U.S. stock futures followed European and Asian shares lower in thin volume after China called off planned trade talks with the U.S. and the Trump administration imposed another $200 billion in "Phase II" China tariffs just after midnight; oil jumped 2.4% as OPEC+ members defied Trump’s calls for lower oil prices during a weekend conference, refusing to boost output.

Asia set the downbeat tone as Hong Kong stocks fell, while thinner than average volumes across Asia due to holidays in China, South Korea and Japan.  "Given that the trade talks are off, investors will be watching what happens after the implementation of the tariffs and particularly whether the U.S. will move to the next phase, which would be tariffs on a further $267 billion of Chinese goods," said Dushyant Padmanabhan, a currency strategist at Nomura in Singapore. White House trade adviser Peter Navarro said on NPR’s Morning Edition that “the president was crystal clear in his statement: if China retaliates, the process will move forward on the additional amount.”

European stocks followed lower, with miners and carmakers, both sectors heavily exposed to global trade, among the biggest decliners in the Stoxx Europe 600 Index, while futures on the S&P 500 and Dow pointed to a weaker open. Randgold Resources and bucked the trend to rally on merger news following news of a merger with Barrick, creating the world's largest gold miner; Sky also rose after Comcast beat Fox in the auction for the broadcaster with a $39 billion bid, a deal that has been two years in the making. Comcast will start buying Sky shares in the market in order to reach the 50% threshold before the Oct. 11 deadline. Current shareholders just got an extra 9% for their patience as Comcast will pay 1,728p for the shares. What Fox will do with its 39% stake is still unknown. Elsewhere, Carrefour denied it approached Casino Guichard-Perrachon only hours after the rival grocer said its board rebuffed a proposal for a possible merger.

Surprisingly, with a new round in the trade war now live and with the Fed set to hike rates in just a few days, the dollar initially pushed higher, but failed to sustain an early-London advance. Pound volatility was the highlight in options space for another day as Brexit headlines were in focus, while the euro advanced after stronger than expected German IFO data beat across the board, and ahead of a Mario Draghi speech Monday.

As the dollar declined, the Chinese yuan dipped, even more, weakening over 200 pips to as low as 6.87 as traders were unable to trade the Shanghai Composite which was closed on Monday.

Elsewhere in overnight FX trading, the euro reversing earlier losses to edge higher in early London session. The pound strengthened on increasing talk of a second U.K. referendum on the final Brexit deal, recovering above $1.31 as some traders took profit on short positions; as Bloomberg notes, the premium to protect against losses in the pound versus the dollar over the next three months has widened to the most since January 2017 after U.K. Prime Minister Theresa May said Friday that Brexit negotiations had reached an impasse.  The Australian and New Zealand dollars declined, leading losses among the Group-of-10 peers, with the offshore yuan as China canceled trade talks with the U.S. and $200 billion of American tariffs on Chinese goods took effect after midnight Washington time.

As noted last night, JPMorgan said it was starting to factor into its strategy a growing potential for a “Phase III” of the tariff war next year affecting all Chinese imports, which would lead to weaker growth in the country and hit U.S. stocks. While the escalation in cross-Pacific trade tensions are proving a new test for global stocks which have posted two strong weeks of gains, today's decline was virtually negligible in the context of the recent sharp move higher.

And with trade war progressing, attention now turns to the Fed's policy meeting that will see rates increased for the third time this year, with markets pricing in another hike in December.

Elsewhere, market jitters continued in Indian shares where the rupee slid as cracks appeared in Asia’s best-performing stock market this year amid concerns about troubles in the shadow banking sector after IL&FS announced several defaults on Friday following by key management resignation.

Emerging-market shares and currencies initially weakened but have since recouped many of their losses as the dollar rally fizzled. The rupee and rupiah led a drop in Asian currencies; Hong Kong stocks fell the most in the region on a day when most North Asian markets were closed for holidays.

Treasuries declined with European sovereign bonds: the 10-year TSY yield gained 2 bps to 3.08%, hitting the highest in more than four months with its fifth straight advance. Germany’s 10-year yield increased two basis points to 0.48%.

