Global equities rallied for a second day on Wednesday with US futures flat while European shares edged higher following a strong session in Asia as safe-havens such as US Treasurys and the Japanese yen dropped to multi-week lows as investors bet the escalating U.S.-China trade spat would inflict less damage than feared. While the rising tariffs between the United States and China threatens to disrupt supply chains and undermine the world economy, markets took cheer from China’s move to levy only 10% duty on $60 billion of U.S. imports, while China's Premier Li promised that China will not stoop to competitive devaluation of its currency, and that China is fully capable of keeping the exchange rate stable, spurring gains in the onshore and offshore yuan. Keqiang’s pledge lifted the yuan up 0.15% at 6.8545 per dollar... ... allowing an index of emerging currencies to rise to its highest since last Friday, as the EM space was a sea of green on Wednesday. Today's euphoria, paradoxically, came after China announced retaliatory tariffs on $60 billion of U.S. goods from wheat to textiles and the Trump administration threatened duties on virtually all Chinese imports. However, both sides indicated there could still be scope to reach a trade deal. The MSCI index of global equities rose 0.2% to a two-week high while emerging stocks too firmed for a second day, led by a one percent jump in Shanghai markets, after a sharp rally the day earlier which some speculated was the result of the "national team" intervening. Still, questions about the trade war remain: "China are out of bullets. The fight is done and dusted. Now it’s just a question of how the Chinese can save face and say ‘alright we’re going to change, going to open up wider access not only to the U.S. but to the EU and Japan’, said Christopher Peel, chief investment officer at Tavistock Wealth in London. "Their economy is export-led, they can’t afford for it to go out of control." JPM echoed the cautious tone, warning that "markets are behaving as if trade war overhang has been removed after details were released on $200bn of tariffs. Positioning stretched." In the US, futures on the S&P 500 hovered around the unchanged line while in Europe, carmakers rose as data showed a surge in European auto registrations in August, with the sector among the best performers in the Stoxx Europe 600 Index. Earlier in the session, MSCI Asia rose 1.1% with shares in Japan, Hong Kong and China climbed. Emerging-market equities advanced for the fifth time in six sessions as their currencies edged higher Government bonds from the United States and Germany saw yields race to multi-week highs. U.S. 10-year yields stayed firmly above the key 3% mark. German bond yields also rose, surpassing 0.5% for the first time since mid-June, lifted by the equity rally and signs of calm on markets in Italy, where the coalition government is now widely expected to deliver a budget that respects EU fiscal discipline rules. “Where we are today, is in a period of relative calm as U.S. bond yields probe their highs, and we become accustomed to trade rhetoric and perhaps, blasé about the economic damage it will cause,” said Societe Generale strategist Kit Juckes. “All things considered, though, the tariff spat could have been a lot worse. Investors reacted relatively well to the news.” The dollar and other haven currencies such as the yen and Swiss franc came under pressure amid the risk on tone, while the pound led gains among Group-of-10 currencies after U.K. inflation unexpectedly accelerated. The Bloomberg Dollar Spot Index extended its weekly drop while the pound briefly rose above $1.32 handle for the first time in two months. Sterling advanced by as much as 0.5% to $1.3215, its strongest level since July 17; data showed U.K. inflation in August rose 2.7% y/y, compared with the median forecast of a slowdown to 2.4% from July’s 2.5% reading. Meanwhile, as the week grinds on, Brexit remains a key item on the agenda, with the United Kingdom and European Union appearing to move closer to a deal. Elsewhere, pot stock Tilray shares extended Tuesday’s gains pre-market after CEO Brendan Kennedy touted the company’s growth prospects in a CNBC interview with Jim Cramer. U.S. and Canadian representatives will meet Wednesday in Washington to pick up Nafta talks. In commodities, oil held on to gains made after Saudi Arabia expressed comfort with Brent prices rising above $80 a barrel. The yen was steady after the Bank of Japan left its policy unchanged, keeping monetary stimulus in place. Expected data include mortgage applications, housing starts, and building permits. Copart and Red Hat are among companies reporting earnings. Market Snapshot S&P 500 futures little changed at 2,910.00 STOXX Europe 600 up 0.2% to 379.47 MXAP up 1.1% to 163.72 MXAPJ up 0.9% to 519.50 Nikkei up 1.1% to 23,672.52 Topix up 1.5% to 1,785.66 Hang Seng Index up 1.2% to 27,407.37 Shanghai Composite up 1.1% to 2,730.85 Sensex down 0.07% to 37,265.17 Australia S&P/ASX 200 up 0.5% to 6,189.96 Kospi down 0.02% to 2,308.46 German 10Y yield rose 1.7 bps to 