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World Stocks Smash New Records; Europe Rebounds As Dollar Slide Ends, MiFID Begins

One day after US equity markets closed the first trading day of the new year at an all time high for the first time since 1992, and the Nasdaq closed above 7,000 for the first time ever, US equities are set for further gains for equities on the second session of the new year after Tuesday’s sharp rally led by tech companies, as investors await minutes from the latest FOMC meeting. The dollar stabilized after five days of declines while Treasuries traded flat.

Overnight, world stocks hit fresh record highs on Wednesday with European markets joining the party as early 2018 is shaping up to be a carbon copy of late 2017. After its biggest one-day gain in more than two weeks on Tuesday, in the wake of its best year since 2009 in 2017, MSCI’s index of global stocks pushed on to new record highs.

"Investors have woken up in the new year and looked forward to another firm year for global growth with very muted downside risk," said Investec economist  Philip Shaw, though he warned against reading too much into the first two trading days of the new year. "The converse is the sell-off in bond markets: the idea that inflation pressures may be firmer than expected and central banks could take a slightly more aggressive approach than previously thought."

On Wednesday, Asian stocks pushed deeper into record territory driven by emerging markets as Japan markets remained closed. The MSCI index of Asia-Pacific shares outside Japan rose 0.4% having jumped 1.4% on Tuesday in its best performance since last March. Miners supported Australia's ASX 200 (+0.2%), which comes amid Australia’s metals and mining index hovered at its best level in 5 years following the rise in metal prices with gold firmly above USD 1300, alongside the recent rally in zinc (zinc hit a 10-year high on Tuesday). Chinese markets initially conformed to the upbeat tone before Hong Kong shares ebbed lower (Shanghai Comp +0.6%, Hang Seng +0.1%), with focus also on the PBoC’s actions whereby they strengthened the CNY fix by the most since May 2016, where USDCNY fell below 6.50. Japanese markets remained closed and will reopen on Thursday. Emerging-market shares also gained for a second session.

Europe's Stoxx 600 Index rose as much as 0.4%, the first advance in four days, as the euro weakened 0.3% against U.S. dollar to $1.2011. Retailers rally and technology companies follow overnight gains in U.S. peers while automakers rebounded from Tuesday’s slump and energy stocks also advanced, however trading volumes were about 25% lower than the 30-day average, in part as a result of the rollout of new MiFID II regulations.

Apple supplier AMS rose as much as 7.2% before paring gains, IQE gauned 2%, while STMicroelectronics and Infineon both rally more than 1.5%; Apple rose 1.8% in U.S. trading yesterday. Silicon-wafer maker Siltronic advances as much as 4.6%; Credit Suisse wrote in a note that November preliminary monthly wafer data from Japan, which tracks ~50% of global wafer shipments, showed “solid” volumes and low inventories.

Next (+6.5%) leads a gauge of retail shares to the best industry performance as it raises its profit forecast after a better-than-expected Christmas. Tech shares climb the most in two weeks after Tuesday’s rally in the Nasdaq 100 Index.

Next is the first major listed retailer to give an update on Christmas trading, but its upbeat update also lifted peer Marks & Spencer by 1.4%. “As much as (Next‘s) update is good news, the constant update-by-update tinkering of guidance and sharp reactions by the share price just goes to show how shareholders are at the mercy of UK consumer trends and whims,” said Mike van Dulken, head of research at Accendo Markets. “The retail sector is a very tricky one.”

As a reminder, European investors are expected to trade cautiously today - and they are - as the biggest shake-up to market regulations in a decade begins. The MiFID II rules are one of the most seismic regulatory shifts in history, affecting everything from investment research to trade execution.

The oversold dollar halted a five-day decline against most G10 peers, helped by higher Treasury yields, ahead of today's publication of the FOMC Dec. 12-13 policy meeting minutes. DXY pushes back above 92.00, providing a minor lift to USD against the G-10, albeit ranges are tight.

EMFX outperforms once again continuing trend from end of 2017, MSCI EMFX index approaching 2013 highs.


Overnight, the yield on 10-year Treasuries jumped by the most in two weeks on Tuesday, helping the dollar halt its slide. The euro and European bonds looked past continued hawkish signals from European Central Bank rate setters. European bonds rose even as Germany’s jobless rate dropped to a record low in December and the euro retreated for the first time in six days.