Crude oil hit a fresh cycle high, as Brent rose above $80/barrel, a 4 year high, after OPEC shunned U.S. President Donald Trump’s calls to increase supply. Looking at the oil rally, traders are looking increasingly convinced it has more juice, while the OPEC meeting on Sunday showed its members clearly have no urgency to boost their output.

Switching to gold, the bullion is still holding around its $1,200 level. Credit Suisse strategists have now abandoned their bearish view on the precious metal, while BofAML sees gold topping $1,300 on fiscal deficit. What’s in it for gold miners? Their valuation level is near an all-time low, the rand is weak and GEM stocks have underperformed their U.S. peers.

In the latest Brexit news, UK PM May’s aides have reportedly begun contingency planning for a snap election in November to save the Brexit talks and her job after EU leaders rebuffed the PM’s Chequers plan. Strategists have begun “war-gaming” an autumn vote to win public backing for a new plan, according to the Times. However, there were also reports UK Brexit Secretary Raab dismissed claims of a snap general election in Autumn, while playing down the chances of the government pivoting towards a Canada-style deal and EU officials are also thought to be working on a counter-proposal to Chequers, which is likely to appear in early October, the Guardian reported. Meanwhile, Telegraph said that a majority of the UK cabinet is now supporting moves towards a Canada-style Brexit deal. As such, May will now be asked to reassess her approach and opt for a free trade agreement that represents a ‘clean Brexit’. UK Cabinet Ministers will be required to grant limitless access to European Union migrants for more than two years after a “no-deal” Brexit, according to the Times. Such a move proposed by Home Secretary Javid will likely anger Brexiteers.

In central bank news, ECB's Dolenc said that ECB's interest rates will remain low through the summer of 2019, says he can't comment on when they will change.

On the geopolitical front, there was a shooting at a military parade in Iran that was claimed by anti-government group as well IS militants, while Iranian President Rouhani criticised the US and Gulf states as having enabled the attack. Iran revolutionary guards threatened retaliation for the attack on the Iranian military parade; although it is not clear who they will retaliate against.

Data include Chicago Fed National Activity and Dallas Fed Manufacturing Activity. Amalgamated Bank and Ascena Retail are reporting earnings.

Market Snapshot

• S&P 500 futures down 0.2% to 2,928.25
• STOXX Europe 600 down 0.2% to 383.38
• MXAP down 0.6% to 165.18
• MXAPJ down 1% to 524.49
• Nikkei up 0.8% to 23,869.93
• Topix up 0.9% to 1,804.02
• Hang Seng Index down 1.6% to 27,499.39
• Shanghai Composite up 2.5% to 2,797.49
• Sensex down 1.7% to 36,221.78
• Australia S&P/ASX 200 down 0.1% to 6,186.87
• Kospi up 0.7% to 2,339.17
• German 10Y yield rose 1.1 bps to 0.473%
• Euro up 0.1% to $1.1763
• Brent Futures up 2.2% to $80.56/bbl
• Italian 10Y yield fell 5.1 bps to 2.47%
• Spanish 10Y yield rose 0.2 bps to 1.497%
• Brent futures up 2.6% to $80.86/bbl
• Gold spot down 0.1% to $1,198.99
• U.S. Dollar Index down 0.1% to 94.15

Top Overnight News

• China dashed hopes for a near-term resolution to the trade war with the U.S., warning Trump that his threats of further tariffs are blocking any potential negotiations. The response, which came just over an hour after the U.S. imposed new duties on $200 billion in Chinese goods on Monday, underscores a deepening gulf between both governments
• ECB should consider tightening monetary policy sooner than originally planned, ECB Governing Council member Ewald Nowotny said Sunday on Austrian television
• Theresa May’s fiercest critics spelt out their Brexit demands on Monday, just as the embattled Conservative leader heads into a potential showdown with her top ministers; The Sunday Times reported that May’s aides have discussed the possibility of a November general election, in which she would seek a public endorsement of a harder Brexit stance
• Bank of England policymakers have the chance this week to share their thoughts on interest rates now that Governor Mark Carney has said he’s staying for longer
• Donald Trump’s demand that OPEC take rapid action to reduce oil prices received a tepid response, with the group saying it would boost output only if customers requested it
• All signs point to Prime Minister Stefan Lofven losing the first round in his battle to remain in power as Sweden seats its new parliament
• Brett Kavanaugh’s nomination to the U.S. Supreme Court is at risk of unraveling after new sexual misconduct allegations emerged, just as the Senate Judiciary Committee prepares to hear testimony from a woman claiming he assaulted her in high school
• The European Central Bank should consider tightening its monetary policy sooner than originally planned, ECB Governing Council member Ewald Nowotny said Sunday on Austrian television
• The European Union’s trade chief heads to New York this week to continue negotiations with the U.S. and Japan, as the three parties seek a way to end what they see as China’s unfair commercial policies and dial down global tensions