0.497% Euro up 0.4% to $1.1712 Italian 10Y yield fell 5.5 bps to 2.431% Spanish 10Y yield rose 0.6 bps to 1.511% Brent futures down 0.1% to $78.93/bbl Gold spot up 0.4% to $1,203.58 U.S. Dollar Index down 0.2% to 94.41 Top Headline News from Bloomberg Chinese Premier Li: China will not devalue the currency to stimulate exports; recent fluctuations in yuan FX rate not an intentional measure U.S. President Donald Trump praised North Korean leader Kim Jong Un for agreeing to further steps toward giving up his nuclear weapons, signaling that stalled negotiations might get back on track despite the lack of concrete details BOJ kept policy measures, forward guidance unchanged as expected; vote 7-2 on YCC and guidance, Kataoka & Harada dissent as expected U.K. inflation unexpectedly accelerated in August, boosted by the cost of theater shows, computer games, transport fares and clothing. The jump to 2.7 percent from 2.5 percent may raise questions about how quickly inflation will return to the Bank of England’s target For officials in Beijing, the worry about Donald Trump’s latest tariffs isn’t the impact on trade: Rather it’s the steady march toward a long-term competition that could thwart China’s rise Lawmakers from Italy’s Five Star Movement are ratcheting up the pressure on Finance Minister Giovanni Tria as the populist party, one of two members of the ruling coalition, seeks more funding for its programs in the coming budget and signals its willingness to raise deficits Australia’s real exchange rate could surge and gross domestic product drop in the event of an all-out global trade war, Reserve Bank research conducted in March suggested The strong franc could derail Switzerland’s “booming” economy, which is enjoying its best period of growth in eight years, the government warned U.K. Aug. CPI y/y: 2.7% vs 2.4% est; Core CPI 2.1% vs 1.8% est; ONS notes rise in recreation and culture sector +3.6% most since 2010 Italy: Deputy PM Di Maio is looking for a 2.5% deficit/GDP level in the budget and is not asking Finance Minister Tria to resign according to Corriere; Repubblica reports Five Star party are looking at ways to pressure Tria Asian equity markets traded positive following the gains in US as global markets took the well-telegraphed and lower than feared tit-for-tat tariffs between US and China in their stride. ASX 200 (+0.5%) was positive with outperformance in miners and energy names following gains in copper and crude oil, while Nikkei 225 (+1.2%) outperformed on a weaker JPY and better than expected trade data. Elsewhere, Hang Seng (+1.0%) and Shanghai Comp. (+1.0%) were initially indecisive due to the uncertainty from the escalation of trade tensions and after the PBoC slowed down on its liquidity efforts, but then shrugged off the concerns alongside the widespread gains in the region and with risk sentiment also underpinned by comments from Premier Li who noted several measures to support companies and dismissed resorting to a devaluation of the currency. Finally, 10yr JGBs traded lower amid the outperformance of Japanese stocks but with losses contained as participants were somewhat tentative heading into the BoJ which proved to be a non-event. Top Asian News Qatar’s QIA Chief Is Said to Leave $320 Billion Wealth Fund Thailand Holds Key Rate With Prospect for Future Hike Rising Acquisitive Indian Billionaire Says He’s Hungry for Deals China Vows it Won’t Weaponize its Currency as Trade War Deepens European bourses (Eurostoxx 50 +0.2%) broadly trade with modest gains thus far in the wake of what was a relatively up-beat Asia-Pac session as trade fears (temporarily) dissipated. The FTSE 100 (-0.2%) lags its peers amid the firmer GBP (post-CPI). Losses for the index have been contained by upside in mining names with materials the outperforming sector; in-fitting with price action in the complex overnight. In terms of individual movers and shakers, Danske Bank sit at the foot of the Stoxx 600 after recent money-laundering troubles forced the co. to cut guidance and remove their CEO. Kingfisher (-5.0%) shares were dealt a blow after announcing a 15% decline in profits with markets also unimpressed by the latest update from Adecco (-4.8%) after the co. forecast a slowdown in revenue growth. To the upside, Babcock (+4.8%) leads the charge for the Stoxx 600 after sticking to their guidance, whilst Commerzbank (+2.8%) are also seen higher after a broker upgrade at RBC. Top European News U.K. Inflation Unexpectedly Accelerates on Theater Prices, Fares Bankia Said to Plan $4.1 Billion Sale of Bad Spanish Assets Sainsbury-Asda Deal Probe Fast-Tracked by U.K. Regulator Tesla Partner Neoen to Seek $525 Million in Largest French IPO In FX, GBP was Among the G10 outperformers, but off best levels on a combination of technical selling around resistance, profit taking and the realisation that 2.7% y/y UK CPI vs the 2.4% consensus will not materially change the BoE policy outlook in the near term at least. Indeed, that rests largely on Brexit developments and the kind of deal that appears to remain on course to be agreed by November. Cable