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.

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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…..financial 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.

What a day…

Following the FOMC Minutes, the dollar was bid and gold was dumped… but that did not last too long…

Nasdaq roared higher once again today as did the rest of the equity market… (Dow nears 25k, Nasdaq well over 7k, S&P over 2500)

VIX was monkeyhammered to an 8 handle for only the 6th time in its history… (the close on 11/3/17 of 9.14 was the lowest in history) VXST dropped to 7.33 record lows.

Bear in mind that VIX had only traded with an 8 handle once before 2017 (on 12/27/93)

Despite a rise in March rate hike odds, treasuries at the long-end rallied (yields dropped)…

The yield curve flattened dramatically today, erasing all of yesterday’s steepening…

The dollar index managed to cling to some gains, but gave back all of the post-FOMC spike…

Gold was smashed lower after the FOMC Minutes but rebounded into the green for the day…

Gold Futures are up 9 days straight today (also in 2/18/14) – has not been a longer winning streak since July 2011 (right before the USA ratings downgrade).

Silver is hovering above a key technical level…

WTI/RBOB both rallied notably today ahead of tonight’s API inventory data…

Notably Copper – after its epic run – is down in 2018…

In the crypto space, Ripple screamed higher once again today, Ethereum jumped to a new record high, and LTC and BTC trod water…

As prices rises the market cap of all crypto currencies has soared above $700 billion for the first time…

So record low risk forecast (VIX), record high stock prices, record high crypto market cap, near-record win streak in gold, and record plunge in the yield curve… and this…

Given the major reshuffle in the voters on the FOMC, we suspect today’s minutes will be shrugged off as ‘old news’, but the fact that gold prices have risen incessantly since Yellen raised rates at her last meeting suggests some language will be needed to tamp down that anti-dollar view.

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Hopes that the Minutes would clarify the confusion left by The Fed’s growth outlook raise and inflation leave and increased its rate trajectory to 7 hikes (from 6), were dashed.

Bloomberg’s Cameron Crise notes that while it’s true that some notable doves are booted out of the voting rotation this year, keep an eye on whether an increasing number of meeting participants will require inflation measures to show up more forcefully before sanctioning another rate hike. If “several,” “a number” or “many” committee members express some unease, then we could be looking at a properly painful squeeze of Treasury shorts.

• *MOST FED OFFICIALS BACKED CONTINUED GRADUAL RATE HIKES
• *FED: FASTER INFLATION FROM TAX CUT AMONG REASONS TO SPEED HIKES
• *SEVERAL FED OFFICIALS CONCERNED BY LOW INFLATION EXPECTATIONS
• *COUPLE OF FED OFFICIALS CONCERNED BY FINANCIAL STABILITY RISKS
• *FED OFFICIALS GENERALLY AGREED FLATTER YIELD CURVE NOT UNUSUAL

Below are select excerpts from the FOMC meeting minutes that concluded on Dec. 13:

On the pace of rate hikes:

“Participants discussed several risks that, if realized, could necessitate a steeper path of increases in the target range; these risks included the possibility that inflation pressures could build unduly if output expanded well beyond its maximum sustainable level, perhaps owing to fiscal stimulus or accommodative financial market conditions.”

Participants also discussed risks that could lead to a flatter trajectory for the federal funds rate in the medium term, including a failure of actual or expected inflation to move up to the Committee’s 2 percent objective. While participants generally saw the risks to the economic outlook as roughly balanced, they agreed that inflation developments should be monitored closely.

A few participants indicated that they were not comfortable with the degree of additional policy tightening through the end of 2018 implied by the median projections for the federal funds rate in the December SEP. They expressed concern that such a path of increases in the policy rate, while gradual, might prove inconsistent with a sustained return of inflation to 2 percent, or that the level of the federal funds rate might already be near its current neutral value.

Here is the unexpected uber-hawkish case on the trajectory of rate hikes:

A few other participants mentioned that they saw as appropriate a pace of additional policy tightening through the end of 2018 that was somewhat faster than that implied by the December SEP median forecast. They noted that financial conditions had not materially tightened since the removal of monetary policy accommodation began, that continued low interest rates risked financial instability in the future, or that the labor market was increasingly tight.

