Wednesday's tech-led rally in stock markets stalled in Europe on Thursday as traders pulled back to hear what the European Central Bank would say about the euro’s run-up in recent months and this morning. Meanwhile, S&P futures dropped 17 points suggesting the rally in underlying stocks will stall once again amid concerns over record valuations.

The drop came after the gains in technology shares drove the largest Nasdaq advance since April on Wednesday as the S&P 500 rose the most since June following the fastest Nasdaq correction from an all-time high in history. The increased volatility in recent days suggests that U.S. stocks may be due for a pullback, with investors weighing catalysts to decide on the trajectory.

Mizuho Bank’s head of economics and strategy in Singapore, Vishnu Varathan, said investors were grappling with whether this month’s steep U.S. tech selloff was really done, and beyond that an increasingly uncertain U.S. political outlook and persistent Sino-U.S. tensions.

Meanwhile, the ECB’s upcoming meeting, along with emergency Brexit talks in London after negotiations turned chaotic again, and wilting commodity markets kept the bulls firmly on the leash. An early push from the pan-European STOXX 600 faltered as tech struggled, the euro and government bonds gained pre-ECB, and drooping oil and metals prices hit the region’s drillers and miners.

Analysts also waited to see whether reports that the ECB will fractionally revise up its COVID-battered economic and inflation forecasts later would ultimately effect the chances of a further ramping up of stimulus, which would rein in the euro (see our full ECB preview here).

“What happens at the ECB today is quite important for global markets,” said TD Securities’ European head of currency strategy Ned Rumpeltin. "There is still one trade, which is reflate or die,” he said referring to stimulus aid lifting asset prices. “So the degree to which the ECB either takes that one step forward or one step back today will be important."

While the ECB is widely expected to keep policy steady, investors will be closely watching comments from President Christine Lagarde for any hints on whether the stronger euro is becoming a problem for the region. Analysts have speculated that Lagarde and her colleagues could start laying the groundwork for an intervention that would prevent the euro’s strength from slowing an economic recovery.

"The persistent dollar weakness since March has started making some governments and central banks uncomfortable," said Athanasios Vamvakidis, head of Bank of America’s Group-of-10 currency strategy. “We expect the ECB to push against euro strength today. It is still early to talk about risks of a currency war, but I would expect more push against further dollar weakness."

Earlier in the session, MSCI's broadest index of Asia-Pacific shares outside Japan snapped its longest losing streak since February with a 0.7% gain. Japan's Nikkei rose 0.9% and Chinese blue chips rose 0.8%. Markets in Sydney and Hong Kong were just better than flat though and, in a reminder of the risks, Jakarta nosedived 5% on plans to re-introduce COVID-19 social restrictions in the Indonesian capital. Like Europe though, Wall Street futures traded down between 0.5%-0.7% ahead of trading there.

In FX, the euro advanced a second day against the dollar as traders awaited Thursday’s European Central Bank’s policy decision. The pound rose as investors awaited the outcome of emergency Brexit talks between the U.K. and the European Union. Risk- sensitive Scandinavian and antipodean currencies edged lower as European stock markets and U.S. equity futures failed build on Wednesday’s gains; the Swiss franc led G-10 peers.

In rates, bond buyers also returned after a tepid response to a $35 billion U.S. 10-year auction overnight, pushing the yield on U.S. 10-year debt down by a whisker to 0.7001% near high end of a less-than-2bp daily range; bunds lag by 2bp ahead of ECB, gilts by 1bp. Treasuries were slightly richer vs Wednesday’s close after paring small gains, with U.S. session focused on August PPI and 30-year bond reopening. Treasury auction cycle concludes with $23b 30-year reopening at 1pm ET (+$4b vs previous 30-year reopening), on the heels of soft demand at both the 3- and 10-year offerings this week.

In commodities, concerns about demand for fuel also had oil prices back under pressure, in an indication of wavering confidence in global growth. Brent crude futures fell back to $40.45 a barrel after bouncing back from a three-month low overnight. U.S. crude futures slipped 0.8% to $37.68 a barrel.

Expected data include jobless claims and wholesale inventories. Chewy, Oracle and Peloton are reporting earnings.

