Japan is failing to beat expectations

Notes/Observations

- Formal adoption of Japan ¥28.1T stimulus package brings on disappointment

Overnight

Asia:

- RBA cuts Cash target rate by 25bps to 1.50% (as expected); statement did not provide clear guidance on the future rate outlook

- Australia Jun Trade Balance registers its biggest deficit in 6 months (-A$3.2B vs. A$2.0Be)- South Korea July CPI data misses expectations (YoY: 0.7% v 0.8%e) and remaining below BOK annual inflation target for almost 3 years

Economic data

- (JP) Japan July Consumer Confidence: 41.3 v 42.0e (1st decline in 3 months)

- (IE) Ireland July Manufacturing PMI: 50.2 v 53.0 prior

- (ES) Spain July Net Unemployment (beat) M/M: -84.0K v -70.0Ke

- (CH) Swiss July PMI Manufacturing: 50.1 v 51.9e

- (UK) July Construction PMI (beat): 45.9 v 44.0e

**Fixed Income Issuance:

- None seen

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

**Index snapshot (as of 10:00 GMT)**

Indices [Stoxx50 -1.7% at 2,919, FTSE -0.8% at 6,640, DAX -1.4% at 10,182, CAC-40 -1.8% at 4,330, IBEX-35 -2.1% at 8,335, FTSE MIB -1.9% at 16,234, SMI -1.1% at 8,039, S&P 500 Futures -0.3%]

Market Focal Points/Key Themes: European equity indices are trading sharply lower in the morning session as banking and financial stocks further losses in continuation of yesterdays sentiment; shares of Unicredit halted earlier in the session, leading the losses seen in the Eurostoxx, with notable losses also seen in shares of Santander, Deutsche Bank, BNP Paribas and ING; shares of RBS and Barclays leading the losses in the financial sector in the FTSE 100; shares of Travis Perkins the laggard in the index after releasing H1 results; commodity and mining stocks also trading sharply lower as WTI slips below the $40/bbl handle; shares of Direct Line and InterContinental Hotels providing some support in the index after releasing respective H1 results.

A plethora of upcoming scheduled US earnings (pre-market) include AmerisourceBergen, Archer-Daniels-Midland, Aetna, Amtrust, Arrow Electronics, Avon, Cardinal Health, Cummins, Constellium, CVS Health, Discovery Communications, Ecolab, Emerson Electric, Eaton Corp, Entergy, Expeditors, Fresh Del Monte, Hyatt, Harris Corp, Jones Lang La Salle, Martin Mariette Materials, Magellan Midstream, Mallinckrodt, The Mosaic Company, NiSource, Pfizer, Procter & Gamble, Pinnacle West, Royal Caribbean, Sabre, SodaStream, Seagate, Molson Coors, Wellcare Health Plans, Welltower, Western Refining, and Xylem.

Equities (as of 09:45 GMT)

- Consumer Discretionary: [InterContinental Hotels IHG.UK +1.7% (H1 results), Lufthansa LHA.DE -3.1% (Q2 results), Metro MEO.DE -7.3% (Q3 results), Travis Perkins TPK.UK -3.6% (H1 results)]

- Consumer Staples: [Eurofins Scientific ERF.FR +7.3% (H1 results)]

- Financials: [Commerzbank CBZ.DE -8.2% (Q2 results), Unicredit UCG.IT -4.6% (said to consider capital increase of €7-8B), Vonovia VNA.DE -1.6% (H1 results)]

- Industrials: [BMW BMW.DE -2.2% (Q2 results), Meggitt MGGT.UK -2.3% (H1 results)]

- Materials: [DSM DSM.NL +4.0% (Q2 results)]

- Technology: [Infineon IFX.DE -3.4% (Q3 results)]

Speakers

- ECB Economic Bulletin: Recovery in the housing market is linked primarily to higher demand

- Italy PM Renzi stated that was normal to have a lot of NPLs after a recession, banks are more of a concern than the NPLs

- Spain interim PM Rajoy: Spain needs new government to provide new stimulus for jobs

- Japan Econ Min Ishihara: Japan's economy lacks strength in spending and investment. Stresses importance of cooperation between BOJ and govt

- Japan Fin Min Aso: Explained stimulus package to BOJ Gov Kuroda as both govt and central bank aimed to end deflation. Discussed contents, scale and effect of economic stimulus steps. Reiterated that would use all tools to help economy. To decide to increase 40-year JGB bonds after market talks; NOT discussing issuing 50-year JGBs

- BOJ Gov Kuroda stated that e_nding deflation was a goal shared with govt. BOJ took action last week due to economic uncertainties (**Note: On July 28th BOJ expanded its annual purchases of ETFs from ¥3.3T to ¥6.0T). Anticipated QQE with negative rates along with government stimulus to have synergistic effects on economy. Did not expect BOJ to shrink its policy after the September review Declined to comment on daily currency moves. Did not expect BOJ to shrink its policy after the September review

- Australia Treasurer Morrison: RBA rate cut not a sign that domestic economy is struggling

- South Korea Vice Fin Min Choi said to be concerned about pace of KRW currency (Won) appreciation and prepared to take steps if necessary to stabilize FX

- Bank of Korea (BOK) July Meeting Minutes had one member note that the risks amid low interest rates should be monitored while another member believe that the accommodative stance should be sustained

- Russia July Oil production 10.85M bpd vs. 10.84M bpd prior

Currencies

- USD continued to be on soft-footing as markets again re-evaluated the timeline for the next potential Fed hike given a slew of weaker-than-expected US data over the past few session.

