With traders realizing that the “Thursday Turmoil Trifecta” looms, world stocks dropped and safe-haven assets rose as investors focused on the growing tension in the Middle East, while caution spread across markets in a week full of risk events including James Comey’s congressional testimony to the ECB’s policy meeting and Britain’s increasingly uncertain election, all in the span of 24 hours. As a result, European and Asian stocks as well as S&P futures all fell, while gold, yen and Treasuries gained.

World stocks edged further away from record highs hit last week, the MSCI world equity index fell 0.12%. Crude continued to decline despite OPEC’s best efforts to stabilize its price, with WTI edging lower by 0.2% to $ 47.33 a barrel, after dropping as much as 1% and rising as much as 0.7% earlier.

Quick recap of the trading action so far courtesy of Bloomberg’s macro squawk wrap:

 Europe follows defensive Asian session with little appetite for risk before events later in the week. USTs continue overnight rally, Eurodollar curve bull-flattens, bund and gilt futures move higher in tandem. DAX reopens after Whit Monday holiday and underperforms other European equity markets, construction sector lags; Banco Popular trades with small gains +1.8% after recent heavy losses. USD/JPY at overnight lows amid broad risk-off, USD grinds marginally higher from overnight lows against G-10; spot gold trades approximately $ 5 away from YTD high, EMFX led lower by ZAR, which spikes lower after South African economy enters recession. Focus overnight on PBOC conducting a 498b yuan 1-year MLF operation, Hibor rates continue to normalize after recent spike higher.

In an otherwise quiet session, the big FX outlier was the yen which rose 0.7% to 109.70 per dollar, reaching the strongest level in six weeks, since April 21. The yen outperformed G10 currencies on haven demand while the pound also gained against the dollar ahead of Thursday’s U.K. election.  Declines in stocks and U.S. Treasury yields prompted yen buying, leading it to break the key 110 level against the dollar in Asian trading.

“Investors appear nervous ahead of several key events on Thursday including the U.K. election, former FBI Director James Comey’s testimony before the U.S. Senate and the ECB meeting,” Credit Agricole SA strategists including Manuel Oliveri said in a note to clients

Gold, which has become an inverse trade on the USDJPY, spiked above $ 1,290, advancing for a third day to the highest since April 18.

10-year Treasury yields fell to near the lowest since November. The dollar traded at an eight-month low.

Europe’s benchmark share index dropped the most in a week led by Swiss pharmaceutical company Roche Holding AG after one of its drug studies disappointed. Miners were among the biggest losers again as Bloomberg’s commodities index declined a sixth day. In Asia, Japan’s Topix index fell 0.8 percent after the yen strengthened. Australia’s S&P/ASX 200 tumbled 1.5 percent, the most in more than two months and reaching the lowest since February. The Aussie dollar swung between gains and losses after the central bank left its benchmark interest rate unchanged.

The Stoxx Europe 600 Index declined 0.4 percent and the FTSE 100 fell 0.2 percent. Futures on the S&P 500 Index dropped 0.1 percent after the underlying gauge slid 0.1 percent Monday. Qatari stocks steadied after plunging the most since 2009 on Monday. Saudi Arabia and three other Arab countries severed most diplomatic and economic ties to the country.

As first warned yesterday, Bloomberg again reminds us that all three major events – Comey, the ECB meet and British election – are set for Thursday, and as a result investors’ risk-off mood this week is understandable. It’s been compounded by a diplomatic spat among energy producing nations in the Middle East and a terror attack in London.

“There is not much scheduled today that could potentially inspire the markets as the main focus this week is on ‘Super Thursday,”’ Piotr Matys, a London-based currency strategist at Rabobank, wrote in a client note. “Essentially, we brace for a volatile session on Thursday and Friday as at least one of those crucial events could trigger sharp moves in the markets.”

Then there was Reuters, which notes that on what BayernLB analysts called “Super Thursday”, British voters will go to polls in an increasingly unpredictable general election, the European Central Bank is due to meet and later the same day former FBI director James Comey will testify before Congress.

“We have a big week or so ahead of us with the UK heading to the polls and the ECB announcing its latest monetary policy decision on Thursday and the Federal Reserve doing the same next Wednesday,” said Craig Erlam, a market analyst for OANDA securities. “Once these events pass, we may have a little more clarity and therefore see a little less caution in the markets.”

The dollar, meanwhile, touched a seven-month low ahead of Comey’s testimony. Reports suggest the former FBI chief plans to talk about conversations in which U.S. President Trump pressured him to drop his investigation into former national security adviser Mike Flynn, who was fired for failing to disclose conversations with Russian officials. The dollar index which tracks the currency against a basket of trade-weighted peers, fell to its lowest level since the November U.S. election.

