Equities reversed initial losses in a morning devoid of economic data, which saw the Eurostoxx 50 turn solidly green after having dropped as much as 0.9% in early trading, while S&P futures also turned lower at first, before following Europe’s rebound to trade in the green. However, it was Walmart blowout earnings report at 7am that pushed the Emini back to the edge of all time highs despite fresh tensions between U.S. and China over Huawei. Elsewhere, treasuries edged higher and gold climbed back above $2,000 an ounce. Iron ore futures rallied to highest since 2014.

Walmart reported non-GAAP earnings per share for the second quarter that beat the highest analyst estimate:

• Q2 revenue $137.7 million, estimate $135.61 billion
• Q2 adjusted EPS $1.56, estimate $1.24.
• Q2 total U.S. comp sales ex-gas +9.9%, estimate +6.2% (CM, average of 11 estimates)

Also of note, Walmart’s U.S. e-commerce sales rose 97% in the quarter, compared with the average analyst estimate of nearly 60%, suggesting that Amazon may be facing some heat as an online retail monopoly. That comes as the coronavirus has catalyzed online purchases, and Walmart has been a primary beneficiary thanks to its revamped website and a new partnership with Shopify to bring more merchants into its fold. Walmart is also planning to introduce a subscription program, dubbed Walmart+, that could challenge Amazon Prime and help it hold onto the millions of new shoppers it has picked up during the pandemic.

U.S. stock index futures edged higher on Tuesday, extending momentum from a tech-fuelled rally in the prior session that saw the Nasdaq hit a record high. Adding to futures upside, Home Depot also rose in pre-market trading after reporting sales growth that was more than double analyst estimates as Americans opened their wallets for home improvement. The home improvement chain rose 2.8% in premarket trade, setting it to hit a record high, after its quarterly comparable same-store sales were much better than expected, as people focused on home repair while staying indoors. Home Depot’s smaller rival Lowe’s and supermarket operator Target will report their quarterly earnings on Wednesday.

In the Stoxx Europe 600 Index, U.K. homebuilder Persimmon Plc was among the biggest gainers after sales reservations increased. The Stoxx 600 erased initial declines, with travel, insurance and banking names leading on the rebound. The FTSE 100 also pared losses to trade flat. The travel subgroup rose 1.1% after falling for two sessions over new travel restrictions imposed on major European countries

Earlier in the session, the S&P 500 futures hit a record high during Asian trade but later lost steam as caution over a Sino-U.S. spat grew after President Donald Trump announced further restrictions on tech giant Huawei Technologies. China firmly opposes the latest U.S. actions against Huawei, Foreign Ministry spokesman Zhao Lijian tells regular news briefing Tuesday in Beijing. Zhao reiterated China’s willingness to retaliate against U.S. actions and said the U.S. move is "nothing short of bullying."

The latest US-China tensions were not enough to spook Asian markets, which gained, led by health care and communications, after rising in the last session despite slumping chipmakers including Taiwan’s MediaTek, which dropped after the U.S. toughened restrictions on Huawei. Markets in the region were mixed, with Jakarta Composite and India's S&P BSE Sensex Index rising, and South Korea's Kospi Index and Taiwan's Taiex Index falling. The Topix was little changed, with Oisix ra daichi rising and Grace falling the most. The Shanghai Composite Index rose 0.4%, with Amlogic Shanghai and Guangdong Rongtai Industry posting the biggest advances.

In rates, despite the latest stock levitation, treasuries also edged higher although they pared gains as E-Minis flirted with record highs. Treasury futures were off the highs of the day into early U.S. session, although yields remain richer across the curve following continued Asia session buying. Yields were lower by as much as 2bp across long-end of the curve in bull flattening move with front-end yields anchored; both 2s10s, 5s30s spreads subsequently tighter by ~1bp. Treasury 10-year yields around 0.677% with gilts and bunds both little changed, slightly underperforming. Bund, treasury and gilt curves bull flatten; 10s trade off best levels, with treasuries outperforming bunds by 1bp.

