European and Asian markets rose, while U.S. index futures were little changed, with the Dow Jones Industrial Average pushing for yet another record, as traders digested the Italian referendum news, await the ECB’s Thursday announcement and reflect in a notably quieter overnight session.  Oil slipped from a 16-month high after 4 straight days of gains, as doubts emerged about how OPEC will implement the first supply curbs in eight years. European bonds gained with stocks.

The euro held firm on Tuesday, having seen a wild 3-cent swing in the wake of Italy’s referendum, while the region’s bond yields dipped in line with U.S. peers as oil saw its first fall for five days. Asian stocks saw their strongest day for 2 weeks overnight after Wall Street’s Dow Jones index hit a record high, and Europe’s main bourses struggled into positive territory as bumper German data helped settle an early wobble.

As concerns about Italy subsided for the time being, Italian bond yields were back below levels seen before Sunday’s referendum defeat for the government, while the euro held at $1.0767 having bounced strongly from as low as $1.0505 on Monday, two days ahead of an ECB decision in which Mario Draghi is expected to extend QE by 6 months with little other adjustments.  “The referendum result could put the ECB under pressure not to taper the asset purchase program but to extend it for six months beyond March (in its current form),” ING strategist Benjamin Schroeder said.

European shares rose on news that German industrial orders soared at the fastest pace for more than two years, stoking hopes that Europe’s largest economy is set for an acceleration in the coming months.  Factories saw demand climb 4.9 percent on the month despite bulk orders being lower than usual, the German economy ministry said. That was the biggest increase since July 2014 and far above the Reuters consensus forecast for a 0.6 percent rise.  “The reading was very strong even without large-scale orders and that suggests it’s more than just a flash in the pan,” BayernLB economist Stefan Kipar said, noting that some firms might have brought orders forward.

The Stoxx Europe 600 Index gained 0.3%, adding to its 0.6% advance from Monday. Italy’s FTSE MIB Index gained ground, up 1.3%, helped by gains of more than 3 percent each by UniCredit SpA and Mediobanca SpA. Stoxx 600 energy producers tracked declines in oil prices, which retreated from the highest close in 16 months. The MSCI Emerging Markets Index jumped 0.9 percent.  Financial shares in China weakened again, however, after the country’s insurance regulator suspended an unlisted firm from selling some products a day after a warning about “barbaric” share acquisitions by asset managers.

In emerging markets, Turkey, where the lira has slumped to record lows in recent weeks, saw a warning from the head of the central bank that the weakness could cause the bank to miss its inflation targets early next year. In Asia, gold nudged off a 10-month low. MSCI’s broadest index for the region bounced 0.7 percent, its biggest daily rise since Nov. 22, as Korea climbed 1.4 percent and Japan rose 0.4 percent. The Australian dollar led declines among major economies, falling 0.5 percent to 74.38 U.S. cents, after the nation’s central bank central bank kept interest rates unchanged and Governor Philip Lowe said “some slowing in the year-ended growth rate is likely.”

In an otherwise quiet session, where E-minis are currently unchanged before Tuesday’s release of factory and durable goods orders, which may confirm the U.S. economy is gaining strength and giving the Federal Reserve more reason to raise interest rates, and after the Dow Average swung back to gains Monday, increasing 0.2 percent to an all-time high, early trader focus was on crude.

Ending a 4-day winning streak, oil prices slipped on Tuesday as crude output rose in virtually every major export region despite plans by OPEC and Russia to cut production, triggering fears that a fuel glut that has dogged markets for over two years might last well into 2017. Brent futures were trading at $54.64 per barrel at 0935 GMT, down 30 cents from Monday’s close; WTI was at $51.39 a barrel, down 40 cents. Traders and analysts cited by Reuters said the boost from last week’s decision by OPEC to cut crude production had faded and the cartel’s promise had been undermined by data showing rising production from within its member countries and Russia.