Asian stocks traded lower with South Korea, Japan, Taiwan and mainland China away due to public holidays, with risk sentiment dampened after China cancelled trade talks with the US. In addition, fresh US-tariffs took effect from today with 10% US tariffs on USD 200bln worth of Chinese goods and China had previously announced a retaliation of 5-10% tariffs on USD 60bln of US goods. ASX 200 (-0.1%) losses were led by weakness in the metals sector, while healthcare and financial names also weighed on the index. Hang Seng (-1.6%) extended on losses from the open as trade concerns remained in focus and amid continued increases in money market rates in Hong Kong with the 3-month HIBOR at its highest in 10 years. China cancelled upcoming trade talks with the US. (WSJ) In related news, there were comments from US President Trump stating the US have a lot more tariffs if China retaliates. (Newswires)

Top Asian News

• China Says Talks Can’t Happen Under U.S. Tariff Threat: Xinhua
• China Beige Book Says Manufacturers Stressed Even Before Tariffs
• Tiny Maldives Boots Out Pro-China President in Election Surprise
• China Firms May Face Strains on 364-Day Dollar Bonds: Law Firm
• India Said to Plan Raising $2.8 Billion by Merging Power Firms

European equities have started the day on the back foot as trade concerns have come back into the fray after US-China sanctions have taken effect and China cancelled US trade talks. The automotive sector is struggling in the wake of this, with weakness in Daimler (-1.3%) and Volkswagen (-1.0%) pressuring both the DAX and consumer discretionary sector into underperformance. This is being further exacerbated by The German Government and carmakers failing to strike a deal on hardware retrofits for older diesel vehicles. The energy sector is the outperformer and benefitting from higher oil prices as market participants digest commentary from the JMMC meeting in Algiers over the weekend. The 2 year takeover saga of Sky (+9.0%) has reached a conclusion as the Co. have accepted Comcast’s bid of GBP 17.28/share made in a blind auction over the weekend. Comcast beat out 21st Century Fox and value the UK broadcaster at over GBP 30bln. Randgold Resources (+4.9%) and Barrick Gold have confirmed they are in late stage discussions regarding a merger valued at USD 18bln.

Top European News

• ECB on Runway to Rate Liftoff Considers What Should Happen Next
• German Business Sentiment Slid Amid New Round in Trade Spat
• The Secret Plot to Tie the Hands of Italy’s Populist Government
• Italian Bonds Extend Drop Amid Budget-Deficit Concerns
• Drax in Talks to Buy U.K Power Generation Plants From Iberdrola

In FX, the Pound has regained some composure after last week’s fall from grace, and its recovery is perhaps even more impressive given weekend UK press reports full of talk about a snap election. Moreover, some market observers are pinning the rebound on latest remarks from Raab striking a defiant message amidst all the growing criticism of and opposition to PM May’s Chequers plan as he maintains that this is the best formula for a deal with the EU, but M&A flows also look supportive given Comcast’s conquest in the battle for Sky. Cable has reclaimed 1.3100+ status, and techs are also noting the fact that a daily cloud base around 1.3055 has held on a couple of occasions, while Eur/Gbp is back below 0.8900 even though the single currency looks more solid around 1.1750 bs the Dollar. In fact, Eur/Usd is trying to probe higher towards 1.1800 in wake of Germany’s Ifo survey that saw a clean sweep of beats vs consensus and only minor moderation in components from the previous month. However, a 1.1780 Fib still needs to be breached from a chart perspective and there is decent option expiry interest from 1.1740-50 (1.4 bn) exerting a gravitational pull.  EM - In contrast to the Cad, Brent’s outperformance vs WTI and further advances towards $81/brl have boosted the Rub to test sub-66.0000 peaks vs the Usd, while the Try has resumed its recovery momentum vs the Usd and bounced off 6.3300+ lows to sit just off 6.2150.