Market Snapshot

• S&P 500 futures down 0.3% to 3,378.75
• STOXX Europe 600 down 0.4% to 368.13
• MXAP up 0.6% to 170.42
• MXAPJ up 0.2% to 559.27
• Nikkei up 0.9% to 23,235.47
• Topix up 1.2% to 1,624.86
• Hang Seng Index down 0.6% to 24,313.54
• Shanghai Composite down 0.6% to 3,234.82
• Sensex up 1.2% to 38,650.61
• Australia S&P/ASX 200 up 0.5% to 5,908.52
• Kospi up 0.9% to 2,396.48
• Brent futures down 0.8% to $40.45/bbl
• Gold spot little changed at $1,946.17
• U.S. Dollar Index down 0.2% to 93.08
• German 10Y yield fell 1.1 bps to -0.473%
• Euro up 0.3% to $1.1834
• Italian 10Y yield fell 0.7 bps to 0.895%
• Spanish 10Y yield fell 2.4 bps to 0.315%

Top Overnight news from Bloomberg

• ECB President Christine Lagarde will have to walk a fine line as she portrays a euro-area economy that’s recovering as hoped from the coronavirus pandemic yet still in need of massive support; see decision day guide
• China’s next five-year plan beginning in 2021 will call for increases to its mammoth state reserves of crude, strategic metals and farm goods
• Trump administration appointees suppressed intelligence on Russian election interference and the threat from white supremacists, according to a whistle-blower complaint filed by the Department of Homeland Security’s former intelligence chief
• One in five U.K. companies is a “zombie,” with profits only just covering debt interest payments, according to a report by an influential Conservative think tank

A quick look around global markets courtesy of NewsSquawk

Asia-Pac bourses were initially mostly positive, but ultimately finished mixed, after taking advantage of the constructive handover from the US where tech rebounded from the recent sell-off to lift the Nasdaq out of a correction, while vaccine concerns also abated amid reports AstraZeneca may resume trials next week. ASX 200 (+0.5%) and Nikkei 225 (+0.9%) gained from the open with tech and mining names leading the advances in Australia but with upside later reversed amid weakness in financials and ongoing tensions with its largest trading partner China after reports that 6 Chinese citizens either left or were denied entry into Australia for alleged espionage or foreign interference. The Japanese benchmark was kept afloat by recent favourable currency moves and better than expected Machinery Orders data, while Tokyo also lowered its virus alert level by one notch. Hang Seng (-0.6%) and Shanghai Comp. (-0.6%) were somewhat cautious after mixed US-China related headlines with the US said to have revoked more than 1000 visas of Chinese nationals as of September 8th due to ties with the Chinese military, although there were also reports that TikTok’s parent, ByteDance, was in discussions with the US government on possible arrangements that would allow the app to avoid a full sale of its US operations. Focus was also on Yum China shares which declined 4% on an underwhelming Hong Kong debut, although Beigene shares were boosted on its inclusion in the HK-mainland stock connect program, while hefty losses were seen in the IDX Composite (-5.0%) which triggered a circuit breaker intraday after the Jakarta Governor announced to reimpose large-scale social restrictions. Finally, 10yr JGBs were lacklustre following the recent mild weakness in T-notes and rebound in equity markets, with price action in 10yr JGBs also hampered by resistance at the 152.00 level and as all metrics suggested a weaker than previous 20yr JGB auction.

Top Asian News

• Dollar’s Dominance Gives U.S. Upper Hand in China Fight
• Yum China Has Hong Kong’s Weakest Debut in More Than a Year
• Tokyo Lowers Virus Alert Level, Eases Restrictions on Bars
• Turkey Is Said to Be Discussing Oil and Gas Exploration in Libya

European stocks trade mixed (Euro Stoxx 50 -0.1%) having experienced directionless trade throughout much of the morning, following on from a mixed/choppy APAC session. Fresh fundamental news flow has been relatively light as participants gear up for the ECB policy decision (full preview available in the research suite). Sectors are mostly lower with no clear risk profile to be derived – Basic Resources, Banks and Oil & Gas stand are the laggards, with the latter on account of softer oil prices, whilst Autos, Travel & Leisure reside on the other side of the spectrum. In terms of individual movers, Akzo Nobel (+3.5%) remains buoyed as the group continues to see improving trends in Q3, with total revenue expected to be close to prior year’s levels – thus providing support to the European Chemical sector. Nexi (+5.2%) remains a top gainer in the region after sources stated that the Co. and SIA are close to clearing a hurdle to a potential merger. Finally, Morrison (-5.1%) trades at the bottom of the Stoxx 600 following their trading update which noted that COVID-19 continues to have a significant and widespread impact on business.

