Whether it is due to the conclusion of quarter-end window dressing, or due to a more poor manufacturing data out of China overnight, but the new quarter is starting off poorly for risk with Europe flat and US equities lower, while the scramble for safety means that bond yields across the developed world just hit new all time lows as precious metals are surging once again on ongoing speculation central banks will do anything to keep markets propped up and buy up even more assets.

As noted earlier, treasury yields fell to a record lows along with sovereign rates from Spain to Japan as policy makers worldwide signaled their readiness to take steps to shore up the economy. Gold extended its fifth weekly advance rising 0.9% to $1,333 and silver jumped as much as 3.6% to the highest since September 2014. US equity futures were down 6 points. The yuan declined to the lowest since 2010 after the Chinese Official Manufacturing PMI printed at 50.0 for June, down modestly from the month prior, while the Chinese Caixin Manufacturing PMI in June tumbled to 48.6 below the 49.2 expected, the lowest reading in 4-months and the 16th consecutive month in contraction territory. Confirming China's concerns was the PBOC's reduction in the 7-Day repo rate by 30 bps to 2.4% as China is now signalling it may have to take more drastic steps to boost the economy.

Yet even with Chinese devaluation concerns looming once more it is all about central banks: yesterday Mark Carney signaled the Bank of England would likely cut interest rates within months, while the ECB said it is considering loosening the rules for its bond purchases, a report which however was denied later by a Reuters report, which in turn pushed Bund yields back down as it meant the scarcity of German paper would persist and forced traders to look for yield across the Atlantic. As a result, the yield on 30-year Treasuries slid as much as nine basis points to an unprecedented 2.1914 percent and was at 2.204 percent as of 6:01 a.m. in New York. The rate on 10-year notes dropped five basis points to 1.3784 percent.

“Policy makers have been very level-headed,” Francois Savary, chief investment officer at Prime Partners in Geneva told Bloomberg. “It’s all about the relief that central banks have intervened. But this rebound is not part of a new trend. There are still political uncertainties and let’s not forget that we’re in a low-growth environment where corporate profits are struggling. Let’s not get euphoric here.”

The question is what happens when this latest round of central bank intervention and jawboning is exhausted: “Markets are reacting positively to the supportive interest rate environment,” said Chris Green, the director of economics and strategy at First NZ Capital Group Ltd. "With interest rates remaining low for longer, the concern is what policy options are left for central banks if we see an even softer patch for the global economy."

It wasn't just the US where yields hit new all time lows - Spanish government securities surged, pushing two- and 10-year yields to all-time lows. Bonds in Italy, which like Spain has a relatively large debt market compared with the size of its economy, also jumped. decision. Japan’s 10-year yield tumbled to an unprecedented minus 0.255%.

The gain in the risk-off complex has so far meant poor performance for risk-on assets: S&P 500 futures fell 0.3%, indicating U.S. equities will snap a three-day rally that erased a June decline and helped the index to a third consecutive quarterly gain.  The Stoxx Europe 600 Index added 0.1%, after gaining as much as 0.6 percent and losing of 0.4 percent. 

The U.K.’s FTSE 100 Index rose 0.3%, after recovering from its post-Brexit slump to reach its highest level since August on Thursday. It is 6.3 percent higher on the week, on course for its best performance since 2011. So much for the Brexit apocalypse so widely predicted by the "experts."

Market snapshot

• S&P 500 futures down 0.3% to 2083
• Stoxx 600 up less than 0.1% to 330
• FTSE 100 up 0.5% to 6534
• DAX up 0.2% to 9702
• S&P GSCI Index down 0.4% to 372.6
• MSCI Asia Pacific up 0.6% to 130
• Nikkei 225 up 0.7% to 15682
• Shanghai Composite up less than 0.1% to 2932
• S&P/ASX 200 up 0.3% to 5247
• US 10-yr yield down 6bps to 1.41%
• German 10Yr yield down less than 1bp to -0.13%
• Italian 10Yr yield down 1bp to 1.25%
• Spanish 10Yr yield down less than 1bp to 1.15%
• Dollar Index down 0.36% to 95.8
• WTI Crude futures down 0.6% to $48.06
• Brent Futures down 0.5% to $49.44
• Gold spot up 0.9% to $1,334
• Silver spot up 2.7% to $19.23

