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Authored by Irina Slav via OilPrice.com,

One of Brazil’s richest men, Eike Batista, has received a 30-year prison sentence for bribes given to the former governor of Rio de Janeiro, Sergio Cabral, Reuters reports, citing a federal court document. Cabral was also convicted.

The federal court found Batista – whose business was mainly in oil and metals – guilty of paying US$16.5 million to Cabral in exchange for winning state contracts, including one for the management of the legendary Maracana stadium in Rio and one for the construction of a US$3.7-billion port, Acu.

According to the prosecution, Batista paid a quarter of the bribe to Cabral in cash. The rest came in the form of Petrobras, Vale, and Ambev stock.

Batista, who was Brazil’s richest man just six years ago, with a net worth of US$30 billion, was an oil and mining bull whose unflagging certainty about oil, metals, and the Brazilian economy clashed with reality when the country plunged into its worst recession in history amid the oil price collapse and the latest metals price rout.

Batista, Reuters recalls, made a lot of expensive bets on offshore oil plays that did not work out as expected due to plummeting prices and operation Car Wash, the large-scale anti-corruption sweep of the government, which shook not just Petrobras but most major companies operating in the country.

Launched in 2014, Operation Car Wash has so far led to 150 arrests, lawsuits, and criminal proceedings. Petrobras was the company most heavily involved in the probe on allegations that high-ranking company officials—along with politicians—had received millions of dollars in illegal payment from other companies to secure contracts with the state oil giant.

Among the politicians involved in the scandal were former presidents Luiz Inacio Lula da Silva and Dilma Rousseff—who was impeached last year—and also current president Michel Temer.

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Instead of winding down his investigation into Russian interference/collusion in the US 2016 election, Robert Mueller is requisitioning additional Department of Justice resources in the latest sign that the probe continues to expand nearly 14 months after Mueller was appointed special counsel. According to Bloomberg, in a sign that Mueller is preparing to hand off more of his investigation to other federal prosecutors – like he did with the investigation into Michael Cohen (which he “delegated” to the southern district of New York) – the DOJ is now spending more on supplemental work for Mueller than it is spending on the special counsel’s own staff.

According to his most recent statement of expenditures, more money is being spent on work done by permanent Department of Justice units than on Mueller’s own dedicated operation. The DOJ units spent $9 million from the investigation’s start in May 2017 through March of this year, compared with $7.7 million spent by Mueller’s team.

Mueller is also increasingly depending on investigators in different areas, including New York, Alexandria, Va. and Pittsburg, Penn. in yet another sign that another handoff could be imminent.

Investigators in New York; Alexandria, Virginia; Pittsburgh and elsewhere have been tapped to supplement the work of Mueller’s team, the officials said. Mueller has already handed off one major investigation – into Trump’s personal lawyer, Michael Cohen – to the Southern District of New York.

In an attempt to “normalize” Mueller’s behavior, DOJ officials told Bloomberg that this type of “expansion” was to be expected: “A heavy investigative load” had been anticipated from the start. Plus, they said, Mueller is showing results (though it appears he’s done just enough to justify continuing with the probe).

“I don’t think he’s getting in over his head,” said Solomon Wisenberg, who served as deputy independent counsel investigating President Bill Clinton in the 1990s. “These things have a tendency to balloon. Yes, it may be taxing on them. No, it’s not that unusual.”

Nor is it unusual for Mueller to turn to U.S. attorneys or to Justice Department headquarters, said Wisenberg, who’s now a partner at the law firm Nelson Mullins Riley & Scarborough LLP.

Mueller’s team will likely be particularly busy in the coming months as he wraps up his negotiations with President Trump’s team and gears up for the trial of Paul Manafort – which is set to begin later this month.

“It’s going to be all hands on deck when they go to the Manafort trial,” Wisenberg said.

Earlier this year, the Internet Research Agency opened another front in Mueller’s war by engaging him in a legal battle in federal court as they’ve sought to expose what Mueller has argued are “sensitive investigative materials”. Another court fight started last week when Andrew Miller, a former aide to Roger Stone, filed a sealed motion to fight one of Mueller’s grand jury subpoenas.

Mueller is also expected to soon begin the sentencing phase of his prosecution of Michael Flynn and George Papadopoulos, both of whom pleaded guilty to lying to investigators, and have offered to cooperate. With so much going on, some experts have quietly urged Mueller to think about cutting back.

“He’s a busy guy,” said Jeffrey Cramer, a former federal prosecutor.

“There’s certainly multiple fronts going on right now,” said Cramer, who’s now managing director of the international investigation firm Berkeley Research Group LLC. “Some of them are more active than others.”

Cramer doesn’t think Mueller’s in over his head but says he might be taking timing into consideration when it comes to making additional moves.

“You don’t have unlimited resources in a sense that you’ve got an unlimited cadre of prosecutors and agents,” Cramer said. “There does come a time where they can only do so much.”

With all this in mind, it certainly doesn’t sound like Mueller is respecting Rep. Trey Gowdy’s admonition – delivered to Mueller’s ostensible boss, Rod Rosenstein – to “finish it the hell up.” At this point, it seems like even Trump agreeing to sit for an interview – something that Mueller has long said would be the capstone to his investigation – would be enough to entice Mueller to wind down his wide-reaching investigation which, in case you forgot, has moved far beyond its initial mandate to investigate “Russian interference.”