In FX, the Bloomberg dollar index slid to the lowest level since 2018, weighed down by disappointing U.S. data and a deadlock in stimulus talks. Demand for the British pound in early London trading from corporate and algo accounts fueled broader dollar weakness, according to two traders in Europe. Sterling may gain further if there are positive developments between between U.K. and European Union officials after Brexit talks resumed Tuesday. The U.K. aside, the lack of news and a thin data calendar has kept the lower-dollar narrative going, spurring direct price action in the cash market. That’s pushed the euro and yen to fresh day highs.

In commodities, WTI and Brent front month futures oscillate between gains and losses as prices recover from overnight lows alongside the stock markets’ grind higher. The weekly API Private Inventory report is due today, with forecasts for headline crude inventories to have fallen ~2.9mln barrels over the last week. Elsewhere, spot gold and spot silver trade on a firm footing above USD 2000/oz and 26/oz respectively, aided by a softer USD. Base metals overnight continued to be bolstered by the PBoC’s recent liquidity injection, with Dalian iron ore rising some 3%.

Meanwhile, traders remain preoccupied with the prospect for more government stimulus. Democrats and Republicans have been deadlocked in negotiations over a stimulus package and the S&P 500 has stalled just below its February closing record.

"A lot of investment professionals as well as retail investors are on the sidelines partially because they are waiting for this second stimulus package,” Erin Gibbs, president and chief investment officer at Gibbs Wealth Management, said on Bloomberg TV. "It’s not a full-on risk-on environment just yet."

Looking ahead, investors will get further hints on the state of the U.S. housing market when July housing starts data is published later on Tuesday.  Expected data include housing starts. Home Depot, Kohl’s, Walmart and Agilent are reporting earnings.

Market Snapshot

• S&P 500 futures little changed at 3,382.50
• STOXX Europe 600 up 0.1% to 369.79
• MXAP up 0.3% to 172.06
• MXAPJ up 0.2% to 568.09
• Nikkei down 0.2% to 23,051.08
• Topix up 0.06% to 1,610.85
• Hang Seng Index up 0.08% to 25,367.38
• Shanghai Composite up 0.4% to 3,451.09
• Sensex up 1.1% to 38,463.56
• Australia S&P/ASX 200 up 0.8% to 6,123.36
• Kospi down 2.5% to 2,348.24
• German 10Y yield fell 0.8 bps to -0.459%
• Euro up 0.2% to $1.1895
• Italian 10Y yield fell 5.7 bps to 0.805%
• Spanish 10Y yield fell 0.9 bps to 0.317%
• Brent futures down 0.1% to $45.33/bbl
• Gold spot up 1% to $2,005.05
• U.S. Dollar Index down 0.3% to 92.60

Top Overnight News

• Face-to-face Brexit negotiations are resuming Tuesday in Brussels. Both sides seek to find an agreement by the start of October, but so far neither the U.K. nor the EU have made enough concessions to reach a breakthrough.
• Germany recorded its highest number of new daily Covid-19 cases in almost four months. The country’s infection rate held above the threshold of 1.0 -- meaning the spread of the virus is accelerating -- fueling fears about European virus resurgence. South Korea’s prime minister announced worship services and large gatherings are now banned in greater Seoul, as cases are rising in the capital and threatening to spread nationwide.
• U.K. retailer Marks & Spencer announced plans to cut 7,000 jobs -- a tenth of its workforce -- in the next three months as a result of coronavirus impact.
• China called the Trump administration’s decision to impose fresh restrictions on Huawei “nothing short of bullying” and said the move can only backfire.