Global Headline News

• Bonds Climb With Gold on Stimulus Optimism as Stocks Pare Gains: Yen advances as data show ongoing decline in Japan prices
• U.S. Yields Set Historic Lows in El-Erian’s Era of Slower Growth: 10-year, 30-year Treasury yields decline to lowest ever
• Disney Said to Acquire Stake in $3.5 Billion MLB Digital Arm Disney has four-year option to acquire additional 33% stake
• Six Williams Directors Said to Resign After Failed Takeover: Almost half of board said to resign following failed merger
• Puerto Rico Defaults on Debt as Obama Approves Restructuring: Governor invokes debt-moratorium law after federal bill passes
• Hedge Funds Set for Worst First Half Since ’11 on Turmoil Managers lost 1.8% on average through June 28, HFR index shows
• BHP Says Court Order Reinstates $6.2 Billion Samarco Claim: Producer says it intends to appeal against court’s decision
• Apple in Exploratory Talks to Buy Jay Z’s Tidal, WSJ Reports: Jay Z bought music streaming service for $56 million in 2015
• Fatal Crash of Tesla on Autopilot Under Investigation by US: U.S. safety regulators say accident happened May 7 in Florida
• Thor Said to Sell Champs-Elysees Building for $544 Million: Buyer said to be a Middle Eastern investor
• Netflix Rises Post-Market, Traders Cite 7Park Channel Checks: NFLX wasn’t immediately available to comment

Looking at regional markets, Asian stocks picked up on the early momentum from the Wall Street closewhere stocks posted a 3-day win streak, although gains have been capped following mixed data releases. Nikkei 225 (+0.7%) traded higher after the BoJ's Tankan survey showed better than expected Large Mfg Industry Index & Outlook figures, while Capex also beat estimates. However, soft Chinese PMI releases have slightly dampened sentiment and pressured indices off their best levels as the Caixin Mfg. PMI fell to a 4-month low. Although, the Shanghai Comp (+0.1%) traded in positive territory for the majority of the session following a net weekly injection and as the discouraging data added to hopes of supportive measures. Of note, Hong Kong markets were closed due to a public holiday. 10yr JGBs tracked T-Notes higher with futures climbing to record highs as the BoJ were in the market for over JPY 1tr1 while yields remained pressured with 2yr,5yr and 10yr yields declining to fresh record lows.

Top Asian News

• China’s Manufacturing Treads Water in June as Services Perk Up: Non-manufacturing PMI at 53.7, compared with 53.1 in May
• Onshore Yuan Slides to 6.6591 vs Dollar, Lowest Level Since 2010: CNY weakens as much as 0.17%
• Japan’s Prices Keep Falling in Challenge to Abe, Kuroda: May core consumer prices fall 0.4% y/y
• Macau Gambling Falls Less Than Estimates Helped by Tourists: Operators are opening more casino resorts aimed at tourists
• Singapore Home Prices Post Longest Losing Streak on Record: Prices fall for 11th quarter as curbs stay
• Bad-Loan Ultimatum in India Sees Default Risk Climb Most in Asia: Bank of India’s CDS jumps as spreads widen on dollar bonds
• Abu Dhabi Fund Denies Guaranteeing 1MDB’s Cayman Investments: 1MDB in months-long dispute with Abu Dhabi’s IPIC over debt
• Trafigura Said in Talks for Stake in $6.5b Indian Refiner: Billionaire Ruia brothers selling stake to pay down debt

In Europe, central banks have stolen the limelight today as ECB and BoE remain at the fore of participants' thoughts and continue to dictate price action. The latest ECB sources saw suggestions that the central bank are not currently considering abandoning their capital key for QE purchases and as such refute suggestions from yesterday that the ECB are concerned about the diminishing pool of eligible debt for their QE programme and subsequently could move away from their current capital key. As such, Bunds and T-notes have seen significant upside, with the German benchmark back above 167, while UST yields reach fresh record lows. In terms of equities, major European indices have traded in a relatively tight range this morning, with Euro Stoxx (-0.25%) trading higher at mid-morning by around 0.2%. Financials are among the worst performers, after hopes of further action by the ECB have been dashed, while defensive sectors in the form of consumer discretionary and consumer staples outperform.

