European Stocks, S&P Futures Surge On Fresh Trade War De-escalation Hopes

After several days of precipitous market drops, and following yesterday's dramatic Apple-led intraday rebound, the biggest since February, S&P futures and European stock markets are sharply higher even as Asian shares slipped, as investor sentiment was boosted by fresh prospects of a thaw in the trade war following overnight news that Chinese Vice Premier Liu He discussed a timetable for trade talks with Treasury Secretary Steven Mnuchin, coupled with a report this morning from Bloomberg that China is moving toward cutting its trade-war tariffs on imported U.S.-made cars, a step which had previously been brandished by President Donald Trump as a concession won during trade talks in Argentina.

The big news overnight was a report according to China's Mofcom which said Vice Premier Liu He spoke by phone with US Treasury Secretary Mnuchin and Trade Representative Lighthizer in which both sides exchanged views on implementing consensus reached by their leaders, while they also exchanged views on pushing forward timetable and road map for next stage of trade discussions.  The news - taken as a positive sign for trade war de-escalation - sent S&P futures as much as 20 points higher, shrugging off losses in the Asian benchmark and a drop in Japanese equities...

... while Europe's Stoxx 600 was trading at session highs, up over 1.5% as a result of a late catch up with yesterday's S&P rebound, led by THE construction, basic resources, builders and telecom sectors even with today's rebound it was still heading for its worst year since 2008.

European automakers also surged following the Bloomberg report that China is said to be moving on the US auto tariffs reduction that US President Trump has previously tweeted on. The proposal has been submitted for review, however, the decision has not been finalised and still could change.

Yet investors also have an eye on the continuing flap over Canada’s arrest of the chief financial officer of Huawei Technologies Co. And among a plethora of political risks, the U.K. is seeking reassurances from European partners over Brexit and fears linger over the possibility a French protest movement could escalate further.

After crashing on Monday to a 21 month low as Theresa May postponed a key Brexit vote in parliament, the pound staged a rally, trimming some of Monday's tumble as the UK Prime Minister tried to convince EU leaders to renegotiate the current Brexit deal.

The broader risk-on sentiment weakened the dollar weakened while Treasuries and European sovereign bonds fell.

With market having been gripped by a growing sense of panic, some - like Nomura's Charlie McElligott - have warned that the next move could be a furious rally higher as hedge funds scramble to recover some of their YTD losses in the last few days of 2018.

“Markets are highly volatile,” said hedge-fund pioneer Paul Tudor Jones at a conference in New York. “I can easily see a situation in 2019 where all the deleveraging that we’ve experienced in the last month and a half -- really, the last four or five months -- all that deleveraging gets reinvested back into the market.”

Meanwhile in India’s assets saw a choppy session, with stocks initially roiled by a surprise resignation of the central bank governor on Monday, before posting a recovery as traders mulled the implications for Prime Minister Narendra Modi of regional election results. Emerging-market currencies and shares edged higher. Oil climbed with most metals.

The dollar dropped versus most of its G-10 peers as concerns over a possible deterioration in U.S.-China trade talks persisted, while short-term positioning and U.K. wage data helped lift the pound from a 20-month low. The pound headed for its first gain in three days versus the dollar, having tumbled Monday to its lowest level since April 2017 after the U.K. Prime Minister opted to delay a key vote on her Brexit deal. The yen climbed against major global currencies as U.K. Prime Minister Theresa May’s Brexit vote deferral and weakness in equity markets deterred risk-taking

Brent (+0.9%) and WTI (+1.0%) prices rebounded, despite drifting lower at the start of the session following comments from Russian Energy Minister Novak that Russia plans to cut oil output by 50k-60k BPD in January which is significantly below the 228,000 BPD figure targeted as part of the latest OPEC deal. Novak adds that they will gradually reduce oil output. Separately, high level internal reports are to cut output by 139k BPD following the OPEC deal. Looking ahead today sees the API weekly data release, which saw a crude stocks build of 5.6mln last week. Gold has strengthened on a softer dollar, although the yellow metal is still off of the 5-month high of USD 1250.55/oz reached in the previous session. Separately, exploration by Rio Tinto in Australia has yet to find any economically viable copper ore veins; the site had been touted as being potentially rich in copper.

