S&P futures slipped back under 3,200 and Chinese stocks finally cracked overnight, after a surprise drop in China’s retail sales signaled a bumpy economic recovery, with investors now turning to for guidance from the ECB on on its massive stimulus program. The dollar jumped and Treasury yields drifted lower.

Nasdaq futures led declines among the main American equity benchmarks, with Twitter plunging 6.6% in the premarket as hackers accessed its internal systems to hijack some of the platform’s top voices including U.S. presidential candidate Joe Biden, reality TV star Kim Kardashian West, former U.S. President Barack Obama and billionaire Elon Musk and used them to solicit digital currency. Tesla dropped 4.9% as its vehicle registrations nearly halved in the U.S. state of California during the second quarter, according to data from a marketing research firm.

Bank of America Corp shares edged lower after it reported a more than 50% decline in second-quarter profit, setting aside $4 billion for potential loan losses tied to the coronavirus pandemic. Morgan Stanley is due to report quarterly results later in the day, wrapping up what has been a mixed bag of quarterly earnings updates from the top six U.S. lenders. Johnson & Johnson was flat as it posted a 35.3% fall in quarterly profit as demand for its medical devices was hammered by hospitals putting off non-urgent procedures such as knee and hip replacement. Diversified manufacturer Honeywell and medical device maker Abbott Laboratories (ABT.N) are also slated to report their quarterly results on Thursday.

Stock markets in Asia and Europe also fell earlier in the day after data showed China's retail sales fell 1.8% in June.

Asian stocks fell, led by communications and health care, after rising in the last session. Most markets in the region were down, with Shanghai Composite dropping 4.5% and Hong Kong's Hang Seng Index falling 2%, while India's S&P BSE Sensex Index gained 0.5%. Trading volume for MSCI Asia Pacific Index members was 20% above the monthly average for this time of the day. The Topix declined 0.7%, with Yoshimura Food Holdings and ITmedia falling the most. The Shanghai Composite Index retreated 4.5%, with China Life and Nacity Property Service posting the biggest slides.

The slump in tech shares and the reminder of the long road ahead to a full global recovery is quashing optimism seen earlier in the week spurred by progress in developing a coronavirus vaccine. While China is experiencing a modest domestic recovery, it remains vulnerable to setbacks as shutdowns continue to hamper activity across the globe.

“The problem is, this is still uneven,” Helen Qiao, chief greater China economist at Bank of America Corp., said on Bloomberg TV, referring to the latest data. “It is hard to see how China can remain on a firm footing at a time when the rest of the world is still coping with a very deep recession.”

In macro, the dollar rose against all Group-of-10 peers and the euro fell to a two-day low in European hours as risk sentiment worsened and given positioning ahead of the ECB. The central bank is widely expected to keep its QE program unchanged at 1.35 trillion euros, supplemented by negative interest rates and generous long-term loans to banks. The Swiss franc and the yen held up well, in line with familiar risk-off patterns; the Norwegian krone was the worst Group-of-10 performer as oil prices edged lower after closing at a four-month high; the OPEC+ alliance confirmed it would start tapering output cuts from next month. The Australian dollar fell as traders focused on the upward revision of job losses in May and a record spike in coronavirus cases in the nation’s second-most populous state.

In rates, 10Y Treasurues were modestly higher, with 10Y yields at 0.62% last. Gilts edged higher after Britain ramped up its bond sale plan by another 110 billion pounds, which was less than the 115 billion pounds estimated in a Bloomberg survey of primary dealers. Most regional bonds climbed ahead of the ECB’s policy decision, where it’s expected to keep its emergency bond-buying program unchanged. President Christine Lagarde will likely face questions over whether the current level of support is sufficient.

Looking at the day ahead now, the ECB meeting and President Lagarde’s subsequent press conference are likely to be the highlights. Other central bank speakers today include the Fed’s Williams, Bostic and Evans. Data releases include June’s retail sales, the weekly initial jobless claims, the Philadelphia Fed’s business outlook survey for July, and the NAHB housing market index for July. Earnings releases will include Johnson & Johnson, Netflix, Bank of America, Abbott Laboratories and Morgan Stanley.