Data on Monday of U.S. services sector activity slowing in May as new orders tumbled also hit the greenback.

 JOLTS April job openings data due. Michaels, Keysight, HD Supply are among companies reporting earnings

Bulletin Headline Summary from RanSquawk

  • European equities enter the North American crossover in negative territory with underperformance in health care names, led by Roche
  • Cable has tested 1.2950 but ran into a wall of selling interest here, but the pullback has found some support ahead of 1.2900 for now
  • Looking ahead, US APIs and NZ GDT Index

Market Snapshot

  • S&P 500 futures down 0.1% to 2,431.75
  • MXAP down 0.2% to 155.09
  • MXAPJ down 0.3% to 502.27
  • Nikkei down 1% to 19,979.90
  • Topix down 0.8% to 1,596.44
  • Hang Seng Index up 0.5% to 25,997.14
  • Shanghai Composite up 0.3% to 3,102.13
  • Sensex down 0.3% to 31,223.91
  • Australia S&P/ASX 200 down 1.5% to 5,667.47
  • Kospi down 0.1% to 2,368.62
  • STOXX Europe 600 down 0.4% to 390.43
  • German 10Y yield fell 1.6 bps to 0.271%
  • Euro down 0.03% to 1.1251 per US$
  • Brent Futures down 0.4% to $ 49.27/bbl
  • Italian 10Y yield rose 1.3 bps to 1.979%
  • Spanish 10Y yield fell 3.0 bps to 1.549%
  • Gold spot up 0.8% to $ 1,289.46
  • U.S. Dollar Index down 0.1% to 96.71

Top Overnight News From Bloomberg

  • U.K. Conservatives at 41.5%, Labour at 40.4%: Survation/GMB poll, Conservative lead falls from 17 points in Survation’s first poll in early May
  • Spain: Banco Popular is preparing the sale of a real estate portfolio worth EU1.5b-EU2b according to Vozpopuli. Bank official says ECB is “perfectly informed” of the current situation
  • Italy: lower house of parliament to start debate on new electoral law today after Constitutional Affairs Committee gave assent
  • South Africa 1Q GDP q/q: -0.7% vs +1.0% est; economy in recession for the first time since 2009
  • RBA keeps cash rate at 1.50% as expected; says GDP expected to have slowed in the March quarter
  • Qatar Crisis Draws Mediation Effort as Saudis Tighten Screws
  • China Rebuffs U.S. Over Detainees Probing Ivanka Shoe Supplier
  • Harvard Man Mindich Loses Out in Endowment Hedge Fund Overhaul
  • Airbus to Cut A380 Output Below One a Month If No New Orders
  • Brevan Howard’s Main Hedge Fund Loses Money for Third Month
  • Anonymous Analytics Says Short-Selling Rival Got It Wrong on AAC
  • Deutsche Bank Says It Can’t Share Details of Trump Relationship

Asia traded mostly lower following a subdued Wall St. close where all 3 major indices finished with minor losses amid range-bound trade. ASX 200 (-1.4%) underperformed as the utilities, REIT and IT sectors weighed down the index, whilst Nikkei 225 (-1.0%) suffered as the JPY firmed across the board. Shanghai Comp. (+0.3%) and Hang Seng (+0.5%) were initially negative after the PBoC refrained from conducting repo operations, although the Chinese bourses attempted to recover following a CNY 498b1n medium lending term facility operation. 10yr JGBs were relatively flat with only minimal gains seen amid a cautious risk tone, while the 30yr JGB auction also failed to spur firm demand despite the b/c printing its highest in 8 months of 3.63 (Prey. 3.35), as this was only a mild increase and other metrics were relatively stable from prior. PBoC skipped open market operations today, but conducted a CNY 498b1n Medium-Term Lending Facility operation.

Top Asian News

  • With 260-to-1 Leverage, A Chinese Giant Takes On Goldman in Repo
  • Billionaire Draper Shuns China Investments Amid Capital Controls
  • China Said to Give Banks More Time to Report on Exposures
  • Beijing Jingyuntong Rises After Solar Pact with Wuhai Government
  • Indian Power Surplus Outlook Signals Lagging Electrification

Souring sentiment this morning in Europe with equities weighed by oil and healthcare names. The big story this morning, is Roche (-4.5%) shares on course for its worst day in 2’/ years after investors were disappointed with the company’s Aphinity study results. Elsewhere, oil prices continue to slip due to the deepening diplomatic rift in the Middle East, this has also impacted the likes of Norsk Hydro who stated that exports from its Qatar-based JV aluminium plant were blocked. Fixed income markets at elevated levels amid the risk off tone, while the German curve has shown some bull flattening. Additionally, peripheral debt has been outperforming, with the Italian and Spanish 10yr widening against the German benchmark. Of note, supply kicked up a notch with Austria tapping 6s and 10s, while the UK issued 5yr debt which was well-digested by the market and caused little of the way in a reaction for UK paper.