“Most of the position adjustments that the OPEC decision forced upon traders have now run their course and it leaves the market exposed to profit taking,” said Ole Hansen, head of commodities strategy at Saxo Bank, citing surveys pointing to record production from OPEC during November. “What’s troubling is that the rise is coming from African producers, two of which are exempt from cutting production,” he said. “The meeting on Saturday between OPEC and non-OPEC producers will be crucial in order to maintain the bullish sentiment seen since last Wednesday.” OPEC’s oil output set another record high in November, rising to 34.19 million barrels per day (bpd) from 33.82 million bpd in October, according to a Reuters survey based on shipping data and information from industry sources.

“It’s a headache for OPEC in terms of increase in production for Libya and Nigeria, definitely that’s a tricky part,” said Bjarne Schieldrop, chief commodities analyst at SEB Markets. “A lot of buying went on following the OPEC decision and now it’s sort of taking it quietly.”

In rates, Italy’s 10-year bond yield declined six basis points to 1.93 percent, almost erasing Monday’s increase of eight basis points. Yields on Portugal’s bonds with a similar due date decreased nine basis points to 3.61 percent, while Germany’s rose one basis point to 0.34 percent. Almost all economists surveyed by Bloomberg expect the ECB to announce on Thursday that its bond-buying program will be extended after March, and most foresee an extension of about six months at the current 80 billion euros ($85 billion) a month. Treasury 10-year yields were little changed at 2.39%.

* * *

Bulletin Market Summary From RanSquawk

• European indices are mixed this morning with more news filtering through from the Italian banking sector
• A much calmer FX market today, but we continue to see Cable pushing higher, with a view to challenging the post Brexit lows seen just under 1.2800
• Looking ahead, highlights include US Factory Orders and API Crude Oil Inventories

Market Snapshot

• S&P 500 futures up 0.1% to 2205.5
• Stoxx 600 up 0.3% to 342
• FTSE 100 down less than 0.1% to 6742
• DAX up 0.1% to 10698
• German 10Yr yield up less than 1bp to 0.34%
• Italian 10Yr yield down 7bps to 1.92%
• Spanish 10Yr yield down 6bps to 1.5%
• S&P GSCI Index down 0.1% to 389.6
• MSCI Asia Pacific up 0.8% to 136
• Nikkei 225 up 0.5% to 18361
• Hang Seng up 0.8% to 22675
• Shanghai Composite down 0.2% to 3200
• S&P/ASX 200 up 0.5% to 5429
• US 10-yr yield down 1bp to 2.38%
• Dollar Index unchanged at 100.09
• WTI Crude futures down 0.4% to $51.59
• Brent Futures down less than 0.1% to $54.91
• Gold spot up 0.1% to $1,172
• Silver spot up 0.4% to $16.82

Top Headlines:

• Sanofi Said to Mull Counterbid for Actelion Amid J&J Talks: French drugmaker said to work with advisers to weigh options
• Utilities Entitled to Damages for Germany’s Atomic Exit: German constitutional court issues ruling in landmark case
• Total, ExxonMobil, Cnooc, Pemex Win Mexico Deep-Water Blocks: Oil majors win blocks in Mexico’s first competitive deep-water oil auction
• Drugmaker Genfit Said to Explore Options Including a Sale: NASH treatment maker said in talks with other drug companies
• SoftBank’s Son Said to Plan Meeting With Trump in New York: Japanese tech company had sought to merge Sprint and T- Mobile
• Fed Officials Eyeing Rate Hike See Path Tied to Fiscal Policies: Fed presidents from New York, Chicago, St. Louis spoke Monday, indicating Fed is close to meeting inflation, job goals
• South Africa to Allow U.S. GM Corn Imports for First Time: Import clearance comes after worst drought since records began
• South Korea’s Park Is Willing to Resign in April, Party Says: Opposition lawmakers still pressing for Park’s impeachment
• United Technologies CEO Says Government Ties Affected Trump Deal: Regulatory, tax reform would benefit company, CEO Hayes says

