It’s deja vu all over again.

In a repeat of yesterday’s session, where US equities and the dollar levitated in a one-way trade, Tuesday’s muted session – where in addition to closed China and South Korean markets, Germany’s Dax is also shut for holiday – has seen early dollar and European equity strength, while the S&P is set for new record highs amid higher E-minis and a VIX that is again lower after 5 consecutive days of declines.

It is also another day for global records: world shares hit their latest all time high on Tuesday, while the dollar was the highest in 6 weeks as encouraging U.S. data lifted it in tandem with global bond yields. MSCI’s 47-country ‘All-World’ index was pushed to the fresh peak as Europe’s main bourses added to gains made in Asia and after Wall Street set its own record close again overnight. It was the tenth new high since late July alone and extends the year’s blizzard of records that started in February to more than 40 according to Reuters, with no sign it is about to run out of steam yet.

That said, both European stocks and the dollar lost some momentum on Tuesday as concerns reemerged about the probability of Trump’s tax cuts. The euro drifted as tensions bubbled in Catalonia, with the common currency sliding briefly below 1.16 before rebounding.

Europe’s Stoxx 600 Index was mixed, and unchanged so far on Tuesday despite US stocks hitting new all time highs and amid a rally in Asian markets. Materials found a bid in Europe, as the sector
outperforms, led by Anglo American, buoyed by its upgrade at HSBC. Yesterday’s volatility seen in Spain, and in the IBEX has slowed, with the Spanish stock index trading marginally lower this morning, as many investors await clarification and insight into further developments in regards to the Catalonian region.

Japanese shares closed at their highest in more than two years, while Chinese stocks in Hong Kong surged, reopening after a one day vacation and boosted by the weekend’s targeted RRR-cut by the PBOC. Developing nation equities also jumped.

SEB investment management’s global head of asset allocation Hans Peterson pointed to strong economic and trade data and signs that firms in large economies like the United States and Europe were finally increasing investment spending. “The fun thing about that is that is will take over from the consumption cycle and means the (global business growth) cycle will be longer than consensus. So I think that is the mechanism that is driving equities at the moment. So we are long equities, we are long emerging markets and we are long Europe. We are risk on.”

The greenback pared an increase but remained higher against almost all its major counterparts. As Bloomberg’s FX strategist Vassilis Karamanlis writes this morning, dollar bulls may need to wait for U.S. jobs data and a speech by Janet Yellen to find the fresh catalyst that could finally push the Bloomberg Dollar Spot Index above its 2017 trendline resistance. The gauge pared early gains as it failed to escape this year’s downtrend. Further hawkish remarks by the Federal Reserve chair or strong employment data due Wednesday may do the trick, yet for now investors are happy to take some chips off the table. The dollar’s inability to breach the technical resistance weighed on sentiment as the euro and pound decisively rose from their day lows, which saw the common currency below $1.1700 for the first time since Aug. 17, and sterling at the lowest in nearly three weeks. The market remains long gamma in euro-dollar and thus any dips are bound to find fading interest.

As a result, profit taking was the name of the game as soon as London trading was underway, according to currency traders. Still, Goldman analysts released a report overnight, in which they see the greenback as having more room to run, thanks to solid growth prospects and the chance that Fed interest-rate hikes will prove more aggressive than market players currently anticipate. As a result, Goldman sees the dollar rising particularly against the euro, which could be hurt by political concerns amid the Spanish woes over Catalonia and by elections in Austria and Italy in coming months.

Meanwhile, the yen weakened to 113.20 per dollar, just a breath away from its Sept. 27 low at 113.26. While USD/JPY follows the market’s latest narrative of a strong dollar, risk reversals buck the trend, diving further into bearish territory for the greenback. Yen calls find good demand on structures expiring post the Oct. 22 election in Japan, while calendar trades are also in play.

“Investors have capacity to buy as the fiscal second half begins, with dip- buying potential for 10-year yields around 0.8%,” says Tadashi Matsukawa, head of fixed-income investment at PineBridge Investments Japan; “Even with strong data, inflation is subdued.”

“With views strongly intact that BOJ will cap the 10- year yield around 11 basis points, 8 basis points is where most investors are looking to buy as there is very little downside risk,” says Satoshi Shimamura, head of rates and markets in the investment strategy department at MassMutual Life Insurance Co. in Tokyo; “Some may even wait until 9 basis points. Until all this appetite has been met, it’s hard to see yields falling.”