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ADP printed that the US economy added 177k jobs in June – missing expectations for the fourth straight month (after significantly under-estimating May’s BLS print). Both Goods (+29k) and Services (+148k) saw gains in June with only Information Service providers seeing a reduction in employment.

The average job gain per month for the last 12 months is now 190k – the highest since Sept 2016.

“The labor market continues to march towards full employment,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “Healthcare led job growth once again and trade rebounded nicely.”

Mark Zandi, chief economist of Moody’s Analytics, said, “Business’ number one problem is finding qualified workers. At the current pace of job growth, if sustained, this problem is set to get much worse. These labor shortages will only intensify across all industries and company sizes.”

 

Full breakdown:

ADP Infographic:

Finally, as a reminder, we note that since President Trump’s election ADP has consistently over-estimated job gains relative to BLS – an entirely different regime from the period of President Obama’s tenure…

 

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With just hours left until the US officially declares trade war on China at midnight on Friday, when the Trump admin enacts tariffs on $34bn in Chinese products and Beijing retaliates instantly, China on Thursday rejected “threats and blackmail” ahead of a threatened U.S. tariff hike, once again striking a defiant stance in the dispute which companies have warned could flare into a full-blown trade war and chill the global economy.

A government spokesman said Beijing will defend itself if U.S. President Donald Trump goes ahead Friday with plans to raise duties on Chinese goods in the escalating conflict over technology policy. The Chinese government has already issued a list of U.S. goods for retaliation, but the Commerce Ministry said it will wait to see what Washington does.

“China will not bow in the face of threats and blackmail, nor will it be shaken in its resolve to defend global free trade,” said ministry spokesman Gao Feng at a news conference.

“China will never fire the first shot,” Gao said. “However, if the United States adopts taxation measures, China will be forced to fight back to defend the core interests of the nation and the interests of the people.”

Friday’s tariff hikes are the first stage in threatened U.S. increases on up to $450 billion of imports from China over complaints Beijing steals or pressures foreign companies to hand over technology. According to Goldman calculations, if the full scope of proposed protectionist measures is implemented, this would raise the total amount of tariffs the Trump administration has proposed from around $500bn to nearly $800bn, or about 4 times the cumulative amount that had been proposed as of a few month ago, before President Trump proposed tariffs on global auto imports on national security grounds.

And while Xi’s government has expressed confidence China can hold out against U.S. pressure, but companies and investors are uneasy. Trade worries are adding to anxiety over cooling economic growth and tighter lending controls that have hit real estate and other industries. The main Chinese stock market index has tumbled 12 percent over the past month.

According to AP, Chinese exporters of tools, lighting and appliances say U.S. orders have shrunk as customers wait to see what will happen to prices.

Ningbo Top East Technology Co., which makes soldering irons in Ningbo, south of Shanghai, used to export 30 percent of its output to the United States, according to its general manager, Tong Feibing. He said American orders have fallen 30 to 50 percent compared with a year ago.

The company wants customers to split the cost of the tariff hike, but few are willing, said Tong.

“There is a chance the company will lose money and might go bankrupt,” said Tong. “I will do whatever I can, including layoffs.”

China’s ruling Communist Party has insisted on making changes at its own pace while sticking to a state-led industrial strategy seen as the path to prosperity and global influence. Officials in Beijing reject accusations of theft and say foreign companies have no obligation to hand over technology. But rules on auto manufacturing, pharmaceuticals and other industries require companies to operate through state-owned Chinese partners and share know-how with potential competitors or teach them how to develop their own.

Beijing has announced changes this year including easing limits on foreign ownership in insurance and some other fields. But none directly addresses the complaints that are fueling its conflict with Washington.

The U.S. also has irked some of its closest allies by hiking import duties on steel, aluminum and autos from Europe, Japan, Canada and Mexico.

“The global trade conflict is at risk of a serious escalation,” said Adam Slater of Oxford Economics in a report.

So far tariffs imposed by all sides affect about $60 billion of goods, or 0.3% of world trade, according to Slater. He said that would rise to a full 4% of the global total if Washington, Beijing and other governments follow through on tariff threats.

Ironically, for all the bluster and counter-American rhetoric, yesterday Reuters reports that the EU flatly rejected a Chinese proposal to form s strategic alliance between the two entities and take on the US. The reason for Europe’s skepticism? The admission behind the scenes that Trump is correct in his blame of Beijing, and also the complete lack of faith in Brussels that anything China promises to do it will actually implement.

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According to conventional wisdom, trade wars are bullish for the dollar, for two main reasons: they tend to be inflationary (import prices spike), and they impact risk assets, resulting in a flight for USD-denominated safety. Indeed, just today, Bloomberg writes that for dollar bulls, Trump’s trade wars are just what the doctor ordered.

They see the greenback as a better haven than gold should the tariff tit-for-tat intensify. Four months after the U.S. president shocked equity markets with his vision of higher duties on imports to America, investors are discovering catalysts that should help the nation’s currency withstand trade turbulence better than gold.

“The dollar has become the main destination for safe-haven investors,” Ole Hansen, head of commodity strategy at Saxo Bank A/S, said by email from Copenhagen. “Geopolitical risk is on the rise, bonds and stocks have sold off and yet gold continues to drift lower.”

A “significant” driver of the dollar’s gains this year has been reduced risk appetite, spurring a tide of capital to dollar assets as emerging markets seize up, according to Jane Foley, head of currency strategy at Rabobank. That said, “the sheer liquidity associated with the dollar means that for some investors it will always be a safe haven,” she wrote in a recent note.