Top European News

• EU’s Bank Resolution Plan Questioned as Denmark Joins Doubters: Italy’s banks saddled with ~EU360b in soured loans
• Deutsche Boerse Director Says ‘Creative’ Answer Needed for LSE: Bloomberg survey shows odds of deal happening at just 26%
• Gove to Make Case for U.K. Premiership After Boris Betrayal: Theresa May is main rival in five-way Tory leadership race
• Euro-Area Manufacturing Grows at Fastest Pace in Six Months: Purchasing Manufacturers’ Index rose to 52.8 in June from 51.5
• U.K. Manufacturing Growth Picked Up Before Brexit Referendum: Purchasing Managers’ Index rose to 52.1 from revised 50.4 in May
• Italy’s Jobless Rate Falls Slightly Before Expected Slowdown: Youth unemployment in May remained unchanged at 36.9%

In FX, the pound slid more, dropping to $1.3250, after sliding 0.9 percent Thursday on Carney’s comments alluding to potential policy action. Sterling reached a 31-year low of $1.3121 on June 27 in the aftermath of the Brexit vote.  The yen snapped a three-day retreat, climbing 0.5 percent to 102.68 per dollar after Japanese data showed core consumer prices dropped for a third straight month, and household spending also declined. The MSCI Emerging Markets Currency Index was little changed on Friday, leaving it 1.2 percent higher this week, the best performance in three months. Brazil’s real and Mexico’s peso have led gains, rising more than 3 percent. The yuan slipped 0.20 percent to 6.6612 per dollar on speculation that the authorities are allowing it to drop. China’s currency weakened more than 3 percent last quarter, the most since the nation unified the official and market rates at the start of 1994.

In commodities, silver jumped as much as 3.6 percent to the highest since September 2014, and gold climbed 0.9 percent to $1,333.63 an ounce with its fifth weekly advance the longest rally since July 2014. Gold will probably extend its rally this half as Britain’s vote to quit the EU adds to the case for the Fed pausing on interest rates, according to Ivan Szpakowski, who left Citigroup Inc. earlier this year to set up a hedge fund that started trading in May. Nickel and lead both rose more than 1 percent. The London Metal Exchange LMEX Metals Index rallied the most in two years last quarter.  West Texas Intermediate crude decreased 0.6 percent to $48.06 a barrel. The commodity jumped 26 percent in the three months through June as declines in U.S. supply fueled speculation the global oil surplus is easing.

On today's US calendar, the highlight will be the June ISM manufacturing print which is expected to have held steady at 51.3. Construction spending for May is also due out along with the manufacturing PMI and later on this evening we’ll get the latest vehicle sales data. There’s a bit more central bank speak with the ECB’s Coeure due this morning in Paris (8.15am BST) and Nowotny (9.30am BST) shortly after, while this afternoon we’ll hear from Bundesbank President Weidmann (4.00pm BST) and the Fed’s Mester (4.00pm BST).

Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities enter the North American crossover modestly lower as the latest ECB sources suggest the central bank are not currently considering abandoning their capital key
• As such, Bunds and T-notes have seen significant upside, with the German benchmark back above 167, while UST yields reach fresh record lows
• Today's highlights include US Mfg PMI, ISM Mfg PMI and potential comments from ECB's Weidmann and Fed's Mester
• Treasuries higher in overnight trading, global equities mixed and gold rallies as central banks around the world promise more stimulus. Fixed income markets early close (2pm ET), rates/FX futures trading floors (1pm ET); U.S. markets closed Monday for holiday.
• Yields on 10- and 30-year U.S. Treasuries fell to records as bonds surged around the world on speculation the U.K.’s decision to leave the EU will slow global growth, prompting the Federal Reserve to abandon plans to raise interest rates
• The European Central Bank is considering loosening the rules for its bond purchases to ensure enough debt is available to buy in the aftermath of the Brexit vote, according to euro- area officials familiar with the discussions
• Justice Secretary Michael Gove made his case to be Britain’s next prime minister after breaking with the incumbent and then betraying the onetime front-runner
• Britain’s vote to leave the European Union, which has whipsawed markets and sparked political turmoil in the U.K., may end up having no impact on the U.S. economy, according to St. Louis Federal Reserve President James Bullard
• Goldman Sachs dismissed about 60 traders and salesmen in New York and London this wee. The cuts, which come on top of at least 353 others in New York this year, affect employees in fixed-income and equities
• For the Bank of Japan tepid economic indicators underscore a looming choice for Governor Kuroda to either step up monetary stimulus, adjust his 2%, two-year inflation target, or suffer a hit to credibility

