S&P futures were fractionally in the red, pressured by a drop in European shares following what several desks called a "hawkish shock" speech by Mario Draghi at the annual ECB forum in Portugal, even as oil rose for a fourth day, boosted by favoriable remarks from China's premier Li, while the Yuan surged 0.4% amid speculation of more PBOC interference in the yuan.

The overnight session was divided in two parts: the early European focus on a spike higher in Chinese yuan, with some speculating on PBOC intervention, others cite tightening in yuan forward curve. Metals and crude both rallied broadly in response, USD pushed weaker against G-10.

The initial PBOC-inspired euphoria was later doused by another central bank, this time the ECB, when a hawkish Draghi speech drove markets, sending the EUR/USD back to YTD highs, and leading to a sharp steepening in German 2s10s and Euribor curves.

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With the help of the sliding dollar, the Euro is now on pace for its best quarter in six years.

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European equity markets open lower led by sector-specific news. As noted earlier, the German auto sector was hit after supplier Schaeffler issued a surprisingly ugly profit warning, Deutsche Telekom weighed on Telecoms sector though basic resources shares were among those bucking the trend as commodities advanced. U.K. banks briefly sold off after BOE raises countercyclical capital buffer to 0.5% (and 1.0% as of November), while Google was down -2.6% in premarket trading after the EU competition commissioner announced a record €2.4BN fine for antitrust issues and skewing search results.

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Gold rebounded after an apparently erroneous order triggered a plunge in the price on Monday. The Chinese yuan surged both onshore and overseas amid speculation of central bank intervention. Treasuries slipped before an appearance by Federal Reserve Chair Janet Yellen.

With Draghi's hawkish outlook shocking markets, it is now up to Yellen. As Bloomberg notes, "traders will be looking to Yellen for clues on the outlook for interest rates and the American economy, especially after weakness in data yesterday added to concerns about the strength of growth. Some investors worry the Fed is taking too rosy a view as it sets the path for increasing borrowing costs. European Central Bank President Draghi struck a cautiously optimistic tone for the euro area, noting a “strengthening and broadening recovery” but stressing the need for prudence in adjusting policy."

Elsewhere, as reported overnight, Brazilian President Michel Temer was charged with corruption in a highly anticipated development that may put the embattled leader of Latin America’s largest economy on trial. Temer, who has denied the charges, could lose his job if indicted and found guilty.

India and Singapore reopened after holidays but many markets, including in Malaysia, Indonesia and most of the Middle East remain closed.

Futures on the S&P 500 Index fell 0.1 percent. The underlying gauge rose less than one point on Monday. The Nasdaq 100 fell 0.4 percent.

In currencies, the euro surged 0.6 percent to $1.1251. The Bloomberg Dollar Spot Index fell 0.3 percent after gaining 0.1 percent in the previous session. The British pound added 0.1 percent to $1.2737.

In commodities, WTI rose 0.8% to $43.73 a barrel, adding to a three-day rally following oil’s drop into a bear market. Gold increased 0.5 percent to $1,250.71 an ounce. The precious metal sank almost 1 percent on Monday.

In rates, the yield on 10-year Treasuries rose two basis points to 2.16%, after dropping less than one basis point on Monday. European government bonds dropped across the board, with the yield on benchmark French bonds climbing six basis points and that of Germany four basis points.

Bulletin Headline Summary from RanSquawk:

• European equity markets trade lower amid hawkish comments from ECB's Draghi
• Bank of England Financial Stability Report; Countercyclical buffer for UK banks raised from 0.00% to 0.50%
• Highlights include Fed's Yellen, Harker and Kashkari

Market Snapshot

• S&P 500 futures down 0.1% to 2,432.80
• STOXX Europe 600 down 0.5% to 387.31
• MXAP up 0.1% to 155.78
• MXAPJ unchanged at 507.63
• Nikkei up 0.4% to 20,225.09
• Topix up 0.4% to 1,619.02
• Hang Seng Index down 0.1% to 25,839.99
• Shanghai Composite up 0.2% to 3,191.20
• Sensex down 0.9% to 30,864.71
• Australia S&P/ASX 200 down 0.1% to 5,714.19
• Kospi up 0.1% to 2,391.95
• Brent futures up 0.8% to $46.19/bbl
• Gold spot up 0.6% to $1,252.19
• U.S. Dollar Index down 0.4% to 97.01
• STOXX Europe 600 down 0.9% to 385.62
• German 10Y yield rose 3.4 bps to 0.279%
• Euro up 0.6% to 1.1243 per US$
• Italian 10Y yield fell 1.8 bps to 1.609%
• Spanish 10Y yield rose 0.5 bp to 1.382%

