Global Rally Pauses As Yields Rise On Surging Oil

US futures edged fractionally higher to start the week with small-caps outperforming as last week's rally, when euphoric investors bought stocks after Fed Chair Jerome Powell’s dovish tilt at Jackson Hole, fizzled. As of 8:00am ET, S&P 500 futures gained 0.1% while and Nasdaq 100 futures turned red after both indexes notched gains of more than 1% on Friday when Powell’s J-Hole speech cemented the case for an interest-rate cut next month; the debate has now shifted to the size of the cut and what that would say about the state of the economy. Pre-market, NVDA which reports earnings this week, was up about 1% leading both Mag7 and Semis higher. Bond yields reversed losses and rose 3 bps tracking the nearly 3% spike in oil after Israel launched a pre-emptive strike involving 100 warplanes on Hezbollah in Lebanon and declared a 48-hour state of emergency while Libya's Eastern government said on Monday morning it will stop all oil production and export. The yen erased all gains after earlier rising to its strongest level since January as it took reacted to the rise in US yields; the dollar edged up while gold held near a record high. Bitcoin touched $65,000 for the first time in about three weeks. The macro data focus is on Durable/Cap Goods but NVDA earnings on Weds is the key event. Powell’s dovish Jackson Hole speech should give a tailwind to risk assets this week.

In premarket trading, Guardant Health slipped 3% after filing an open-market agreement to sell as much as $400 million in shares via Jefferies. SolarEdge Technologies gained 4% after Zvi Lando stepped down as CEO. Here are the other notable premarket movers:

• Daqo New Energy (DQ) falls 4% after the polysilicon maker reported revenue for the second quarter that missed the average analyst estimate.
• PDD Holdings (PDD) falls 15% after reporting weaker-than-expected sales, a sign that Temu’s growth is falling short of investors’s heightened expectations.
• Xpeng ADRs (XPEV) gains 3% as the Chinese electric-car maker said its CEO He Xiaopeng had purchased 1m Class A shares of the company in the open market at an average of HK$27.13 each, in a filing to HKEX.

Positioning for lower US borrowing costs rippled through financial markets after Fed Powell said that the “time has come” to pivot to monetary easing. Traders added to bets on a half-point of rate cuts in September — but a reduction of that magnitude could signal the economy is heading for a hard landing, tempering demand for stocks.

“If you have to cut rates faster, that also suggests that the economy is doing less well,” Eleanor Taylor Jolidon, co-head of Swiss and global equities at Union Bancaire Privee, said on Bloomberg TV. “A 50 basis-point cut would be reflection of that weaker data that we saw at the end of July that did somewhat spook the market.”

Fears of escalating conflict in the Middle East prompted some haven buying after an Israeli strike on Hezbollah targets in southern Lebanon. Crude oil advanced almost 3%. The yen gained for a second day to its strongest level since January, but then started tracking rising US yields which moved in tandem with oil, and the USDJPY is now at session highs, almost 100 pips off the lows.

Europe's Stoxx 600 index was little changed, with trading volumes less than half of the average as UK markets are closed for a holiday.  Germany’s business outlook held at its lowest level since February, highlighting the gloom once again engulfing Europe’s biggest economy after an early-year rebound fizzled out, but some assistance may be on the way on interest rates. After first lowering borrowing costs in June, the European Central Bank has signaled another move is likely in September. Here are the biggest movers Monday:

• Elia Group shares rise as much as 3.8% as Oddo upgrades the Belgian electricity firm to outperform, saying a new CEO and larger capital expenditure plan may boost the shares
• Instalco falls as much as 4.6% after Kepler Cheuvreux cut its recommendation for the Swedish electrical-installations group to hold from buy, advising caution until there is proof that its end markets are recovering
• Meyer Burger shares slump as much as 56% after the Swiss solar panel maker announced it will pause the construction of a solar cell plant in Colorado, which is currently not financially viable

