Stocks in Europe faded early gains and S&P futures fell after a mixed session in Asia as chip stocks were taken to the woodshed on poor guidance from Nvidia and Applied Materials sparked fears that the chip bull run is over, while investors wondered whether China and America can de-escalate their trade war after mixed signals by US officials just days before the G-20 summit.

The euro failed to rebound while the sterling halted its biggest drop in 2 years after some of the most dramatic 24 hours yet in the Brexit process and another turbulent week for world markets. With reports of a UK leadership coup still rife and fear that the country could crash out of the EU without an agreement, cable struggled to rise above $1.28.

Meanwhile traders around the world were waiting for an outcome from the ongoing Brexit saga: “If and when a vote on the withdrawal agreement occurs is uncertain. Whether the withdrawal bill is passed by both houses of Parliament is uncertain,” Joseph Capurso, a senior currency strategist at CBA, said in a note. “Whether the Prime Minister resigns or is challenged for the leadership is uncertain. And, whether there is a second referendum and/or an election is uncertain.”

Fears over political turmoil in the UK and Italy dragged Europe’s Stoxx 600 back into the red, set for its first weekly drop in three, trimming Friday’s gain as AstraZeneca’s drop weighed on the gauge after a cancer-drug setback while telecom names were outperforming. Utilities started the session lower in the wake of yesterday’s ECJ decision which deemed the UK’s scheme for ensuring power supplies during the winter months as a violation of state aid rules. Other individual movers include Vivendi (+4.2%) sit at the top of the Stoxx 600 after posting impressive Q3 sales metrics and announcing a potential sale of part of their Universal Music Group division. Elsewhere, AstraZeneca (-2.3%) and Shire (-1.3%) have been seen lower throughout the session after both posting disappointing drug updates.

Not helping sentiment, ECB head Mario Draghi said the bank still plans to dial back its stimulus at the end of the year, but acknowledged the economy had hit a soft patch and inflation may rise more slowly than expected. “If firms start to become more uncertain about the growth and inflation outlook, the squeeze on margins could prove more persistent,” Draghi told a conference.

Earlier in the day, Asian shares ended the session in the red (MSCI Asia -0.2% to 151.52), led lower by declines in Japan, even as China and Hong Kong rose after initial reports the United States might pause further China tariffs were denied by Commerce Secretary Wilbur Ross who damped hopes of any imminent trade deal with China. The Nikkei fell 0.6% pressured by a drop in the USDJPY after China Mofcom began an investigation into alleged dumping of machine tools by Japanese firms. The Hang Seng (+0.3%) and Shanghai Comp. (+0.4%) swung between gains and losses after continued liquidity inaction by the PBoC which skipped Reverse Repos for a 16th consecutive occasion.

S&P futures were hit on fresh slowdown concerns, this time out of the semiconductor/chip space, after Nvidia gave a dire sales forecast, projecting a 20% drop in revenue while a disappointing outlook from Applied Materials indicated the chip industry is holding off on expansion plans in the face of a murky outlook for electronics demand. The chipmaking sector saw another bout of selling in Asia, wiping at least $11.2 billion in market value amid signals that demand for servers, personal computers and mobile is falling.

Also falling after hours were shares of AMD and Intel, dragging Nasdaq futures lower.

“It started with Apple, then Nvidia … Since performances of these companies set the tone for the global tech and chip industries, related Japanese stocks will likely be sluggish for a while,” said Takatoshi Itoshima, a strategist at Pictet Asset Management.

The Bloomberg Dollar Spot Index was little changed after Fed Chairman Powell flagged his concern over potential headwinds for the U.S. economy, while the pound staged a modest rebound on reports that some pro-Brexit ministers decided to stay in their governmental posts. The pound gained as U.K. Prime Minister Theresa May defied demands to quit and amid reports her environment secretary wouldn’t resign, following the resignation of several ministers Thursday. The yen rallied as trade stress simmered, with investors trying to gauge whether China and the U.S. can de-escalate their dispute.

Also under water was the cryptocurrency Bitcoin, which hit a one-year trough overnight. It had tumbled 10 percent early in the week when support at $6,000 gave way. It was last changing hands at $5,500 on the Bitstamp platform.

