S&P futures rose after yesterday’s volatile session ahead of today’s Fed decision, and European stocks jumped after Italy struck a crucial budget deal with the EU following a downbeat Asian session as oil tried to rebound after a furious three-day selloff that rattled global markets and sent investors scrambling into the safety of government bonds (in record numbers according to BofA).

The Stoxx Europe 600 Index gained 0.5% rising to session highs after four days of declines, with banking and healthcare stocks contributing the most to the gains, after the European Commission decided against launching a disciplinary procedure against Italy over its budget, while carmakers climbing on hopes of a breakthrough on trade.

Rome and Brussels ended their long-running feud over Italy’s 2019 budget, striking a deal on spending plans that had shocked investors and stoked tensions between the country’s populist government and the rest of the EU. Valdis Dombrovskis, the EU commission vice-president responsible for the euro, said the agreement that had been reached would lead to a budget deficit next year of precisely 2.04% of GDP and not a penny less or more compared with 2.4 per cent in Rome’s original plans.

Europe’s rebound followed a weak Asian session which saw equities mostly lower after a disappointing market debut for SoftBank Group’s Japanese telecom business and amid cautious trade ahead of the FOMC rate decision, and after the attempted rebound on Wall St. where the S&P closed little above its 2018 low. Australia’s ASX 200 (-0.2%) was pressured by oil names following the mass decline in the complex, while Nikkei 225 (-0.7%) initially traded with no firm direction amid a choppy JPY before digging deeper into losses and giving up the 21,000 handle. Sentiment across the region was also reflected by the 10% plunge in Softbank’s mobile business in its USD 24bln market debut. Elsewhere, Hang Seng (+0.2%) and Shanghai Comp. (-0.5%) were mixed as the former was supported by financial names with the four large banks in positive territory. Meanwhile, mainland gains in real estates and utilities were offset by the decline in the energy and healthcare sectors. Finally, JGB futures posted the biggest intraday gain since 2016 on growing concerns over the global economy health, at one point triggering an emergency margin call for JGB futures  after the 10Y note future spiked as it triggered stop losses.

Futures on the S&P 500 Index erased losses made in late trading on Tuesday after earnings from FedEx cast doubt on the strength of global trade, and were trading 25 points higher from session – and 2018 – lows of 2,530.95. FedEx, considered a bellwether for the world economy, slashed its 2019 forecasts, noting “ongoing deceleration” in global growth and sending S&P futures sharply lower early in the session only for market to quickly BTFD.

Even with today’s rebound, US stocks are set for their worst December since 1931, the depths of the Great Depression.

“It’s a confluence of several important factors: the market is adjusting its outlook on growth and there is a consensus we will see a slowdown. More importantly, the market is adjusting to the idea this will translate into lower earnings growth,” said Norman Villamin, chief investment officer for private banking at Union Bancaire Privee in Zurich.

“It’s being complicated by the tightening liquidity situation with the Fed expected to move today and the ECB having signaled the end of its (stimulus)”.

Crude was mixed, trading unchanged after the biggest three-day slump since 2016 on slowing demand. Oil’s spectacular fall – down almost 10% since last Thursday – and world stocks’ plunge to 19-month lows spurred speculation the U.S. Federal Reserve might be done with tightening after its policy meeting later in the day. While WTI was unchanged at just above $46 after plunging 6 percent overnight, its 35% fall since October is sending a deflationary pulse through the world just as trade and economic activity are cooling.

Looking at today’s Fed decision, Fed Fund Futures are sticking with a two-in-three chance of a rate rise on Wednesday and Villamin expects the Fed to move twice in 2019. That’s a more hawkish call than the broader market which is pricing less than one rise in 2019, down from three not long back.

“One thing I would like to see is what people are calling a dovish hike,” Ronald Temple, head of U.S. equity and co-head of multi asset at Lazard Asset Management LLC, told Bloomberg TV. “The hiatus on trade helps as well, but I’m a bit more skeptical about how long-lasting that is.”

Beyond the Fed, trade and politics remain the dominant themes. Unless Trump and Congress reach a deal, spending authority expires for a majority of the U.S. government on Friday night. Meanwhile, Treasury Secretary Steven Mnuchin said America and China are planning to hold meetings in January to negotiate a broader trade truce.

The expectations of a Fed pause and the equity selloff sent 10-year Treasury yields to the lowest since August at 2.799 percent down 20 bps in December – while two-year yields touched a three-month trough of 2.629 percent, sliding from November’s 2.977 percent peak. Meanwhile, as noted earlier, Italian debt surged after the European Commission was said to have decided against launching a disciplinary procedure against the country over its budget.

The yield on benchmark Japanese notes slipped to within striking distance of 0% before a rapid turnaround as the surge in demand triggered a margin call.