The MSCI Asia Pacific Index advances for third day, with Hong Kong and Australia leading regional winners. Hang Seng climbs about 0.8% as tech stocks resume gains. Shanghai Composite remains broadly unchanged. Japanese stocks underperformed as the yen strengthens to below 144-handle against the dollar.  Elsewhere, the People’s Bank of China left the rate on its one-year policy loans, or the medium-term lending facility, at 2.3%, after a slashing the rate by 20 basis points in July. The decision underscores Beijing’s cautious approach in supporting the economy, even as China reported a rare contraction in bank loans amid weak demand. The PBOC has been walking a fine line of stimulating growth and cooling a government-bond buying spree to limit financial risks in recent months.

In FX, the Bloomberg dollar index rose 0.1% after it slumped the most in nine months on Friday. Aussie and kiwi are at the bottom of G-10 currency scoreboard. USD/JPY rose 0.2%, paring earlier decline of 0.6% to 143.45, the lowest since Aug. 5 after Powell said the “time has come” for the Fed to lower benchmark rates from their two-decade high, his clearest signal yet that long-awaited rate cuts are imminent.  One-month risk reversals in EUR/USD rallied to 38 basis points, the most bullish sentiment for the common currency since Dec. 2020

In rates, the 10-year Treasury yield reversed an earlier drop to rise 2bps to 3.812%, tracking the sharp spike in oil prices. Most euro-zone 10-year yields are higher by ~2bp on the day after Germany’s IFO business confidence index fell less than expected; UK markets are closed for a bank holiday. The Australian curve bull steepens with 3-year yield down 6bps. JGB futures remain stronger in line with Friday’s post-Powell Treasury rally. Treasury auctions ahead this week include $69b 2-year Tuesday, $70b 5-year Wednesday (a possible unscheduled reopening) and $44b 7-year Thursday

In commodities, oil surged almost 3% as the Middle East braced for escalating conflict after an Israeli strike on Hezbollah targets in southern Lebanon. Cease-fire negotiations were held in Cairo and are set to continue, AP said. Separately, Libya’s eastern-based government said it will stop all oil production and exports. Gold extended a rally above $2,500 an ounce, and was trading near all time highs of $2,525. Iron ore extended a rebound with China’s huge inventories of the material continuing to draw down, in a tentative sign that a period of severe oversupply is starting to ease. 

Looking at today's calendar, the US economic calendar includes July preliminary durable goods orders (8:30am) and August Dallas Fed manufacturing activity (10:30am). Fed speakers scheduled include San Francisco Fed President Dale (2pm)

Market Snapshot

• S&P 500 futures up 0.2% to 5,662.25
• STOXX Europe 600 little changed at 517.73
• MXAP up 0.5% to 186.37
• MXAPJ up 0.8% to 579.25
• Nikkei down 0.7% to 38,110.22
• Topix down 0.9% to 2,661.41
• Hang Seng Index up 1.1% to 17,798.73
• Shanghai Composite little changed at 2,855.52
• Sensex up 0.8% to 81,769.62
• Australia S&P/ASX 200 up 0.8% to 8,084.52
• Kospi down 0.1% to 2,698.01
• German 10Y yield little changed at 2.24%
• Euro little changed at $1.1181
• Brent Futures up 1.1% to $79.88/bbl
• Gold spot up 0.4% to $2,523.20
• US Dollar Index little changed at 100.69