Top European News

  • May Sends Johnson to Labour Heartland as Terror Shapes Campaign
  • Popular in Fight to Survive as Bank Updates ECB on Situation
  • German Top Court to Issue Nuclear-Fuel Tax Ruling June 7
  • Rocket-Backed Delivery Hero Targets $ 500 Million in IPO

In currencies, the yen rose 0.7 percent to 109.70 per dollar as of 10:07 a.m. in London, reaching the strongest level since April 21. The Bloomberg Dollar Spot Index fell 0.1 percent, trading at the lowest since October. The euro was little changed at $ 1.1254 and the British pound rose 0.2 percent to $ 1.2923. Watching USD/JPY, European markets have desisted from extending the USD/JPY push lower, and as we noted yesterday, 109.50-60 support here has been noteworthy, though we suspect a warranted push lower would have made light work of this. More support seen lower down at 109.00, but dealers report stops below here. Mid curve treasury yields have stabilised a little, so this is providing a near term prop, but Wall Street will likely dictate from current levels. In GBP, Cable has tested 1.2950 but ran into a wall of selling interest here, but the pullback has found some support ahead of 1.2900 for now. This will likely come under pressure as the election jitters are cranked up, and we suspect some of this is being reflected in the buoyant tone in EUR/GBP. Traders however, are also loath to sell out EUR/USD from current levels, as we await the ECB press conference on Thursday. The market is pre-empting some of communication leading to a change in tack in ECB policy, but expect Draghi and co to be as vague as possible, given their awareness of market eagerness to get ‘ahead’ of an eventual signal to reining in stimulus.

In commodities, gold climbed 0.7 percent to $ 1,289.04 an ounce, advancing for a third day to the highest since April 18. WTI crude edged lower by 0.2 percent to $ 47.33 a barrel, after dropping as much as 1 percent and rising as much as 0.7 percent earlier. The notable mover today is Gold, pushing up towards USD1290+ levels on the back of the risk tone which is have been worsening over a combination of factors, but which until now, have done little to put a dent in the Wall Street climb higher. In spite of the gains seen in the S&P, Dow and NASDAQ, buyers of the safe haven have been `following’ the yellow metal higher, with Silver lagging as we were trading on an USD18 handle the last time Gold was up here. Consequently, base metals are sporting a heavy tone, with Copper edging back to the lower end of the USD2.50-2.60 range. This is the underperformer on the day, with Platinum and Palladium showing modest gains on the day. Oil prices will remain heavy for the foreseeable future with focus on US shale production, but we continue to watch the API’s (tonight) and the DoE report tomorrow. WTI struggles in the low USD47.00’s, though we saw a snap up from sub figure levels this morning.

Looking at the day ahead, this morning in Europe it’s fairly quiet with the only releases scheduled being the Sentix investor confidence reading for June (expected to hold steady) and Euro area retail sales data for April (+0.2% mom expected). In the US the sole release is JOLTS job openings for April. Away from that we are expecting to receive the ECB’s latest CSPP and PSPP holdings data after technical issues yesterday delayed the release.

US Event Calendar

  • 10am: JOLTS Job Openings, est. 5,750, prior 5,743

DB’s Jim Reid concludes the overnight wrap

With bigger events to come later this week including a potential ‘super’ Thursday, markets never really got out of the starting blocks on Monday. Unsurprisingly much of the focus was of a political nature following the terrible London attack over the weekend and then the Qatar and Gulf news this time yesterday. The White House confirmed last night that President Trump is committed to holding talks with all parties in the Gulf in a bid to “de-escalate” the crisis. Qatar’s main stock exchange plummeted -7.27% and by the most since 2009. Oil was initially +1.50% higher as we went to print yesterday with WTI trading up at $ 48.42/bbl however that move was quickly reversed as the news was seen as having a limited impact on Gulf energy supplies. In the end WTI eventually closed last night at $ 47.40/bbl and over 2% off the highs and it is down another half a percent this morning.