There is another reason why traditional economic theory would suggest the dollar should gain: the prospect that import tariffs will reduce the US current-account deficit even as the Fed hikes rates, thereby creating a rare opportunity in which the dollar can be used both as a haven and in carry trades, according to Andreas Steno Larsen, a global currency strategist at Nordea Bank AB in Copenhagen.

But is that really true? According to Bloomberg macro commentator and former Lehman trader Mark Cudmore, not only are trade wars imminently dollar negative, but in a note overnight, he writes that the dollar is set for an imminent slide on what he calls “flawed tariff logic.”

Specifically, he envisions two key things: positioning and the yield effect. On the first, last Friday we showed that after being very bearish on the dollar for the better part of a year, speculators have turned sharply bullish, suggesting there are few shorts left to cover, and the marginal buyers may already be in the trade.

Speculative USD positioning against currencies in the CFTC CoT report, in $ bn

What about yields? as Cudmore writes, “they topped out in mid-May and have been steadily declining since The flattening U.S. curve emphasizes that the more important long-term impact of any tariffs will be the hit to growth U.S.-led trade wars only encourage other countries to divert their trade relationships elsewhere, thereby undermining the dollar’s relevance at the margin.“

As a result of the flattening of the TSY curve, the more important long-term impact of any tariffs will be the hit to growth U.S.-led trade wars only encourage other countries to divert their trade relationships elsewhere, thereby undermining the dollar’s relevance at the margin.

So are all those betting on a strong dollar (and weaker yuan), as trade war begin wrong? Read his full note below and decide:

Dollar Set for Imminent Slide on Flawed Tariff Logic:

The outlook for the dollar is increasingly bearish because investor positioning is misaligned with how the trade war will play out in the market.

There’s a stale narrative that trade tensions are bullish for the dollar. This column argued that way back in March, but the dynamics are shifting negatively for the dollar at the margin.

It’s been overlooked that the Bloomberg Dollar Spot Index hit its intraday high two weeks ago and its closing high in the middle of last week.

The argument that tariffs are inflationary, and so will lead to more rate hikes, is a very poor reason to be already long the dollar.

Any price effects will take time to feed through to consumers and much of the impact will be felt long before there’s any effect on the CPI basket of goods.

For further evidence of the flaw in the tariffs-equal-inflation-equals- higher-rates-equals-stronger-dollar logic, look no further than U.S. yields themselves. Across the curve, they topped out in mid-May and have been steadily declining since

The flattening U.S. curve emphasizes that the more important long-term impact of any tariffs will be the hit to growth U.S.-led trade wars only encourage other countries to divert their trade relationships elsewhere, thereby undermining the dollar’s relevance at the margin.

As the world’s largest economy, the U.S. had the strong hand in the early stages of trade negotiations. But, if it escalates into a sustained trade war, the U.S. position weakens substantially due to its twin deficits. It can’t afford to play such hardball that foreign governments become incentivized to stop funding its largesse.

On the other hand, if trade tensions abate, investors will releverage into EM and risk assets, which will result in a de facto selling of the world’s reserve currency.

Why would fresh investors buy the dollar now? A hawkish Fed and the initial tariffs are priced. Whichever way things develop from here, it’s much more likely to be a dollar-bearish world.

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President Trump’s tweets demanding that OPEC step in and “do something” to halt the inexorable rally in oil prices (i.e. pump more) have been notably ineffective, as crude has continued to push through highs not seen since late 2014. And after the president took some time off from the July 4 holiday to again demand that OPEC turn up the pumps (after Saudi Arabia poured cold water on its “promise” to pump an extra 2 million barrels a day), Iran – which has the most to lose from an increase in Saudi production – is now begging Trump to stop tweeting, arguing that his tweets are only serving to drive prices higher.

The OPEC Monopoly must remember that gas prices are up & they are doing little to help. If anything, they are driving prices higher as the United States defends many of their members for very little $’s. This must be a two way street. REDUCE PRICING NOW!

— Donald J. Trump (@realDonaldTrump) July 4, 2018

According to Bloomberg, Iran’s OPEC governor Hossein Kazempour Ardebili issued a message to Trump, carried by the Iranian oil ministry’s news service, begging him to stop tweeting at OPEC and claiming that the tweets are “discrediting” the organization. “Your tweets have driven the prices up by at least $10 a barrel,” Kazempour said. “Pls stop it, otherwise it will go ever higher!”

“You are hammering on good guys in OPEC,” Kazempour said. “You are actually discrediting them and undermining their sovereignty, we expect you to be more polite.”

Iran’s #OPEC governor Hossein Kazempour Ardebili says #Trump tweets have already pushed up #oil prices by $10, says “he must stop this method”. #Iran #realDonaldTrump pic.twitter.com/ExOEzQXDvi

— Press TV (@PressTV) July 5, 2018

Kazempour also accused Trump of being a hypocrite by sanctioning OPEC members then trying to boss the organization around.

“OPEC has not defined oil prices for the past 30 years,” Kazempour said. “You impose sanctions on major producers, founders of OPEC, and yet you are asking them to reduce the prices?! Since when did you start ordering OPEC!”

Come to think of it, the Iranian is right: after all the biggest driver behind the recent oil spike has little to do with structural supply and demand, but rather with Trump’s latest Iran oil embargo, which the US is rushing to shove down allies’ throats.