- EUR/USD drifted to 5-year highs above the 1.12 handle

- PM Abe detailing the size and structure of Japans fiscal support package left plenty of room for disappointment. Dealers noted that the Yen was being supported by rising yields as the nominal JPY rates and yields have squeezed massively higher over the past week. Markets have come to the conclusion that BoJ would retreat from its negative interest rate (NIR) policy when its meets in September. The 10-year JGBs fell for a fourth consecutive session, which has seen the yield lift to minus 0.01%, the best level in nearly five months, from the -0.295% low seen last week. USD/JPY holding below the 102 level in the session to 3-week lows

**Fixed Income:

- Bund futures trade at 167.17 down 28 ticks as the short end outperforms but off lows as Equities trade down sharply . Futures traded just below 166.92 support to 166.90 with a break targeting 166.36 then 166.01 Friday low then 165.94. A move higher targets 168.00 followed by 168.12-16 region before targeting 168.86 post Brexit high.

- Gilt futures trade at 129.92 down 51 ticks continuing to retrace from highs. A continued move lower targets 129.31 triple bottom with further downside momentum targeting 128.84. A move back higher looks to close the 130.49 gap then 131.03 high followed by 131.34 fib extension. Sterling futures trade down 2 to 3bp with Jun17Jun18 trading 5-6bp continuing to steepen from lows.

- Tuesdays excess liquidity report showed Monday's excess liquidity rose to €970.8B a rise of €57.9B from €912.9B prior. This was primarily due to AFs and MonPol portfolios falling to negative €553.9B. AFs are negative when the MonPol portfolios exceeds the liquidity absorbing effect of AFs. Use of the marginal lending facility fell to €12M from a prior €44M.

- Corporate issuance saw $23.4B come to market via 7 deals marking the third busiest day for IG issuance of the year headlined by Microsoft jumbo $19.75B 7 part offering. This puts YTD volumes ex SSA at $876B down fractionally from prior year levels.

Looking Ahead

- 05.30 (UK) Weekly John Lewis LFL sales data

- 05:30 (HU) Hungary Debt Agency (AKK) to sell 3-month Bills

- 05:30 (BE) Belgium Debt Agency (BDA) to sell combined €1.3-1.7B in 3-Month and 6-Month Bills

- 05:30 (UK) DMO to sell £2.5B in new 0.50% July 2022 Gilts

- 05:40 (UK) BOE Indexed Long-Term Repo Operation Results

- 06:30 (EU) ESM to sell €1.5B in 3-month Bills

- 07:45 (US) Weekly Goldman Economist Chain Store Sales

- 08:00 (BR) Brazil Jun Industrial Production M/M: 1.1%e v 0.0% prior; Y/Y: -6.3%e v -7.8% prior

- 08:15 (US) Baltic Dry Bulk Index

- 08:30 (US) Jun Personal Income: 0.3%e v 0.2% prior; Personal Spending: 0.3%e v 0.4% prior, Personal Saving Rate: No est v 5.3% prior, Real PCE: 0.2%e v 0.3% prior

- 08:30 (US) Jun PCE Deflator M/M: 0.2%e v 0.2% prior; Y/Y: 0.9%e v 0.9% prior

- 08:30 (US) Jun PCE Core M/M: 0.1%e v 0.2% prior; Y/Y: 1.6%e v 1.6% prior

- 08:55 (US) Weekly Redbook Sales

- 09:00 (EU) Weekly ECB Forex Reserves

- 09:00 (MX) Mexico Jun Leading Indicators M/M: No est v -0.05 prior

- 09:00 (SG) Singapore July Purchasing Managers Index: 49.5e v 49.6 prior, Electronics Sector Index: No est v 49.0 prior

- 09:45 (US) July ISM New York: No est v 45.4 prior

- 10:00 (NZ) Fonterra Global Dairy Trade Auction: Dairy Trade price Index

- 10:00 (MX) Mexico Weekly International Reserves

- 10:00 (DK) Denmark July Foreign Reserves (DKK): No est v 452.6B prior

- 11:00 (BR) Brazil to sell I/L 2-21, 2026, 2035 and 2055 Bonds

- 11:00 (UR) Ukraine to sell Bonds

- 11:30 (US) Treasury to sell 4-Week Bills

- 15:00 (CO) Colombia Jun Exports: No est v $2.7B prior

- 15:00 (CO) Colombia May Economic Activity Index (Monthly GDP) Y/Y: 1.6%e v 0.6% prior

- 16:30 (US) Weekly API Oil Inventories

- 17:00 (KR) South Korea July Foreign Reserves: No est v $369.9B prior

- 18:45 (NZ) New Zealand Q2 Unemployment Rate: No est v 5.7% prior; Employment Change Q/Q: No est v 1.2% prior; Y/Y: No est v 2.0% prior

- 19:01 (UK) July BRC Shop Price Index Y/Y: No est v -2.0% prior

- 19:30 (AU) Australia July AIG Performance of Services Index: No est v 51.3 prior

- 21:00 (NZ) New Zealand July ANZ Commodity Price M/M: No est v 3.8% prior

- 21:45 (CN) China July Caixin China PMI Services: No est v 52.7 prior, Composite: No est v 50.3 prior

- 22:00 (JP) Japan July Services PMI: No est v 49.4 prior; Composite PMI: No est v 49.0 prior

- 22:30 (HK) Hong Kong July Composite PMI: No est v 45.4 prior

- 23:00 (SG) Singapore Composite PMI: No est v 52.3 prior

- 23:00 (CN) China to sell 1-Year and 10-year Bonds