The day the Dow crosses 20,000 may finally be here, because with DJIA futures trading 65 points higher in premarket trading, added to yesterday’s close of 19,912 and latest record high in the S&P, it means that all it will take is a modest of only 25 points for the critical Dow threshold to be finally breached. Celebrating the upcoming record, world stocks hit a 19-month high on Wednesday, lifted by strong Japanese trade data, strong European company earnings and hopes that U.S. President Donald Trump will press ahead with a large fiscal spending package. In short: the Trumpflation rally is back with a bang (even if the dollar is not particularly enjoying it, although the decoupling between the USD and rates was duly noted yesterday so it isn’t too surprising).

“U.S. stocks have shown renewed signs of life this week, as the market toyed with the idea of reigniting the ‘Trump rally’ that we saw in the aftermath of the presidential election,” said Kathleen Brooks, research director at City Index.  “Wednesday’s key theme is the return of the ‘Trump trade’,” Brooks said.

In early trading, European equities extended the global rally as corporate earnings reignited investors’ optimism in economic growth with construction  companies outperforming on expectations Trump will announce the “massive” Mexican wall.

The MSCI All-Country World Index rose to 433.6, up 02%, to its highest level since June 2015 as equity markets from Tokyo to London climbed after the S&P 500 Index closed at a record. BHP Billiton Ltd. paced gains in resources shares and iron ore extended a rally. A surge in industrial metals bolstered raw-materials companies, while gold declined for a second day.  The yen edged higher after sliding Tuesday. The Aussie fell after weaker-than-expected inflation data, while oil retreated after a four-day advance.

Europe’s index of 300 leading shares and Germany’s DAX both rose 1 percent and Britain’s FTSE 100 was up 0.7 percent.  Spanish bank Santander was among the big gainers in Europe, its 4 percent rise in 2016 net profit giving its share price a similar boost and leading the continent-wide rally in bank stocks, despite some disappointing data out of the German IFO survey which missed on both expectations and conditions.

Japan’s Nikkei advanced 1.4 percent, buoyed by data showing the country’s exports rose for the first time in 15 months in December, a positive sign for the economy even as talk of U.S. protectionism looms over the outlook.

Corporate earnings are offering relief after traders began to unwind a rally in the dollar and equities amid concern that gains after Trump’s election had gone too far. Alibaba Group Holding Ltd. lifted its sales forecast as Chinese spending held strong and BHP reported a gain in second-quarter iron ore production after prices soared on demand from China. D.R. Horton Inc., the largest U.S. homebuilder, topped analysts’ estimates as job growth fueled buyer demand. As a result, S&P U.S. futures pointed to a higher open on Wall Street. On Tuesday the S&P 500 and Nasdaq both rose to fresh record highs and the Dow Jones Industrials came within 51 points of the elusive 20,000 mark. On Wednesday, the S&P is poised for another all time high.

Lingering concerns about growing protectionism from the Trump administration, and the potential negative effects on global trade and growth, remained close to the surface.

“It has kept dollar/yen flat despite the S&P 500 hitting new highs and Treasury yields edging up,” Kit Juckes, head of FX research at Societe Generale in London, was quoted by Reuters. “There’s no doubt that a major bout of protectionism-induced risk aversion would be yen-supportive, as well as negative for a bunch of currencies that depend on U.S. trade,” he said.

The 10-year yield inched up to 2.48 percent, recovering from its dip below 2.40 percent earlier in the week, while the two-year yield held firm at 1.23 percent. It was as low as 1.14 percent on Monday. While the greenback moved in tandem with the snap back in U.S. Treasury yields overnight, it struggled to make much headway in Asian and European trading. Germany’s 10-year Bund yield rose to a six-week high of 0.38 percent and France’s benchmark 10-year yield hit a one-year high of 0.95 percent, with bond prices weighed down by the rally in stocks and new debt supply.

The dollar slipped 0.1 percent to 113.65 yen, and 0.1 percent against a basket of currencies. The euro was unchanged at $1.0725, little-moved by a surprised fall in German business morale this month. Sterling jumped, rising just shy of $1.26 on a combination of short covering and position squaring. The decision overall was seen as clearing the way for Prime Minister Theresa May to get on with launching Brexit talks. Sterling has bounced 4 percent over the last week.

