Global trade was front and center again, after the Trump administration proposed another round of trade talks with Beijing before slapping China with $200BN in tariffs in the absence of key concessions from Beijing, while traders were on edge ahead of a slew of central bank announcements and critical CPI data in the US.

One day after Apple's latest iPhone unveiling disappointed shareholders who sold AAPL stock and pressured tech stocks, world markets calmed and MSCI’s All World index was set for a fourth straight day of gains with S&P futures slightly higher after Asian shares jumped ending a 10 day losing streak, the longest in 16 years, on renewed hopes of fresh trade negotiations between the US and China.

Shanghai, Tokyo, Jakarta stocks all gained around 1% following Wednesday's sharp drop in the dollar, while Hong Kong’s Hang Seng finished up 1.8%, while China’s yuan also edged higher in the currency markets even if the Shanghai Composite barely budged amid ongoing skepticism inside Ground Zero, China, that talk this time will be different.

Initially, Europe also moved higher, led by automakers with gains between 0.2% and 0.6% for German, French, Italian and Spanish shares offsetting a weaker FTSE in London which was hit by weaker oil and tobacco stocks. However, Europe's Stoxx 600 index erased gains of as much as 0.3% as the Turkish lira plunged after country’s President Recep Tayyip Erdogan attacked the central bank for continuously missing inflation targets and saying the CBRT "should cut this high-interest rate", just hours before rate decision.

European shares have remained especially sensitive to rising EM risks, especially in Turkey, as exporters and banks have exposure to developing nations. Meanwhile, The euro edged lower and the pound was steady ahead of central bank announcements which are not expected to deliver any major surprises.

Staying in Europe there was some more Italian drama after La Stampa reported that Italian Finance Minister Giovanni Tria called Prime Minister Giuseppe Conte to discuss the struggle over the 2019 budget and threatened to resign. The FTSE MIB was trying to bounce back after a 17% drop in the past four months, while Italian bonds declined for a third day after the nation’s latest debt auction drew weaker demand.

Meanwhile, as previewed earlier, as part of today's ECB announcement, the biggest "surprise" will likely be that growth forecasts are tweaked lower, even as the central bank keeps its guidance on interest rates which will stay at record lows “at least through the summer” of next year. According to Bloomberg, given the highly negative sentiment toward the banks - the sector index SX7P is down more than 20% since a peak in January, trades below book value and at 9.3x expected earnings which is its lowest P/E ratio in two years, with a dividend yield of 5% - risk seems to be on the upside for the sector heading into Draghi’s press conference.

Over in the US, index futures all pointed to a slightly firmer open.

In FX, the dollar nudged higher after a weaker than expected PPI report which saw producer prices drop for the first time in 18 months, undermined the case for a faster pace of policy tightening by the Federal Reserve. The latest CPI data is due out at 8:30am today.

The euro hovered around $1.1624 having gained around 0.6 percent so far this week. The yen weakened 0.2 percent to 111.47 per dollar on the soothing trade noises. Sterling held near a six-week high of $1.3087 as Brexit-supporting lawmakers in British Prime Minister Theresa May's party publicly pledged support for her to stay in power.

Treasuries edged lower while Italy’s bonds underperformed other European sovereign debt as speculation swirled around the fate of the country’s finance minister.

Elsewhere, emerging-market shares and currencies climbed helped by the recent weakness in the dollar, with South Africa’s rand leading the pack. Crude oil pared two days of gains made on the outlook for tighter supply. The potential impact on commodities from Hurricane Florence faded with lower wind speeds. Meanwhile, copper held above $6,000 in London as metals broadly keep Wednesday’s gains on optimism around an easing in the US-China trade war. 

Market Snapshot

• S&P 500 futures up 0.09% to 2,891.00
• STOXX Europe 600 up 0.2% to 377.96
• MXAP up 0.9% to 160.29
• MXAPJ up 0.9% to 512.81
• Nikkei up 1% to 22,821.32
• Topix up 1.1% to 1,710.02
• Hang Seng Index up 2.5% to 27,014.49
• Shanghai Composite up 1.2% to 2,686.58
• Sensex up 0.8% to 37,717.96
• Australia S&P/ASX 200 down 0.8% to 6,128.72
• Kospi up 0.1% to 2,286.23
• German 10Y yield rose 0.5 bps to 0.416%
• Euro down 0.06% to $1.1619
• Brent Futures down 0.9% to $79.03/bbl
• Italian 10Y yield rose 0.8 bps to 2.589%
• Spanish 10Y yield rose 0.2 bps to 1.465%
• Brent Futures down 0.9% to $79.03/bbl
• Gold spot down 0.03% to $1,205.82
• U.S. Dollar Index up 0.1% to 94.92