spiked above 1.3200 at one stage, but ran in to heavy offers above the big figure and up to 1.3215, while Eur/Gbp retreated from 0.8900 again before testing but not clearing its 100 DMA around 0.8863 or stops below convincingly. EUR/CAD - Also bid vs a broadly soft Greenback, but the single currency is still struggling to make a clean break above 1.1700 amidst reported decent offers between 1.1720-50, while the Loonie is around 1.2950 in the run up to more NAFTA talks and testing the first band of offers seen up to 1.2940. EM - The revival across the region has resumed, and with the Try and Zar prominent ahead of potentially key/pivotal events on Thursday in the form of the SARB policy meeting and Turkish medium term economic plan. The Rand is back above 15.0000 vs the Usd, and firmly in spite of softer than forecast SA inflation data that should confirm no change in official rates, while the Lira has recovered from recent wobbles to trade over 6.3000 again vs the Dollar In commodities, WTI and Brent crude futures trade relatively unchanged and in close proximity to recent Saudi-inspired highs with last night’s unexpected build in the API survey providing a minimal drag on prices. Focus throughout the week will likely begin to turn towards this weekend’s meeting in Algiers which will see OPEC and OPEC+ producers take stock of their latest strategy adjustment in June with Iranian production likely a hot-topic for the event. In metals markets, spot gold is modestly firmer alongside a slightly softer USD with the yellow metal maintaining a USD 1200/oz handle. Elsewhere, copper in Shanghai hit a one-month high overnight amid support from the broader risk-appetite, with sentiment also propelling zinc to trade with gains of circa 3%. Finally, plans for Chinese infrastructure spending helped underpin steel rebar prices with the metal posting its best daily performance in a week. On today's calendar, we’ll get the July current account balance from the ECB while August housing starts and building permits data highlight a quiet US calendar. Outside of that the informal EU leaders meeting kicks off today and continues into Thursday with the latest UK proposals for withdrawing from the EU an obvious topic of discussion to watch out for. Elsewhere Russia President Putin is due to meet Hungary Prime Minister Orban with energy policy likely to be the main point of focus, while the ECB’s Draghi and BoE’s Haldane are also slated to speak. US Event Calendar 7am: MBA Mortgage Applications, prior -1.8% 8:30am: Current Account Balance, est. $103.4b deficit, prior $124.1b deficit 8:30am: Housing Starts, est. 1.24m, prior 1.17m; 8:30am: Building Permits, est. 1.31m, prior 1.31m DB's Jim Reid concludes the overnight wrap Prices are likely to go up as the trade war escalates. Indeed, over the last 36 hours we have now seen the US announce tariffs on $200bn of Chinese exports to the US – with the potential for more – and China retaliate with the announcement of tariffs in the range of 5-10% on $60bn of US imports. However, markets have so far shrugged their shoulders and decided to rally. Last night the S&P 500 and the DOW finished with gains of +0.54% and +0.71% respectively while the VIX (-0.89pts) edged back below 13 once again. Despite a bad day for Tesla (-3.35%), which is apparently under a Justice Department investigation regarding Elon Musk’s recent tweet about going private, the NASDAQ advanced +0.76%. This followed markets in Europe ending flat to slightly higher and as you’ll see shortly bourses in Asia also extending gains. Also, as we’ll see below, bonds sold off notably across the globe. Various theories did the rounds yesterday as to why risk assets have rallied in response to the escalation with the consensus being that it was mostly in line with what was expected. Also noteworthy was the Chinese government yesterday announcing a boost to infrastructure investment growth. Meanwhile with the US administration also suggesting that the tariff rate won’t be lifted to 25% until next year, there’s perhaps also some hope that negotiations could resume between the two governments and therefore some sort of agreement reached to walk back on the tariffs. In any case the next move is clearly crucial, particularly if the US administration acts upon China’s move by introducing tariffs on the remaining $267bn of Chinese exports to the US. You also can’t rule out the possibility of China going down the non-tariff route given the limitations on how much tariffs they can apply. The nuclear option would be to sell US Treasuries and on that note overnight we’ve had data released which showed that China’s holdings of US Treasuries in July fell to the lowest in six months ($1.17tn from $1.18tn in June).This was just as the trade war was ramping up so although the data is a little stale and the actual size of the reduction is small it’s still noteworthy and a data point to watch in the future. Yesterday our China Chief Economist Zhiwei Zhang updated his views on the latest US tariffs on China (but prior to the China retaliation). In his view, he sees this as the