Expected data include PPIs and small-business optimism index. American Eagle and Pivotal Software are among companies reporting earnings.

Market Snapshot

  • S&P 500 futures up 0.7% to 2,662.00
  • MXAP down 0.3% to 147.99
  • MXAPJ up 0.1% to 477.40
  • Nikkei down 0.3% to 21,148.02
  • Topix down 0.9% to 1,575.31
  • Hang Seng Index up 0.07% to 25,771.67
  • Shanghai Composite up 0.4% to 2,594.09
  • Sensex up 0.2% to 35,044.71
  • Australia S&P/ASX 200 up 0.4% to 5,575.88
  • Kospi down 0.04% to 2,052.97
  • STOXX Europe 600 up 1.4% to 343.77
  • German 10Y yield rose 2.6 bps to 0.272%
  • Euro up 0.2% to $1.1383
  • Italian 10Y yield fell 2.6 bps to 2.74%
  • Spanish 10Y yield rose 1.7 bps to 1.46%
  • Brent futures up 0.5% to $60.45/bbl
  • Gold spot up 0.3% to $1,248.54
  • U.S. Dollar Index down 0.3% to 96.97

Top Overnight News from Bloomberg

  • Top Chinese and American trade officials spoke by phone, signaling that dialog between the two nations on trade issues is at least continuing despite a diplomatic row over the arrest of a senior Chinese businesswoman
  • Faced with a Brexit vote she can’t win, Theresa May appears to be gambling that running down the clock to a no-deal departure might change the arithmetic in Parliament
  • The European Union won’t allow U.K. Prime Minister Theresa May to reopen negotiations over the Brexit divorce deal -- but it could offer some of the reassurances she says she wants, officials said.
  • In India, Urjit Patel’s shock exit as governor of the central bank roiled financial markets already nervous about early election results showing Prime Minister Narendra Modi’s ruling party losing support in key states.
  • OPEC’s surprise output reduction has wrong-footed short-sellers. Hedge funds increased wagers against rising Brent crude prices for a 10th straight week in the period that ended last Tuesday and cut bullish bets on West Texas Intermediate oil to the lowest in almost six years
  • Allies of Republican Representative Mark Meadows are pressing for him to be Donald Trump’s new chief of staff as the White House weighed other serious contenders, including U.S. Trade Representative Robert Lighthizer, for the vital leadership post
  • Jerome Powell is ramping up Federal Reserve communication to build public trust and help insulate it from political attack
  • Indian assets swung as investors weighed Modi’s performance in the polls in states which are key to his reelection bid in 2019

Asian equity markets were mixed as sentiment in the region only found mild solace from the tech-led recovery on Wall St. ASX 200 (+0.4%) was firmer at the open in which outperformance in the tech sector helped the index pick itself up from around 2-year lows although this later stalled amid weakness in energy and financials, while Nikkei 225 (-0.3%) swung between gains and losses due to a lack of fresh drivers and an indecisive currency. Shanghai Comp. (+0.4) and Hang Seng (unch.) were also choppy on trade uncertainty amid lingering concerns the Huawei situation could spill-over to US-China trade talks, although there were reports that Vice Premier Liu spoke with US Treasury Secretary Mnuchin and US Trade Representative Lighthizer in which they exchanged views on pushing forward the timetable and road map for the next stages of trade discussions. Meanwhile, India markets were initially pressured following the shock resignation by RBI Governor Patel which many viewed to be in protest for government meddling, while the state assembly elections added to the woes for the government with the ruling BJP party on track to lose some states to the main opposition ahead of next year’s general election. Finally, 10yr JGBs were uneventful amid the indecisive risk tone and with participants following mixed results at the 30yr JGB auction.