Top European News

• Euronext Is Said to Ready Over $4 Billion Bid for Borsa Italiana
• Nexi, SIA Close to Clearing Hurdle to Blockbuster Merger
• Deadly Hog Fever Arrives in Germany, Europe’s Top Pork Producer
• Navalny Security Tightened as Putin Foe Revives, Spiegel Says

In FX, there was not much movement in G10 currencies compared to the frantic price action that panned out on Wednesday, but the ECB policy meeting and press conference from President Lagarde hold potential to spark another bout of volatility along with the extraordinary joint committee convene between the EU and UK arranged after yesterday’s controversial IMB. In the interim, Usd/major pairs are mixed and relatively rangebound as inferred by the DXY holding within a tight range just above 93.000 (93.281-036) ahead of US claims, ppi and wholesale inventories. Meanwhile, the Euro is meandering between 1.1839-01 and well flanked by decent option expiry interest (down to 1.1775 and up to 1.1900 – full details on the headline feed at 6.56BT), with Cable pivoting 1.3000 and Eur/Gbp hovering nearer the upper end of 0.9105-0.9075 parameters.

• NOK/SEK - Little independent impetus or direction via Scandinavian inflation data (headline as forecast and core firmer in Norway vs mostly softer than expected Swedish CPI and CPIF), but wavering risk sentiment following the midweek session recovery and a downturn in crude prices have pushed the Crowns back down within 10.6720-10.6210 and 10.3516-10.3206 respective parameters.
• CHF/JPY/CAD/NZD/AUD - The Franc is outperforming above 0.9100 vs the Greenback and just shy of 1.0750 against the Euro for no apparent or obvious reason other than consolidation off recent lows, while the Yen is retracing towards 106.00 where heavy expiries reside (2 bn) ahead of almost as much from 105.85 to 105.80 (1.9 bn), and with latest BoJ source reports about a looming economic assessment upgrade largely shrugged aside. Elsewhere, the Loonie retains some post-BoC momentum in advance of Governor Macklem’s speech, with Usd/Cad straddling 1.3150 and the Antipodean Dollars are essentially idling vs their US counterpart as Nzd/Usd and Aud/Usd rotate around 0.6680 and 0.7275. Next up for the Kiwi, NZ manufacturing PMI and food price index reads for August, while the Aussie will continue to monitor Chinese diplomatic developments and daily PBoC fixes for the Cny. Talking Yuan, market observers report that Usd 3 bn options for Cnh to hit 8 in one year went through during Asian trade and for reference the pair is now circa 6.8400, so devaluation and/or a major Buck rally envisaged by the aggressor.
• EM - The Rand is lagging in wake of a much wider than anticipated SA Q2 current account deficit, but for once the Lira is showing a degree of resilience in the face of Greek calls for tough EU sanctions against Turkey and data revealing a rise in unemployment. Indeed, Usd/Try has defended attempts on 7.5000, thus far at least.

In commodities, WTI and Brent front month futures have been drifting lower in early European trade after relatively sideways overnight price action, with the benchmarks straddling figures just below USD 38/bbl and USD 40.50/bbl respectively. A few updates for the complex – the EIA STEO revised its US oil supply forecasts lower by 210k BPD for 2020. However, after September, “EIA expects U.S. crude oil production to decline slightly, averaging just under 11.0mln BPD during the first half of 2021 because EIA expects that new drilling activity will not generate enough production to offset declines from existing wells.” Meanwhile, the delayed Private Energy Inventory report adds further to the bearish narrative after printing a surprise build of 3mln bls vs. Exp. -1.3mln bbls during the last week – traders will be eyeing confirmation via today’s EIA DoE’s released at 1600BST/1100ET. Elsewhere, participants are keeping an eye on the storage situation given the touted demand decline amid a resurgence in COVID-19 cases, with sources via EnergyIntel noting that traders and international oil companies are actively booking VLCC supertankers for the next 6-12 months – suggesting participants are looking for storage of oil as opposed to sales – reflected in the curve contango. Also note, ahead of the JMMC meeting on the 17th, sources stated that the recent price decline was causing concern in Riyadh, but not yet panic - adding that there was not a need for a "bigger cut" at this point. Elsewhere, spot gold and silver remain relatively contained within tight ranges just sub-USD 1950/oz and around USD 27/oz respectively ahead of the ECB policy decision later today. In terms of base metals LME copper prices have been declining alongside stocks, with participants keeping an eye on the easing COVID-19 measures in Chile.