Elsewhere, spot gold reached its highest since mid-September at $1,321.33, before edging back to $1,313.81 per ounce. Oil prices hit their highest since mid-2015, only to stall when major pipelines in Libya and the UK restarted and U.S production soared to the strongest in more than four decades. Brent crude futures was trading flat at $66.57 a barrel, while U.S. crude futures nudged up 7 cents to $60.43 a barrel.

Expected data include MBA mortgage applications, November construction spending and FOMC meeting minutes

Bulletin Headline Summary from RanSquawk

  • Trump tweets that his nuclear button is better than Kim Jong Un’s. N. Korea and S. Korea engage in dialogue
  • European equities rise modestly; positive trading update from Next helps lift other retailers
  • Highlights include the FOMC minutes, US ISM Manufacturing and US auto sales

Market Wrap

  • S&P 500 futures up 0.2% to 2,698.00
  • VIX Index trading 2.9% lower
  • STOXX Europe 600 up 0.3% to 389.45
  • MSCI Asia-Pac up 0.2% to 175.90
  • MSCI Asia-Pac ex Japan up 0.4% to 579.69
  • Nikkei down 0.08% to 22,764.94
  • Topix down 0.08% to 1,817.56
  • Hang Seng Index up 0.2% to 30,560.95
  • Shanghai Composite up 0.6% to 3,369.11
  • Sensex down 0.01% to 33,808.43
  • Australia S&P/ASX 200 up 0.2% to 6,070.38
  • Kospi up 0.3% to 2,486.35
  • German 10Y yield fell 1.0 bps to 0.457%
  • Euro down 0.2% to $1.2035
  • Brent Futures up 0.08% to $66.62/bbl
  • Italian 10Y yield rose 7.8 bps to 1.825%
  • Spanish 10Y yield fell 3.3 bps to 1.581%
  • Gold spot down 0.3% to $1,314.29
  • U.S. Dollar Index up 0.1% to 91.97

Top Overnight News

  • Janet Yellen’s Federal Reserve probably didn’t make much progress last month toward resolving the biggest topic of debate during her tenure leading the central bank: low inflation
  • Republicans plan to work on reaching a budget caps deal during a Wednesday meeting between congressional leaders and White House officials, and won’t spend time discussing other issues such as immigration, according to senior GOP aide.
  • Deadly protests in Iran have intensified talks within the Trump administration about imposing fresh sanctions against the Islamic Republic, as the U.S. president seized on the crisis to justify his long- standing opposition to a 2015 nuclear agreement.
  • North Korea used a hotline with South Korea for the first time in about two years to make initial contact after Kim Jong Un proposed sending a delegation to the Winter Olympics next month.
  • Germany’s unemployment rate fell to a record low as the number of people out of work slid for a sixth month, signaling that Europe’s largest economy is continuing to boom despite a slight softening in business confidence
  • The European Central Bank is heading for a two-year leadership overhaul that peaks with the selection of a successor to President Mario Draghi, and it will be politics as much as ability that determines who get the jobs
  • Trump Hardens Immigration Stance Heading Into Shutdown Talks
  • Bitcoin Falls Into Gray Area of Disclosure Rules for Congress
  • Oil Trades Near Two-Year High as U.S. Stockpiles Seen Dropping

Most Asian markets gained on the second trading day of 2018, with investors cheering the strong start to 2018 seen on Wall Street. Miners supported the ASX 200 (+0.2%), which comes amid Australia’s metals and mining index hovered at its best level in 5 years following the rise in metal prices with gold firmly above USD 1300, alongside the recent rally in zinc (zinc hit a 10-year high on Tuesday). Chinese bourses initially conformed to the upbeat tone before Hong Kong shares ebbed lower (Shanghai Comp +0.6%, Hang Seng +0.1%), with focus also on the PBoC’s actions whereby they strengthened the CNY fix by the most since May 2016, where USDCNY fell below 6.50. Japanese markets remained closed and will reopen on Thursday.