Which also means that Trump himself could easily reverse much if not all of the recent spike in prices by simply agreeing to the Iran deal and refusing to reimpose sanctions on Iran and lift sanctions on Venezuela. Though that likely wouldn’t go over well with his base (not to mention Republicans in Congress).

But there’s another reason why Iran probably wants Trump to stop: Iran has an interest in Saudi Arabia keeping production as low as possible as sanctions kick in and Iran searches for buyers for its crude, which no longer can be paid for in dollars. And while Iran is likely sharing in the economic boost from higher oil and gas prices, the reality is that Trump’s tweets have had only a muted impact on gas and oil prices, as Goldman Sachs (and most other banks) see supply risks surrounding Venezuela and Iran as the primary culprit.

But that likely won’t stop Trump from accusing OPEC of being “up to something” when he needs a political whipping boy as higher prices at the pump squeeze American consumers and threaten to undo the economic benefit from the Trump tax cuts.

To be sure, while Saudi Arabia has the capacity, pushing production to the limit would likely only briefly arrest the climb in prices while using up the buffer with which OPEC can respond to supply outages – meaning that any future outages would likely have an outsized impact.

Unless of course, there is a sharp drop in global oil demand, which could well happen if the economic slowdown in China accelerates, or if the PBOC is afraid to cut rates – as it will have to to prompt growth – over fears it is seen as trade war retaliation.

That said, Iran probably has the most to lose should Trump succeed in striking a deal with the Saudis: Not only is Trump trying to blame OPEC for a problem that he helped create, any agreement between the president and Iran would likely result in more market share going to the Saudis – Iran’s geopolitical archrival – while lower prices would rob the Iranian economy of what little benefit it has received from the rally. Finally, while Saudi Arabia will pay lip service to Trump, it would never boost production by so much it splinters OPEC as everyone still remembers what happened in November 2014 when Saudi Arabia decided to go it alone, promptly sending the price of oil crashing from $70 to as low as $20.

So, in summary, don’t expect either Trump or Iran to stop jawboning any time soon.

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Bulletin Headline Summary from RanSquawk

• European equities positive as auto names drive gains, on suggestions that US is ready to give car tariffs a break
• UK markets react to an upbeat Carney after the BoE chief suggests Q1 softness was largely due to weather
• Looking ahead, highlights include, US ADP, ISM non-MFG, DOEs, FOMC minutes, and ECB’s Weidmann and Mersch

With trade war between the US and China set to begin at midnight on Friday, the market is taking on a surprisingly relaxed attitude, and after S&P futures rose yesterday even as human traders were out on vacation, this morning S&P futures have continued their ascent and are back to where they were before the waterfall drop just before Tuesday’s close when China announced it would prohibit Micron from temporarily selling chips in China.

And in advance of the grand trade war start, on Wednesday China Mofcom said China will respond if US implements tariffs, while Customs states that tariffs on US goods will immediately take effect after US tariffs on China are in place; however as China has said just this many times before, the market largely ignored this latest threat.

It wasn’t just the US that was in a better mood this morning, but most European markets as well, if only for the time being.

The Stoxx Europe 600 was lifted by carmakers which rebounded on hopes of a cross-Atlantic tariff deal, after Handelsblatt reported the U.S. Ambassador to Germany told the country’s automakers he was asked by Washington to reach a solution between Berlin and Brussels on car tariffs. Specifically, Washington would support lowering car tariffs to zero for U.S. and European carmakers; the report added that the bosses of Volkswagen, Daimler and BMW as well as the head of parts maker Continental were in attendance. While it was unclear if Germany would accept such a broad zero-tariff regime, the market took the news as an indication of a softening in Trump’s stance, even though this is a verbatim replica of what Trump has already floated previously.

Elsewhere, recently battered Glencore Plc rose over 3% after announcing it’ll buy back as much as $1 billion of its shares, following the report earlier this week that it was being the target of a DOJ money-laundering probe.

Meanwhile, after the PBOC intervened verbally (and physically) in the yuan market on Tuesday, the Chinese currency barely budged – at least in the context of Tuesday’s gargantuan, 1200 pip intraday move, and despite a sharply higher fixing in the onshore Yuan, one which was once again stronger than the Wall Street consensus, the freely traded offshore Yuan went nowhere as the currency appears to have flatlined for the time being.

The return of stability to the Yuan did not help Chinese stocks, however, where the equity bear market deepened, with the Shanghai gauge closing at its lowest level since March 2016, as traders braced for the imposition of U.S. tariffs on July 6. The index is now 23.2% off its January highs.

China’s weakness dragged the MSCI Asia ex-Pac index lower by another 0.5% to 162.58, and pushed Japan’s Nikkei down 0.8% to 21,546.99, Hong Kong’s Hang Seng Index down 0.2%, and S. Korea’s Kospi 0.4% lower to 2,257.55. Still, the losses was relatively more manageable than in the sharp rout seen in recent days.

Elsewhere in FX, the Bloomberg Dollar Spot Index headed for its third day of declines, having touched a three-week low, and has now wiped out half its gains following the ECB’s unexpectedly dovish QE-taper-but-will-keep-rates-lower-for-longer announcement from mid-June.