Cable traded near session lows in the mid 1.32 range after EU’s Barnier said there is “still a serious divergence on financial settlement on Brexit” while European president Jean-Claude Juncker said the UK “have not yet made sufficient progress” in Brexit talks. Not helping was news that U.K. construction unexpectedly shrank in September, moving below the the 50 level that divides expansion from contraction.

Japanese bonds were mixed after a soft auction for benchmark 10-year notes as investors remained cautious about buying at the start of the fiscal second-half. Borrowing costs across the euro zone nudged higher too. Southern European bonds continued to underperform meanwhile as political tensions remained in Spain after Sunday’s independence vote in Catalonia was marred by police violence. In the US, the 10Y yield rose 2bps to 2.36%, while a stronger view that the Federal Reserve will raise U.S. interest rate for a third time this year in December kept two-year U.S. government bond yields hovering at a 9-year high.

WTI and Brent crude futures have seen subdued trade following the 2% sell-off seen in oil markets yesterday, which many touted to be on the news that OPEC oil output had risen last month by 50,000 BPD. The bearish push was halted by resting bids ahead of 50.00/bbl, as the support level was evident. “The fourth quarter is not too kind to the price of oil, as we switch from summer demand to expectations of winter demand,” said Jonathan Barratt, chief investment officer at Ayers Alliance in Sydney.

Gold’s bearish September continued into October, as safe haven flows further reverse, with the market now testing the
1268.00 area, which was prevalent before the North Korea related rally.

Market Snapshot

• S&P 500 futures up 0.06% to 2,527.75
• E-Mini Nasdaq 100 futures up 0.1%
• VIX Index drops 1.2% after five days of declines
• MSCI Asia up 0.5% to 162.19
• MSCI Asia ex Japan up 0.6% to 534.62
• Nikkei up 1.1% to 20,614.07
• Topix up 0.7% to 1,684.46
• Hang Seng Index up 2.3% to 28,173.21
• Shanghai Composite up 0.3% to 3,348.94
• Sensex up 0.6% to 31,483.30
• Australia S&P/ASX 200 down 0.5% to 5,701.44
• Kospi up 0.9% to 2,394.47
• STOXX Europe 600 unchanged at 390.12
• German 10Y yield rose 3.4 bps to 0.485%
• Euro up 0.08% to $1.1742
• Italian 10Y yield rose 4.5 bps to 1.863%
• Spanish 10Y yield rose 1.7 bps to 1.711%
• Brent Futures up 0.04% to $56.14/bbl
• Gold spot down 0.01% to $1,270.96
• U.S. Dollar Index up 0.1% to 93.65

Bulletin Headline Summary From RanSquawk

• In FX, the Greenback’s gains have slowed against its major counterparts. RBA kept rates unchanged as expected and highlighted the firmer currency
• EU equities trade subdued following the Nikkei seeing highest level since Aug’16, as a weaker JPY aids the push
• Looking ahead, highlights include: US vehicle sales and APIs

Top Headline News

• The president will travel on Wednesday to Las Vegas after the mass shooting there. The 64-year-old gunman had no connection to international militant groups, the FBI said, rebutting a claim of responsibility by Islamic State.
• The White House ruled out talks with North Korea over its nuclear arsenal just days after Secretary of State Rex Tillerson said U.S. was in direct communication with Pyongyang. This was the latest sign that Trump and his top diplomat have different views on the best way to address North Korea’s accelerating nuclear and ballistic missile programs
• The White House is showing “softness” on ending a $1.3 trillion federal tax deduction filers get for their state and local taxes, Senator Bob Corker said Monday, questioning whether GOP has fortitude for tax overhaul
• Tesla Falters With Model 3 as Initial Output Trails Forecast
• Qatar Fund Is Said to Weigh Asset Sales as It Looks Homeward
• Equifax Says Additional 2.5m U.S. Consumers Potentially Impacted
• Crisis in Spain: separatist activists are taking to the streets of Barcelona to protest the police violence that marked Sunday’s vote and reinforce their demands for a split with Spain after winning an illegal referendum at the weekend
• Some analysts are projecting a small increase in auto sales for the month, which would be a first in 2017. September has one more selling day than a year ago, though, so even if the actual number of vehicles sold ticks up, the seasonally adjusted annualized rate (SAAR) probably will drop again
• Equifax Inc.’s former CEO Richard Smith, who stepped down on Sept. 26, is expected to be the sole witness at a U.S. House Energy and Commerce subcommittee hearing to examine the company’s massive data breach
• The dollar rose for a second day after U.S. factory data released Monday beat estimates, supporting the case for the Federal Reserve to raise interest rates. The Catalan independence vote and speculation about a more hawkish new Fed chief continued to support the dollar