Top Overnight News

• U.S. government has proposed another round of trade talks with Beijing to avoid further escalation in Donald Trump’s trade war with China, the president’s top economic adviser said
• If ECB President Mario Draghi intends to plow on with the plan to phase out asset purchases starting next month, then he’ll need to explain why the confidence of policy makers remains intact: decision day guide
• Hurricane Florence weakened on its course to the U.S. East Coast but is still big enough to deliver a rainy punch and threaten a huge swath of the Carolinas coastline
• Italian bonds declined for a third day amid reports that Finance Minister Giovanni Tria threatened to quit over the country’s budget negotiations and the nation’s latest debt auction drew weaker demand
• The ECB said banks have selected the euro short-term rate, or Ester, as their preferred replacement for Eonia, a gauge of how much they charge each other for loans
• Erdogan published an executive decree that forces contracts between two entities in Turkey to be made in liras rather than foreign currencies
• Australian employment jumped by more than twice economists’ estimates in August, while the jobless rate remained unchanged as more people sought jobs
• Bank of Japan will keep policy unchanged next week, according to all economists surveyed by Bloomberg. A majority point to the central bank staying on hold until after a sales- tax increase next year
• The EU is gambling on U.K. Prime Minister Theresa May making concessions on the Irish border to pave the way for a Brexit deal in November and are starting to redraft the language on the so-called Irish “backstop” in an attempt to make it more acceptable to Britain
• Pro-Brexit members of May’s Conservative Party are running out of patience with her refusal to ditch her so-called Chequers proposals and will launch a formal leadership challenge against her if she does not do so in the next three weeks

Asian equity markets were positive with sentiment underpinned by hopes of a de-escalation of the trade dispute after the US invited China for trade talks which was seen to be an effort to get negotiations back on track. This lifted most the regional bourses with Nikkei 225 (+0.9%) also euphoric on better than expected Machine Orders which grew at the fastest pace since January 2016, while ASX 200 (-0.8%) bucked the trend as financials were dampened after further unscrupulous practices were revealed at banking royal commission. Elsewhere, Hang Seng (+2.5%) and Shanghai Comp. (+1.2%) were firmer with sentiment boosted by the more encouraging trade-related headlines and after the PBoC upped its liquidity efforts, while participants also digested lending data in which New Yuan Loans missed estimates although Aggregate Financing, which is the broadest measure for China’s credit growth, topped forecasts. Finally, JGBs were flat as focus centred on the region’s riskier assets, while stronger demand at today’s 5yr auction also failed to underpin prices of the 10yr.

Top Asian News

• Nobel Prize Winner’s Microlender Enters Japan to Fight Poverty
• Sri Lanka Says Has Been Acting to Counter Currency, Eco Risks
• Korea Sovereign Fund Exits Investment With Paul Singer’s Elliott
• China Welcomes U.S. Invitation for Trade Talk: Commerce Ministry

Equities are mixed, with trading tentative ahead of the BoE, ECB and CRBT rate decisions later on in the day. Major moves have been confined to equity specific stories, with Michelin’s guidance reaffirmation leading the CAC to the top of the bourse pile. Despite FTSE heavyweights RBS (announcement of a special dividend) and Glencore (base metal strength) outperforming, the FTSE is leading the losses in the index space, with SSE close to the foot of the bourse after a broker downgrade.
The IT sector is the marked sector outperformer with semiconductor names benefiting from AMD’s outperformance in the US session.

Top European News

• European Autos Outperform on Possible New Round of Trade Talks
• Italy Bonds Dip on Report Tria Offered to Quit on Budget Discord
• Reports of Tria Resignation Unfounded: Finance Ministry Official

In FX, the DXY index and broad Dollar are softer post-US initiatives to resume formal trade discussions with China, but off lows and relatively side-lined ahead of US inflation data later. The DXY is attempting to nudge back up towards 95.000 from 94.767 at worst, as Usd/G10 pairings consolidate before Thursday’s headline events. AUD - The major outperformer and beneficiary of planned mediation on tariffs between Washington and Beijing, but still laboring on approaches or rebounds to 0.7200, even with the extra incentive of upbeat Aussie data overnight (August payrolls easily exceeded consensus and largely due to full-time jobs). Note also, Aud/Usd flanked by hefty option expiry interest at 0.7220-30 (1 bn) and 0.7140-50 (1.1 bn). JPY - Back to the bottom of the G10 pile on the aforementioned de-escalation of global protectionism tensions, and significantly stronger than expected Japanese machinery orders, with reported domestic offers at 111.50 revisited ahead of larger supply said to be lurking between 111.60-70, plus large option expiries between 111.50-65 (2.1 bn) in the mix. EM - The Lira looks all set to grab the limelight at midday with anticipation/hype running rife for the CBRT rate decision amidst extremely wide-ranging estimates about the extent and manner of the flagged policy stance change. For the benchmark 1 week repo, forecasts span from unchanged to as much as +725 bp, while others suggest that the Bank may be more creative/subtle/restricted and tweak other official rates/corridors instead. Usd/Try poised around the middle of a 6.3385-3905 band in the run-up, while the Rand continues its impressive rebound towards 14.8000 vs the Usd on the softer Dollar overall, and with some independent encouragement from Moody’s downplaying the threat of an SA ratings downgrade.