In commodities, the oil sector is benefitting from commentary over the weekend where OPEC stated that they would only boost production should customers require it, with Saudi Energy Minister Al-Falih also saying that the “market is well supplied”, and that demand will increase in October. This commentary disregarded US President Trump’s calls to markedly increase output to reduce oil prices, and also came amid the OPEC world outlook that stated demand is expected to continue growing at a healthy rate in the medium-term. This has seen Brent up over 2% today and with it finding a firm footing above USD 80/bbl in European trade. In reaction to this markets are gearing up for higher oil prices in the medium-term, with Bank of America Merrill Lynch revising their 2019 oil price forecasts. This has gone from USD 75/bbl to USD 80/bbl for Brent and USD 65/bbl to USD 67/bbl for WTI.  In the metals space, gold is essentially unmoved after declining over a percent on Friday, with the yellow metal trading within a thin USD 5/oz range. London copper has fallen from 10 week highs as trade concerns hit the market, with the construction material trading around USD 6,330/T in Monday’s session.

US Event Calendar

• 8:30am: Chicago Fed Nat Activity Index, est. 0.2, prior 0.1
• 10:30am: Dallas Fed Manf. Activity, est. 31, prior 30.9

DB's Jim Reid concludes the overnight wrap

The Fed (Wednesday) is the main event although Italy’s draft 2019 budget (Thursday) could grab the global market spotlight away from Washington if the recent run of better political headlines proves illusory. So, Wednesday will likely see the widely anticipated 25bps rise to 2.25% (upper bound) in the Fed Funds rate but the statement and press conference will be the main market mover. A reminder that DB continue to expect 5 more hikes after this one out to the end of 2019. Thursday is the deadline for Italy's draft 2019 budget. As has been the case of late expect daily newsflow leading up to this. Will the more market-friendly Finance Minister Tria’s recent rhetoric win out or will the populist Deputy Prime Ministers Salvini and Di Maio influence be felt? The former favors a deficit target of around 1.6% of GDP, while the latter have pushed for a target above 2%. Our economists believe that any target below 2.3% will be enough to maintain debt sustainability for now and satisfy the market, but the European Commission may be more demanding. We’ll also be attentive to any one-off measures that may act as a backdoor way of raising the deficit without affecting the headline number.

Meanwhile, the main data highlights this week revolve around the inflation prints in the US and Europe. On Friday we'll get the August PCE report in the US where the consensus expects a +0.1% mom print which would be enough to hold the annual rate at +2.0% yoy. In Europe, we'll get the September CPI report for the euro area on Friday too with the consensus expecting no change in the +1.0% yoy core reading. Country-level data in Europe is also due out in Germany (Thursday), France (Friday), Italy (Friday) and Spain (Friday).

Brexit might also grab the headlines after a turbulent end to last week which we detail below. The U.K. Labour Party (the opposition) have their annual conference this week and there’s every chance that the membership might recommend a second EU referendum which may start to shape the opposition’s actual policy on the issue. Party leader Corbyn suggested over the weekend that he would respect the membership’s vote (Tuesday) but he would prefer a general election. Talking of which, the Sunday Times reported that aides of PM May have been preparing the grounds for a snap election in November to try to break the Brexit deadlock. This was flatly denied but it shows how fluid this situation is at the moment. The FT also reported that Shadow Chancellor John McDonnell was pushing for a policy whereby every large British company would be forced to hand over 10% of the company’s equity to workers within a decade. If Labour were to get elected and if they enacted this it would be a monumental upheaval to capitalism in the U.K. There are so many permutations possible before Xmas on both Brexit and who leads the country into 2019. See the link later for the latest DB Brexit view and fresh Sterling short recommendation.

Kick-starting the week, the 10% tariffs on $200bn of Chinese goods by the US took effect overnight with China set to retaliate with tariffs on $60bn of US goods imminently. Over the weekend China called off trade talks which were planned with US officials with Bloomberg reporting a source as saying that talks are unlikely to resume until after the US mid-term elections now. So any hopes of de-escalation any time soon appear low. Markets-wise, a number of holidays in Asia today means it’s been a fairly thin session for volumes although of the bourses that are open the Hang Seng (-1.25%), ASX (-0.07%), Jakarta Comp (-0.96%) and Nifty (-0.52%) are all in the red. Futures in the US are also lower along with most EM currencies.