Looking at Asian markets, stocks carried on the momentum from Wall St where Dow posted fresh record highs amid strength in tech and financials, while contagion fears in Europe had also dissipated. ASX 200 (+0.5%) traded higher and was led higher by the materials and mining sectors, while Nikkei 225 (+0.6%) was underpinned by financials. Chinese markets were mixed with Hang Seng (+0.8%) outperforming, while Shanghai Comp (+0.2%) lagged following a weak liquidity operation by the PBoC. 10yr JGBs traded lower amid the heightened risk appetite in the region, with demand also dampened following an enhanced liquidity auction for 20yr, 30yr and 40yr JGBs which drew a lower b/c and wider spreads. RBA kept the Cash Rate unchanged at 1.50% as unanimously expected and stated that maintaining policy is consistent with sustainable economic growth and achieving the inflation target over time. RBA commented that the economy is continuing its transition from the mining investment boom and that some slowing in the year-ended growth rate is likely, before it picks up again.

Top Asian News

• Singapore and Australia Margin Rules to Start in March 2017: Australia has six-month transition period for variation margin
• ICAP Showing Yuan Tumbling 8.8% Against Dollar Fuels Jitters: CFETS data show onshore spot rate rose amid weakening dollar
• Samsung’s Lee in Crosshairs as Tycoons Grilled Over Scandal: Tycoons testify in connection with influence-peddling case
• China’s Robot Boom Raises Yaskawa’s Prospects and Profile: Yaskawa President says he’s rejected several deal offers
• RBA Holds Key Rate as Commodity Upswing Outweighs Slowdown: Annual growth figures predicted to slow in 3Q
• Half-Point India Rate Cut Seen by Economist Amid Cash Chaos: Call by IIFL’s Datar is more aggressive than consensus outlook

In Europe, indices are slightly higher this morning (EUROSTOXX 50 +0.2%) with more news filtering through from the Italian banking sector, as sources suggest that Monte Paschi (BMPS IM) (-2.2%) board meeting is said to be delayed until Wednesday Or Thursday.Elsewhere, financials are bouncing back after losses seen yesterday, but this did coincide with broker upgrades for HSBC and SocGen. Also in equity markets spreadbetters are taking a hit (IG Group -30%) after FCA look to announce new rules for CFD trading accounts including increased margins and amendments to new customer bonus rules.
In fixed income markets, Bunds trade largely flat this morning as participants await the ECB meeting. Today we have also seen outperformance in peripheral yields and some narrowing of the German/French spread following reports of more French government stability as Bernard Cazeneuve named is French PM.

Top European News

• EU Said to Mull Seeking Post-Brexit Deal Before Transition Talk: Consensus forming on bloc’s Brexit position, EU officials say
• ABN Amro to Sell $20 Billion of Private Banking Assets to LGT: ABN Amro agreed to sell its private-banking assets in Asia and the Middle East to Liechtenstein-based LGT to focus on its European operations
• Monte Paschi Recapitalization Hangs in Balance After Debt Swap: Troubled lender releases final results of debt conversion, set to decide in coming days whether to proceed with plan

In currencies, the Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, was little changed after falling 0.4 percent Monday. The euro traded at $1.0773 after ending Monday up 0.9 percent, erasing an earlier slide of as much as 1.5 percent in the wake of the Italian vote. The Australian dollar led declines among major economies, falling 0.5 percent to 74.38 U.S. cents, after the nation’s central bank central bank kept interest rates unchanged and Governor Philip Lowe said “some slowing in the year-ended growth rate is likely.”

In commodities, oil prices slipped on Tuesday as crude output rose in virtually every major export region despite plans by OPEC and Russia to cut production, triggering fears that a fuel glut that has dogged markets for over two years might last well into 2017. Brent futures were trading at $54.64 per barrel at 0935 GMT, down 30 cents from Monday’s close; WTI was at $51.39 a barrel, down 40 cents. Traders and analysts cited by Reuters said the boost from last week’s decision by OPEC to cut crude production had faded and the cartel’s promise had been undermined by data showing rising production from within its member countries and Russia. “Most of the position adjustments that the OPEC decision forced upon traders have now run their course and it leaves the market exposed to profit taking,” said Ole Hansen, head of commodities strategy at Saxo Bank, citing surveys pointing to record production from OPEC during November. “What’s troubling is that the rise is coming from African producers, two of which are exempt from cutting production,” he said. Aluminum fell 1.2 percent to $1,713 a metric ton, the biggest drop in a week. The metal will probably tumble next month as an “irrational” increase in prices prompts companies to restart plants, while new capacity also ramps up in the world’s largest supplier, according to China’s top metals industry group. Copper lost 1.4 percent and zinc slid 0.7 percent.