The euro rose above $1.17 following hawkish rhetoric from ECB policymakers with Bloomberg reporting on Wednesday that some ECB policy makers are uneasy that investors aren’t betting on an interest-rate hike until December 2019, suggesting a move in September or October next year could be on the cards. The common currency was further boosted by Germany’s factory orders for the month of May surging 2.6% m/m, well above a forecast of 1.1% gain.

The pound held steady as U.K. Prime Minster Theresa May continues to seek backing for her vision of Brexit and after BOE’s Carney said tighter policy will be needed. The biggest gain versus the dollar was seen in the Swedish krona, boosted this week by hawkish central bank rhetoric according to which Sweden may hike rates before the end of the year.

In rates, U.S. Treasuries slipped alongside European counterparts. 10Y yields were 3bps higher at 2.86%, pushed the 2s10s spread from the flattest since 2007 after it hit 30bps on Tuesday. The yield on 10Y Germany bunds also rose three basis points to 0.34%, the highest in more than a week on the biggest increase in more than three weeks.

Brent crude fell as traders weigh tightening U.S. supplies against a pledge from Saudi Arabia to expand output. Emerging-market shares dropped for the eighth time in nine days, and developing-nation currencies nudged lower. Commodities, heavily exposed to international trade, fell. Iron ore futures in Singapore hit the lowest since May.

In the latest news surrounding the neverending Brexit saga, Theresa May is said to have asked Chancellor Hammond and Business Secretary Clarke to warn colleagues of the dangers in pressing for a hard Brexit at the meeting on Friday at Chequers. Elsewhere, there were also reports that ministers warned PM May not to sidestep controversial Brexit issues at the meeting amid concern focus on customs may neglect issues such as services sector and freedom of movement.

In the biggest central bank news overnight, Bloomberg reported that some ECB policymakers are said to be concerned regarding some investors’ expectations for a hike in end-2019 as they view this as too late, according to sources which also suggested that the door is open for possible rate move in September or October next year. The news sent the EUR higher and repriced rate hike expectations. Elsewhere, ECB’s Praet says the uncertainty about the inflation outlook has been declining significantly, and the risk of deflation has vanished, there are grounds to be confident that the sustained convergence of inflation will continue in the period ahead. Added that the expectation is that policy rates will remain at their present levels at least through the summer of 2019 and, in any case, for as long as necessary

Also overnight BoE Governor Carney said data gives him confidence that the soft UK economy in Q1 was largely due to weather and not economic climate; reiterating tighter monetary policy will be needed. Added that pay and domestic cost growth have continued to firm broadly as expected, widespread evidence that slack is largely used up. Meanwhile, BoJ Board Member Masai said it may take some time to reach to reach 2% price goal and that it is appropriate to continue with strong monetary easing in a persistent and sustainable manner. Furthermore, Masai also suggested that structural problems in the banking industry should be discussed independently from monetary easing.

Today’s economic data include initial jobless claims, Markit PMI readings, but all attention will fall on the FOMC minutes, with traders scanning for hints of a dovish relent by the Fed after the recent repricing of a total of 4 rate hikes in 2018.

Market Snapshot

• S&P 500 futures up 0.4% to 2,724.00
• STOXX Europe 600 up 0.4% to 381.50
• MXAP down 0.5% to 162.58
• MXAPJ down 0.2% to 529.85
• Nikkei down 0.8% to 21,546.99
• Topix down 1% to 1,676.20
• Hang Seng Index down 0.2% to 28,182.09
• Shanghai Composite down 0.9% to 2,733.88
• Sensex down 0.05% to 35,626.24
• Australia S&P/ASX 200 up 0.5% to 6,215.52
• Kospi down 0.4% to 2,257.55
• German 10Y yield rose 2.9 bps to 0.334%
• Euro up 0.3% to $1.1687
• Brent Futures down 0.5% to $77.86/bbl
• Italian 10Y yield rose 1.8 bps to 2.388%
• Spanish 10Y yield rose 3.5 bps to 1.334%
• Brent Futures down 0.5% to $77.86/bbl
• Gold spot down 0.04% to $1,254.48
• U.S. Dollar Index down 0.1% to 94.40

Top Overnight News

• The U.S. imposition of tariffs on $34 billion of China’s exports will not only hurt China, but the U.S. itself and the rest of the world. That’s because $20 billion of those goods are produced by foreign companies, including American companies, Gao Feng, China’s Commerce Ministry spokesman said Thursday
• China’s proposed additional tariffs on U.S. goods will become effective “immediately” after the U.S. imposes its levies, according to a statement on General Administration of Customs Thursday
• U.K. Prime Minister Theresa May is fighting to win Cabinet backing for her Brexit plan as a compromise proposal that aimed to unite warring ministers was rejected by her chief negotiator — Brexit Secretary David Davis
• Oil traded near $74 a barrel as investors weighed tightening U.S. supplies against a pledge from Saudi Arabia to expand output. Meanwhile, President Donald Trump lashed out at OPEC
• Investors from Japan have plowed record amounts into U.S. stocks, corporate bonds and agency-backed securities, pushing investments in those assets past $1 trillion for the first time ever this year. That’s a stark contrast to the big pullback from Treasuries, which has cut Japan’s holdings to a seven-year low
• Italy’s new government will have both tax cuts and a universal basic income in its very first budget to show financial markets the coalition isn’t backing down from its agenda, Finance Minister Giovanni Tria said. The sweeping economic program is aimed at proving to investors that the populist administration is serious about its mission
• Friday July 6 is the date when the world’s two largest economies are due to slide deeper into a trade conflict that’s roiled markets and cast a shadow over the global growth outlook.
• Some European Central Bank policy makers are uneasy that investors aren’t betting on an interest-rate hike until December 2019, according to people familiar with the matter. A move in September or October next year is in the cards, the people said, even though the decision will be data dependent
• German factory orders surged in May, ending a string of declines and suggesting a much- awaited pick-up in growth momentum in Europe’s largest economy