Treasuries were steady while 10-year yields on German bonds were set for their biggest weekly fall in three weeks, in a sign that the Brexit uncertainty and worries about Italy’s finances, continued to support demand. Italian bonds edged higher even as European Commission Vice President Valdis Dombrovskis said in an interview with Il Sole 24 Ore that the country’s government was openly defying EU budget rules. Emerging-market currencies consolidated recent gains while oil prices extended their rebound.

Oil prices rose, helped by a decline in U.S. fuel stockpiles and the possibility of a cut in OPEC output. Brent (+1.3%) and WTI (+1.1%) are both in the green and continuing their rebound seen yesterday with WTI hovering around USD 57.00bbl. Energy newsflow remains light, post-yesterday’s DoE report, however, Iraq’s North Oil Co. have announced that they have resumed Kiruk oil exports heading towards the Turkish port of Ceyhan. Looking ahead, the main highlight on the calendar will be the Baker Hughes rig count. Elsewhere, natural gas futures are relatively steady after their 19% decline yesterday which came in the wake of a 20% increase the day before.

In geopolitical news, US Republican and Democrat Senators filed a bipartisan bill seeking to suspend arms sales to Saudi Arabia in response to war in Yemen and killing of journalist. North Korean Leader Kim inspected test of new high-tech tactical weapons, according to Yonhap citing North Korean state media

Today’s data include October industrial production and capacity utilization. Viacom is among companies reporting earnings

Market Snapshot

• S&P 500 futures down 0.3% to 2,725.25
• STOXX Europe 600 down 0.01% to 358.38
• MXAP down 0.2% to 151.52
• MXAPJ up 0.2% to 486.84
• Nikkei down 0.6% to 21,680.34
• Topix down 0.6% to 1,629.30
• Hang Seng Index up 0.3% to 26,183.53
• Shanghai Composite up 0.4% to 2,679.11
• Sensex up 0.5% to 35,446.11
• Australia S&P/ASX 200 down 0.1% to 5,730.55
• Kospi up 0.2% to 2,092.40
• Brent futures up 1.2% to $67.41/bbl
• Gold spot up 0.3% to $1,216.36
• U.S. Dollar Index little changed at 96.93
• German 10Y yield rose 0.8 bps to 0.368%
• Euro up 0.2% to $1.1346
• Italian 10Y yield rose 0.3 bps to 3.12%
• Spanish 10Y yield fell 1.4 bps to 1.617%

Top Overnight News

• Fed Chairman Jerome Powell has laid out a scenario for a pause in the central bank’s interest-rate hiking campaign sometime next year by highlighting potential headwinds to the U.S. economy.
• British Prime Minister Theresa May is defying demands to quit as she battles to keep control of her fractious government long enough to deliver a Brexit deal that’s drawn ire from across the political spectrum.
• Pro-Brexit ministers Michael Gove, Liam Fox, Chris Grayling, Penny Mordaunt and Andrea Leadsom have decided together not to quit the government, Times reporter Tim Shipman said on Twitter.
• ECB’s Draghi sees no reason for expansion to come to abrupt end, he said at an event in Frankfurt, Germany.
• PG&E Corp. rallied as much as 49 percent in extended trading Thursday after the head of the California Public Utilities Commission said he can’t imagine allowing the state’s largest utility to go into bankruptcy as it faces billions of dollars in potential liability from deadly wildfires
• Deutsche Bank AG and Bank of America Corp. have been contacted by U.S. criminal investigators for information about transactions they handled for a small bank branch in Estonia that’s at the center of one of the biggest money-laundering investigations in history, according to two people familiar with the matter.

Asia-Pac stocks traded indecisively as the region lacked fresh catalysts and as uncertainty regarding Brexit and US-China trade played on investor’s minds. ASX 200 (-0.1%) and Nikkei 225 (-0.6%) were choppy with outperformance of tech and mining names in Australia overshadowed by a lacklustre broader market, while the Japanese benchmark was subdued by mild flows into the JPY and after China Mofcom began an investigation into alleged dumping of machine tools by Japanese firms. Elsewhere, Hang Seng (+0.3%) and Shanghai Comp. (+0.4%) swung between gains and losses after continued liquidity inaction by the PBoC which skipped OMOs for a 16th consecutive occasion, while participants were also tentative amid ongoing trade uncertainty after conflicting reports regarding the next round of China tariffs being placed on hold which USTR Lighthizer later denied. Finally, 10yr JGBs were mildly higher with prices underpinned amid an indecisive tone seen in stocks and with the BoJ also present in the market for JPY 680bln of JGBs in the belly to super-long end.