Market Snapshot

• S&P 500 futures down 0.8% to 3,194.50
• STOXX Europe 600 down 1% to 370.26
• German 10Y yield fell 0.6 bps to -0.45%
• Euro down 0.07% to $1.1404
• Italian 10Y yield fell 1.1 bps to 1.074%
• Spanish 10Y yield rose 0.4 bps to 0.426%
• MXAP down 1.5% to 164.16
• MXAPJ down 1.8% to 538.13
• Nikkei down 0.8% to 22,770.36
• Topix down 0.7% to 1,579.06
• Hang Seng Index down 2% to 24,970.69
• Shanghai Composite down 4.5% to 3,210.10
• Sensex up 0.5% to 36,212.32
• Australia S&P/ASX 200 down 0.7% to 6,010.86
• Kospi down 0.8% to 2,183.76
• Brent futures down 0.9% to $43.38/bbl
• Gold spot down 0.3% to $1,805.32
• U.S. Dollar Index up 0.1% to 96.18

Top Overnight News from Bloomberg

• Tokyo joined Australia’s second-biggest state in posting record coronavirus cases as second waves spread in several hotspots
• The Chinese economy expanded 3.2% in the second quarter from a year ago as the nation returned to growth, but the economy remains 1.6% smaller than a year ago and details showed the recovery was uneven, with a contraction in retail sales continuing in June
• As countries across Asia Pacific struggle with resurgences of the coronavirus, one data point is steering government responses: the share of cases with no clear indication of how infection occurred
• For all the pressure on U.K. Chancellor of the Exchequer Rishi Sunak to explain how he’ll repair public finances ravaged by the coronavirus, investors are lending the money with very few questions
• A relentlessly expanding physical hoard of bullion stored in London and New York means exchange-traded funds have usurped managed money in the futures market as the key driver of the price of the shiny metal
• The number of hours worked in the U.K. economy fell the most on the record in the coronavirus lockdown, underlining the risk facing the labor market as government income support is phased out

Asian stocks traded negatively as the recent vaccine optimism that underpinned global stocks took a back seat to the slew of tier-1 releases in the region including Australian Employment numbers, as well as Chinese GDP, Industrial Production and Retail Sales data. ASX 200 (-0.7%) was subdued with underperformance seen in commodity names and amid rumours of a potential Stage 4 lockdown surrounding Victoria state where its capital Melbourne is currently under stage 3 restrictions. Nikkei 225 (-0.8%) was pressured by recent detrimental currency flows and after falling short of the 23K status, while KOSPI (-0.6%) also declined after the BoK kept rates unchanged at 0.5% as expected and provided a grim tone on the economy. Elsewhere, Hang Seng (-2.0%) and Shanghai Comp. (-4.5%) failed to benefit from the mostly better than expected Chinese data in which GDP and Industrial Production topped estimates but Retail Sales disappointed and showed a surprise contraction which led to concerns related to consumer demand and an uneven recovery. Finally, 10yr JGBs were higher amid the negative mood across stocks and improved demand at the enhanced liquidity auction for 2yr-20yr JGBs.

Top Asian News

• Apple Supplier JDI Surges as CEO Reveals Mobile OLED Talks
• Worst China Stocks Selloff Since February Caps Brutal Reversal
• Hong Kong Sees Record 63 Local Virus Cases in Swelling Wave
• Thai Finance Minister Quits in Cabinet Shake-Up Amid Slump

European equities have started the session on the backfoot (Eurostoxx 50 -0.7%) as markets take a breather from some of the recent vaccine-inspired gains. Macro newsflow from a European perspective has been light as markets look ahead to the latest policy announcement from the ECB today and perhaps more importantly the upcoming negotiations on the EU recovery fund and budget. In terms of the composition of losses in Europe, all sectors trade lower with the exception of oil & gas names which trade closer to the unchanged mark post-yesterday’s JMMC agreement while telecom names are erring higher as well. The laggard in Europe is Food & Beverage with Heineken (-2.5%) a noteworthy underperformer after the Co. reported a 16% decline in H1 sales. Elsewhere, for the luxury sector, Richemont (-5.3%) sit near the foot of the Stoxx 600 after posting a near 50% decline in Q1 trading revenue in what was a particularly bleak earnings report. Other movers include Zalando (+2.1%) and Atos (-1.7%) post-earnings, whilst Deutsche Lufthansa (-3.0%) lag other travel & leisure names despite noting that it hopes to get around 90% of its short haul flights back up and running by the end of October.