Asian equity markets were cautious from the open ahead of this week’s key risk events and following the US holiday closure, with sentiment later deteriorating as focus turned to the looming July 6th tariffs. Nikkei 225 (-0.8%) initially struggled for direction and remained at the whim of the currency before trade war fears eventually took its toll, while ASX 200 (+0.5%) bucked the trend with upside led by strength in telecoms and the heavily-weighted financials sector. Elsewhere, Hang Seng (-0.2%) and Shanghai Comp. (-0.9%) began choppy after the PBoC skipped open market operations for a net liquidity drain of CNY 140bln which coincided with its previously announced targeted RRR cut taking effect, before trade concerns and fears of a full-blown trade war proved to be the deciding factor. Finally, 10yr JGBs saw mild gains and approached closer to the 151.00 level, with the late support seen as risk sentiment soured on tariff fears and which also followed firmer demand in the 30yr auction. PBoC skipped open market operations for a net daily drain of CNY 140bln, although its previously announced targeted RRR cut took effect from today, which is said to release CNY 700bln of funds. PBoC set CNY mid-point at 6.6180 (Prev. 6.6595)

Top Asian News

• Top Manager Sticks With Samsung Before Results, Defying Analysts
• Philippines CPI Smashes Forecasts in ‘Setback’ for Espenilla
• Beauty Turns Ugly: Cosmetic Stock Implodes After Leading World
• China Says U.S. ’Fully’ Understands its Stance over Trade

Automotive names are driving European stocks higher after reports of compromises being close on auto tariffs, with a reduction in tariffs being touted. As such the DAX is outperforming on the back of strength in index heavy-weights Daimler (+3.9%), Volkswagen (+4.3%), BMW (+5.2%) and Continental (+2.8%), with traders eyeing the 100DMA of 12,515 on the upside, currently trading at 12,454. Peugeot (+3.3%) and Michelin (+3.0%) are also driving the CAC, with the bourse breaking through its 100DMA and approaching its 200DMA of 5,374. Further support is offered to the French index after Sodexo (+6.7%) reported positive sales figures. Associated British Foods (-4.6%) reported uninspiring earnings, and have increased concerns over their sugar business not meeting profit targets. This is pressuring consumer staples (-0.5%) which is currently the worst performing sector. The materials sector is outperforming on the back of mining names (FTSE 350 mining index +1.9%) moving in sympathy with Glencore (+3.3%) post announcement of a USD 1bln share repurchase. Linde (+1.3%) have said that a sale of Praxair’s European gas businesses will allow for a merger clearance by the  European Commission. Praxair have agreed to sell their assets to Taiyo Nippon Sanso

Top European News

• Italy to Start Sweeping Economic Program With Upcoming Budget
• Euro-Area Bonds Decline on Conviction ECB May Raise Rates Sooner
• SBM Slumps as Brazil Decision Keeps Company From Largest Market
• Primark Sticks to Cautious U.S. Expansion Plans as Sales Gain

In FX, The EUR currency has extended gains vs the Usd through the 1.1700 handle and first heavy expiry option hedges at the strike (2.3 bn today, and a further 1.7 bn on Friday), albeit briefly, in wake of latest ECB sources claiming market expectations for an end 2019 rate hike would be too late, and with perhaps some added momentum from upbeat German data (industrial orders). Eur/Jpy also boosted by M&A-related flows, but capped around 129.50 and just ahead of its 55 DMA (129.54). GBP/CAD/CHF/JPY – All relative stable vs the Greenback, with Cable building a firmer base above 1.3200, but not able to clear 1.3250 and its 21 DMA just above ahead of a speech from BoE Governor Carney and the next big Brexit event (Chequers on Friday). In the event the MPC head was positive on growth and the inflation outlook, lifting near term rate hike expectations and the Gbp through the aforementioned psychological and technical resistance levels albeit briefly. The Loonie is essentially stuck around 1.3150, Franc equally tight within 0.9940-10 bounds and hardly responding to in line Swiss CPI data (albeit weaker vs the Eur circa 1.1600), while the Jpy hugs 110.50 eyeing decent expiries between there and 110.60 (1 bn). SEK – Onward and upward for the Krona, and latest catalyst comes in the form of strong Swedish data (industrial output), with further gains vs the Eur that is strong in its own right, as mentioned earlier – Eur/Sek inching close towards 10.2000.

In commodities, Oil prices were down with WTI languishing around the USD 74 level after US President Trump reiterated his position on Twitter overnight vs. OPEC of prices being too high. This was reversed in later trade however, with WTI positive and Brent negative on the day as traders look ahead to today’s holiday-delayed DoE inventory report. In the metals scope Gold is pulling back after hitting a one week high in yesterdays trade of USD 1,261/oz, currently at USD 1,253/oz. Base metals are slipping as the threat of a trade war looms, with zinc and nickel sulking around one-year lows. Copper is also being hit by these worries, with the bellwether metal down 2.8% in Shanghai.