Top Asian News

  • Macau Casino Stocks Jump as Analysts Flag December Revenue Hopes
  • Tencent Music Guides Pricing Around Midpoint in $1.2 Billion IPO
  • HNA Is Said to Tap Credit Suisse to Revive Sale of Pactera Unit
  • Goldman Sachs Buys Minority Stake in Turkey’s Hurriyet Emlak
  • India Rupee, Stocks, Bonds Drop as RBI Chief’s Exit Roils Market

Major European Indices are in the green [Euro Stoxx 50 +1.6%], with some outperformance seen in the SMI (+1.6%) bolstered by strong performance in index heavyweight Novartis (+1.6%) after the FDA approved Pear Therapeutics mobile application, which their Sandoz unit will be rolling out in the US. The SMI is also bolstered by LafargeHolcim (+3.6%), which is benefitting from outperformance in the materials sector seen today on the back of US and Chinese representatives planning the next steps in trade discussions. FTSE 100 (+1.3%) is lagging its peers, amidst currency effects from ongoing Brexit developments. Other notable equity movers are WPP (+6.5%) after an update to guidance, and Ashtead Group (+4.2%) after they announced full year expected results to be ahead of expectations.

Top European News

  • Amsterdam Brothels to Get a Review by City’s First Female Mayor
  • Danske to Sell Swedish Pension Assets to Polaris, Acathia
  • Vivendi Urges Telecom Italia to Hold Shareholders Meeting
  • Future of ‘Macronomics’ Tested by Violence on French Streets
  • Casino Debt Swaps Rise to Record as French Protests Add Pressure

In FX, the GBP is ahead of the pack in terms of broad G10 currency advances vs the Greenback as the DXY ducks back under the 97.000 level. Cable has bounced further from yesterday’s new 2018 low circa 1.2507, through the pre-official cancellation of the Brexit vote base around a big figure higher and just shy of 1.2640, mainly on short covering and consolidation, but also with the aid of strong UK average earnings. Meanwhile, Eur/Gbp has retreated towards 0.9000 having cleared 0.9050 and topped out not too far from 0.9100.

  • EUR/CHF/SEK/NOK - The next best majors, with the single currency maintaining its recovery momentum off 1.1350 lows vs the Usd, but capped ahead of 1.1400 and perhaps conscious of hefty option interest between 1.1390 and the bog figure (2 bn). The Franc remains relatively firm within a 0.9905-0.9865 range and above 1.1250 vs the Eur, while the Scandi crowns have clawed back recent losses amidst an improvement in risk sentiment, and with the Sek awaiting Swedish inflation data on Wednesday after significantly stronger than forecast Norwegian CPI metrics yesterday. Eur/Nok is around 9.7000 and Eur/Sek back below 10.3000.
  • JPY - Also trying to pare losses vs the Dollar after extending its downturn from 112.25 to 113.35 and extremely close to a Fib level, but unable to rebound through 113.00 where heavy supply is touted and a 1.5 bn option expiry resides.
  • AUD/CAD/NZD - Mixed fortunes once again as the Aud reclaims 0.7200+ status vs its US counterpart, albeit just, on more promising vibes regarding US-China trade, which have also nudged the Aud/Nzd cross back up towards 1.0500, as the Kiwi losses sight of 0.6900 vs the Usd. Meanwhile, the Loonie is back on the 1.3400 handle and regaining some composure alongside crude prices.
  • EM - The Try continues to underperform on bearish technical rather than fresh fundamental impulses, but did glean support from another upbeat snapshot of Turkey’s current account to trade back near 5.3500 vs the Dollar from 5.4000+ at one stage.

In commodities, Brent (+0.9%) and WTI (+1.0%) prices have strengthened, despite drifting lower at the start of the session following comments from Russian Energy Minister Novak that Russia plans to cut oil output by 50k-60k BPD in January; which is significantly below the 228,000 BPD figure targeted as part of the latest OPEC deal. Novak adds that they will gradually reduce oil output. Separately, high level internal reports are to cut output by 139k BPD following the OPEC deal. Looking ahead today sees the API weekly data release, which saw a crude stocks build of 5.6mln last week. Gold has strengthened on a softer dollar, although the yellow metal is still off of the 5-month high of USD 1250.55/oz reached in the previous session. Separately, exploration by Rio Tinto in Australia has yet to find any economically viable copper ore veins; the site had been touted as being potentially rich in copper.