In commodities, oil is slipping after IEA’s monthly report which reported an increased level of production by OPEC to offset falling Iranian production, and whether premiums are being unwound as Florence has weakened a bit more, but is still life-threatening storm surge and rainfall is still expected. Brent futures are now hovering above USD 79.00/bbl after breaking USD 80.00/bbl in Wednesday’s trade. This is discounting the potential support offered to the fossil fuel by the closure of oil production facilities in the eastern part of the South China Sea before two typhoons hit the area. In the metals scope, gold is essentially unmoved ahead of this Thursdays Central Bank flurry, with low volumes seen as investors hold off trading the yellow metal. Shanghai copper (+2.3%) has seen its largest one-day gain in 3 months off the back of restored US-China trade talks, with nickel (+2.6%) and zinc (+2.6%) also benefiting from the improved risk tone. IEA Monthly Report: maintains their global oil demand growth forecast for 2018 and 2019 at 1.4mln bpd and 1.5mln bpd respectively. Said that the global oil market is tightening up. The Brent price range of USD 70-80bbl seen since April could be tested. OPEC crude output stands at a 9-month high of 32.63mln bpd in August.

The day ahead will be dominated by the ECB, BoE, CBT and US CPI but there are other data releases to highlight including the final August CPI revisions in Germany and France, Argentina CPI for August, and the latest weekly jobless claims and August monthly budget statement in the US. Worth flagging also is the IMF conference on sovereign debt including opening remarks from Lagarde, as well as scheduled speeches from the Fed’s Quarles (at 3pm BST) and Bostic (at 6pm BST). We’ve not mentioned the BoE but DB agrees with consensus that no changes to policy are likely. Officials may mention the recent softening in economic data and could comment on ongoing Brexit negotiations, but it shouldn’t be market moving.

US Event Calendar

• 8:30am: US CPI MoM, est. 0.3%, prior 0.2%; CPI Ex Food and Energy MoM, est. 0.2%, prior 0.2%
• US CPI YoY, est. 2.8%, prior 2.9%; CPI Ex Food and Energy YoY, est. 2.4%, prior 2.4%
• 8:30am: Real Avg Weekly Earnings YoY, prior 0.11%; Real Avg Hourly Earning YoY, prior -0.2%
• 8:30am: Initial Jobless Claims, est. 210,000, prior 203,000; Continuing Claims, est. 1.71m, prior 1.71m
• 9:45am: Bloomberg Consumer Comfort, prior 58
• 2pm: Monthly Budget Statement, est. $187.0b deficit, prior $107.7b deficit

DB's Jim Reid concludes the overnight wrap

There’s the potential for today to be the most exciting day of the week. Indeed, we’ve got the ECB, CBT and BoE meetings as well as a US CPI report all within the space of an hour and a half (from 12pm to 1.30pm for those wanting to get an upper hand on lunch orders).

Of these, the ECB, CBT and US CPI are much more likely to be market moving than the BoE. Briefly previewing these, first up is the ECB where our economists’ expectation ( link ) is that we’ll get a confirmation that QE net purchases will be phased out in the final quarter of this year. As a reminder, the ECB included a caveat which gave it optionality of sorts depending on incoming data, but given that the inflation outlook hasn’t weakened since June then there’s little reason to think that there’s been a “major deviation” that could cause the ECB to change its tune. Meanwhile, relative to the most recent consensus expectations, our colleagues note that the June staff forecasts look in line to marginally too optimistic so there’s a moderate risk that the staff revise forecasts slightly lower (around a tenth lower for CPI and GDP). On this it’s worth noting the Bloomberg article doing the rounds yesterday which suggested we would see lower GDP forecasts from the ECB today. Also worth watching out for is President Draghi’s response to Italy. It’s hard to see him approaching any questions from reporters with anything but a straight bat but the market will no doubt be closely watching.