The Bloomberg Dollar Spot Index fell a third day as traders speculated the Fed may signal Wednesday that it’s approaching a pause in its rate-hike cycle; the greenback retreated versus most of its Group-of-10 peers. The euro advanced and Italian bonds surged to take yields to the lowest in nearly three months after the nation was said to have reached a technical agreement with EU officials over its budget. The pound was steady after U.K. inflation rate slowed to a 20-month low of 2.3% y/y, in line with estimates. The Norwegian krone led gains in G-10, rebounding from a one-year low against the euro, as oil prices stabilized

In commodities, Brent (+0.1%) and WTI (+0.1%) remain in close proximity to recent lows following from yesterdays significant losses where WTI dropped by 7.3%. Prices were mostly unreactive to the surprise 3.5mln barrel build in API crude inventories, where consensus has been for a draw of over 2mln barrels. Markets will be looking to see if EIA data later in the session confirms this build or if the crude stocks consensus of -2.475mln barrels is correct; if the build is confirmed it will be the first in 3 weeks and may generate new downward price pressure.

Gold is trading relatively flat after reaching a 5-month high of USD 1251.43/oz earlier in the session, with the yellow metal  continuing to benefit from a softer dollar ahead of the FOMC decision. Elsewhere, profit margins at Chinese steel mills has  significantly narrowed in November as the Chinese government has removed overall winter production restriction, now allowing  cities and provinces to decide output curbs based on their emissions levels.

Market Snapshot

• S&P 500 futures up 0.8% to 2,559.25
• MXAP up 0.3% to 148.27
• MXAPJ up 0.6% to 479.88
• Nikkei down 0.6% to 20,987.92
• Topix down 0.4% to 1,556.15
• Hang Seng Index up 0.2% to 25,865.39
• Shanghai Composite down 1.1% to 2,549.56
• Sensex up 0.4% to 36,506.13
• Australia S&P/ASX 200 down 0.2% to 5,580.60
• Kospi up 0.8% to 2,078.84
• STOXX Europe 600 up 0.1% to 340.95
• German 10Y yield rose 0.8 bps to 0.252%
• Euro up 0.4% to $1.1403
• Italian 10Y yield fell 2.1 bps to 2.576%
• Spanish 10Y yield fell 2.7 bps to 1.351%
• Brent Futures up 1% to $56.83/bbl
• Gold spot down 0.1% to $1,248.30
• U.S. Dollar Index down 0.2% to 96.87

Top Overnight News from Bloomberg

• The U.S. and China are planning to hold meetings in January to negotiate a broader truce in their trade war but are unlikely to have any face-to-face contact before then, according to Treasury Secretary Steven Mnuchin. READ: Xi’s defiant end to 2018 signals more U.S.-China tension ahead
• Italy’s populist government is betting the European Commission will ratify an informal budget deal on Wednesday to avoid sanctions over its spending plans
• U.K. Cabinet ministers agreed to implement “in full” plans for a no- deal break from the European Union, including 3,500 troops put on standby and 2b pounds ($2.5b) of funds made available for contingencies
• Economic jitters and surging supplies from the U.S. to Russia hammered oil again, with crude suffering its biggest decline in more than three weeks
• Japan’s exports rose 0.1% in November from a year earlier, broadly in line with estimates and reflecting a weakening pace
• Thailand’s central bank raised its benchmark interest rate for the first time since 2011, joining peers in the region in tightening monetary policy this year
• India’s rupee rallied with sovereign bonds as sliding oil prices improved the outlook for the nation’s finances and the central bank extended support via open-market debt purchases
• Citigroup Inc. faces losses of as much as $180 million on loans made to an Asian hedge fund whose foreign-exchange wagers went awry, prompting board-level discussions and a business shakeup, according to a person briefed on the matter

Asian equities were mostly lower amid cautious trade ahead of the FOMC rate decision, and after the attempted rebound
on Wall St. where the S&P closed little above its 2018 low, while the Dow Jones was supported by gains in Goldman Sachs. ASX
200 (-0.2%) was pressured by oil names following the mass decline in the complex, while Nikkei 225 (-0.7%) initially traded with no
firm direction amid a choppy JPY before digging deeper into losses and giving up the 21,000 handle. Sentiment across the region
was also reflected by the 10% plunge in Softbank’s mobile business in its USD 24bln market debut. Elsewhere, Hang Seng
(+0.2%) and Shanghai Comp. (-0.5%) were mixed as the former was supported by financial names with the four large banks in
positive territory. Meanwhile, Mainland gains in real estates and utilities were offset by the decline in the energy and healthcare
sectors. Finally, JGB futures posted the biggest intraday gain since 2016 on growing concerns over the global economy health,
while futures purchases were also exacerbated after BoJ kept 5-10yr purchases steady at JPY 430bln.