US Event Calendar

  • 8:30am: PPI Final Demand MoM, est. 0.0%, prior 0.6%; PPI Ex Food and Energy MoM, est. 0.1%, prior 0.5%
  • 8:30am: PPI Final Demand YoY, est. 2.5%, prior 2.9%; PPI Ex Food and Energy YoY, est. 2.5%, prior 2.6%

DB's Jim Reid concludes the overnight wrap

What I learnt about yesterday was that it seems easier to leave the solar system than the EU. Yes Voyager 2, which left the earth in 1977, has now waved goodbye to our solar system and entered interstellar space some 18 billion miles away. Ironically, at around the same time this was announced we discovered that the UK, which joined the EEC in 1973, is still struggling to pull away from the EU. With today’s long anticipated vote now postponed, it takes an intergalactic sized mind to work out the end game from here. Feel free to tell me if you have one.

To be fair, space debris was being flung at markets from all angles yesterday until the Starship US recovered from a difficult take-off and rallied to find a higher orbit to settle in. The S&P 500 closed +0.18%, while the DOW and NASDAQ gained +0.14% and +0.74% respectively. These three were down -1.89%, -2.08%, and -1.30% at the lows for the session. Brent crude oil fell -2.89% to $59.89 per barrel, just about erasing Friday’s post-Opec rally. There wasn’t a clear catalyst, though the softer Chinese import data we highlighted yesterday might have been a factor weighing on demand expectations. This also helped the dollar to gain +0.72% for its best session in a month. The energy sector led S&P 500 losses, trading down -1.62%, while the aerospace sector paced gains (+1.98%) as media outlets reported that President Trump will seek $750 billion in defence spending for next year’s budget, notably above the expected $700bn.  Credit wasn’t immune with US HY credit spreads another +7bps wider while 10yr Treasuries finished +1.3bps higher. The 2s10s yield curve flattened by another -0.8bps, and back within one bp of its cyclical  closing low. The recent moves continue to weigh on financials (-1.40%), which took the four-day move to -8.81% and the biggest since August 2015. The banks sub-index dropped -2.33% and is also now down -21.6% from the January highs and therefore has entered the definition of a bear market.

To be fair, all this really played second fiddle headlines wise to a dizzying day of merry-go-round and quite remarkable Brexit developments. Early yesterday morning we finally got confirmation just before 11.30am BST that the Parliament vote was being postponed with the PM telling Cabinet Tories that she would suffer a ‘notable’ loss should they go ahead with the vote on the current deal. This set the stage for PM May’s statement in the House of Commons. The PM confirmed that the vote had been deferred indefinitely, and said she would go back to Brussels to ask EU leaders for more assurances including some kind of power over the Irish backstop. It’s hard to see this as anything but stalling for time, given that the PM didn’t really offer any new information. Ultimately, the PM seems to be insisting on her own deal without offering an alternative. European Council President Tusk tweeted that “we will not renegotiate the deal, including the backstop,” so it’s quite difficult to see how this circle can be squared in the immediate term. Things got worse for the PM when House of Commons speaker Bercow suggested that the PM’s decision to delay the vote is “discourteous” and that the vote could still go ahead. Quite incredible scenes, and the odds of a no-confidence vote have certainly risen substantially. There will be an emergency debate in the House on Brexit today but with May travelling to the continent to see Merkel and Rutte, this will likely be a point scoring one rather than a gathering of much substance.

Sterling looked helplessly on as the PM spoke and ultimately ended up falling -1.30% and to the lowest since April 2017. Though overshadowed by the drama in Parliament, it’s worth noting that earlier in the day the ECJ confirmed that the UK can unilaterally reverse the Brexit process if it so chooses. Gilts rallied with that move for Sterling with 10-year and 30-year yields dropping  -6.6bps and -12.3bps respectively. The FTSE 100 (-0.83%) outperformed other European markets (STOXX 600 -1.87%) thanks to the Sterling move while other bond markets in Europe were slightly stronger, with bund yields -0.4bps lower. Meanwhile IG and HY cash credit spreads in Europe finished +1.0bps and +8bps wider respectively.

