% and as low as 0.520% in a short space of time before eventually finishing near the bottom of that range and 1.2bps lower on the day. French and Dutch 10y bonds were also 2.6bps and 1.4bps lower. There was a decent rally for the periphery however with yields in Italy and Spain 8.4bps and 9.6bps lower, respectively. It was notable that the move for latter now means that the Spain-Germany 10y spread is at the narrowest since 2015.

So where does that leave the ECB? With the council deliberately avoiding setting expectations for the timing of a policy decision, Mark believes that this reduces the probability of a decision as soon as September. December might however also be considered too late and so in Mark’s view an announcement on October 26th now feels most likely with committees tasked on September 7th. The onus now will be on the inflation data in the coming months. Financial conditions and of course economic growth shouldn’t be underestimated either. Next month’s Jackson Hole speech will benefit from another month of inflation data and is likely to be the next big event for markets.

That rally for the Euro appeared to weigh on equity bourses in Europe with the Stoxx 600 eventually closing -0.38%. Across the pond the S&P 500 slipped into the red in the first hour of trading after US special counsel Robert Mueller announced that he was examining a broad range of financial transactions involving President Trump. That story broke one day after Trump told the NY Times that any investigations around his personal finances would be crossing a red line. Markets recovered however and the S&P 500 (-0.02%) eventually ended little changed. The Dollar index ended the session down -0.50% while Gold was +0.26%.

This morning in Asia it’s been a fairly quiet end to the week although the tone is slightly risk off. The Nikkei (-0.25%), Hang Seng (-0.24%), Shanghai Comp (-0.11%) and ASX (-0.40%) have all slipped into the red. Commodities are broadly unchanged along with the USD.

Jumping to the latest on Brexit, this morning the Guardian are reporting that the UK cabinet will agree to the free movement of EU citizens for up to 4 years as part of a transitional deal. The article suggests that a consensus in the cabinet has been secured, with the news likely to help the softer-Brexit camp. One to watch today potentially.

Yesterday’s economic data was a bit of a sideshow but for completeness, in the UK, June retail sales (ex-auto fuel) was slightly higher than expectations (+0.9% mom vs. +0.5% expected). Over in the US initial jobless claims fell 15k to 233k last week, lower than expectations of 245k while the Philadelphia Fed’s headline manufacturing index fell 8.1pts to a still solid 19.5 in July, albeit a bit below market expectations (23.0), with many of the key component indices also weaker (including shipments and new orders index).

Before we take a look at today’s calendar, this morning our European equity strategy team have published a first take on Q2 earnings season. DB’s Wolf von Rotberg highlights that so far Q2 is off to a weak start: with around 20% of Stoxx 600 companies having reported, only 47% of companies have beaten on EPS, down from the stellar 63% in Q1 and below the historical average of 53%. Most of the reports so far are from non-euro earners – and with the euro up 4% during Q2, FX pressures are likely to keep the Q2 beat ratio subdued once the euro earners start reporting. FX strength is also leaving its mark on the full-yearconsensus earnings expectations, with Euro area earnings revisions having turned sharply negative over the past two weeks. The team see downside risk to their expectation of 10% EPS growth this year, given our FX strategists’ recent 14% upward revision to their year-end projection for the EUR trade-weighted index (every 10% rise in the EUR TWI lowers EPS by 5%).

Looking at what is a very quiet day ahead now. In the UK, public sector net borrowing data for June is due. Across the Atlantic, there are no prints due in the US, however Canada will release data on June CPI (Bloomberg est: 1.1% yoy) which could worth a watch given the recent focus on global inflation. Away from the data, US earnings seasons remains a focus, with General Electric, Honeywell International, Colgate-Palmolive and Fifth Third Bancorp schedule to report.