Asian equity markets traded mixed following a similar indecisive performance for stocks on Wall St amid a lack of fresh developments on the macro front and with participants tentative ahead of the risk events later in the week. ASX 200 (+0.8%) and Nikkei 225 (-0.2%) were varied with Australia kept afloat by strength in healthcare, tech and metal miners as gold made its way back closer towards the USD 2000/oz level, although gains were capped for the index by disappointing earnings with financials pressured after Westpac scrapped its dividend citing a highly uncertain outlook and BHP shares were subdued by weaker results. Furthermore, consumer staples suffered after Coles reported a slump in pre-tax profits and with Treasury Wine Estates the worst performing stock due to China launching anti-dumping investigations on imports of Australian wine. Conversely, the Japanese benchmark was negative with exporters hampered by a stronger currency, while Hang Seng (+0.1%) and Shanghai Comp. (+0.4%) remained positive after the PBoC continued its liquidity efforts and with Hong Kong set to announce a 3rd round of COVID-19 relief, although tensions persisted as reports suggested the delay in trade review talks was likely due to a lack of atmosphere and the US also recently tightened restrictions on Huawei's access to US technology and semiconductors. Finally, 10yr JGBs were higher amid weakness in Japanese stocks and following the gains seen in T-notes, but with further gains restricted by mostly weaker results at the 30yr JGB auction in which the bid to cover and accepted prices declined from prior.

Top Asian News

• Singapore Leads on Libor Replacement in Asia With Note Sale
• China DNA Firm Unit Said to Consider $1 Billion Shanghai IPO
• Jack Ma’s Ant Group Is Said to Plan Consumer Finance Firm
• Turkey’s Lenders May Have to Borrow at Highest Central Bank Rate

European bourses trade mostly firmer [Euro Stoxx 50 +0.5%] after recovering from broad-based losses seen at the cash open, despite a lack of fresh catalysts and against the backdrop of thinner August volumes. The initial defensive bias seen across sectors has somewhat faded, with broader sectors now mostly higher with no clear risk profile to be derived. The detailed breakdown sees Travel & Leisure and Autos the top performers, whilst Banks and Financial Services hold onto losses amid a lower yield environment, whilst ECB’s VP de Guindos also noted that banks are unlikely to fully recovery from the pandemic before 2022. In terms of individual movers, Clariant (+5.2%) holds onto opening gains with traders citing reports yesterday that the group and China’s Chemtex have agreed on a biofuel partnership, in which the two parties will collaborate to market and sell Clariant’s sunliquid technology licenses, as well as services and supplies for advanced biofuel plants in China. Elsewhere, mining-giant BHP (-1.5%) remains subdued post-earnings after missing analyst expectations across a number of metrics, albeit share prices have lifted off lows alongside the broader markets, with BHP losses potentially cushioned by the announcement of thermal coalmine sales within two years. Meanwhile, AstraZeneca (+0.5%) outperforms the healthcare sector as the Co’s Imfinzi has been grated priority review in the US. Finally, the Bank of America August Global Fund Manager Survey showed that investors say long US tech was most crowded trade, then long gold, whilst top tail risks are COVID-19 second wave followed by US-China trade war and the US election.

Top European News

• EU Is Most Preferred Equity Region Globally, BofA Survey Shows
• Nordic Capital Said to Raise About $5.9 Billion For New Fund
• U.K. Hits Online Realtor Purplebricks With Money-Laundering Fine
• Pandora Sees 2020 Sales Falling as Much as 20% Amid Pandemic

In FX, another retreat in real rates for Gold bugs to embrace and reload long positions to the broad detriment of the Dollar, as the index retreats further to fresh ytd lows (92.469) after a failing to sustain gains above 93.000 in listless seasonal trade. Ahead, US housing data is highly unlikely to alter the landscape before Wednesday’s FOMC minutes, initial claims and flash PMIs, but tomorrow’s 20 year auction could conceivably impact Treasuries after last week’s Quarterly Refunding prompted pronounced bear-steepening with ramifications for the Greenback and other currencies by default.