Looking at the day ahead, the main focus will likely be the release of the FOMC meeting minutes for the June 13th policy meeting. We algo get the final June services and composite PMIs due along with the June ISM non-manufacturing, and June ADP employment change reading. The latest weekly initial jobless claims data will also be due. Away from that, BoE Governor Mark Carney is due to speak at an event in Newcastle while the ECB’s Mersch and Nowotny along with Bundesbank President Jens Weidmann will also be speaking at different times at the Central Bank of Austria’s annual conference.

US Event Calendar

• 7:30am: Challenger Job Cuts YoY, prior -4.8%
• 8:15am: ADP Employment Change, est. 190,000, prior 178,000
• 8:30am: Initial Jobless Claims, est. 225,000, prior 227,000; Continuing Claims, est. 1.72m, prior 1.71m
• 9:45am: Bloomberg Consumer Comfort, prior 57.3
• 9:45am: Markit US Services PMI, est. 56.5, prior 56.5; Composite PMI, prior 56
• 10am: ISM Non-Manf. Composite, est. 58.3, prior 58.6
• 2pm: FOMC Meeting Minutes

DB’s Jim Reid concludes the overnight wrap

Just as you thought it was safe to leave the office in Europe last night and relax knowing that nothing was going to happen in the US due to the holiday, along comes a Bloomberg news story after 6pm in Frankfurt suggesting that “some ECB policy makers are uneasy that investors aren’t betting on an interest-rate hike until December 2019”. It was a big headline but as DB’s Mark Wall pointed out the article really only hinted that September and October were thought to be  mis-priced. DB’s George Saravelos also made the point that markets had probably gone too far the other way in terms of not pricing the first 20bps hike until March 2020. He also made the valid point that we were reaching the limits of divergence between ECB and Fed policy expectations. If the ECB market pricing is right, it’s probably because the world is struggling (e.g. major Italy problems or a full trade war) and the Fed will have to pause. If the Fed is correct, the ECB will likely have to move earlier or more than currently priced. Overall Mark Wall still thinks the first 20bp deposit rate hike/25bp refi rate hike will be in September 2019. The Euro jumped 25c on the story but it happened too late to impact bond yields.

This morning in Asia, markets are trading lower with the Nikkei (-1.0%), Kospi (-0.69%), Hang Seng (-0.87%) and Shanghai Comp. (-0.88%) all down and losses accelerating from the open. Meanwhile the Yuan is weaker for the first time in three days (-0.1%) and the euro is little changed. In Japan, BOJ board member Masai echoed similar messages as his peers, noting that “it’s appropriate to continue with strong monetary easing in a persistent and sustainable manner…”  and that it may take “some time” to achieve the bank’s 2% price stability goal. Now turning to some trade headlines. In Europe, the Handelsblatt reported that the US ambassador Grenell told a group of German car industry leaders that the US government was seeking talks with the EU with a proposal that would reduce tariffs to zero for US and EU car makers. Although a potential obstacle is that the EU is not allowed under global rules to reduce its 10% tariff on American cars unless the union does so for all the WTO members or via other bilateral accords. Notably, the FT reported yesterday that the EU is studying whether it’s feasible to negotiate a deal with other big car exporters such as the US, Japan and South Korea which would lower tariffs to “agreed levels for a specified set of products as part of a plurilateral agreement” without including the entire membership of the WTO. So it seems lots bubbling along behind the scenes.

Meanwhile both the US and China plan to implement higher tariffs on each other from tomorrow ($34bn worth of goods), but despite the 12 hour time zone head start for Beijing, China’s Ministry of Finance clarified yesterday that “we will never fire the first shot and will not implement tariffs ahead of the US”. This morning, China’s Commerce Ministry spokesman Gao reiterated that China will have to fight back if the US goes ahead and impose the tariffs.

Following on with the trade theme, Chancellor Merkel warned the Germany parliament of the potential fallout from a trade conflict with the US, noting that tariffs on EU cars would be “much more serious” than levies on steel. Notably she seems to prefer negotiations as “it’s worth every effort to try to defuse this conflict, so it doesn’t turn into a war”, but also added that “…it takes two sides to do that”. Looking ahead, the German Economy Minister Altmaier is scheduled to meet with his French counterpart next Wednesday to discuss next steps.

Over in the US, today’s FOMC minutes should be of particular interest, especially with the Powell led-Fed growing more comfortable with inflation moving back to target, as the latest data has shown. In terms of what to look out for, our US economists believe that discussion regarding trade developments and the flattening yield curve will be of note given recent comments by Fed officials. Regarding the former, many policymakers have mentioned this as a key risk to their outlook. As Powell acknowledged in both his press conference and his Sintra appearance, there are rising anecdotal reports of concern about trade from the Fed’s business contacts. Other Fed policymakers have also echoed this sentiment.

The flattening yield curve has elicited differing views among policymakers, with some Fed officials such as Chair Powell, Governor Brainard and NY Fed Williams downplaying its significance, while other regional Fed presidents have voiced concerns. It is possible we will see some discussion on the Fed’s balance sheet policy given that interest on excess reserves (IOER) was raised five bps less than the target range for the policy rate. Out economists however doubt the Fed is contemplating any imminent changes to the pace of balance sheet roll off at present. We shall find out more soon.