Top Overnight News

• ECB’s Draghi: factors dampening inflation are on the whole temporary; the central bank can accompany the recovery by adjusting the parameters of its policy instruments, not in order to tighten the policy stance, but to keep it broadly unchanged
• U.S. GSEs: senators Corker and Warner working on a plan to break up Fannie and Freddie
• BOE: raises countercyclical capital buffer to 0.5% from 0.0%, plans further raise to 1.0% in November
• Canada: U.S. to impose additional tariffs on Canadian lumber imports
• China Premier Li: economy keeps steady growth with improvement in 2Q; continues stable positive trend in 2017
• Brazil: President Temer charged with corruption by top prosecutor
• Hong Kong small-cap stock plunge wipes out $6.1 billion in value
• Dimon Says JPMorgan Headcount to Keep Rising Despite Automation
• Sprint Jumps on Report Deutsche Telekom Favors T-Mobile Merger; Sprint Said in Talks With Charter, Comcast on Wireless Deal
• Stada Plunges as $5.9 Billion Bid Fails to Lure Investors
• Li Says China to Meet Growth Goals, Vows Free Trade Support
• Draghi Defends ECB Stimulus Saying Jobs Matter Most for Equality
• Deutsche Telekom Won’t Sell BT Group Stake, CEO Hoettges Says
• Deutsche Bank Wasn’t Only ‘Mirror’ Trader: Russian Central Bank
• Germany Asks Opel to Update Zafira 1.6l Diesel Engine Software
• Volkswagen, Nvidia to Cooperate on Mobility Services
• Volvo Cars, Autoliv Add Nvidia as Partner on Self- Driving Autos
• Spanish Lender Bankia Agrees to Buy BMN in All- Stock Deal
• Chemicals M&A Still Hot Topic in Europe, U.S., Citi Says
• Hollywood Said to Be Auditing China’s Box-Office for First Time
• Jorge Mas Plans to Bid $1b-$1.1b for Miami Marlins: Fox Business
• Morgan Stanley Raises Alcoa Price Target, Cuts Cliffs
• Apple Acquires Eye-Tracking Company SensoMotoric For AR Tech

Asia equities traded mostly in the green following a similar close on wall St., where financials outperformed as Fed comments backed the FOMC to continue hiking rates gradually, while the tech sector lagged after the US Supreme Court reinstated much of Trump's travel ban. ASX 200 (-0.2%) saw broad-based weakness with gold miners also suffering from yesterday's selling in the precious metal, while Nikkei 225 (+0.3%) was buoyed by a weaker JPY. Shanghai Comp. (+0.2%) and Hang Seng (-0.1%) were indecisive with stronger Industrial Profit growth counterbalanced by the PBoC refraining from liquidity injections for a 3rd consecutive day. 10yr JGBs were relatively flat with some mild upside seen despite the positive risk tone in Japan. Furthermore, the curve steepened with outperformance in the short-end following a 2yr bond auction which saw increased demand from prior as the b/c surged to 6.79 vs. Prey. 5.06. Chinese Premier Li stated that China is able to meet major economic targets this year and that China will ease market entry restrictions, as well as deepen reforms. Furthermore, Premier Li also stated that will maintain stable macro-policies and will not resort to massive stimulus. (Newswires)

Top Asian News

• Hong Kong Small Cap Stock Plunge Wipes Out $6.1 Billion in Value
• Cotton Crop in Top Grower Seen at 3-Year High on Local Price
• China Stocks Reverse Drop in Afternoon as Consumer Shares Gain
• Russia Has Plan for North Korea to Give Up Nuclear Program: RIA
• China Said to Discuss VAT Exemption for Asset Management Firms
• Noble Group Slides as Fitch Sees Real Possibility of Default
• Exporters Lead Advance in Japanese Stocks as Yen Maintained Loss

EU bourses saw some bearish pressure on the back of Draghi's comments, as all European majors trade in the red. Telecoms lag amid morning reports stating that Sprint said to be in exclusive talks with Charter, subsequently putting talks with T-Mobile US (TMUS) on hold (DTE GY holds a stake in TMUS). Fixed Income markets saw a subdued morning; however, a somewhat hawkish Draghi has weighed on European paper. The 10y Bund has been the main driver in the move, trading at session lows, down now over 20 ticks on the session. Bond trading is likely to focus on central bank speech today, with Yellen set to speak later in the session.