• GBP/CAD/JPY – The Pound has recovered from Monday’s lethargy and rebounded to the top of the major ranks, with Cable establishing a firmer base on the 1.3100 handle and within striking distance of early August highs (1.3186), while Eur/Gbp has drifted back down to pivot 0.9050. Elsewhere, the Loonie is extending advances vs its US counterpart beyond 1.3200 ahead of Canadian CPI tomorrow and not showing any real adverse reaction to news of Finance Minister Morneau’s resignation, while the Yen has made a decisive break through 106.00 to expose recent peaks around 105.32-30 in wake of an improvement in Japan’s Tankan index, albeit still deeply negative.
• EUR/AUD/CHF – Also firmer against the Buck, as Eur/Usd retests resistance above 1.1900, the Aussie eyes loftier levels over 0.7200 amidst more constructive cross-flows down under and hardly a flinch on the RBA minutes that merely reiterated forward policy guidance (accommodation to continue as long as required alongside 0.25% 3 year yield target for progression towards full employment and inflation remit). Similarly, the Franc registered a new multi-year apex circa 0.9038 before Swiss trade and ip data on Thursday.
• NZD/NOK/SEK – The G10 laggards, with the Kiwi still reeling from COVID-19 2nd wave concerns and also having to contend another dovish RBNZ call after ANZ joined the chorus anticipating further easing to -0.25% by early Q2 next year. Nzd/Usd is straddling 0.6550, but Aud/Nzd has extended to 1.1040+ following brief retracement through 1.1000 overnight. Meanwhile, the Swedish and Norwegian Krona have both lost impetus vs the Euro around 10.3300 and 10.5100 after a decline in industrial inventories and against the backdrop of waning crude prices.
• EM – Most regional currencies are retrieving losses or appreciating further vs the Dollar, but yet again the Lira is flagging just above 7.4000 awaiting the latest CBRT rate meeting in stark contrast to the Yuan heading towards 6.9100 irrespective of ongoing US-China tensions outside of Phase 1 trade deal terms that Beijing claims will be adhered to even though the meeting to discuss progress has been delayed.

In commodities, WTI and Brent front month futures oscillate between gains and losses as prices recover from overnight lows alongside the stock markets’ grind higher. That being said, news flow has again remained light for the complex ahead of the JMMC meeting tomorrow – where no major surprises are expected. Meanwhile, Russian Energy Minister Novak has contracted the coronavirus, but is showing no symptoms and will tune in to tomorrow’s meeting via videocall. Before that, the weekly Private Inventory report is due today, with forecasts for headline crude inventories to have fallen ~2.9mln barrels over the last week. Elsewhere, spot gold and spot silver trade on a firm footing above USD 2000/oz and 26/oz respectively, aided by a softer USD. Base metals overnight continued to be bolstered by the PBoC’s recent liquidity injection, with Dalian iron ore rising some 3%. Separately, LME copper continues to grind higher as it tracks the stock markets and with falling LME inventories also supportive for the red metal. Finally, BHP’s outlook notes that there was extremely challenging demand in H1 for its products and expects iron ore prices to ease from current spot levels and China’s growth to moderate over time.

US Event Calendar

• 8:30am: Housing Starts, est. 1.25m, prior 1.19m; Housing Starts MoM, est. 4.97%, prior 17.3%
• 8:30am: Building Permits, est. 1.33m, prior 1.24m; Building Permits MoM, est. 5.33%, prior 2.1%

DB's Craig Nicol concludes the overnight wrap

It may have been another fairly slow summer Monday but yesterday was the closest yet that the S&P 500 (+0.27%) has come to striking a new all-time high on a closing basis. Just over 4 points separate it from a new record now. Yesterday was one of the more dull Monday’s that we’ve had though with the intraday range on the S&P 500 just 8.4pts points (0.25%) - the tightest daily range since the shortened trading day of Christmas Eve 2019 - while the VIX nudged down another -0.7pts to the lowest since February 21 now at 21.4.