Oil prices gave back much of their overnight gains. Brent futures dipped 0.5 percent to $55.13 per barrel, after rising 0.4 percent overnight, following a report from API that showed a surprise inventory build. If history is any indication, today’s DOE inventory report should show a big draw.

Market Snapshot

• S&P 500 futures up 0.3% to 2281.5
• Stoxx Europe 600 up 0.9% to 365.3
• MSCI Asia Pacific up 0.4% to 140.94
• US 10Yr yield up 2 bps to 2.49%
• Dollar index down 0.2% to 100.1
• WTI oil futures down 0.7% to $52.82/bbl
• Gold spot down 0.5% to $1203.23/oz

Top News

• Trump Pins Keystone, Dakota Pipeline Fate on Renegotiation
• German Business Confidence Unexpectedly Weakened in January
• Trump to Unveil Plans for Mexico Border Wall in Security Push
• Novartis Mulls Options Including Spinoff, IPO for Alcon Unit
• Salon Media Weighs Sale of Controlling Stake to Activist: NYP
• Takata Surges After Reiterating It Wants to Avoid Bankruptcy
• Japan Dec. Exports Rise 5.4% Y/y; Est. +1.1%
• Cisco to Buy Software Maker AppDynamics for $3.7 Billion
• Plains Expands Permian Pipeline Reach With $1.2 Billion Deal
• Alibaba Adds $7.5 Billion in Market Value After Raising Forecast

Asia equity markets traded higher as they were proplled higher from the record highs in the US, where markets cheered President Trump’s executive orders to advance the Keystone XL and Dakota Access pipelines which saw S&P 500 and NASDAQ Comp. hit record highs, while the DJIA moved to within 100 points of the elusive 20,000 level. Nikkei 225 (+1.4%) outperformed on JPY weakness and encouraging trade data which showed exports increased for the first time in 15 months, while ASX 200 (+0.4%) was lifted by gains in big miners after BHP Billiton reported better than expected Q2 iron ore output and Rio Tinto announced the sale of 2 mining assets. Hang Seng (+0.4%) and Shanghai Comp. (+0.2%) were also positive, although somewhat lagged their regional peers following a weak PBoC liquidity operation and reports the CIRC toughened regulation for insurers’ major stock investments. 10yr JGBs traded lower amid the increased risk appetite in Japan, with demand for government paper also dampened after a weak bond buying operation by the BoJ.

European equities have spent the European morning in the green, following on from the upside seen both stateside and over in Asia. Notable movers include Novartis (+2.9%) and Santander (+4.4%) in the wake of their earnings, while Deutsche Bank (+2.6%) also contributes to the upside seen in financials, with materials also leading the indices higher. The FTSE 100 was initially bolstered by upside in materials names following positive production updates from BHP Billiton and Antofagasta, however, the index lost some of its shine amid the tech-based spike higher seen in GBP/USD. In tandem with the risk on sentiment, Bund futures have reached fresh YTD lows to test 162.00 to the downside, while some of the pressure is potentially attributed to tapering concerns from Japan after BoJ’s Rinban operation buying focus was in the long end, potentially rising fears of tapering by the BoJ. Alongside this, EU corporate issuance is also likely taking its toll on regional paper.

Top European News

• Novartis Says 2017 FY Sales to Be Broadly in Line with Prior Yr
• Santander 4Q Net Beats Estimate; CET1 Fully Loaded 10.55%
• Intesa Weighing Generali Deal That Would Reshape Italy Finance

In currencies, the Bloomberg Dollar Spot Index was little changed. The gauge has fallen for four straight weeks, the longest retreat since February. The pound was little changed after falling as much as 0.9 percent on Tuesday. The yen rose 0.1 percent to 113.66 per dollar following a 1 percent slide the previous session.  The Mexican peso reversed early gains after a New York Times report said Trump will sign an executive order for a border wall to be built. The Australian dollar fell 0.8 percent, erasing gains after data showed consumer-price growth weakened.

In commodities, gold slid 0.5 percent to $1,204.07 an ounce after sliding 0.8 percent Tuesday. The metal reached the highest level since November earlier in the week. Iron-ore futures increased 1 percent to near the highest level in more than two years. Speculation of sustained Chinese demand for imports is outweighing repeated warnings from analysts that the rally is overextended and will unravel. There has been little relent in the Copper rise, having seen a 3%+ rise over the last couple days on supply concerns. Oil lost 0.8 percent to drop below $53 a barrel. Industry data showed U.S. stockpiles expanded while Libya increased crude output to the highest since 2014 as the country restores production following internal conflict.