* * *

US Event Calendar

• 9:45am: Markit US Manufacturing PMI, June F
• 10am: ISM Manufacturing, June, est. 51.3 (prior 51.3)
• 10am: Construction Spending, May, est. 0.6% (prior -1.8%)
• 1pm: Baker Hughes rig count
• Wards Domestic Vehicle Sales, June, est. 13.4m (prior 13.33m)

* * *

DB's Jim Reid concludes the overnight event summary

In a day of fascination in UK politics, it was BoE chief Mark Carney who stole the show markets wise when he discussed the likelihood of looser monetary policy over the summer in an afternoon speech. This was combined with a Bloomberg story late in the day suggesting that the ECB are considering moving away from capital keys to allow them to increase the pool of securities they can buy and possibly give them more flexibility to help direct funds to the more indebted in the future. Both stories helped sharply turn around a day that started with weakness in the morning European session.

Expanding on those two in order, in his second televised address since last Thursday Carney said specifically that ‘it now seems plausible that uncertainty could remain elevated for some time’ and that ‘the economic outlook has deteriorated and some monetary policy easing will likely be needed over the summer’. Carney also highlighted that the Bank will ‘discuss further the range of instruments at our disposal’. It’s worth noting that the upcoming two BoE policy meetings are relatively close together. The first is in just two weeks (July 14th) and the second on August 4th. DB’s George Buckley highlighted in his “As the dust settles” note on Friday that a cut at the August meeting could well be justified and this meeting also happens to line up with the next BoE inflation report. In any case markets yesterday moved to swiftly re-price the odds of a cut this summer. Indeed based on futures markets the implied probability of a cut in July is 62% - the highest it’s been and up from 11% pre-referendum while the probability of a cut by August is 76% and up from 15% in the same time frame. Sterling was little changed in the build up to Carney’s speech but plummeted as he spoke, hitting an intraday low of $1.3206 (about -1.65% lower on the day) before settling down to finish -0.88% by the close at $1.3311. The FTSE 100 and 250 climbed +2.27% and +1.68% respectively with a late rally into the close while it was amazing to also see the March 2019 Gilt hit negative territory yesterday at -0.006% after dropping over 10bps. Putting it in perspective, this time last year that bond was trading with a yield of 1.177%!

Meanwhile the ECB story which emerged after Carney’s speech suggested that policy makers have started to become concerned that the eligible pool of securities for QE has shrunk so much post Brexit that some Governing Council members are starting to favour switching the allocation of purchases towards one in line with a country’s outstanding debt pile. All eyes will be on what the potential Bundesbank response is but there’s no doubting that, if true, the news would be very supportive for risk assets. Indeed Italy would be one to reap the rewards with the potential for a lot more buying of BTP’s. Peripheral rates markets were the big winners yesterday as a result with 10y yields in Italy, Spain and Portugal falling 11bps, 9bps and 8bps respectively while the core was flat to a few basis points tighter. The FTSE MIB also bounced into the close to finish +1.57% yesterday which outperformed the Stoxx 600 (+1.04%), DAX (+0.71%) and CAC (+1.00%). Credit markets were also stronger with financials in particular (senior and sub 5bps and 13bps tighter respectively) leading the charge. It’s worth also mentioning that yesterday the European Commission was said to have authorized for Italy to use government guarantees as a precautionary liquidity support for its ailing banking sector, so it’s likely that this also helped support sentiment. A reminder that the next ECB meeting is on the 21st of July which suddenly looks like it has the potential to be very interesting.

Switching our focus over to markets this morning in Asia where there’s been a fair bit of data out for us to highlight. The June PMI’s have been released in China with the non-manufacturing PMI rising 0.6pts to 53.7 (highest since March) while the manufacturing PMI declined one-tenth to 50.0 as expected. The private Caixin manufacturing survey however did reveal a 0.6pt decline to 48.6 which is the lowest since February. Meanwhile in Japan headline inflation has moved further into deflationary territory in May at -0.4% yoy from -0.3%. If there’s good news it’s that the decline was a little less than expected (-0.5% yoy). Core CPI printed at -0.4% yoy too (from -0.3%) while the core-core declined one-tenth also to +0.6% yoy. Also out is the Q2 Tankan survey where the large manufacturers index held at +6 (vs. +4 expected) while the large non-manufacturing index declined 3pts to +19 (vs. +22 expected). Readings for small firms weakened. Elsewhere Japan’s jobless rate has held steady at 3.2% in May, while household spending has fallen to -1.1% yoy in the same month (from -0.4%). Taken together it’s hard to imagine that the data will do anything other than further the pressure on the BoJ to react later this month.