US Event Calendar

• 8:30am: PPI Final Demand MoM, est. 0.2%, prior 0.6%; PPI Ex Food and Energy MoM, est. 0.2%, prior 0.5%
• 8:30am: PPI Final Demand YoY, est. -0.3%, prior -0.4%; PPI Ex Food and Energy YoY, est. 0.3%, prior 0.3%
• 8:30am: Initial Jobless Claims, est. 850,000, prior 881,000; Continuing Claims, est. 12.9m, prior 13.3m
• 9:45am: Bloomberg Consumer Comfort, prior 45.1
• 10am: Wholesale Inventories MoM, est. -0.1%, prior -0.1%; Wholesale Trade Sales MoM, prior 8.8%

DB's Jim Reid concludes the overnight wrap

Disorder certainly continues to rule at home. Last week I beamed at how easy the first couple of days at nursery were for the twins. Well this week has been a different story. I think they believed that after two days followed by a weekend of no school that was their education was over with and were thus quite relaxed. This week as soon as my wife has pulled out their uniform to dress them, they have screamed and kicked the house down. My wife rung me in my cozy isolated home office at 915am yesterday to let me know that the only way she could get them to school was in their pyjamas and then to get the teacher to help change them at school once she’d dropped my daughter off. She was still shaking and needed to pause before she drove home. I felt a bit guilty being on an earlier work conference call during the turmoil downstairs. Having said that please please book me for a call any day between 8-9am so I can avoid a nervous breakdown.

Markets went from breaking down to recovery yesterday and recouped much of their losses from the previous day’s selloff. US tech outperformed, with the NASDAQ advancing +2.71%. That included strong performances from Tesla (+10.92%), Microsoft (+4.26%) and Apple (+3.86%), though the broader S&P 500 was also up +2.01% as 23 of 24 industries rose on the day (Autos at -0.37% the sole exception). The rebound was the best day for the S&P in over three months, while the NASDAQ’s daily advance was the most since 29 April. Similarly equities bounced back in Europe, where the STOXX 600 rose +1.62%, while the DAX climbed +2.07% to leave the index down just -0.09% on a YTD basis.

Speaking of Europe, the ECB will be taking centre stage for markets today as they announce their latest monetary policy decision and also release their updated macroeconomic forecasts. This meeting has come increasingly into focus in recent weeks, with the euro having risen above $1.20 at one point for the first time in over 2 years, and this appreciation has triggered a verbal reaction from ECB speakers. Meanwhile there’s the risk that the rising exchange rate reinforces low inflation, with the latest flash CPI estimate for August showing a negative reading (at -0.2%) for the first time in over 4 years. That said, we did get a Bloomberg headline yesterday saying that the forecasts were said to show more confidence in the outlook, with the euro moving higher after the news broke.

In terms of what we’re expecting today, our European economists think that the policy stance will be left unchanged, but that the ECB will reinforce their communications with a resolutely dovish message, before easing further in December with an expansion of their asset purchase programme. That December easing would coincide with the release of the ECB’s staff 2023 inflation forecasts, which could form the basis for a policy shift.

Ahead of this, markets in Asia are following Wall Street’s lead with the Nikkei (+0.64%), Hang Seng (+0.04%), Shanghai Comp (+0.29%) and Kospi (+0.82%) all up. Meanwhile Yields on 10y USTs are down -1.7bps this morning reversing much of yesterday’s rise and futures on the S&P 500 and Nasdaq are down -0.30% and -0.27% respectively.