As for Turkey, well the market is expecting the CBT to hike the one-week repo rate to 325bps to 21% although the range among economists on Bloomberg is anywhere from no change to 725bps of hikes. So it could be an interesting meeting. Our economists in Turkey expect ( link ) the CBT hike to 22% while also returning back to full funding from the policy rate. They note that this would translate into 275bps of effective tightening as the marginal lending rate for local banks would move to 22% from 19.25% currently at the overnight facility. Despite rallying yesterday (+1.35%), the Lira is still down -40.19% YTD so clearly the market is crying out for some policy stability to help stem the rout. The question though is how much tightening is needed.

Elsewhere, the consensus for US CPI this afternoon is another +0.2% mom core print for August – the 35th month in a row with such a forecast – which should be enough to keep the annual reading at +2.4% yoy. Our US economists actually expect the latter to round down to +2.3%, however, the three and six month annualized changes should firm to +2.45% and +2.12% respectively so it should continue to ensure that the Fed remain resolute in their tightening mode. Last Friday’s strong AHE print and Tuesday’s JOLTS data signaled that inflationary wage pressures should continue, so the inflation pulse does seem to still be on the up for the US right now.

Going into Super Thursday markets in Asia appear to be in a much more upbeat mood which seems to reflect the news that broke yesterday suggesting that US Treasury Secretary Mnuchin had reached out to China to propose a new round of trade talks. Economic Advisor to the White House Larry Kudlow has since confirmed this overnight. The Nikkei (+0.84%) and Hang Seng (+1.40%) are leading gains on the back of that while the Shanghai Comp (+0.14%) and Kospi (+0.18%), although off their highs, are also up. Futures are more or less flat in the US while bonds are more mixed but the overall scope of moves is fairly modest. Looking back to yesterday, equities spent much of day grappling between a tumbling tech sector, another sharp leg higher for oil prices and that story suggesting that the US will propose a new round of trade talks with China. After diving between gains and losses, by the close of play last night the S&P 500 finished +0.04% with energy stocks up +0.51% while the NASDAQ fell -0.23% and wiped out around half of Tuesday’s gain. Apple closed -1.25% (with the stock trading mostly flat after the new iPhone release) and the NYFANG index ended +0.05%. Credit markets continued their recent strength, with the  CDX IG index tightening 1bp to 57.5bps – its lowest level since March. CDS has outperformed cash notably of late.

The MSCI EM index traded up +0.12%, gaining for the only second session in the last eleven trading days. The EM currency index rallied +0.80% after the positive trade headlines regarding new US-China discussions. Meanwhile, WTI Oil (+1.62%) turned in its second consecutive >1.5% session yesterday and Brent hit $80/bbl for the first time since May with rising concerns about supply including the impact of Hurricane Florence driving price action. Demand looks healthy too, with US data showing a drawdown in crude oil inventories of 5.3 million versus expectations for a 1.6 million barrel drawdown. Bonds largely ignored the oil and trade headlines though, with Treasuries finishing 1.3bps lower and yields in Europe down a similar amount. BTPs (+0.6bps) underperformed for the second day, albeit modestly, following a later-denied Ansa news story about the 5SM Party asking for €10bn for its citizen income proposal or otherwise Finance Minister Tria’s resignation.

Ahead of today’s US CPI, yesterday’s headline PPI data for August initially looked like a slight inflation miss but at closer inspection it was much more of a wash. Indeed the headline number came in at -0.1% mom (vs. +0.2% expected) largely due to the trade component, causing the annual reading to fall to +2.8% yoy from +3.3%. However the healthcare component was a solid +0.18% mom (implying a decent read-through to PCE) and we also saw the ex-food, energy and trade reading rising one-tenth to +2.9% yoy.

We also had speeches from two FOMC members yesterday, though neither signaled a substantive change in policy views. Fed Governor Brainard recommitted to the gradual pace of rate hikes, cited financial stability as a potential concern, and mentioned emerging markets, the yield curve, and the still low level of r-star as potential problems moving forward. St. Louis Fed President Bullard reiterated his dovish view that rates are already near neutral, or even already restrictive, given the slope of the yield curve and the level of market-based measures of inflation expectations. Brainard is nearer the centre of the committee and her speech probably better reflects the median FOMC view, but Bullard’s comments remind us that some issues will continue to be debated on the FOMC.

The day ahead will likely be dominated by the four events we highlighted further up (ECB, BoE, CBT and US CPI) but there are other data releases to highlight including the final August CPI revisions in Germany and France, Argentina CPI for August, and the latest weekly jobless claims and August monthly budget statement in the US. Worth flagging also is the IMF conference on sovereign debt including opening remarks from Lagarde, as well as scheduled speeches from the Fed’s Quarles (at 3pm BST) and Bostic (at 6pm BST). We’ve not mentioned the BoE but DB agrees with consensus that no changes to policy are likely. Officials may mention the recent softening in economic data and could comment on ongoing Brexit negotiations, but it shouldn’t be market moving.