The Nikkei and Topix are both +0.67% higher following the data while the Yen is also around +0.3% stronger. Bourses in China are modestly higher while the Kospi and ASX are +1.00% and +0.61% respectively. Sterling is about +0.2% stronger while FTSE 100 futures are up about a percent.

Moving on to look into a bit more detail on that latest swing in UK politics where, following that announcement from Boris Johnson yesterday, the majority of the betting odds appear to be in favour of Theresa May as the being the next UK PM, indeed a view also shared by the BBC. While May backed the ‘remain’ campaign it did feel like her speech yesterday offered a relatively clear path ahead. May highlighted that there ‘must be no attempt to remain inside the EU, no attempts to re-join through the back door and no second referendum’. She also went on to say that there should be no general election until 2020 and no decision to invoke article 50 until the British negotiating strategy is agreed and clear.

Changing tack, as we discussed at the top, yesterday Michal Jezek in my team published a note reviewing the performance of CSPP-eligible, ineligible non-bank and (ineligible) bank senior EUR bonds, assessing their relative performance since we formulated our CSPP strategy before the programme started. We affirm our strategy, sticking to overweight CSPP-eligible bonds for now given the uncertain outlook after the Brexit vote. In addition to senior unsecured bonds, we look at performance across the bank capital structure. We highlight the outperformance of AT1s relative to bank equity, in contrast to the bank sell-off early in the year. Finally, we produce a list of the top and bottom 300 EUR IG senior benchmark bonds ranked by relative spread performance since a) the Brexit vote and b) the CSPP announcement, indicating which are eligible and which are ineligible non-bank or bank bonds. See the note for more details. Email Michal.Jezek@db.com if you didn't get it.

In a last mention of the ECB for today, this morning our European equity strategists published a report on market expectations for ECB easing. They highlight that while the story which emerged yesterday potentially removes some near term financial stress in markets, other referendum related risk factors, while less immediate, are still in place. The weakness in European banks raises the risk that the Euro area credit impulse will turn negative which points to downside risks for domestic demand growth, macro uncertainty in both the UK and Euro area is also likely to remain elevated and finally the prospect of further USD strength raises the risk of further CNY depreciation and oil price weakness. They maintain their overall cautious stance on European equities and also banks as a result and see upside as relatively capped even with the ECB story.

In terms of the rest of the price action yesterday, the stimulus prospect boost to markets also helped Wall Street close the quarter on a strong note yesterday. The S&P 500 finished +1.36% and actually erased a monthly decline in the last minutes of trading to close just in positive territory for June. Yesterday’s gains actually came despite a rougher session for Oil with WTI closing -3.11% and back below $49/bbl although precious metals and especially Silver (as you’ll see in our performance review below) continued the amazing run after rallying +2.28% and to the highest level since September 2014.

There was a bit of data yesterday too. In the US initial jobless claims were up 10k last week to 268k which is pretty much where the four-week average is sitting. Meanwhile the Chicago PMI printed at 56.8 for June (vs. 51.0 expected) which is a 7.5pt rise from that low May print and actually the highest reading since January last year. That perhaps provides some upside risk to the ISM manufacturing print today. Meanwhile in Europe the CPI headline estimate for the Euro area in June was slightly higher than expected (+0.1% yoy vs. 0.0% expected) after being at -0.1% in May. Core inflation rose one-tenth to +0.9% yoy after expectations were for no change. Meanwhile the Q1 GDP print for the UK was left unchanged in the final revision at +0.4% qoq, German unemployment also held steady at 6.1% while the flash June CPI print for France came in at +0.2% mom as expected.

Taking a look at the day ahead, datawise in Europe this morning we’ll get those final revisions to the manufacturing PMI’s as well as a first look at the data in the periphery and for the UK. The Euro area unemployment rate for May is also due to be released (expected to nudge down one-tenth to 10.1%). The highlight this afternoon in the US will be the June ISM manufacturing print which is expected to have held steady at 51.3. Construction spending for May is also due out along with the manufacturing PMI and later on this evening we’ll get the latest vehicle sales data. There’s a bit more central bank speak with the ECB’s Coeure due this morning in Paris (8.15am BST) and Nowotny (9.30am BST) shortly after, while this afternoon we’ll hear from Bundesbank President Weidmann (4.00pm BST) and the Fed’s Mester (4.00pm BST).