Top European News

• Analysts Wary After Biggest Swedish Bank Has Tiny Impairment
• U.K. Bond-Sale Plan Is Now Equal to 18% of GDP to Fund Recovery
• Risky Debt Threatens U.K. Recovery, Finance Lobby Says
• Johnson Battles U.K. Spy Watchdog Ahead of Key Russia Report

In FX, the Dollar has clawed back more lost ground vs G10 and EM rivals on renewed safe haven demand as euphoria over COVID-19 vaccines fades somewhat and markets look ahead to key events, like the ECB, US retail sales data and weekly initial claims. However, the DXY still looks precarious just above 96.000 after Wednesday’s bearish break below the round number (to 95.770 and just off the June low), as coronavirus cases and deaths continue to rise in several states and reach fresh record peaks in some areas, such as Texas yesterday.

• GBP/NZD/AUD - The major victims of a reversal in broad risk sentiment and associated Greenback revival, but with Cable also undermined by negative technical factors having lost grip of the 1.2600 handle and a series of shorter term MA levels, including the 50, 100 and 200 markers, on the way down through 1.2550. Note, conflicting UK jobs data has not really impacted, but the Pound may be taking heed of NIRP expectations in Short Sterling futures that been brought forward by some 6 months in wake of BoE’s Tenreyro’s ‘live’ revelation yesterday. Meanwhile, benign NZ CPI and a mixed Aussie employment report have not helped the Nzd or Aud retain gains vs the Usd, with the former back under 0.6550 and the latter retreating through 0.7000.
• EUR/CAD/JPY/CHF - Also unwinding outperformance relative to the Buck, as the Euro relinquishes 1.1400+ status ahead of the ECB policy meeting and press conference amidst another heavy spread of option expiries descending from just shy of Wednesday’s high (circa 1.1452) at 1.1440-30 (1 bn) through 1.1380-75 (1 bn) down to 1.1350 (2 bn). Note, a full preview of the upcoming July ECB convene and presser is available on our Research Suite and will be reposted via the headline feed in the run up to the event. Similarly, the Loonie is paring back post-BoC between 1.3502-29 parameters against the backdrop of softer crude prices, while the Yen has pulled back from over 107.00, albeit some distance from 1.5 bn expiry interest at 107.25-35, and the Franc is straddling 0.9450.
• SCANDI/EM - General weakness, or payback after midweek session strength with few exceptions and the oil/commodity bloc bearing the brunt of the general deterioration in temperament. However, the Cnh is holding around 7.0000 following another firm PBoC Cny fix and a slew of Chinese data overnight that was either side of expectations, but comfortably above consensus in terms of Q2 GDP.

In commodities, WTI and Brent are once again subdued following the modest pullback in sentiment more broadly before today’s key central bank event. For the crude complex itself, since yesterday’s JMMC meeting where they confirmed OPEC+ will begin easing production cuts to 7.7mln BPD (~8.3mln BPD when taking compensation into account) there has been very little in the way of fundamental updates. As attention now returns more so to the demand side of the equation and the impact of any further COVID-19 induced headwinds; for the supply side, attention will be on whether OPEC+ members who are required to over-compensate do so as well as the situation in areas including Libya. Elsewhere, spot gold has had a somewhat more rangebound session but has most recently erred lower as European equity bourses attempt to rise from their session lows. Saudi Energy Minister said the effective oil cuts in August will be around 8.1-8.2mln BPD and reportedly commented that it is too late to change August quotas at this JMMC since term lifters' nominations are already set for the month. (Newswires)

US Event Calendar

• 8:30am: Initial Jobless Claims, est. 1.25m, prior 1.31m; Continuing Claims, est. 17.5m, prior 18.1m
• 8:30am: Retail Sales Advance MoM, est. 5.0%, prior 17.7%; Retail Sales Ex Auto and Gas, est. 5.0%, prior 12.4%
  • Retail Sales Ex Auto MoM, est. 5.0%, prior 12.4%; Retail Sales Control Group, est. 4.0%, prior 11.0%
• 8:30am: Philadelphia Fed Business Outlook, est. 20, prior 27.5
• 9:45am: Bloomberg Consumer Comfort, prior 42.9
• 10am: Business Inventories, est. -2.3%, prior -1.3%
• 10am: NAHB Housing Market Index, est. 61, prior 58
• 4pm: Net Long-term TIC Flows, prior $128.4b deficit; Total Net TIC Flows, prior $125.3b