Top European News

• Bankia, Banco Mare Nostrum Boards Sign Merger Agreement
• Nomura to Set Up German Unit in Preparation for Brexit
• Euro Jumps; Draghi Sees Temporary Factors Weighing on Inflation
• U.K. Grocers Back in Growth as Brits Pay More for Their Shopping
• Italian Business Confidence Unexpectedly Rises On Better Outlook
• European Miners Advance as Iron Ore Jumps Most in Four Months
• North Korea Sanctions Violations Trigger Fines at Latvian Banks
• Petrofac Not Getting Paid for Oil Sales From Greater Stella Area

In currencies, it has been a lively morning for the EUR as the speech from president Draghi at the ECB forum on central banking was met positively. Traders took their cue from the comments highlighting the strengthening and broadening Euro area recovery and that deflationary forces have been replaced by reflationary ones. He also stated — again — that monetary accommodation is still required and that adjustment to policy will need to be gradual. Nevertheless, the market is still positioning for an eventual reining in of stimulus, and will continue to buy dips in EUR/USD and EUR/GBP, with EUR/JPY back at the session highs after a brief dip this morning. EUR/USD still faces as wall of selling interest into 1.1300, but for EUR/GBP, uncertain future in the UK makes for a comfortable buy in the near term, with the market having bid this cross rate well off the pre 0.8700 support highlighted in the past week or so. Still no major direction to discern in Cable, and we remain right in the middle of the broader 1.2400-1.3000 limits we see playing out until we get some fresh colour/news on Brexit. The rate policy ahead is being discounted to a larger degree despite the anticipated shift on the vote split. Pre 1.2800 still very well offered, but demand ahead of 1.2700 to note also.

In commodities, gold has recovered some of the heavy drop suffered in early Monday trade, in what is believed to have been a stop chase or errant volumes entered. We are back above USD1250.00 this morning, but we see the USD based weakness tempered by the steady risk tone. Silver is also steady in the upper USD16's for now. Base metals show modest gains on the day, having seen decent gains over the last few days, and with reports of steel mill closures in China, iron ore has recovered a little more today. Copper is still holding circa USD2.64-5 this morning, so net little changed over the last 24 hours, with Zinc and Lead outperforming on the morning so far. Oil prices have also stabilised in the near term, but with little change to the overall backdrop of rising US production, traders will be wary of riding this latest move higher. WTI has held off USD44 so far.

Looking at the day ahead, we will receive the June consumer confidence reading (expected to edge down to 116.0 from 117.9) along with the Richmond Fed’s manufacturing index print for June and S&P/Case-Shiller house price index reading for April. Also of note today will be comments from Fed Chair Yellen at 6pm BST when she is due to speak in London on “Global Economic Issues”. Q&A is also expected to follow. The Fed’s Harker is also due to speak in London at 4pm while Williams speaks this morning at 9am BST and Kashkari also speaks at 10.30pm BST.

US Event and Central Bank Calendar

• 9am: S&P CoreLogic CS 20-City MoM SA, est. 0.5%, prior 0.87%;YoY NSA, est. 5.9%, prior 5.89%
• 10am: Conf. Board Consumer Confidence, est. 116, prior 117.9; Present Situation, prior 140.7; Expectations, prior 102.6
• 10am: Richmond Fed Manufact. Index, est. 5, prior 1
• 11am: Fed’s Harker Speaks on Economy in London
• 1pm: Fed’s Yellen Speaks on Global Economic Issues in London
• 5:30pm: Fed’s Kashkari Speaks at Townhall Event in Houghton, Michigan

DB's Jim Reid concludes the overnight wrap

While there wasn’t too much song and dance in markets yesterday, US politics was more of a talking point. Early in the day we learnt firstly that President Trump’s travel ban had been mostly cleared by the US Supreme Court which in turn allows it to take effect this week. Press reports were calling it a ‘partial victory’ for Trump insofar as the ban will take effect on people from the 6 nations concerned who lack a “bona fide relationship” in the US. After the close the focus then swiftly turned over to the healthcare debate with the findings from the CBO on the proposed bill. The headlines were largely dominated by the finding that an additional 22 million Americans would be left without insurance in a decade under the proposal, compared to 23 million in the House plan that passed in May. The CBO also found that the bill would lower the deficit by $321bn over the same period which compares to a $119bn reduction under the House bill. Significantly, following the CBO findings 3 Republican senators announced that they would block the bill from advancing. As a reminder, Majority Leader Mitch McConnell can only afford a maximum of two dissenters. McConnell is still aiming for a vote on the measures before the July 4th recess so it’ll be worth keeping an eye on how things progress.

Closer to home in the UK we finally learned that PM May’s Conservatives party had agreed to a pact with Northern Ireland’s DUP. The BBC reported that the pact included an extra £1bn in funding for Northern Ireland over the next 2 years. Staying with the UK, yesterday May’s government published the citizen’s rights plans in a 20 page report following talks last week. The EU’s Chief Negotiator Michal Barnier did however respond to the plan by saying that “more ambition, clarity and guarantees needed than in today’s UK position”. The EU’s Tusk also called it “below expectations” while Germany’s Merkel said it was a “good start” but “not a breakthrough”. So those talks will likely drag on.