On Trump’s tax cuts and fiscal stimulus::

“Many participants expected the proposed cuts in personal taxes to provide some boost to consumer spending.”

“Many participants judged that the proposed changes in business taxes, if enacted, would likely provide a modest boost to capital spending, although the magnitude of the effects was uncertain.”

On policy failure and inflation not reaching the Fed’s 2% target:

“Participants also discussed risks that could lead to a flatter trajectory for the federal funds rate in the medium term, including a failure of actual or expected inflation to move up to the Committee’s 2 percent objective.”

As Bloomberg observes, there was also a lengthy discussion of the yield curve, suggesting that Bullard’s and Kocherlakota’s point of potential yield curve inversion were duly noted:

Meeting participants also discussed the recent narrowing of the gap between the yields on long- and short-maturity nominal Treasury securities, which had resulted in a flatter profile of the term structure of interest rates. Among the factors contributing to the flattening, participants pointed to recent increases in the target range for the federal funds rate, reductions in investors’ estimates of the longer-run neutral real interest rate, lower longerterm inflation expectations, and lower term premiums.

They generally agreed that the current degree of flatness of the yield curve was not unusual by historical standards. However, several participants thought that it would be important to continue to monitor the slope of the yield curve. Some expressed concern that a possible future inversion of the yield curve, with short-term yields rising above those on longer-term Treasury securities, could portend an economic slowdown, noting that inversions have preceded recessions over the past several decades, or that a protracted yield curve inversion could adversely affect the financial condition of banks and other financial institutions and pose risks to financial stability.

A couple of other participants viewed the flattening of the yield curve as an expected consequence of increases in the Committee’s target range for the federal funds rate, and judged that a yield curve inversion under such circumstances would not necessarily foreshadow or cause an economic downturn. It was also noted that contacts in the financial sector generally did not express concern about the recent flattening of the term structure.

There was the usual asset bubble discussion:

“In light of elevated asset valuations and low financial market volatility, a couple of participants expressed concern that the persistence of highly accommodative financial conditions could, over time, pose risks to financial stability.”

And tied to that, the traditional observations of lack of tightening in financial conditions:

With regard to financial markets, some participants observed that financial conditions remained accommodative, citing a range of indicators including low interest rates, narrow credit spreads, high equity values, a lower dollar, and some evidence of easier terms for lending to risky borrowers.

On what companies would do with cash from tax cuts:

Many participants judged that the proposed changes in business taxes, if enacted, would likely provide a modest boost to capital spending, although the magnitude of the effects was uncertain. The resulting increase in the  capital stock could contribute to positive supply-side effects, including an expansion of potential output over the next few years. However, some business contacts and respondents to business surveys suggested that firms were cautious about expanding capital spending in response to the proposed tax changes or noted that the increase in cash flow that would result from corporate tax cuts was more likely to be used for mergers and acquisitions or for debt reduction and stock buybacks.

Back to inflation:

“participants generally viewed the medium-term outlook as little changed, and a majority commented that they continued to expect inflation to gradually return to the Committee’s 2 percent longer-run objective.”

“Several of them expressed concern that persistently weak inflation may have led to a decline in longer-term inflation expectations; they pointed to low market-based measures of inflation compensation, declines in some survey measures of inflation expectations, or evidence from statistical models suggesting that the underlying trend in inflation had fallen in recent years.”

“Due to the persistent shortfall of inflation from the Committee’s 2 percent objective, or the risk that monetary policy could again become constrained by the zero lower bound, a few participants suggested that further study of potential alternative frameworks for the conduct of monetary policy such as price-level targeting or nominal GDP targeting could be useful.”

On the topic of labor market slack:

“Many indicated that they expected cyclical pressures associated with a tightening labor market to show through to higher inflation over the medium term.”

Since The Fed hiked rates in December at Yellen’s last stand, there has only been one major asset winner…

Gold Futures are up 9 days straight – has not been a longer winning streak since July 2011 (right before the USA ratings downgrade).

Also notable, while financial conditions did tighten modestly after the last rate hike, they have eased back to unchanged from the rate hike now…and the curve has collapsed…

Which suggests the rate hikes will keep coming… March rate hike odds are at 66%…

*  *  *

Full Minutes below