Top Overnight News

• Stocks paused on Monday as rising tension in the Middle East tempered the bullish sentiment sparked by the prospect of imminent Federal Reserve interest rate cuts.
• Hours after 100 Israeli warplanes swooped over southern Lebanon, taking out thousands of Hezbollah missile launchers in what was called a preemptive strike, the Middle East braced for an expanded conflagration that could involve Iran and its allied militias.
• Canada Industrial Relations Board (CIRB) imposed binding arbitration on Teamsters Union, CN, and CPKC railways, according to Teamsters cited by Reuters. Canada Industrial Relations Board halts work stoppages at CN and CP railways.
• Canada Labour Minister Mackinnon said the CIRB has issued a decision to impose final and binding arbitration in negotiations between CN Rail, CPKC, and Teamsters Canada Rail Conference, and he expects that railway companies and employees will resume at the earliest opportunity, according to a post on X.
• Canadian National Railway said it had received an order from CIRB imposing binding arbitration between the company and Teamsters Canada Rail Conference. This means that the strike notice recently issued to CN by the Teamsters is now voided. CN Rail added that CIRB has also ordered that no further labour stoppage, including lockout or strike, can occur during the arbitration process, and will comply with the order, which also extends the current collective agreement until a new agreement is signed between the parties.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks kicked off the week mixed following the gains on Wall Street after Fed Chair Powell's dovish pivot, whilst the weekend was packed with geopolitics in which the heavy fires between Israel and Hezbollah resulted in no civilian casualties, but both sides expressed no appetite for further escalation. ASX 200 traded firm with the index underpinned by Real Estate, Tech, and Energy, although further upside was limited by the losses in Healthcare - the underperforming sector. Nikkei 225 was pressured by the recent JPY strength following the Fed Chair's dovish comments after the BoJ Governor's hawkish remarks on Friday, in which Powell's speech ultimately resulted in a weaker Dollar and lower US bond yields. Auto stocks fell with Yamaha Motors sliding after reports Yamaha Corp was to sell a 1.7% stake in Yamaha Motors. Hang Seng and Shanghai Comp. were mixed with Hong Kong bolstered by its Real Estate sector, whilst the mainland was subdued in a tight range after the PBoC conducted its delayed MLF with a maintained rate at 2.30%. US equity futures were mostly subdued at the resumption of trade with contracts taking a breather after Friday's Powell-induced gains. Ultimately, price action was flat and horizontal overnight. (ES -0.1%)

Top Asian News

• PBoC Governor Pan said financial risks in key areas are being resolved in an orderly manner and added the government will encourage financial institutions to increase support for weak links or in key areas, according to Bloomberg.
• PBoC injected CNY 300bln via 1-year MLF at a maintained rate of 2.30% (delayed MLF).
• PBoC injected CNY 471bln via 7-day Reverse Repo at a maintained rate of 1.70%.
• Japanese former Defence Minister Shigeru Ishiba says he will run in the ruling LDP leadership race on September 27th, according to Reuters.
• IMF Chief Economist said there is scope for the BoJ to further normalize monetary policy, raising interest rates gradually for some time, according to Reuters.

European bourses have kicked the week off with marginal losses, Euro Stoxx 50 -0.1%. Sectors are mixed with no overarching theme; Tech is the incremental laggard as we count down to Nvidia numbers later in the week. DAX 40 -0.2% is the incremental laggard; German Ifo release was better-than-feared but was a poor set of data and keeps stagnation/recessionary talk alive. Stateside, futures are a touch higher with specifics light as participants digest Jackson Hole and prepare for NVDA and PCE this week before Payrolls next week, ES +0.2% & NQ +0.2%.

Top European News

• ECB's Chief Economist Lane said the return to the 2% inflation target is not yet secure. "The monetary stance will have to remain in restrictive territory for as long as needed to shepherd the disinflation process towards a timely return to the target", Lane said. Lane also warned that keeping rates high for too low could deliver below-target inflation.
• Riksbank Minutes: Overall, the minutes highlight that while a 50bps move was considered/discussed the preference among the board was for 25bps with various factors as to why a larger magnitude would not be appropriate. However, the language makes clear that nothing is ruled out ahead and the preference from the governor is for a cut to occur at each meeting in H2 (in-line with the most dovish end of the new verbal guidance from August). Full details on the headline feed