Looking at the day ahead, it looks set to be a quiet day in the US today with the only data due out being the November FHFA house price index reading. We are due to hear from the BoE’s Carney at 4pm GMT when he holds a keynote speech at a G20 conference in Germany. The Bundesbank’s Weidmann and SNB’s Jordan are also scheduled to speak. Finally in terms of earnings, 31 S&P 500 companies are scheduled to report including Boeing (prior to the open) and eBay (after the close).

DB’s Jim Reid concludes the overnight wrap

Markets tried to come out of their recent lethargy yesterday with a strong day for risk and with bond yields climbing notably. Indeed both the S&P 500 (+0.66%) and Nasdaq (+0.86%) hit new record highs with the former in particular benefiting from a decent surge from metals and raw materials producers. DuPont and Freeport-McMoRan stood out most of all following their latest quarterly earnings reports and which more than overshadowed disappointing numbers out of Verizon which weighed on the wider telecoms sector. More notable though were the moves in rates. 10y Treasury yields climbed 6.8bps to close at 2.466%. That more or less wiped out Monday’s rally and it means that yields are now back to being just 1bp below the 2017 high and about 13bps off the highs in December. It was a similar story in Europe where 10y Bund yields climbed 4.6bps to finish at 0.404%. That’s just a shade below the 2017 high of 0.420% which itself was the highest yield in just under a year. It was much the same in EM too with hard currency 10y bond yields in Brazil, Colombia and Argentina between 4bps and 10bps higher.

A few factors seemed to combine to contribute to that sell-off in bonds. A broadly stable set of PMI indicators in Europe appeared to kick start the moves with the PMI’s pointing to what would be a solid start for growth in Europe in 2017. Manufacturing data in the US then surprised to the upside (we’ll touch on the data in more detail later on) while the corporate earnings results also helped sentiment to swing back positively. In addition WTI Oil rebounded +0.82% to close back above $53/bbl while it was a good day also for Iron Ore (+1.92%), Copper (+2.55%) and Aluminium (+0.95%). In addition to that there was  plenty of chatter about supply-induced weakness in European govvies with deals in France (20y), Spain (10y) and the UK (40y) while a 2y Treasury auction priced with the largest tail for a 2y auction since July.

Meanwhile the new Trump administration continues to plough on and dominate the front pages with the latest news being that Trump has taken steps to move forward on the construction of the Keystone XL and Dakota Access oil pipelines – both of which had previously been blocked by Barack Obama. As well as this, Trump’s budget chief nominee and well known fiscal hawk, Mick Mulvaney, also confirmed that that the near-$20tn national debt burden will need to be “addressed sooner rather than later”. Mulvaney also said to the Senate Homeland Security and Governmental Affairs panel that all Medicare benefits should be means-tested and that he supports a slow raising in the Social Security retirement age. All this adding more fuel to the fire in the fiscal stimulus debate. Mr Trump’s latest tweet suggested today will be a day of national security news. He also reiterated that “we will build the wall”. So watch this space.

Before we go on further, this morning in Asia we’ve seen most bourses follow the lead from Wall Street last night and trade higher in the early going this morning. The Nikkei (+1.10%), Hang Seng (+0.12%), Shanghai Comp (+0.15%), Kospi (+0.11%) and ASX (+0.38%) are amongst those markets higher while US equity index futures have also edged up. There was also some data out of Japan where exports were reported as rising a bumper +5.4% yoy in December (vs. +1.1% expected). In fact it is the first time YoY exports have turned positive in Japan since September 2015, bringing to an end 14 consecutive months  of negative prints.

Staying in Asia briefly, yesterday our China Chief Economist Zhiwei Zhang published a note highlighting a subtle and modest interest rate hike by the PBoC yesterday. He highlights that the PBoC hiked the rate of its medium-term lending facility (MLF) by 10bps in liquidity injections. Significantly, while the direct tightening impact is relatively small (compared with a benchmark interest rate hike), it does send important policy messages. Zhiwei highlights that firstly, it shows the PBoC’s determination to contain financial risks, serving as a warning shot to some leveraged investors on the domestic financial market. Secondly, against the backdrop of a potential Fed rate hike, this move breaks down the expectation that there would not be an interest rate hike of any kind in China, to a certain extent helping to reduce the pressure of capital outflows.