Top Asian News

• China’s Kindergarten Crackdown Is the Latest Disaster for Stocks
• Modi Is Said to Enlist Tata for Jet Airways Rescue Ahead of Vote
• Philippines Shuts 3 Miners, Suspends 9 Others After Review
• Indian Central Bank Board to Discuss Surplus Funds Transfer

European equities trade relatively flat (Eurostoxx 50 +0.2%) in the wake of mixed trade headlines overnight for the US and China. Performance across European indices is relatively equal whilst focus once again falls on the FTSE 100 (U/C) which remains at the whim of Brexit-inspired fluctuations in the GBP. Once again, potential upside for the index is being capped by losses in domestically focused banking names (RBS -3.0%, Lloyds -2.1%) as Brexit uncertainty continues to dampen investor sentiment. In terms of sector specifics, most sectors are trading higher with mild outperformance seen in telecom names. Utilities started the session lower in the wake of yesterday’s ECJ decision which deemed the UK’s scheme for ensuring power supplies during the winter months as a violation of state aid rules. Other individual movers include Vivendi (+4.2%) sit at the top of the Stoxx 600 after posting impressive Q3 sales metrics and announcing a potential sale of part of their Universal Music Group division. Elsewhere, AstraZeneca (-2.3%) and Shire (-1.3%) have been seen lower throughout the session after both posting disappointing drug updates.

Top European News

• Finnish Software Company Basware Is Said to Explore Sale
• Vauxhall Owner Said to Weigh Closing a Factory Post-Brexit
• Amid Brexit Gloom, Deutsche Bank Sees Frankfurt as Next London
• Nyrstar Surges on Hopes Over Trafigura Refinancing Talks

Currencies:

• GBP – The Pound is not the biggest net mover for a change, but still one of the most volatile and vulnerable as Cable pivots 1.2800 and Eur/Gbp trades between 0.8850-80. The fall-out from Wednesday’s Cabinet meeting continues as UK PM May strives to sell the Brexit draft, but facing a rising rebellion within the Conservative Party that appears to have reached the critical mass required to trigger a no confidence vote. However, some positive news with a key Minister deciding not to follow others out of the Government, as Gove opts to stay rather than go. In terms of technical impulses, Cable is holding above yesterday’s 1.2725 low, ahead of chart support around 1.2710-00 that protects mtd and ytd troughs at 1.2696 and 1.2662 respectively, while near term resistance is seen around 1.2836 before 1.2850, but 1 bn option expiries at 1.2800 could well exert more influence into the NY cut. For Eur/Gbp, several MAs form support blow 0.8850 and the 100 DMA at 0.8910 may hamper further gains if 0.8900 is breached.
• JPY – Maintaining a firm underlying safe-haven bid as broad risk sentiment remains fragile and China is reportedly investigating machine dumping by Japan – Usd/Jpy near the bottom of a 113.20-65 range.
• EUR/CAD/CHF – All narrowly mixed vs the Greenback, with the single currency keeping afloat of 1.1300 and eyeing a Fib at 1.1358, while the Loonie is holding recent recovery gains through 1.3200 as oil prices continue their rebound and the Franc meanders between 1.0075-50 vs 1.1000+ earlier this week when the broad Dollar and DXY were in the ascendency (index well above 97.000 vs just below the figure presently).
• EM – The Lira is off best levels, but still relatively bid after reports that the US could Turkish cleric Gulen in an attempt to assuage President Erdogan to adopt a less aggressive stance against Saudi Arabia over the Khashoggi killing. Usd/Try now near the middle of a 5.3240-3940 band.

In commodities, gold (+0.2%) is trading relatively flat after hitting new weekly highs of USD 1218.39/oz earlier in the session; following uneventful overnight trade. Elsewhere, Shanghai Zinc prices have risen due to London Metal Exchange stockpiles falling to decade-low levels. Brent (+1.3%) and WTI (+1.1%) are both in the green and continuing their rebound seen yesterday with WTI hovering around USD 57.00bbl. Energy newsflow remains light, post-yesterday’s DoE report, however, Iraq’s North Oil Co. have announced that they have resumed Kiruk oil exports heading towards the Turkish port of Ceyhan. Looking ahead, the main highlight on the calendar will be the Baker Hughes rig count. Elsewhere, natural gas futures are relatively steady after their 19% decline yesterday which came in the wake of a 20% increase the day before.