Asia equity markets were mostly higher with Hang Seng (+2.25%) the outperformer as it played catch up on return from holiday and took its first opportunity to celebrate news of the PBoC’s targeted RRR cut which according to sellside calculations will release hundreds of billions of liquidity into the (stock) market. The Nikkei 225 (+1.05%) was also positive with sentiment underpinned amid upside in USD/JPY and after the fresh intraday records set by all the major US indices. Conversely, Shanghai Comp and KOSPI are shut for the entire week, while ASX 200 (-0.6%) underperformed with weakness in energy names after oil slipped over 2% yesterday and with financials dampened after QBE raised it catastrophe claims allowance due to the recent hurricanes.

Top Asian News

• Anil Ambani’s Telecom Unit Heads for Record Low as Merger Fails
• Kansai Electric Bellwether for Koike’s ‘Party of Hope’
• China Stock Rally Finds a New Gear as Shares Soar Most in a Year
• Mobike, Ofo Investors Are Said in Talks to Merge China Startups
• Steel Boom Drives 400% Surge for Suppliers of Critical Niche
• India Bond-Related Flows Keeping Rupee Losses in Check: Traders
• Japan’s Corporate Foreign Bond Issuance Hits Record on M&A

In Europe, equity markets trade largely sideways across the board, as many Eurex participants are off their desks amid the German holiday. European bourses have failed to gain traction from Asian and American sessions, where the Nikkei hit its highest level since August 2015, following another record for the S&P500. Materials have however found a bid in Europe, as the sector outperforms, led by Anglo American, buoyed by its upgrade at HSBC. Elsewhere, yesterday’s volatility seen in Spain, and in the IBEX has slowed, with the Spanish stock index trading marginally lower this morning, as many investors await clarification and insight into further developments in regards to the Catalonian region. Fixed Income markets have continued to trade bearishly, although volumes are lighter due to the German Unity Day Holiday, alongside a day that lacks much in the way of underlying tier one data releases. Gilts did nudge higher on the back of the surprise contraction in the UK construction PMI.

Top European News

• Ryanair Adds Fewest Customers Since March After Scrapped Flights
• Spain’s Crisis Deepens as Catalonia Secession Clock Ticks Down
• May’s Brexit Budget Offer Is Said to Be Conditional on Trade
• EU Demands More U.K. Brexit Clarity Before Approving Trade Talks
• U.K. Construction Unexpectedly Shrinks as Confidence Weakens
• UBS Starts French JV for Family Office, Private Equity

In currencies, cable was offered following the UK Markit Construction PMI, falling below 50.00 and printing the lowest figure since July 2016, at 48.1. Cable fell through yesterday’s low as a result, and August’s high could now behave as temporary support for the pair. The USD has given back ground against its major counterparts, following the bullish pressure seen through yesterday’s European and US sessions. The DXY fell short of the push toward 94.00, as EUR/USD found support at the 1.17 handle. USD/JPY saw a surge post European trade yesterday, with the pair breaching 113.00, as a clear break of the long-term 2017 resistance trendline has been confirmed. Investors will look toward July highs around 114.50 as the next bullish target. The outperformance in the Nikkei was spurred by the increased bullish pressure in USD/JPY, with talk of large fund interest in the pair, which continues to look towards September’s high, with further resistance likely at the 114.50 area. For the Euro, global political conditions have aided to the support seen in the EUR this morning, as Spanish/ Catalonian unrest wanes, with aforementioned bids arriving in EUR/USD. EUR/GBP has largely moved sideways as the greenback’s volatility dictated trade. Meanwhile for the OZ and Kiwi, the RBA was the headline of the Asian session, where rates were kept on hold at 1.50%, as expected. Concerns of the economy continued, with the bank stating that a strengthening AUD would slow economy and restrain price pressure. Further reiterating ‘it judges steady policy is consistent with the growth and inflation target. AUD saw a bearish push on the comments, as the growing currency concerns further diminish the likelihood for a RBA move. AUD/USD slipped through 0.78 and looks back toward the 2016 trading range. Kiwi suffered overnight, as New Zealand NZIER Confidence fell to an 18-month low, triggering some early Asian selling, as further pressure was witnessed as a result of the dovish skew from the RBA