Top Asian News

  • China Seen Raising Money Market Rates Three Times This Year
  • China’s Longest Bond Rout Has Further to Go as Rates Climb
  • No Fanfare for Indonesia as Economy Hits Trillion-Dollar Mark
  • North Korea Makes Contact With Seoul to Discuss Joining Olympics
  • HNA- Owned Shadow Banking Platform Is Said to See Late Payments

Finally joining the party, European equities have seen a modest bounce-back from yesterday’s losses to trade mostly higher across the board (Eurostoxx 50 +0.4%). The only outlier has been the FTSE 100 (flat) which has been unable to join the party as recent GBP gains have kept potential moves to the upside capped. This also comes in spite of strong performance in UK retail names with Next (+7.1%) top of the leaderboard after an encouraging sales update and raising guidance; subsequently supporting the likes of Marks & Spencer and Associated British Foods (owner of Primark). Elsewhere, tech names are also seen higher in a continuation of sentiment seen on Wall Street yesterday, energy names have also been supported after oil prices hit 2015 highs yesterday. In fixed income, Bunds have reclaimed a bit more lost ground to reach 161.45, with market contacts seeing bids above 161.35 from short term/intraday traders looking for a 50% retracement of Tuesday’s sell-off, which equates to 161.48 – so arguably realised give or take a few ticks. 161.53 represents the next upside pivot, with buy-stops anticipated on a break for a re-test of Tuesday’s opening Eurex peak (161.78), but above forecast German jobs data may have scuppered any prospect of a further rebound. 

Top European News

  • DKSH, Experian, Bureau Veritas Jump on CS Upgrades; Hays Sinks
  • Spanish Unemployment Shows Euro’s Pain and Gain: Markets Live
  • Illiberal EU Leaders Huddle in Hungary as Bloc Tightens Screws

In the commodities complex, both WTI and Brent crude futures are seen in modest positive territory ahead of today’s delayed API release. In terms of energy newsflow, things remain light with markets continuing to keep an eye on events in Tehran (albeit Iran denies any impact on their production/export levels). In metals markets, gold has taken a breather from recent advances after hitting 3 ½ month highs with prices broadly tracking movements in the USD. Elsewhere, base metals were also seen lower with some analysts citing adverse weather conditions.

In FX markets, the DXY has maintained recovery gains above Tuesday’s circa 91.750 3 month low, but the Index has not managed to reclaim the 92.000 handle and therefore looks prime for further losses without any additional support/momentum, which could come via tonight’s FOMC minutes and/or the first official monthly BLS report of the year on Friday. Elsewhere, GBP marginally outperforming as Cable edges towards 1.3600 (no impact from UK construction PMI miss), while Aud/Usd and Nzd/Usd are both off yesterday’s peaks. 0.7850 continues to cap the former pair, and the Kiwi is sitting right on its 200 DMA (0.7105-10) after just failing to reach/breach strong resistance around 0.7132 on Tuesday. Eur/Usd has not really benefited from better than expected German data and remains around 1.2040, with 1.2092 (2017 high). Usd/Jpy contained within another tight range with 112.00 and key chart support just above still being respected, while light offers around 112.40 are noted ahead of bigger sell orders between 112.60-70.

Looking at the day ahead, Germany’s unemployment rate was released, and printed at a new all time low of 5.5%. In the US, we have the December ISM manufacturing reading and total vehicle sale stats. Away from the data, the FOMC minutes for the December meeting will also be due.

US Event Calendar

  • 7am: MBA Mortgage Applications, prior -4.9%
  • 10am: Construction Spending MoM, est. 0.5%, prior 1.4%
  • 10am: ISM Manufacturing, est. 58.2, prior 58.2; Prices Paid, est. 64.5, prior 65.5; New Orders, prior 64
  • 2pm: FOMC Meeting Minutes
  • Wards Total Vehicle Sales, est. 17.5m, prior 17.4m; Domestic Vehicle Sales, est. 13.4m, prior 13.4m

DB's Jim Reid concludes the overnight wrap

US equities powered to fresh records last night with the S&P500 +0.83% and the Nasdaq (+1.50%) up the most since October 27th 2017 and closing above 7,000 for the first time.

On the other side of the pond, yesterday was all about the trinity of the Euro strength, bond weakness and Euro stocks suffering. The Euro hit $1.2059 ($1.2081 intra-day) and to the highest close since January 2015, 10 year Bunds rose 4.1bps to the highest since October 25th last year and Euro equities (DAX -0.36%, CAC -0.45%) generally weakened to levels seen back in September.