DB’s Jim Reid concludes the overnight wrap

Had you known in advance the outcomes of all the three big events of the year (Brexit, US elections and the Italian referendum) would it have helped you make money? It’s not obvious that it would, especially if your timing was slightly off. Clearly there are some assets where the impact would have been fairly obvious but the wider markets have been more difficult to second guess. For us the Italy ‘no’ result was relatively well priced in given the likely immediate ramifications but we still would have expected the jitters for longer than the 2 minutes the European markets took to bottom out yesterday morning. With Italy it’s still possible that post the rejection everything stays similar in the government apart from PM Renzi who as we know tendered his resignation yesterday. So the market is giving Italy the benefit of the doubt for now even if there was some underperformance of Italian risk yesterday.

Indeed the FTSE MIB initially dropped -2.20% at the open but that fall proved short lived with the index then rebounding and peaking a shade above +1.50% a short time later. Thereafter, the index swung in and out of positive and negative territory before finishing the day down a modest -0.21%. That was in the context of a +0.56% gain for the Stoxx 600 and an impressive +1.63% jump for the DAX. Unsurprisingly much of the focus was on how banks would fare. While the Stoxx 600 banks index closed up a fairly resilient +0.76% there were notable heavy falls for the likes of Banco Popolare di Milano (-7.91%), Banco Popolare (-7.44%), Mediobanca (-4.24%) and Unicredit (-3.36%) as the market questioned the likelihood of some of the ongoing bank recapitalisation plans going ahead.
It was a similar story in credit markets although the underperformance of financials generally was more obvious. The iTraxx Main index ended the day little changed but did wipe out an early 3bp move wider, while the iTraxx Crossover index finished 5bps tighter. Senior financials did end 3bps wider however while subordinated financials were over 6bps wider by the end of play. Of the four Italian banks within the latter index, Mediobanca spreads were 3bps wider while spreads for Intesa Sanpaolo, Generali and Unicredit were 8bps to 10bps wider. So some underperformance but as we mentioned at the top perhaps some signs that the market is giving Italy the benefit of the doubt for now.

Over in sovereign bond markets 10y BTP yields finished the day 8.3bps higher at 1.981% which compares to a 5.0bp move higher for similar maturity Bund yields. The remainder of the periphery was actually little changed. Elsewhere the Euro traded in a near 3% range. After tumbling as much as -1.50% early in the Asia session it then rallied as Europe kicked into gear and actually closed up +0.94% on the day. The US session was for the most part a reflection of the reasonably positive sentiment. The S&P 500 closed up +0.58% and 10y Treasury yields ended a modest 1bp higher at a shade below 2.400%.
While we expect the political situation to move fairly swiftly it’s still worth considering the medium-term consequences for Italy in the wake of the result. In his note following the result yesterday, DB’s Marco Stringa made the important reminder that the referendum was a catalyst rather than the cause of Italy’s complex situation. The complexity is due to disappointing growth, concerns about the banking system and the rise of populist and euro-sceptic parties. At least initially, Marco does not expect to revise down GDP projections as the “No” outcome was his central case scenario. The likelihood of a systemic solution for the NPL issue will influence the medium-term evolution of the Italian banking sector and banks’ ability to support investment growth. Marco expects no pro-active systemic solution for the banking sector before the next election. He also expects a new electoral law for both Houses of the Parliament. In his opinion, it is important that a compromise on a new electoral law does not lead to a system that encourages the formation of governments supported by overly heterogeneous coalitions.

Politics was the overwhelmingly dominating theme throughout yesterday. Along with digesting the Italian referendum outcome, there was also some focus on a Sunday Times article confirming the UK Government’s plans to potentially pay into the EU budget for access to the single market, something which PM May is calling a ‘grey Brexit’, i.e. in between the black and white demands of leave and remain hardliners. So further evidence that the UK government is becoming increasingly pragmatic from the early hard line stance. As a reminder the Supreme Court hearing continues today.