Over in markets yesterday, the Italy bank rescue over the weekend coupled with some decent data in Germany (more on that later) combined to help European equities start the week on the front foot. The Stoxx 600 firmed +0.37% while Italy’s FTSE MIB rallied +0.81% (with Italian Banks up +2.43%). BTPs also rallied 3bps at the 10y which compared to a much more mixed session for the rest of the periphery. US equities got off to an equally positive start however faded as the session drew to a close. The S&P 500 ended +0.03% with the VIX also closing below 10 (at 9.90) for the seventh time this year, while in bond land Treasuries were a basis point or two lower across the curve not helped by some soft durable and capital goods orders data (again more on that later). The Fed’s Dudley also spoke although largely focused his remarks about effective communication so far around balance sheet strategy and the lack of any market response.

Coming back to Italy, in credit yesterday we saw a notable rally in Banca Popolare di Vicenza and Veneto Banca senior bonds after the weekend rescue package. After trading around 86c on Friday the news over theweek helped Vicenza’s 2.75% 2020 senior bonds rally all the way back above par yesterday and in fact close just above 102c. Veneto’s 4% 2019 senior bonds also rallied 19pts yesterday to close at 104c. The latter traded as low as 74c just a couple of weeks ago. The move to protect senior bondholders was also reflected in a 2bp rally for the iTraxx Senior Fins index to 51.7bps while Sub Fins underperformed (+0.5bps to 129.5bps) with Vicenza and Vento sub debt largely getting wiped out. This news hopefully continues to help support our financials over non-financials trade. We still think the former offer value. As a reminder our other big trade at the moment is Euro IG over HY. As discussed yesterday we wonder whether the recent US energy sector sell-off will help this trade too by creating a little contagion into other HY sectors and currencies.

Staying with credit. The latest weekly ECB CSPP holdings data was out yesterday. They are not being very predictable at the moment and it was another week of below par purchases averaging €300mn/day vs. the long-term average of €365mn/day. However although the CSPP/PSPP ratio was down to 12.1% (from the previous week's 12.7%), the average since April has been 13.2% which still compares favourably with 11.6% before then. After a strong May for CSPP, perhaps corresponding with high supply, June has seen below average purchases. So the more recent data suggests that the ECB are tapering corporate purchases but perhaps not as much as government equivalents.

Refreshing our screens this morning, there’s not a huge amount of direction for bourses in Asia as we type. While the Nikkei (+0.30%), Hang Seng (+0.14%) and Kospi (+0.17%) are posting modest gains, bourses in China are flat and the ASX is -0.33%. Data in China this morning, without moving the dial, was supportive with industrial profits rising to +16.7% yoy in May (from +14.0% in April). Elsewhere Oil (+0.37%) has continued to build on the recent bounce-back from last week’s lows (currently at $43.53/bbl after touching $42.05/bbl on Wednesday). There is also some news to report out of Brazil with the announcement earlythis morning that President Michel Temer has been indicted for corruption.

Jumping back to that macro data we mentioned earlier, yesterday in the US we learned that headline durable goods fell -1.1% mom in May and a bit more than expected (-0.6% expected). A big decline in aircraft orders played a part although the ex-transportation reading also disappointed after revealing that orders rose just +0.1% mom (vs. +0.4% expected). The closely watched core capex orders print was also soft (-0.2% mom vs. +0.4% expected). Away from that, the Dallas Fed’s manufacturing index fell 2.2pts in June to +15.0 (vs. +16.0 expected) with the new orders index in particular declining a fairly steep 8.5pts. As alluded to earlier, there was however some better news in Germany. The headline IFO business climate reading for June climbed 0.5pts to 115.1 (vs. 114.5 expected) and in doing so hit a new post reunification high. Components for expectations and current assessment were also firmer. Our economists in Germany noted that the data points to a solid rise in Q2 GDP and have now lifted their forecast to +0.6% qoq from +0.4%. That has also had the effect of lifting their 2017 forecast to +1.6% yoy from +1.3%.

In terms of the day ahead, this morning in Europe the only data of note due out is from the UK where the CBI’s distributive trades survey for June is released. Also of note is the BoE’s Financial Stability Report due at 10.30am BST with Governor Carney then scheduled to speak shortly after. In the US this afternoon we will receive the June consumer confidence reading (expected to edge down to 116.0 from 117.9) along with the Richmond Fed’s manufacturing index print for June and S&P/Case-Shiller house price index reading for April. Also of note today will be comments from Fed Chair Yellen at 6pm BST when she is due to speak in London on “Global Economic Issues”. Q&A is also expected to follow. The Fed’s Harker is also due to speak in London at 4pm while Williams speaks this morning at 9am BST and Kashkari also speaks at 10.30pm BST. The ECB’s Draghi will make an introductory speech at the ECB forum in Sintra too.