As for last week, equity markets advanced amid mostly positive data, though PMIs in Europe disappointed slightly. The S&P 500 (-0.04% Friday) and DOW (+0.32% Friday) have hit new all-time highs during last week, though only the DOW closed at its peak. The NASDAQ (-0.51% Friday) shed -0.29% amid another tough week for the tech sector- the IT-heavy index is now down -1.51% this month versus the S&P 500’s +0.97% rally. The Euro Stoxx 600 rallied +1.70% last week, its best performance since March, with Italian stocks leading gains (FTSEMIB +3.12%).

In the US, jobless claims fell to a fresh 48-year low, while regional business surveys from the New York and the Philadelphia Federal Reserve Banks printed firmly in expansionary territory. In Japan, August CPI beat expectations at 1.3% yoy, sparking a 1.5bps selloff in JGB – not much a move in absolute terms, but it makes last week the sharpest selloff since July. Digging into the European data, the highlight was a 2pt miss for Germany’s manufacturing PMI, which fell to 53.7 from 55.9, dragging down the composite PMI as well. The new export orders sub-index dipped to 48.2, its lowest level since June 2013. Services held up though and the overall Euro Area composite PMI printed at 54.2 from 54.5 last month, consistent with still above-potential growth. The employment sub-index stayed flat at 55.3, its highest level in over a decade.

Government debt mostly sold off last week, with Treasury yields up 6.7bps to 3.063%, their highest level since May. That marks the 4th consecutive advance for US yields, the longest streak since January-February. In Europe, yields had traded higher for most of the week, but partially retraced after Friday’s softer PMIs. German bund yields rose 1.1bps on the week, while BTPs continued to rally. Italian 10y yields are 40.6bps lower this month (-15.3bps last week), on track for their best month since July 2015 and their second-best month since 2013.

Despite the divergence in US and European yields last week, the Euro rallied +1.07% and the DXY index shed -0.74%. Both moves came off their peaks/ troughs after the softer European data caused the euro to partially retrace. Emerging market currencies mostly rallied, with the EM FX index up +1.30% on the week. The Turkish Lira retreated -1.93%, as investors were not impressed with the governments new macro plan, while the Argentine Peso (+6.91%), South African Rand (+4.27%) and Russian Ruble (+2.49%) all advanced.

The sharpest FX mover of the week was the pound, which erased gains of +1.76% to end the week virtually flat after Brexit headlines exploded on Friday. Prime Minister May declared that negotiations with the EU are “at an impasse” and reiterated that “no deal is better than a bad deal.” This follows an acrimonious EU summit on Thursday and comes ahead of the Conservative party conference on 30 Sep-1 Oct. Our economists believe that it will be hard for May to maintain her strength into the conference while simultaneously negotiating a compromise with Brussels. They still think a deal by November is possible, but downgrade the odds that Parliament approves one to 50%. There is likely to be more rhetoric and volatility ahead. Full note here.

Finally, oil markets whipped around last week amid competing reports about Saudi Arabia and OPEC’s production plans. Early in the week, reports like Bloomberg suggested that Saudi Arabia was comfortable with oil at $80/barrel, and Brent crude oil futures duly tested that level, which has held since 2014 without breaking. On Friday, however, various reports have suggested that OPEC may support a 500k barrel per day expansion in production. After trading as much as +2.60% higher on the week, Brent retraced to close +0.91% higher. Over the weekend OPEC and its allies suggested that output would only be
increased should customers demand it.

It's a quiet start to the week for data. In Europe, we get the September IFO survey in Germany along with September CBI Trends total orders and selling prices data for the UK. In the US, we'll get the August Chicago Fed national activity index and  September Dallas Fed manufacturing activity index. Away from that, ECB President Draghi is due to speak in Brussels. Away from that, German Chancellor Angela Merkel will speak in Hanover, France will unveil its 2019 budget and French President Emmanuel Macron will meet US President Donald Trump in New York.