That was largely the limit of the excitement for markets though. The S&P 500 (-0.12%), Dow (-0.10%) and Stoxx 600 (-0.13%) all faded to small losses. The Nasdaq briefly touched a new intraday record high before also fading later in the session too to close -0.16%. Alphabet’s share pricing passing the $ 1,000 mark less than a week after Amazon achieved such a feat was a notable landmark however. If you are lucky enough to have bought and held since Google IPO’d then that’s a total return of 2260%.

Meanwhile bond markets were also a bit weaker at the margin yesterday which more than likely reflected a fairly busy day for issuance in the US. 10y Treasury yields edged up 2.3bps to close at 2.183% while yields in Europe were up 1-2bps generally. Elsewhere, in FX Sterling recovered from early losses to close up +0.12% as markets digested the latest set of opinion polls (more on that shortly). Finally the rest of the commodities complex away from Oil was soft, particularly base metals like Aluminium (-1.45%), Zinc (-1.74%) and Iron Ore (-3.27%). It’s worth noting that Iron Ore is now down to the lowest level since October last year and over 41% off the February highs.

In terms of the macro, yesterday’s US economic data wasn’t hugely inspiring. In a busier than usual day for releases following a Friday employment report, the main focus was on the ISM and PMIs. The  non-manufacturing ISM came in at 56.9 for May which was both down 0.6pts versus April and also a shade lower than the consensus of 57.1. The details were a bit more mixed. While new orders fell 5.6pts to 57.7 the employment component interestingly rose 6.4pts to 57.8 and to the highest since July 2015 which was a bit of a head scratcher given the soft payrolls report. Meanwhile the services PMI was revised down 0.6pts to 53.6 which has left the composite at 53.6 and up for the second month in a row (although below the January high of 55.8).

Away from that there were some revisions made to both Q1 nonfarm productivity – which is now reported as being flat as opposed to the initial -0.6% reading – and unit labour costs (which were revised down to 2.2% from 3.0%). In other news factory orders were reported as falling -0.2% mom in April while core capex orders were revised up one-tenth to +0.1% mom.

In Europe the main focus was on the remaining PMIs for May. The final services PMI for the Euro area was revised up one-tenth to 56.3 which means it is down just 0.1pts from the April high. That left the composite unrevised at 56.8 which is flat versus April. At a country level the services reading for France was revised down 0.8pts to a still relatively solid 57.2 while Germany was revised up 0.2pts to 55.4. In the periphery we saw small misses for both Spain and Italy. Our European economists made the important note that the details of the PMIs revealed that both input and output prices indices were revised slightly lower in the May data. This means PMI prices indices have retreated for the past 2-3 months and while they expect core inflation to begin to recover as we move into H2, much like the CPI report last month, these figures will do little to change the ECB’s cautious assessment. At a broad level however our economists also note that the PMIs are consistent with Q2 GDP growth of around +0.8% qoq assuming
June is unchanged which represents clear upside to their +0.5% qoq view. All eyes will be on the incoming Q2 hard data flow including some of the industrial data later this week.

Switching over to the latest in Asia now where markets for the most part appear to be following the soft lead from Wall Street last night and trading slightly weaker. The Nikkei (-0.72%), Shanghai Comp (-0.20%), Kospi (-0.13%) and ASX (-1.07%) have all dipped lower with most sectors under pressure. The Hang Seng (+0.20%) is the only index current tracking higher. Gold (+0.39%) and the Yen (+0.52%) are also a little firmer reflecting the risk off moves while the Aussie Dollar is a little weaker ahead of the RBA meeting where no change in policy is expected.

Back to the latest polls in the UK. There were a couple released in the morning. The first was another YouGov poll (conducted 29 May-4 June) with a sample size of over 50,000 (8,000 votes were taken on 4 June) which showed the Conservatives as holding a 4% lead over Labour at 42-38%. The model also suggested that the Conservatives are on track to take between 268-344 seats which again suggested that the Tories could lose their majority (326 needed). Shortly after that an ICM/Guardian poll (2-4 June) of 2000 respondents showed the Conservatives as holding an 11% lead over Labour at 45-34%. That’s unchanged versus the same poll just under a week ago. Last night a Survation Poll for ITV showed the Conservatives as holding a 1% lead at 41% to 40%. It was noted that this poll was conducted over June 2-3 and prior to  the weekend terror attack.

Looking at the day ahead, this morning in Europe it’s fairly quiet with the only releases scheduled being the Sentix investor confidence reading for June (expected to hold steady) and Euro area retail sales data for April (+0.2% mom expected). Over in the US this afternoon the sole release is JOLTS job openings for April. Away from that we are expecting to receive the ECB’s latest CSPP and PSPP holdings data after technical issues yesterday delayed the release. UK PM Theresa May is also due to take part in a live ITV interview this evening at 7.30pm BST.

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