In commodities, WTI and Brent crude futures have seen subdued trade following the 2% sell-off seen in oil markets yesterday, which many touted to be on the news that OPEC oil output had risen last month by 50,000 BPD. The bearish push was halted by resting bids ahead of 50.00/bbl, as the support level was evident. Gold’s bearish September continued into October, as safe haven flows further reverse, with the market now testing the 1268.00 area, which was prevalent before the North Korea related rally.

Looking at the day ahead, we have the Eurozone PPI (0.3%, Exp. 0.1% mom,; 2.5% Y/Y, exp. 2.3%) and UK’s Markit construction PMI this morning (48.1, Exp. 51.0, Last 51.1). Over in the US,
there is total and domestic vehicle sales stats for September. The BOE
will publish its record of the Financial policy committee. Over in the
US, the Fed’s Powell will speak on regulatory reform.

US Event Calendar

• Wards Total Vehicle Sales, est. 17.2m, prior 16m; Domestic Vehicle Sales, est. 13m, prior 12.5m

DB’s Jim Reid concludes the overnight wrap

Yesterday saw a battle between safe haven core bond markets wanting to rally or hold in after the Catalonian vote and equities wanting to rally due to the generally strong PMIs/ISMs. Below we update our PMI vs YoY equity analysis after yesterday’s numbers and on balance many equity markets are now ‘cheap’ albeit with the usual caveats. Before we get there let’s recap the main market moves and stories.

Turning first to the initial reactions following Catalonia’s independence vote. The EU spokesman Margaritis Schinas noted “under the Spanish constitution, the vote was not legal” and as President Juncker noted earlier “this is an internal matter for Spain that has to be dealt with in line with the constitutional order of Spain”. Locally, the leader of the Ciudadanos party (Albert Rivera – ally of PM Rajoy) called for new regional elections as “this is the only possible way we can truly go to vote and not be kidnapped as we are at the moment by this coup against democracy”.

In terms of the markets reactions, Spain’s IBEX sold off 1.21% (the weakest day since August) – led by the financials sector, the Euro dropped -0.69% and Spain’s 10y bond yields jumped 8.8bp. Elsewhere, peripheral bonds were also impacted, with Italian and Portugal’s 10y yields up c4bp, but core bond yields were lower to little changed, with UST 10y up +0.7bp, while Bunds (-1.3bp), OATs (-1bp) and Gilts (-3.5bp) fell slightly. Notably, Bunds traded with an intraday range of c5bp, before the spread between Bunds and Spanish 10y yields settled at 124bp – highest since early June.

For those who may have missed it, DB’s Marc’s De-Muzion published a report “Catalonia: What next?” He notes that if Catalan government declares independence (potentially on 6 October), then the Spanish government has little choice but to trigger Article 155 and withdraw regional government’s authority in Catalonia and call for early regional elections. If the Catalan government does not declare independence, the regional government would most likely dissolve and early regional elections would be called. Ultimately, the solution to the Catalan situation has to come via lengthy, constructive  dialogue and negotiations.

Overnight, White House spokeswoman Sanders has said “now is not the time to talk” with North Korea over its nuclear arsenal but that’s not really having much impact. Markets are trading on the firmer side in Asia with the ASX 200 down -0.41% being an exception while the Nikkei is up +0.77%. The Hang Seng has jumped +1.59%, partly reflecting a catch up effect as the market reopened post holidays as well the delayed positive reactions following cuts to bank reserve requirements (Banks +2.87%) and stronger than expected Chinese manufacturing PMI over the weekend. Note that Chinese bourses and the Kospi are closed for the week.

Turning to President Trump’s tax plan. National Economic Council Director Gary Cohn has provided a bit more clarity, noting that the cUS$2.6trln of offshore profits sitting in lower tax countries may be subjected to a one-time tax in the “10% range”, although tax industry experts suggest 15% may be more likely. Elsewhere, Moody’s has confirmed that the current tax plan is “likely credit negative” for the US government as “tax cuts would not be offset by equivalent cuts to spending”.