FX

• DXY flat after what was a bruising week for the Dollar last week, picked up off the overnight 100.52 base but is yet to make any real traction into the green.
• EUR and GBP both a touch softer; no real follow through from Ifo while the UK is away for a Bank Holiday with specifics light thus far. Single currency back below 1.12 after failing to hold onto the handle overnight.
• Havens outperform given the weekend's geopolitical escalation while CitiFX month-end model points to USD selling with the strongest signal vs the JPY; USD/JPY sub-144.00.
• Antipodeans softer given the risk tone and after strong performance last week.
• PBoC set USD/CNY mid-point at 7.1139 vs exp. 7.1132 (prev. 7.1358)
• Brazil's Central Bank Chief Neto said recent volatility may show the market is pricing less room for fiscal and monetary intervention in the future, according to Reuters.

Fixed Income

• Bunds in the red after only a fleeting haven bid on overnight geopols. Complex came under some modest pressure after a better-than-feared German Ifo release, but one that still points to significant pressure in the bloc's largest economy.
• At session lows of 134.24 but yet to test Thursday's base at 134.11 with Friday's at 134.07 before the figure.
• OATs await details from the meeting between President Macron and other political leaders, following on from his meeting with NFP PM candidate Castets on Friday.
• USTs are essentially flat with specifics light as the benchmarks has already reacted to Jackson Hole with attention now on upcoming inflation and jobs numbers. Holding at the low end of 113-22 to 113-30 parameters, support some way off at Friday's 113-08+ base.

Commodities

• Crude benchmarks at session highs of 75.83/bbl and USD 80.02/bbl for WTI and Brent respectively, upside driven by the weekend's geopolitical escalation.
• As it stands, we are awaiting any fresh details from Hezbollah and/or Israel on their next steps.
• Spot gold also supported and lifting further above the USD 2500/oz mark but yet to test the USD 2531/oz ATH from last week.
• Base metals firmer, supported by the initially constructive overnight tone and now awaiting fresh macro drivers in somewhat light trade; reminder, UK Bank Holiday means no LME trade.
• Russia's (441k BPD) Omsk oil refinery has reported a fire, which has been brought under control; plant is working as usual

Geopolitics: Middle East

• Lebanon's Hezbollah launched hundreds of rockets and drones at Israel early on Sunday. Meanwhile, Israel's military said it struck Lebanon with around 100 jets to thwart a larger attack. The event was framed as one of the biggest clashes in more than 10 months. Three deaths were confirmed in Lebanon and one death in Israel, both sides indicated appetite to avoid further escalation, but warned that there could be more strikes to come, according to Reuters.
• Hezbollah said it completed the 'first phase' of its response to Israel's killing of a top commander last month and hit 11 Israeli military sites on Sunday, firing more than 320 Katyusha rockets, according to Reuters. Hezbollah said it began the attack on Israel with a large number of drones in response to the top commander's killing in a Beirut suburb last month, and it will take “some time” to complete its response to the top commander's killing.
• Israeli PM Netanyahu said the military intercepted all the drones that Hezbollah launched at a strategic target in central Israel, and the attacks are 'not the end of the story.' Netanyahu added that the country has taken the first step towards returning its residents in the north safely to their homes, according to Reuters.
• Hezbollah leader Nasrallah said the group will assess the impact of Sunday’s operation; if results are not seen to be enough, "we will respond another time". The Group said its military operation was completed as planned, with precision, and decided not to respond to the killing of a top commander by targeting civilian areas. Response was delayed for several reasons, including mass Israeli and US military mobilization. Hezbollah said it wanted to target military sites close to Tel Aviv, and targeted a military intelligence base 110 km into Israeli territory, 1.5 km away from Tel Aviv. The group said for the first time, it sent drones to Israel from the Bekaa region, while the group said it had no intention to use precision missiles today, but may use them in the near future.
• Israel's Foreign Minister said Israel does not seek a full-scale war but will act according to developments on the ground, according to Reuters.
• Gaza talks in Cairo ended without agreement, according to Reuters citing Egyptian sources. "Axios quotes US official: Gaza talks will continue in the coming days through working groups to address issues and remaining details", reported by Sky News Arabia.
• White House National Security Adviser Sullivan says they are still working in Cairo towards a ceasefire deal, according to Reuters.
• Hamas' armed wing said it fired a rocket at Tel Aviv, according to Reuters.
• Jordan warned the escalation in Lebanon and its 'dangerous repercussions' could lead to regional war, according to Reuters.
• On Sunday, Hamas said that it rejects the new Israeli conditions put forward in the Gaza ceasefire talk, according to Reuters.
• Iranian Foreign Minister said Iran is "not afraid of escalation, but we do not seek it, unlike Israel", according to Al Jazeera, adding that their retaliation "will be decisive and well calculated".
• Yemen's Defence Minister said Yemen is ready to inflict painful blows on Israel, according to IRNA.