Moving on. For those that missed it yesterday, the UK Supreme Court threw up few surprises by confirming that the triggering of Article 50 will require an act of Parliament. The court ruled by an 8-3 majority. Significantly however the Supreme Court did not prescribe a lengthy bill and the judges dismissed the cases from the devolved authorities. Brexit Secretary David Davis confirmed that the Government will “shortly introduce legislation to allow the government to move ahead with invoking Article 50” and that “this will be a straightforward bill”. So this largely fits in with our view that the government will not offer significant concessions on the negotiating front and it’s likely that they will have sufficient support in Parliament to meet the end March deadline. Sterling did dip as much as -0.93% lower intraday yesterday but pared most of that move into the close to finish little changed at around the $1.253 mark.

Back to the aforementioned data, in Europe the flash PMI’s came in broadly flat in January with the composite for the Euro area at 54.3 versus 54.4 in December and market expectations of 54.5. By sector the manufacturing index reached a new cyclical high of 55.1 and encouragingly within the details there was a new post-2008 high for the employment index at 53.5. Our economists in Europe noted that with Germany posting a 0.5pt fall and France a 0.7pt rise, the flash PMI’s implied a marginal decline of the composite PMI on average in Italy, Spain and Ireland. That said, if unchanged for the rest of Q1 the Euro area composite PMI would point to GDP growth of close to +0.5% qoq which is above our economists’ forecast for +0.3%. Meanwhile in the US the flash manufacturing PMI for this month printed at 55.1 which was 0.8pts above the December reading and also above the 54.5 consensus estimate. The Richmond Fed manufacturing survey also came in above market at +12 (vs. +7 expected) although existing home  sales in December did disappoint slightly (-2.8% mom vs. -1.6% expected).

Before we wrap up, it was interesting to hear the hawkish comments out of the ECB’s Lautenschlaeger yesterday. The policy maker said that “all preconditions for a stable rise in inflation exist” and that “I am thus optimistic that we can soon turn to the question of an exit” from the ECB’s QE programme.

Looking at the day ahead, this morning in Europe the early data comes from France where we’ll get January confidence indicators. Germany then follows with the January IFO survey before we then get CBI trends orders and selling prices data in the UK for this month. It looks set to be a quiet afternoon in the US today with the only data due out being the November FHFA house price index reading. Away from the data we are due to hear from the BoE’s Carney at 4pm GMT when he holds a keynote speech at a G20 conference in Germany. The Bundesbank’s Weidmann and SNB’s Jordan are also scheduled to speak. Finally in terms of earnings, 31 S&P 500 companies are scheduled to report including Boeing (prior to the open) and eBay (after the close).

end

Under relentless pressure from President Donald Trump, Mexico is said to be ready to discuss changes to trade rules about a product’s country of origin to try to avoid a disruptive fight with the United States over commerce.

As the two countries begin a difficult new relationship, Mexico sees possible common ground with Trump on the “rules of origin” of the North American Free Trade Agreement (NAFTA) that binds the two countries and Canada, Reuters reported. However, as AFP adds, even before the talks started, Mexico has drawn red lines ahead of the negotiations with Trump’s administration, warning it could quit the talks and NAFTA itself, if the discussions hit a wall, no pun intended.

Of course, it all begins with the wall.

During his campaign, Trump vowed to make Mexico pay for a massive border wall and threatened to finance it by tapping into the $25 billion in remittances that Mexican migrants sent back home last year. Mexico does not see things that way. “There are very clear red lines that must be drawn from the start,” Economy Minister Ildefonso Guajardo told the Televisa network as he prepares to meet with US officials in Washington on Wednesday and Thursday.

Asked whether the Mexican delegation would walk away from the negotiating table if the wall and remittances are an issue, Guajardo said: “Absolutely.”  Guajardo and Foreign Minister Luis Videgaray will hold the face-to-face talks with the new US administration ahead of a meeting between Trump and President Enrique Pena Nieto on January 31.