On the coronavirus, here in the UK yesterday the government officially announced the overnight news that gatherings in England would now be limited to a maximum of 6, either indoors or outdoors. That came as a further 2,682 cases were reported yesterday, which pushed the 7-day average (2,363) to its highest since May 27. Prime Minister Johnson said that mass testing could be the route back to normal life, and that the first pilot of this would go ahead in the English city of Salford next month. In other news, following the pause in the AstraZeneca trial after a person developed neurological disorder that causes inflammation of the spinal cord, the FT reported that the trials could resume next week. Having been more than -3% lower following the open, the company’s share price pared back its losses by the end of the session to close up +0.15%. Bloomberg has reported that “an unrelated neurological illness” led to a pause in trials in July as well which was confirmed by an AstraZeneca spokeswoman who said that “There was a brief trial pause in July while a safety review took place after one volunteer was confirmed to have an undiagnosed case of multiple sclerosis,” and added that the independent panel monitoring the trial concluded the diagnosis was unrelated to the vaccine after which the trials resumed. Elsewhere, Asahi has reported that the Tokyo Metropolitan Government has decided to lower its coronavirus alert by one notch from the highest of four levels. The same report also added that Tokyo is planning to end its request of shorter hours at bars and restaurants next week.

The virus news in the US steadily gets better, while the service industry in New York City got a huge boost yesterday when Governor Cuomo announced that indoor dining may resume on September 30. Elsewhere in the US, California had its lowest cases since May and Miami has eased its city-wide curfew and has reopened outdoor public spaces such as the zoo and theme parks.

Concerns over Brexit remained yesterday as the UK government published their Internal Market Bill, which would allow the government to override elements of the Withdrawal Agreement reached between the UK and the EU last year. A number of senior EU figures weighed in negatively in response to the bill’s release, with Commission President von der Leyen tweeting that she was “Very concerned about announcements from the British government on its intentions to breach the Withdrawal Agreement. This would break international law and undermines trust.” Others to respond negatively included the Irish PM, the European Council President, as well as the former UK Conservative Prime Minister John Major, though EU sources told Reuters that they would not seek to suspend the talks between the two sides on their future relationship. Speaking of those discussions, the 8th negotiating round wraps up today, so we should hopefully get some headlines on whether there’s been any progress or not from the key players. Meanwhile, Bloomberg has reported overnight that the EU believes it may have a case to seek legal remedies even before the UK internal-market bill is passed by the UK Parliament and that it would have a clear justification once the bill becomes law, according to the EU’s preliminary analysis of the UK legislation. Criticism on the internal-market bill has also come from across the Atlantic with the US House Speaker Nancy Pelosi saying that the UK must ensure the free flow of goods across the border, as agreed in Britain’s deal with the EU last year. She added that “If the UK violates that international treaty and Brexit undermines the Good Friday accord, there will be absolutely no chance of a US-UK trade agreement passing the Congress.”

Over in fixed income, sovereign bonds sold off yesterday, with yields on 10yr Treasuries (2.1bps), bunds (+3.3bps) and gilts (+4.9bps) all moving higher. Other safe have assets also struggled, with the Japanese Yen being the worst-performing G10 currency, while the dollar index (-0.25%) fell back as well. Oil rebounded however, with WTI (+3.51%) and Brent (+2.54%) recovering at least some of the previous day’s losses. It was the largest one-day move higher for WTI since mid-June as the risk-on sentiment mixed with expectation that American stockpiles have dropped for a seventh week running. With the greenback falling, gold rose the most in 2 weeks (+0.77%) even with higher yields on the day.

Finally there wasn’t much data of note yesterday, though the number of job openings in the US in July rose to a higher-than-expected 6.618m (vs. 6m expected), which is their highest level since February before the impact of the pandemic was felt. That said, unlike in February when unemployment was below 6m, the total number of unemployed workers in July stood at 16.3m, so the number of unemployed far exceeded the number of openings.

Looking to the day ahead, the aforementioned ECB decision and President Lagarde’s subsequent press conference will be a key highlight. Lagarde will also be speaking at a Bundesbank event later in the day, and separately the ECB’s Villeroy and Bank of Canada Governor Macklem will be speaking. Data releases include French and Italian industrial production for July, while from the US there’s the weekly initial jobless claims and August’s PPI reading. Finally, the 8th negotiating round between the UK and the EU on their future relationship concludes today.