As for European markets yesterday, the Stoxx 600 edged up +0.06% on muted trading volumes with gains in telco stocks broadly offset by tech (-1.18%) which was weighed down by the prior day’s news that US chipmaker Micron Technology
was temporarily banned by a Chinese court from selling in China due to a patent dispute. Across the region, the DAX and FTSE both dipped c0.3% while Spain’s IBEX rose +1.0%, as a rally in Telefonica lifted the index higher (shares +2.5%).

Meanwhile Sterling rose +0.28% vs. the dollar after the UK’s June services PMI rose to an eight month high and also beat consensus expectations. Government bonds softened a little with 10y bond yields up 1-3bp across the region (Bunds +1.1bp; Italy +2bp) while Gilts underperformed following the stronger services PMI print (+3.4bp). In commodities, both LME Zinc (-3.19%) and Copper (-1.62%) fell near one year lows while precious metals nudged up c0.3% (Gold +0.18%; Silver +0.40%).

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In Europe, the final readings of the June composite PMIs were stronger than expected. Both the Euro area’s services and composite PMI were revised up, to 55.2 (+0.2pt) and 54.9 (+0.1pt), respectively. In the details, most of the upward revisions came from Germany, with its composite PMI revised up 0.6pt to 54.8 while France’s print was downwardly revised by 0.6pt to 55. The UK’s services PMI rose 1.1pt mom to an eight month high of 55.1 (vs. 54.0 expected) while its’ composite PMI also beat at 55.2 (vs. 54.5). The survey also showed the fastest pick up in new work in 13 months while Markit noted these figures suggests UK economic growth has doubled to 0.4ppt in 2Q following a weak 1Q that was weighed down by harsh weather. Meanwhile Italy’s June service and composite PMIs were also above expectations, at 54.3 (vs. 53.3 expected) and 53.9 (vs. 53.2) respectively.

Looking at the day ahead, the main focus will likely be the release of the FOMC meeting minutes for the June 13th policy meeting. In terms of data, the only release of note in Europe is May factory orders data in Germany. In the US it’s a little  busier with final June services and composite PMIs due along with the June ISM non-manufacturing, and June ADP employment change reading. The latest weekly initial jobless claims data will also be due. Away from that, BoE Governor Mark Carney is due to speak at an event in Newcastle while the ECB’s Mersch and Nowotny along with Bundesbank President Jens Weidmann will also be speaking at different times at the Central Bank of Austria’s annual conference.

via RSS https://ift.tt/2KIEjUv Tyler Durden

Authored by Irina Slav via OilPrice.com,

When reports emerged that India and China are in talks about forming an oil buyers’ club, OPEC was probably too busy with its upcoming June 22 meeting to concern itself with that dangerous alliance. Now, it may be time for it to start worrying.

“The timing is right. The boom in U.S. oil and gas production gives us greater leverage against OPEC,” the Times of India quoted an Indian official as saying last month after the formal start of said talks. The two countries, after all, account for a combined 17 percent of global oil consumption and they are the ones that would be the hardest hit if prices rise as a result of OPEC’s actions.

What’s more, they might not be alone in this attempt to curb OPEC’s clout on the global oil market. According to Bloomberg’s Carl Pope, Europe and Japan, previously reluctant to take part in any anti-OPEC projects, may now join in. The reason they are likely to join in is that unlike in previous oil price cycles, now there are alternatives to fossil fuels. Electrification is where OPEC may have to face off with a future oil buyers’ cartel.

India, China, and Europe are all very big on EV adoption. Japan is a leader in battery manufacturing.

If they set their minds to it, these four players could upend the oil market and effectively cripple OPEC. Of course, this is a best-case scenario of the kind that rarely unfolds in reality.

Let’s take India, for example. A recent survey suggested that as many as 90 percent of Indian drivers were willing to switch to EVs if the government built the necessary charging infrastructure, reduced road taxes, and increased subsidies. Another survey identified price and range as additional roadblocks towards the mass adoption of EVs in India. Because of these challenges, New Delhi recently amended its ambitious goal of having an all-EV fleet on the roads of the country by 2030 to having 30 percent of the fleet electric.

China, for its part, is the undisputed leader in global EV adoption: the country accounted for more than 50 percent of global EV sales last year in case you were thinking, “Wait, wasn’t that Norway?” However, this was in large part made possible by generous government subsidies for EV manufacturing. These subsidies are due to be wound downto 0 by 2020, and carmakers are already beginning to brace for a future without the support of the state. It’s safe to say it remains uncertain if the EV boom will continue after 2020.

This precarious situation with EVs is reason enough for China and India to seek more clout on international oil markets dominated by OPEC and would justify the formation of a “buyers’ club.”

Europe, for its part, is, as a whole, a top performer in EV adoption and it is also very big on environmentalism. At the same time, it still imports crude and quite a lot of it, so it cares about oil prices as a large buyer.

China and India are facing challenges in EV adoption. Europe could help and benefit from it. After all, taken together, Europe, China, India, and Japan account for the manufacturing of as much as 65 percent of the world’s cars, and a lot of these are manufactured in Europe. These four also consume 35 percent of the world’s crude oil and would like to reduce this number.

According to Pope, if they get together, they would be able to negotiate either a more gradual or a faster shift to EVs. It would all depend on whether OPEC would agree to maintain lower prices or not.

A more skeptical view would note the challenges in EV adoption such as subsidies and infrastructure. These would take time to be overcome even if everyone played together. Yet long-term, an oil buyers’ alliance could be a force to be reckoned with by the oil producers, and the latter need to start paying attention now.

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