US Event Calendar

• 9:15am: Industrial Production MoM, est. 0.2%, prior 0.3%; Manufacturing (SIC) Production, est. 0.2%, prior 0.2%
• 11am: Kansas City Fed Manf. Activity, est. 11, prior 8
• 4pm: Total Net TIC Flows, prior $108.2b, Net Long-term TIC Flows, prior $131.8b

DB’s Jim Reid concludes the overnight wrap

Yesterday was an extraordinary day where we saw rival factions go into battle, huge infighting, disloyalty, a colossal power struggle, and lots of head scratching over who will win out and where this is all going to end. Indeed, the teaser trailer for the final Game of Thrones series out next April was finally released. However, a remarkable 3 hour UK parliamentary session where PM May was grilled from all sides of the House of Commons probably topped it for drama even if it lacked the CGI effects.

Before we lay out our views on what’s happened over the last 24 hours in our homeland, it’s worth quickly recapping what markets have done as unlike in previous months, it’s not just Sterling which has borne the brunt.

Yes, the Pound did fall -1.65% relative to the Dollar for the biggest one-day decline since October 2016. It was also down -1.86% against the Euro. More dramatic was the move for Gilts where 10y yields rallied -13.3bps and the most since August 2016. They are also now down -37.6bps from the intraday October highs and there’s now only about 12.5bps of hikes priced in for next year  by the BoE. In equities, the overseas earnings-focused FTSE 100 closed flat but the more domestically orientated FTSE 250 ended -1.31%. The sector breakdowns were starker with an index of UK homebuilders closing down -6.76% and the most since the referendum in June 2016 and UK banks selectively weak. RBS at one stage tumbled -10.20% intraday before closing -9.63%. Barclays and Lloyds were down -4.11% and -5.04% respectively. The biggest movers in credit indices were unsurprisingly UK assets too. Looking across iTraxx Main, nine of the top 10 widest credits were UK names with the top three being Marks & Spencer (+17bps), Barclays (+17bps) and RBS (+16bps). How much of these moves were Brexit specific and how much were concerns about what a Jeremy Corbyn led Labour Party General Election win might mean for various companies was difficult to disentangle.

The pain for UK assets spread throughout Europe too, with the DAX, CAC and FTSE MIB finishing -0.52%, -0.70% and -0.90%. Bunds rallied -3.7bps and are now down to 0.358% and testing the October lows again. Treasuries also rallied slightly, with 2- and 10-year yields down -1.5 and -1.2bps. US equities rallied strongly throughout the afternoon session in New York, with the S&P 500 retracing losses of as much as -1.14% to close +1.06%, for the 15th widest trading range of the year. Other major indexes staged similar rebounds, with the DOW up +0.83% and the NASAQ gaining +1.72%. The price action reflected a partial unwind of the last few sessions’ sharp moves, with the best-performing sectors being those that had recently sold off. Energy gained +1.47%, as WTI oil rallied +0.46%, and tech advanced +2.46%. Sentiment was also boosted by comments from US Commerce Secretary Ross, in which he described the upcoming meeting between Presidents Trump and Xi as “the big event” and said that “if it goes well, it’ll set the framework for going forward.” This suggests that there is scope for real compromise later this month at the November 30-December 1 G20 summit.

This morning in Asia, markets are largely up following Wall Street’s lead with the exception of Japan. The Hang Seng (+0.29%), Shanghai Comp (+0.71%) and Kospi (+0.40%) are all higher along with most Asian markets while the Nikkei (-0.29%) is down. Elsewhere, futures on the S&P 500 (-0.21%) are pointing towards a softer open.

So back to the main story. All eyes now are on whether or not we’ll get a vote of no confidence for PM May. The remarkable 3 hour Parliamentary session yesterday left you feeling in no uncertain terms that the Withdrawal Agreement (WA) is highly unlikely to pass in its current form. However, before we even get there, the leadership challenge is the next hurdle. The odds of such a contest appeared to substantially increase yesterday with headlines speculating that close to the required 48 MPs had written to the Conservative 1922 Committee including arch-Brexiteer Jacob Rees-Mogg. This came after two cabinet members yesterday resigned including Dominic Raab – the Brexit Secretary. PM May reportedly offered Tory MP Michael Gove – one of the staunchest Brexiteers – the job of Brexit minister to replace Raab, though media reports suggested that he will resign his post completely instead, which would be a negative signal for May’s ability to keep her coalition together. Other junior ministers also resigned through the day. Overnight, the Telegraph reported that the DUP will scrap its coalition with the Conservatives unless/until PM May is replaced. This would be materially negative news for the embattled PM and for markets, but the pound traded flat amid thin overnight liquidity.