In addition to the wall, Trump wants to renegotiate NAFTA with Mexico and Canada, warning last week that he would abandon the pact unless the United States gets “a fair deal.” The Mexican government has responded that it is willing to “modernize” the pact, which came into force in 1994 and represents $531 billion in annual bilateral trade between Mexico and the United States.

Some 80 percent of Mexico’s exports go to the United States, a clear indicator of the country’s dependence on the US market for its economic well-being.

But Guajardo warned on Tuesday that Mexico was also willing to use the nuclear option, and exit the 23-year-old agreement. “If we’re going for something that is less than what we have now, it doesn’t make sense to stay in,” Guajardo said.

That said, since Trump’s stated intention is ultimately dismantling Nafta, Mexico’s gambit does not sound like a very reasonable initial negotiating position.

Cited by AFP, Pena Nieto vowed on Monday that there would be “neither confrontation nor submission” in the negotiations, which will include trade, immigration and other issues. Pena Nieto also looked further north for help on Sunday as he spoke with Canadian Prime Minister Justin Trudeau by telephone to discuss ways to boost North American economic integration.

Luis de la Calle, a Mexican economist and one of the original NAFTA negotiators, said it is impossible to enter negotiations without being willing to walk away if necessary.

Trump “puts pressure in an almost extortionist manner… to get as many concessions as possible,” de la Calle told AFP. “But countries must be much smarter.”

It was not clear just how countries can be smarter if, at least in the case of Mexico, the US has enough trade leverage it could cripple 80% of Meixcan exports overnight.

Videgeray said that while the United States has “great interest” in talking about trade, Mexico wants to “talk about every issue.”

On a separate topic, Pena Nieto has called on the Trump administration to do more to stop the illegal flow of weapons from the United States into Mexico, which Mexican officials blame for fueling a brutal drug war. To this Trump has responded that Mexico has to do more to stop the illegal flow of drugs from Mexico to the United States.

Meanwhile, even as it faces tough talks with the United States, the Mexican government is setting its eyes on new trade pacts with other countries. After Trump withdrew the United States from the Trans-Pacific Partnership on Monday, Pena Nieto said his government would immediately seek to negotiate bilateral agreements with other TPP members to “diversify” his country’s trade relations.

Guajardo noted that Mexico has good relations with China and said Beijing was a “big concern” for the Trump administration. It is unclear whether China has an interest in expanding its Pacific trade partnership to include the US neighbor, and how the US would react to such an eventuality.

But Valeria Moy, director of the Mexico Como Vamos think tank, said Latin America’s second biggest economy cannot lose sight of the importance of the United States while it looks for deals elsewhere.

“If you have the world’s biggest market next door to you, that’s the market you need to take care of, period,” Moy said. “What we can diversity is who we buy from.” And since that is not the US, one can see why Trump is confident he has all the leverage ahead of this particular round of trade talks which will be closely followed by the rest of the world, as it sets the stage for similar bi- and multi-lateral talks with other nations around the globe all vying for the wallet of America’s overindebted consumer.

Finally, making matters worse for Mexico is that suddenly its “other” Nafta partner, Canada, appears to have left it hanging. In a separate Reuters report, Canada said it would focus on preserving its U.S. trade ties during talks to renegotiate NAFTA and may not be able to help Mexico avoid being targeted by the Trump administration, Canadian government sources say.

“We love our Mexican friends. But our national interests come first and the friendship comes second,” a source said on the sidelines of a cabinet retreat in Calgary, Alberta.

“The two are not mutually exclusive,” the source added. The comment was the starkest yet by Canadian officials, who are increasingly convinced Mexico will suffer the most damage from changes to the North American Free Trade Agreement.

The government dismisses the idea that Canada will formally abandon Mexico. Foreign Minister Chrystia Freeland said on Tuesday that Canada supported NAFTA as a trilateral agreement and noted that Trudeau had talked to Mexican President Enrique Pena Nieto over the weekend.

That said, the government sources note Mexico and Canada would appear to have little in common. Trump is unhappy about the large U.S. deficit with Mexico and has promised to punish firms with manufacturing bases there.

“Our negotiating positions are totally different. Mexico is being hung out of an skyscraper window by its feet,” said a second government source.

“Mexico is in a terrible, terrible position. We are not,” said another Canadian person involved on the trade file.

And just like that, Trump has managed to divide, and shortly conquer, his counterparties in yet another negotiation.