Bond yields rose across the world in what was the first day of the ECB halving their bond purchases. Hawkish talk from ECB’s Coeure (more below) over the weekend and the higher risk of inflation from strong Eurozone PMIs were factors discussed yesterday. Outside of Bunds, we also saw other core 10y bond yields up 4-6bp (UST +5.8bp; OATs +3.9bp) and peripherals up c8bp (Portugal +8.1bp; Italy +8.4bp), with the latter partly impacted by softer than expected manufacturing PMIs (behaving a bit like a credit). Elsewhere, Gilts underperformed, with yields up 9.8bp as investors likely unwinding some of Gilts rally in late December when liquidity was light.

Staying with bonds, US 10 year Breakevens climbed (+2.7bps) and above 2% for the first time since March 2017. In fact since September 2014, it’s only been above 2% for a few weeks in Q1 last year when it reached a peak of 2.0765%. So the year has definitely started with a reflation trade theme in the air.

A reminder that yesterday we did our performance review of 2017 and out of the 39 assets we regularly cover, Bunds were the worst performer in local currency terms. This was with 2017 still seeing very strong QE and very low government issuance. As we also reminded readers yesterday, 2018 will be the first year this decade that QE accumulation from the big-3 (ECB, Fed and BoJ) won’t increase relative to net government issuance from these three regions. How bonds cope with this will be one of the key drivers of assets in 2018. We continue to think yields go higher from here.

Moving onto central bankers speak, the ECB’s Coeure warned over New Year that QE will not last forever and that “given what we see in the economy, I believe there is a reasonable chance that the extension of our QE program decided in October can be the last”. That said, he did reiterate the governing council’s view that the program “can be kept in place for longer should inflation disappoint on the downside”, and if inflation turned out higher than expected, “we would have plenty of instruments with which to react”.

Following on, the ECB’s Nowotny also added to the debate on QE and equity markets. He noted the end of QE is “within sight”, but it will take a “couple of years” until the ECB’s total assets start to shrink even if net new bond  purchases stop, in part given the rolling over of maturing assets into new ones. On equities, he sees the US markets as “very heated”, so more capital is now flowing into Europe, so “one has to be careful we don’t get a price bubble in Europe, too”.

Over in Asia, South Korea has offered to hold talks with North Korea on 9 January post Kim Jong Un’s more conciliatory New Year’s address. Elsewhere, NBC reported NK may test a ballistic missile within days. This morning in Asia, markets are broadly higher again. The Kospi (+0.23%) and China’s CSI 300 (+0.56%) is up modestly while Hang Seng is down marginally as we type.

Now recapping other markets performance from yesterday. The US dollar index continued to weakened and fell 0.41% back to mid-September levels. Conversely, the Euro rose 0.39% towards its three year high and Sterling jumped 0.64%. In commodities, WTI oil was marginally lower (-0.08%) but remained near its 2.5 year high despite tensions over in Iran. Elsewhere, precious metals rose c1% with Gold up for the ninth day and back to its  September highs (Gold +1.13%; Silver +1.49%), while other base metals were little changed (Copper -0.22%; Aluminium -0.20%; Zinc flat).

Away from the markets and onto Brexit, in the lead up to the March talks on trade deals, Brexit Secretary Davis noted that the EU can’t pick and choose which parts of its economic relationship it wants to maintain with the UK and that “the final deal should cover… services”, which runs counter to EU negotiator Barnier’s prior claims that financial services could not be included.

Elsewhere, Mr Davis noted that a decision on a post Brexit transition period is “doable” by March. Finally, the FT noted the UK has held informal talks to potentially join the Trans-Pacific Partnership trade group post Brexit.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In Europe, the final reading of the December manufacturing PMI was unrevised at 60.6, the highest on record since data started in 1997. Germany’s PMI was also unrevised at 63.3 and the highest on record. Elsewhere, the US manufacturing PMI was revised 0.1ppt higher to 55.1 while France was revised 0.5ppt lower to 58.8. Finally, the flash manufacturing PMIs for the UK weakened from last month’s four year high to 56.3 (vs. 57.9 expected) while Italy (57.4 vs. 58.5 expected) and Spain’s PMI (55.8 vs. 56.2 expected) were both below market.

Looking at the day ahead, Germany’s unemployment rate (5.5% expected) will be out. Over in the US, we have the December ISM manufacturing reading and total vehicle sale stats. Away from the data, the FOMC minutes for the December meeting will also be due.