The dilemma for those Brexiteer Tories wanting a leadership contest is that if they force one and May survives (she only needs a majority but, in reality, a narrow win could make her position untenable) she is safe from a challenge for 12 months. The dilemma for those Brexiteers voting against her WA is that this may lead to a series of events that brings a second referendum and the possibility of no Brexit at all. The dilemma for the remain Tory MPs is that if they vote against either or both of Mrs May and the WA, it may topple Mrs May and lead to a leadership challenge. It is highly likely that a hard Brexiteer will be one of the two candidates put to the grass root membership, and given demographics they would have a strong chance of winning and would thus pursue a harder Brexit. So no side has the upper hand at the moment.

As discussed above, the last twenty four hours have illustrated that there is seemingly no parliamentary majority for the current WA. At the same time, there is little prospect of further negotiation with the EU27, given the limited timeline. As DB’s Oliver Harvey wrote yesterday, May is therefore trapped in a bind. The only way to secure parliamentary support for the current deal will be under considerable market pressure, perhaps after multiple failed votes. There are two other options perhaps. One is a pivot towards a much softer form of Brexit – such as EEA membership plus a permanent customs union – however it’s not clear if there’s sufficient time on the EU side to agree to this. The other is a second referendum. This in itself would likely split the Tory Party although it would likely gain parliamentary support. The difficulty will be deciding what question to pose to electors. Some suggest there might be two.

Believe it or not, there was some non-Brexit newsflow yesterday. In Italy, Deputy PM Salvini’s Chief Economic Advisor Claudio Borghi made headlines by responding to a tweet in a manner that seemed to imply that if the League gets a majority in the next election, then Italy would exit the Eurozone. In fairness, this wasn’t how I read the reply but markets traded off the headlines and didn’t really look for the tweet. It was entirely inconsistent with what he’s said in the past and he later denied it outright. However, Italian assets did still react and underperformed post the headline. BTPs sold off +8.9bps from their strongest intraday level, but ultimately closed flat. Elsewhere the US announced sanctions against a total of 17 Saudi Arabian officials concerning the death of Khashoggi. Those sanctions including freezing assets of the officials and limiting access to the US financial system.

The Turkish Lira was already gaining yesterday, but was boosted further by reports that the US is considering removing the Turkish cleric Fethullah Gulen from US territory and ultimately closed +1.94% stronger. Turkish authorities have accused Gulen of coordinating an attempted coup in 2016, though the US has not endorsed the claims. If confirmed, the move by the US would represent a considerable thaw in relations between the two countries after they reached a nadir earlier this year.

Meanwhile the economic data that was out was truly a sideshow however for completeness, euro area new car registrations fell -7.3% yoy in October. This partially reflects the idiosyncrasies associated with new emissions rules and shows some bounce back from September’s -23.5% decline. The euro area’s seasonally adjusted trade balance printed at 13.4bn euros, a touch softer than expected. In the UK, retail sales fell -0.5% mom and softened to +2.2% yoy, versus expectations for +0.2% and +2.8%. Core retail sales missed by a similar margin. In contrast, October US retail sales beat expectations, rising +0.8% mom (versus expected +0.5%), though the control group marginally missed, rising +0.3% versus expected +0.4%. November activity surveys from the Philadelphia and New York Federal Reserve Banks were mixed, with the Philly index dropping to 12.9 from 22.2 and the NY index rising to 23.3 from 21.1.

Before we take a look at day ahead, in credit, Michal in our team published a one-pager “After Red October, Better Credit Fund Flows in November So Far” in which he provides an update on recent IG fund flows and puts them in the broader context of other asset classes. You can download the report here . Now as for the day ahead, well it’s hard to look past anything other than Brexit  headlines dominating. However there are some data releases due. In Europe we’ll get final October CPI revisions for the Euro Area and Italy while in the US we’ll get October industrial production and the November Kansas City Fed PMI. We’ll also hear from ECB President Draghi this morning in Frankfurt before the Bundesbank’s Weidmann speaks at the same event this afternoon. Over at the Fed, Evans speaks in the afternoon. Oh and their might be some Brexit headlines to consider.