The news that we did get included President Trump praising China’s purchases of corn, beef and soybeans, while Peter Navarro, the Director of the Office of Trade and Manufacturing Policy, said that the Phase One deal reached with China was on track. It’s hard to be upbeat about the progress of fiscal talks however, with Senate majority leader Mitch McConnell saying that although discussions were “still going on”, that “I can’t tell you with certainty we’re going to reach an agreement”. That being said, late last night there were reports that Senate Republicans are planning to introduce a new version of the stimulus bill that is more pared down than the $1tn bill already submitted. Overnight, Bloomberg reported that the pared down legislation would include a $300 a week enhanced unemployment benefit, money for small business aid, additional U.S. Postal Service funding and protection for employers against lawsuits stemming from Covid-19 infections.

Speaking of fiscal stimulus, we did hear yesterday about the prospect of further measures in Germany, where finance minister Scholz has proposed extending the country’s job support scheme from 12 to 24 months, in a move that will cost €10bn. A government spokesman said that Chancellor Merkel was open to the programme continuing in principle, and the proposal is interesting when you consider that Germany is set to undergo a more moderate contraction compared with its European partners this year (DB forecasting -6.4% decline in 2020 vs. -11.0% for both France and Italy).

The focus overnight has turned to the US Commerce Department’s decision to impose further restrictions on Huawei aimed at cutting the Chinese company’s access to commercially available chips. The new restrictions built upon the existing ones announced in May by adding 38 Huawei affiliates in 21 countries to an economic blacklist. Despite that news the Shanghai Comp +0.42% and Hang Seng +0.15% are still higher this morning along with the ASX (+0.74%), however the Nikkei -0.23%, Kospi -0.15% and Taiwan’s TAIEX index -0.42% are down. Meanwhile, futures on the S&P 500 are trading flat and yields on 10y USTs are down -1bp.

Back to yesterday, where talk of further stimulus didn’t dent the performance of sovereign bonds, which made gains on both sides of the Atlantic. By the close, 10yr yields on US Treasuries (-2.1bps), Bunds (-3.0bps) and Gilts (-2.7bps) had all fallen, and the spread of Italian yields over bunds fell by -2.7bps to their tightest in nearly 6 months. That move for Treasuries also saw the curve bull flatten, with 2s10s actually back down -2.7bps to 53.5bps having struck 56.6bps at the highs last week. Meanwhile, European equities similarly moved higher, with the STOXX 600 up +0.32%, while the dollar lost ground for a 4th straight session (-0.31%), putting it close to its 2-year low reached earlier in the month. The drop in yields and the dollar saw precious metals gain sharply. Gold gained +2.07% yesterday after enduring a weekly loss for the first time since the first week of June, while silver similarly rallied +3.93%.

While equities pushed on, credit was a touch weaker yesterday with IG and HY spreads ending +1bp and +3bps respectively in both USD and EUR. There was a milestone of sorts reached in the USD IG market however, with issuance hitting a new record of $1.34tn, and surpassing 2017’s full year total despite only being 8 months into the year.

In other news, the Democratic convention kicked off, though thanks to Covid-19 it was a much more subdued affair than in previous election cycles. There wasn’t a great deal that was newsworthy in the speeches, but we did get a Washington Post/ABC News poll out yesterday showing Biden with a 53-41 lead over President Trump. Overall, the RealClearPolitics polling average of the last two weeks shows the former Vice President 7.7pts ahead of President Trump.

As for data yesterday, the Empire State manufacturing survey for August came in at a lower-than-expected 3.7 (vs. 15.0 expected). However, it’s not worth over-interpreting the decline since this is a diffusion index, where respondents are simply asked whether conditions have improved or worsened, rather than by how much. The other release from the US was the NAHB housing market index for August, which rose to 78 (vs. 74 expected), matching its record.

Finally, looking at the day ahead, the data highlight will be US housing starts and building permits data for July. From central banks, we’ll hear from ECB Vice President de Guindos, and earnings releases include Walmart and Home Depot.