beginning of the real trade war but is pretty sanguine about the impact on growth. The first $50bn of tariffs on Chinese exports was small and China’s total exports remained strong. However, Zhiwei believes that the impact from this round will slow export growth to 7% in Q4 this year and 4% in Q1 next year – from 12% in Q2 and 11% in Q3 this year. Looser monetary and fiscal policies will kick in though. Indeed, the housing cycle is picking up, with new housing starts running at 23% 3mma yoy, and property prices accelerating. The push to boost infrastructure investment will likely help as well. All this would allow the RMB to depreciate to 7.40 (currently 6.85) in 2019. Overall this helps maintain his view for 6.5% growth in Q3 and Q4 this year and 6.3% in 2019. He thinks this scenario is positive for cyclical stocks and commodities in China. See here for the report. Back to markets this morning where, as mentioned at the top, it’s been another decent session for risk in Asia. Leading the way is the Nikkei (+1.35%) again following an uneventful BoJ meeting where policy, as expected, was left unchanged. All eyes on Governor Kuroda’s press conference shortly after we go to print however for any hints as to what conditions necessitate more flexibility in the 10y JGB band. Meanwhile there’s also gains for the Hang Seng (+0.97%) and Shanghai Comp (+0.97%). The only development on the trade war front overnight is China Premier Li Keqiang publically stating that China won’t devalue the Yuan in order to boost exports following the tariff announcement. He said doing such would “do more harm than good” while playing down any concerns that the weakness in the currency earlier this year was intentional. As we type the CNY is actually +0.14% on the day so far. Elsewhere there’s also some headlines trickling through from the Korea summit with the most noteworthy being that both North and South Korea have agreed on specific steps towards denuclearizing, albeit with still plenty of vague and missing details. The two countries are also supposedly considering a joint bid for the 2032 Summer Olympics. Coming back to yesterday, the other side of the equity move was a decent selloff for bonds. Yields in Europe (ex Italy – more on that below) were broadly 2-4bps higher while Treasuries finished last night 6.8bps higher and finally closed above 3% (3.056%) for the first time since 1 August and at the highest level since May. In conjunction with the risk-on tone, a busy day for US IG issuance was blamed for the Treasuries move and there may have been a little fear over a China response on Treasuries at some point. BTPs finished 5.6bps lower but yields were initially higher after more clashes within the government over spending plans. The improved mood for risk rather than any fresh newsflow appeared to help BTPs rally back. The FTSE MIB also closed +0.55% and higher for the third day in a row, its longest such streak in 10 weeks. Elsewhere, EM currencies traded flat in aggregate, with the Lira (-1.12%) balancing out the Ruble (+1.04%). Brent Oil also rallied +1.26% to $79.03/bbl to snap a three-day losing run after Saudi Arabia announced that they were comfortable with Brent above $80/bbl. On the Brexit front, focus continues to centre on today’s two-day summit in Salzburg, though reports yesterday suggested that EU officials do not plan to make an official joint statement at the event. Instead, media reports suggest that both parties will continue to negotiate over the Irish border and the future EUUK relationship with the aim of finalizing a formal agreement in November. The precise details will likely be deferred until closer to the actual exit date in January 2021. Barnier called October the “moment of truth” and “it’s then we will see whether the agreement we’re hoping for will be within our grasp”. The only notable data release yesterday was the US NAHB Housing Market Index for September, which printed at 67 versus expectations for 66. That’s slightly stronger than expected, but still down from its peak at the end of the last year, and consistent with DB’s expectations for a moderate slowdown in housing sector activity. A reading above 50 indicates expansion, and the index has firmly been above that threshold since 2014. Outside of the obvious focus on any further trade developments, the main data highlight this morning will likely be the August inflation report for the UK where the consensus expectation is for a small decline in core CPI to 1.8% yoy (from 1.9%) and a similar decline for PPI output prices. Away from that we’ll get the July current account balance from the ECB while August housing starts and building permits data highlight a quiet US calendar. Outside of that the informal EU leaders meeting kicks off today and continues into Thursday with the latest UK proposals for withdrawing from the EU an obvious topic of discussion to watch out for. Elsewhere Russia President Putin is due to meet Hungary Prime Minister Orban with energy policy likely to be the main point of focus, while the ECB’s Draghi and BoE’s Haldane are also slated to speak.