This morning in Asia markets are trading mixed with the Nikkei (-0.41%) and the Hang Seng (-0.08%) trading lower while the Kospi (+0.07%) and Shanghai Comp (+0.28%) are up. However, the markets are off their lows as sentiment seems to have been aided to an extent by the overnight statement from China’s Ministry of Commerce that China’s Vice Premier Liu He, US Treasury Secretary Steven Mnuchin and US Trade Representative Robert Lighthizer spoke overnight on the phone exchanging views on the timetable  and road map of future trade talks. No further details were provided. However, this should be slightly reassuring for markets as it shows that the US-China trade talks haven't fallen apart in the aftermath of the Huawei CFO’s arrest. Meanwhile, it’s worth adding that the Indian equity market is down c. -1% this morning following the resignation yesterday of Central Bank governor Urjit Patel. There was some talk a few weeks ago about Patel potentially resigning, however this appeared to die down with the RBI board  meeting last month and a shift in stance to a slightly more dovish leaning last week. The news yesterday therefore was a bit of a  surprise. The Indian Rupee is down -1.2% this morning and the benchmark 10y sovereign bond yield is up by c. +10bps. However, sentiment in Indian markets also seems to be impacted by the election results in key states where the ruling party is seeing losses ahead of next year’s national elections. Elsewhere, futures on S&P 500 are down -0.28%.

As we go to print we have our usual daily Italian headlines. Repubblica are reporting that PM Conte is aiming for a 2.1% deficit and the EU is demanding 1.95%. However, Messaggero is reporting that Salvini and Di Maio are refusing to go below 2.2%. It seems like there is still work to be done here ahead of the planned EU council meeting on 13-14 December, where Italy is expected to table its fresh budget.

After the European close yesterday our European economists published their 2019 outlook yesterday (available here ). They downgraded their growth and inflation forecasts by 0.3pp and 0.2pp to 1.4% and 1.3%, respectively. The moves reflect weaker external and domestic conditions, though the real key will be the big risks around Brexit, Italy, and the trade war. If any of these events resolve negatively, they could weigh further on growth, though they also have the scope to provide upside to the forecast if they end up reaching positive conclusions. Politics will remain a focus, with European Parliament elections, and possibly also elections in Germany, Spain, and perhaps even Italy. As a result of all this, they now expect the first ECB policy rate hike to be delayed to the first quarter of 2020.

Staying with Europe, also after the close yesterday, French President Macron gave a public address to placate the “yellow vest” groups who have protested his policies in recent weeks. He announced a tax exemption to incentivise employers to give year-end bonuses, ended taxes on overtime and small pensions, and raised the minimum wage to be financed with public funds.

The measures represent an acceleration of plans already scheduled to be implemented over the next few years, though it presents downside risks to the country’s 2.8% deficit target for next year. Our economists already thought the target would slip, so these measures ratify their view. The wave of populism continues to roil economic policies, resulting in looser fiscal policies, and the trend looks set to continue.

Coming back to the UK, while the Pound didn’t immediately react a great deal to it, yesterday’s data releases in the UK did little to improve the mood. That was particularly the case with the October industrial production (-0.6% mom vs. +0.1% expected) and manufacturing (-0.9% mom vs. 0.0% expected) production prints. There was better news at least with the October monthly GDP reading, which rose +0.1% mom as expected, putting the 3M/3M monthly GDP change at +0.4%.

As for the other data that was out yesterday, the Sentix investor confidence for the Euro Area declined 9.1pts and far more than expected to -0.3 (vs. +8.3 expected). That’s actually the lowest reading since December 2014 and the fourth consecutive monthly decline. In the US, the only data release yesterday was the October JOLTS report, which showed job openings rising slightly to 7.079m and more or less in line with the consensus.

In terms of the day ahead, data releases in Europe this morning include Q3 payrolls in France, October and November employment stats in the UK (average weekly earnings and the unemployment rate expected to hold steady at +3.0% yoy and +4.1% respectively) and the December ZEW survey in Germany. In the US we’ve got the November NFIB small business optimism reading followed by the November PPI report (headline PPI expected to be flat mom and ex food and energy rise +0.1% mom). Away from that the ECB’s Guindos is due to speak this morning in Frankfurt before Italian Finance Minister Tria speaks at a conference in Rome. Worth flagging also are election results in India for five states which will likely be seen as an important test for PM Modi ahead of next year’s election. Also of note is Google CEO Pichai testifying before the US House Judiciary Committee. It’s expected that election meddling and privacy issues will be top of the agenda.