DB's Jim Reid concludes the overnight wrap

Risk assets were positive but volatile yesterday. It looked like a decent session was going to fizzle out as stocks dipped from their peaks 45 minutes before the European close as US/China tensions hit the headlines again and tech stocks came under some pressure after a dizzying run. However by the end of the session the S&P 500 reversed its downward course to finish just shy of its post-pandemic high. The reversal seemed driven by headlines that President Trump has told aides that he does not want to escalate tensions with China and also that Senate Majority Leader McConnell reiterated his plans to release a fiscal stimulus bill early next week. By the close the S&P 500 had advanced a further +0.91%, but was up as much as +1.27% at the day’s high and had briefly erased its YTD losses. The Nasdaq was up a lesser +0.59%, having been up over 1% earlier in the session but in negative territory after Europe closed. The best performing stocks were some of the most affected by the pandemic and the shutdowns. In the US, Airlines were among the leading industries, up over +10%, while Norwegian Cruise Line (+20.68%), Carnival (+16.22%), and Royal Caribbean Cruises (+21.20%) were among the best performing stocks in the S&P.

It was a similar story in Europe, where the Travel and Leisure sector (+6.06%) led the STOXX 600 higher, however the sector is still over -33% down from pre-pandemic highs compared to the broad index which is down -13.83%. The rise of cruise lines, airlines and other hospitality stocks in both the US and Europe was likely tied in parts to the positive vaccine stories over the last 36 hours. Europe managed to survive the aforementioned dip in risk sentiment with most of the bourses up by around 2%, including the STOXX 600 (+1.76%), the DAX (+1.84%) and the CAC 40 (+2.03%).

In terms of earnings, Goldman Sachs rose +1.4% yesterday as they announced, like their American peers, a large jump in fixed incoming trading. FICC sales and trading revenue of $4.24 billion beat an estimate of $2.64 billion. Also in-line with peers was the large Q2 provision for credit losses, up $1.59 billion from the prior year. Alcoa slightly beat after the close, but most importantly on the earnings call CEO Harvey said, "if the number of virus cases increases substantially in a prolonged first or potential second wave, a new round of strict lockdown orders would likely cause the current demand recovery to reverse course."

Asian markets are trading lower this morning with the Nikkei (-0.71%), Hang Seng (-1.17%), Shanghai Comp (-1.41%), Kospi (-0.52%) and Asx (-0.97%) all down. A miss on retail sales data seems to be weighing on Chinese bourses even as Q2 GDP surprised on the upside (more below). The jump in COVID-19 infections in the region seems to also be acting as an overhang. Futures on the S&P 500 are also trading down -0.40%.

In more detail on the data, China’s Q2 GDP surprised on the upside with a reading of +3.2% yoy (vs. +2.4% yoy expected). Only 2 out of 28 economists on Bloomberg had pencilled in an above +3% print. Bloomberg highlighted that public investment swung to growth of +2.1% yoy in 1H, after contracting in the first 5 months. China’s 1H GDP growth now stands at -1.6% yoy (vs. -2.4% yoy expected). Alongside GDP we saw the other main data releases for June with industrial production rising in line with expectations at +4.8% yoy while YtD fixed asset investment came in at -3.1% yoy (vs. -3.3% yoy expected). Retail sales disappointed with a print of -1.8% yoy (vs. +0.5% yoy expected). The surveyed jobless rate for the month fell to 5.7% (vs. 5.9% last month). Elsewhere, Chinese President Xi Jinping wrote in a brief letter to a group of global chief executives that “We will continue efforts to deepen reform and opening, and provide a more sound business environment for Chinese and overseas investors.”

On the coronavirus, markets were initially reacting to the previous night’s news from the Moderna’s trial, in which their vaccine produced antibodies in all the patients tested. In response the company’s share price was up by +6.90% yesterday. The other news came through from UK ITV’s Robert Peston, who tweeted that “Positive news is coming on Oxford Covid-19 vaccine. The vaccine is generating the kind of antibody and T-cell (killer cell) response that the researchers would hope to see, I understand.” AstraZeneca shares surged following that tweet, ending the day up +5.23%, and Peston’s report on the ITV website said that the news could come as soon as today. Sky News also reported that the Lancet medical journal will publish data on the potential AstraZeneca Plc vaccine on Monday, so one to look out for.