Elsewhere, news also tricked in late in the day that Eurozone finance ministers had agreed to provide short term debt relief measures for Greece prepared by the European Stability Mechanism, although they seemingly failed to form a consensus on a broader accord for various reform targets and measures. Significantly, the participation of the IMF in the bailout program appears to still be up in the air with talks breaking up last night over splits in the various reform targets. According to the FT, Eurogroup President, Jeroen Dijsselbloem, confirmed that getting the IMF on board by the end of the year is unlikely and that instead talks will continue into the New Year. Meanwhile over in France, the latest update there is that Prime Minister Manuel Valls has declared that he will run for presidency as had been somewhat expected following the news that Hollande had ruled himself out of contention.

Refreshing our screens this morning it’s been a broadly positive session in Asia this morning. Markets have largely followed the lead from the moves in Europe and on Wall Street last night with the Nikkei (+0.53%), Hang Seng (+0.86%), Shanghai Comp (+0.08%), Kospi (+1.32%) and ASX (+0.81%) all edging higher. EM currencies are also generally a touch stronger, while the Aussie Dollar has weakened modestly (about -0.17% as type) after the RBA left rates on hold as expected.

Moving on. As far as the economic data was concerned yesterday, it was on the whole relatively positive. The primary focus in the US was on the November ISM non-manufacturing print which was reported as rising 2.4pts to 57.2 and well exceeding expectations for a rise to 55.5. That is in fact the best reading since October 2015 and whilst the details revealed a modest decline in new orders (by 0.7pts to 57.0) there were gains across components of business activity, employment and new export orders. It was noted that the employment component in particular, which came in at 58.2, is the 5th largest print since the start of the series in 1997. Meanwhile, the final services PMI reading for November was revised down a modest 0.1pts to 54.6 which puts the composite at 54.9 and unchanged versus October. Lastly the labour market conditions index for November was reported as rising by 1.5pts in November which is the best monthly gain since July.

In Europe the data was focused on the final November PMI readings. There was a bit of disappointment in the final services revision for the Euro area which was revised down from 54.1 to 53.8 largely as a result of a 1pt downward revision in France to 51.6. Putting it in context however that reading for the Euro area is still the highest this year while the composite level of 53.9 is also the highest in 2016. The most interesting takeaway was the data for the non-core and specifically Italy where the services reading printed at a bumper 53.3 (vs. 51.6 expected), up 2.3pts from October and the highest level since February. Our European economists highlighted that, should the data for the Euro area remain unchanged in December, then the composite PMI would point to GDP growth of +0.4% qoq in Q4 and so represents some upside to their current estimate.

Before we look at today’s calendar, yesterday also marked the last day for Fedspeak prior the blackout period kicking in, although again there was little new that could move the dial. NY Fed President William Dudley opined that ‘it is important that fiscal and monetary policy are well aligned going forward’ and that ‘there appears to be few imbalances in the economy that could lead to the current expansion ending’. Perhaps more interestingly, Dudley acknowledged the recent tightening in financial conditions but also suggested that that he does not see this as prompting great concern and instead said that it seems broadly consistent given that it’s being driven by a greater likelihood of stronger near-term aggregate demand and less downside risk to the growth outlook. Meanwhile Chicago Fed President Charles Evans said that the Fed needs to be patient to ‘see what fiscal program emerges’ but that he see’s every reason to think that the economy is to ‘stay strong for the next few years given Trump administration’s planned policies’.

Looking at the day ahead, the early data out this morning in Europe comes from Germany where the October factory orders data will be released. Later this morning we’ll get the final revisions to Q3 GDP in the Euro area along with the growth components. No change from the +0.3% qoq flash print is expected. This afternoon in the US we’ll firstly get the October trade balance reading, with the final Q3 nonfarm productivity and unit labour costs data also scheduled for release. Factory orders data for the month of October is also due along with this month’s IBD/TIPP economic optimism index reading. Lastly, final durable and capital goods orders revisions for October will be released.