Quickly recapping yesterday’s market performance now. US bourses strengthened further, with the S&P up +0.39% to another record high, with gains led by the materials, health care and financials sector. Elsewhere, the Dow (+0.68%) and Nasdaq (+0.32%) also advanced modestly. Over in Europe, excluding Spain’s IBEX (-1.21%), other regional indices were all higher, with the Stoxx 600 (+0.51%), DAX (+0.58%), FTSE 100 (+0.90%) and FTSE MIB (+0.51%) seeing firm days. Notably, the VIX has remained below 10 for the fourth consecutive day and is now (9.45) the lowest since late July and getting closer to the all time lows again after the North Korea wobbles destroyed the peace in early August.

Turning to currencies, the US dollar index gained 0.52% following the stronger than expected ISMs, while Sterling fell 0.91% versus the Greenback, likely impacted by the softer manufacturing PMIs and concerns on political stability as the annual Conservative Party conference began. In commodities, WTI oil fell -2.11% following reports of higher OPEC output last month, in part as Libya’s oil fields are back online coupled with a lower OPEC production compliance rate of 82% (vs. 88% previous). Elsewhere, precious metals were slightly lower (Gold -0.67%; Silver -0.42%), while other LME base metals (Zinc +2.34%; Copper +0.19%; Aluminium -0.05%) were broadly higher yesterday.

Away from the markets and onto central banker’s commentaries. On inflation, the ECB’s Praet noted the “overall inflation developments, despite the solid (economic) growth, have remained subdued” and that “a very substantial degree of monetary accommodation is still needed for underlying inflation pressure to gradually build-up”. Notably, he was quite vocal on forward guidance, saying “….in conditions in which uncertainty is high, frontloading the accumulation of a given stock of purchases more forcefully signals the central bank’s commitment to inject the degree of accommodation necessary to support the recovery..”. Over in the US, the Fed’s Kashkari reiterated his preference to “not to raise rates again until we actually hit 2% core PCE inflation” and that “I believe the most likely cause of persistently low inflation are additional domestic labour market slack and falling inflation expectations”.

Elsewhere, data wise yesterday the most significant releases of note were the September manufacturing PMIs and ISM data in Europe and the US. With regards to the former, the final print for the Euro area was revised down a very modest 0.1pts to 58.1 however that print still puts it at the highest level in more than six and a half years. As a reminder, the August reading was 57.4. What was perhaps most notable was the lack of any negative impact of a stronger euro which you would expect to have the most impact on the manufacturing sector.

Indeed the new orders component rose another 0.2pts to 58.5 and a 3-month high. The employment component also hit a 20-year high at 56.5 and the backlog of work was also up at a new cyclical high. At a country level, Germany was left unrevised at 60.6 and France was revised up 0.1pts to 56.1 – putting both at 77- month highs. There were also significant milestones hit for the Netherlands (79- month high) and Greece (111-month high). Meanwhile, the data for the periphery revealed a much better than expected reading for Spain (+1.9pts to 54.3 vs. 53.0 expected – a 3 month high) offset by a slightly softer than expected reading for Italy (unchanged at 56.3 vs. 56.8 expected). The UK also saw a 0.8pt decline to 55.9 (vs. 56.2 expected).

Across the pond, there was a huge positive surprise in the ISM reading for the US which came in at 60.8 which compares to expectations for 58.1. The reading was also up a full 2pts from August and is the highest since May 2004. New orders also surged to 64.6 (from 60.3) and hit the highest in 7- months while employment printed at 60.3 and the highest since March 2011. The manufacturing PMI was confirmed at 53.1 (+0.1pts from the flash). Notably, the two recent storms had a modestly positive impact on the index by causing longer lead times for supplier deliveries and additional new orders, yet  the underlying improvement was still broad-based across the survey.

Looking at the day ahead, we have the Eurozone PPI (0.1% mom, 2.3% yoy expected) and UK’s Markit construction PMI this morning. Over in the US, there is total and domestic vehicle sales stats for September. Onto other events, there will be numerous speakers at the UK’s Conservative Party conference, including: Home secretary Rudd, Trade secretary Fox, Brexit secretary David Davis and Foreign secretary Johnson. Then the BOE will publish its record of the Financial policy committee. Over in the US, the Fed’s Powell will speak on regulatory reform.