There are some signs that the virus’ continued spread throughout the US may be slightly slowing in states that showed sharp increases in mid-June. Florida reported a 3.5% increase in cases yesterday, below the 4.5% weekly average. Still deaths continue to rise in the state, a further 112 reported yesterday compared to the average of 90 per day over the last week. Meanwhile Arizona saw a 2.5% increase that is also lower than its weekly average of 2.9%, however positive tests in the state remain very high at 23.4%, indicating that the official count may be missing a large number of cases. Deaths in the state rose by 97, the 5th increase in the last 6 days, and well above the 7 day average of 68. We would expect case growth to slow down this week as activity has dropped in these regions. Overall cases in the US rose by 2.0%, in-line with the last week’s average. According to rtlive’s model, only 6 states currently have an Rt under 1.0 and so there is very real concern of cases rising throughout the country even as the majority of the northeast sees limited case growth.

In Asia, after Tokyo raised their alert level to the highest point on a 4-point scale yesterday, they reported a record 280 confirmed cases today. The 7-day average of new cases in the city is now above its April peak. Tokyo‘s governor has urged residents to avoid stores that don’t meet guidelines designed to reduce the spread, but hasn’t called on businesses to close their doors yet. Australia’s second most populous state, Victoria recorded 317 new cases in the past 24 hours, the largest single-day increase for any of Australia’s states and territories.

On another note, the use of masks continued to become more widespread, with Walmart announcing that it would require all customers to wear them in its US stores from July 20. This comes as more US states have adopted mask mandates in recent days, the most recent of which was Alabama yesterday. The state borders recent hotspot Florida and has seen daily new cases rise by over 1,500 for 4 days in a row for the first time. In Europe, both Ireland and Serbia announced that the use of masks would become mandatory. The former also announced that they will delay the latest phase of reopening, which included bars and nightclubs, after the effective transmission rate rose over 1.0 in the country.

Attention today will turn to the ECB’s latest monetary policy decision, along with President Lagarde’s subsequent press conference. Our European economists write in their preview (link here ) that they expect the policy statement to remain unchanged, following the decision at the last meeting to expand the envelope for their Pandemic Emergency Purchase Programme by a further €600bn, bringing the total up to €1.35tn. Though recent comments from ECB officials have shown signs of an emerging optimism, our economists don’t believe these signal a change in the policy stance, and expect the commitment to “substantial monetary policy stimulus” to be repeated. Other issues to look out for include any comments from President Lagarde on the German Constitutional Court, now that the German Bundestag has passed a motion on proportionality.

Staying on Europe, our economists have written a fresh blog post on the proposed EU recovery fund ahead of the special European Council summit that commences tomorrow in Brussels (link here ). Their view is that although an agreement is still possible this weekend, it would now be a positive surprise, with the political messaging having shifted away from expecting a (full) agreement on Friday and Saturday. This could simply be expectations management, but so far there is no indication of the differences of opinion between member states having been bridged yet. That said, if agreement is not reached this weekend, then they still expect an agreement within weeks. The question of how the market will respond to the lack of an agreement will ultimately depend on the post-summit statements on how close or far the EU is from an agreement.

Ahead of that and the ECB later today, the euro actually strengthened to a 4-month high against the US dollar yesterday, at $1.1412. Indeed, if it surpasses the $1.145 it reached at the height of the market’s pandemic fears in early March, that’ll take the euro to its strongest level against the dollar in over a year. Meanwhile in fixed income, yields on 10yr Italian debt fell by -1.1bps to close at their lowest level in over 3 months, but bunds held steady, with just a +0.3bps rise. Over in the US, yields on 10yr Treasuries similarly rose by just +0.7bps.

Looking at yesterday’s data, the main news came from the US, where industrial production rose by a stronger-than-expected +5.4% in June (vs. +4.3% expected), though this still left IP -10.9% below its level in February before the pandemic hit. Further positive news came from the New York Fed’s Empire State manufacturing survey, with the headline general business conditions index rising to 17.2 (vs. 10.0 expected), the first positive reading since February. Finally here in the UK, the June CPI reading rose by a tenth to +0.6% (vs. +0.4% expected),which is the first time that the inflation rate has risen since January.

To the day ahead now, and as mentioned the ECB meeting and President Lagarde’s subsequent press conference are likely to be the highlights. Other central bank speakers today include BoE Governor Bailey, along with the Fed’s Williams, Bostic and Evans. Data releases include May’s UK unemployment and the Euro Area trade balance, while over in the US, we’ll get June’s retail sales, the weekly initial jobless claims, the Philadelphia Fed’s business outlook survey for July, and the NAHB housing market index for July. Earnings releases will include Johnson & Johnson, Netflix, Bank of America, Abbott Laboratories and Morgan Stanley.