Geopolitics: Ukraine

• Ukrainian President Zelenskiy said negotiations are ongoing with Saudi Arabia, Qatar, Turkey, and Switzerland about a second summit on peace, according to Reuters. He added Ukraine’s operation in Russia’s Kursk region is difficult but he views its progress positively.
• Russia and Ukraine exchange 115 prisoners each, according to RIA. Russia said Ukraine has returned servicemen captured in the Kursk region.
• Ukraine's military says Ukraine air defence systems in Kyiv region engaged in repelling Russian air attack, according to Reuters.
• Ukraine said Belarus massing troops at the border under a pretext of drills, and warned of “unfriendly moves”, according to Walla's Elster.
• Russian Kremlin says there have been no ceasefire discussions with Ukraine; topic of negotiations has "pretty much lost its relevance".

Geopolitics: South China Sea

• Philippines' South China Sea Task Force said Chinese Coast Guard vessels 'made close perilous manoeuvres that resulted in ramming' and deployed water cannons against Manila's fisheries vessel, leading to engine failure, and added that fisheries vessel was 'targeted by People's Liberation Army Navy ship and multiple China Coast Guard ships' to block the mission.
• China says it 'took control measures' towards the Philippine vessel near the Sabina Shoal, and added that Philippine's vessel 'illegally' entered waters near Sabina Shoal in the South China Sea. China said the Philippine vessel has been continuously approaching Chinese Coast Guard ships in a dangerous manner, according to Reuters.
• Philippines South China Sea Task Force said a Chinese fighter jet 'engaged in irresponsible and dangerous manoeuvres, deploying flares multiple times at a dangerously close distance', according to Reuters.

Geopolitics: US-China

• Chinese Commerce Ministry said it strongly opposes the US adding Chinese entities to the export control list over Russia-related issues, and the action disrupts international trade order and hinders normal economic exchanges. Commerce Ministry said it will take necessary measures to resolutely safeguard the legitimate rights of Chinese companies.

Geopolitics: Other

• Chinese President Xi is to visit Russia in October, according to RIA citing the Chinese envoy.
• North Korea said it will continue to strengthen strategic power to control security challenges posed by the reorientation of US nuclear strategy, according to KCNA.
• China's military said it conducted armed patrols and air-ground joint police patrols near China-Myanmar borders, according to a statement.
• Taiwan Defence Ministry says in the past 24 hours, 12 Chinese military aircraft were detected operating around Taiwan (vs 12 in the prior 24 hours), according to Reuters.

US Event calendar

• 08:30: July Durable Goods Orders, est. 4.9%, prior -6.7%
  • July Durables Less Transportation, est. 0%, prior 0.4%
  • July Cap Goods Orders Nondef Ex Air, est. 0.1%, prior 0.9%
  • July Cap Goods Ship Nondef Ex Air, est. 0.2%, prior 0.2%
• 10:30: Aug. Dallas Fed Manf. Activity, est. -16.0, prior -17.5

Central Bank speakers

• 14:00: Fed’s Daly on BTV