Top Asian News

• China Watchers Split on Yuan Outlook; It Comes Down to Trade
• Samsung’s 5G Network Grab Gets Boost With Huawei, ZTE Under Fire
• Third Canadian Citizen Detained in China, National Post Says
• Stocks Edge Up Before Fed Decision; Bonds Steady: Markets Wrap

Major European indices are in the green (Euro Stoxx 50 +0.5%(, with some outperformance seen in the FTSE MIB (+1.6%) with banking names such as UBI Banca (+4.0%) and Intesa Sanpaolo (+3.7%) benefitting from reports that the EU commission has accepted Italy’s 2019 budget deficit at 2.04%. Sectors are mixed with some outperformance seen in the telecom and consumer discretionary sector. Other notable movers include GlaxoSmithKline (+6.6%) in the green as they are to create a new healthcare joint venture with Pfizer estimated combined sales of GBP 9.bln. With Fresenius SE (+3.0%) following an upgraded to buy at Goldman Sachs. Whilst Natixis (-6.5%) are at the bottom of the Stoxx 600 after reporting Q4 revenue will be 10% lower than the previous year. Whilst postal names such as Royal Mail (-2.6%) and Deutsche Post (-4.5%) are down after FedEx cut their guidance.

Top European News

• Europe Loses Taste for Punishing Russia as U.S. Toughens Stance
• Italian Markets Rally as Budget Agreement Seen Reached With EU
• U.K. Unveils Post-Brexit Migrant Plan for Skilled Workers
• Electronics Retailer Ceconomy Latest Victim of Retail Crisis

In FX, the Dollar remains depressed in the run-up to the FOMC in anticipation of a dovish hike if not quite one more and done as a growing number of pundits look for the accompanying statement and guidance to be tweaked via the dot plots and/or removal of further gradual tightening. The index has duly retreated from another 97.000+ test and is holding just above recent lows ahead of 96.500, with the December base so far around 96.360 and ytd peak circa 97.710-715 the obvious bearish and bullish targets depending on the tone of the Fed.

• EUR/AUD/NZD – All vying for top G10 spot and biggest gainer vs the flagging Greenback, but with the single getting an extra lift or rather relief bid on the back of Italy and EU agreement on the 2019 budget that is likely to be officially announced by Italian PM
• Conte shortly. Eur/Usd has subsequently revisited 1.1400+ terrain, albeit just, while Aud/Usd has had another go at 0.7200 and the Kiwi is pivoting 0.6850 even though NZ current account data for Q3 was somewhat disappointing overnight. Note, decent option expiry interest may act as a drag on Eur/Usd with 1 bn at 1.1375 and the same amount between 1.1355-60 rolling off, while there  is strong chart resistance ahead of 1.1450 at 1.1442 (earlier December peak) and 1.1445 (Fib).
• JPY/GBP – Also firmer vs the Usd, with the former just off a marginal new mtd high, but perhaps restricted to an extent by option related flow as 1.2 bn resides between 112.00-05 and 1.5 bn sits from 112.40-50, while for the Yen there is also the BoJ’s final policy meeting of 2018 to consider just after tonight’s FOMC. Meanwhile, Brexit continues to put a brake on the Pound, or at least temper Sterling gains as Cable crests 1.2650 and Eur/Gbp hovers around 0.9000 with little reaction to broadly in line UK inflation data or a modest beat on CBI trends that seems to have been released early.
• CAD/CHF – The marginal underperformers, with the Loonie still blighted by crude’s slump and diplomatic strains with China, but just off new ytd lows a fraction above 1.3500 ahead of Canadian CPI data, while the Franc meanders between 0.9910-35 and  around 1.1300 vs the Eur.

In commodities, Brent (+0.1%) and WTI (+0.1%) remain in close proximity to recent lows, as global equity markets have begun  stabilising, following on from yesterdays significant losses where WTI dropped by 7.3%. Prices were mostly unreactive to the  surprise 3.5mln barrel build in API crude inventories, where consensus has been for a draw of over 2mln barrels. Markets will be  looking to see if EIA data later in the session confirms this build or if the crude stocks consensus of -2.475mln barrels is correct; if  the build is confirmed it will be the first in 3 weeks and may generate new downward price pressure.

Gold is trading relatively flat after reaching a 5-month high of USD 1251.43/oz earlier in the session, with the yellow metal continuing to benefit from a softer dollar ahead of the FOMC decision. Elsewhere, profit margins at Chinese steel mills has significantly narrowed in November as the Chinese government has removed overall winter production restriction, now allowing cities and provinces to decide output curbs based on their emissions levels. Saudi Finance Minister says the 2019 budget allocation to the energy industry, mining and logistics is over 3 times higher than in the previous budget.

US Event Calendar

• 7am: MBA Mortgage Applications, prior 1.6%
• 8:30am: Current Account Balance, est. $125b deficit, prior $101.5b deficit
• 10am: Existing Home Sales, est. 5.2m, prior 5.22m; Existing Home Sales MoM, est. -0.38%, prior 1.4%
• 2pm: FOMC Rate Decision; Interest Rate on Excess Reserves, est. 2.4%, prior 2.2%

DB’s Jim Reid concludes the overnight wrap

Ahead of the Fed meeting conclusion today, yesterday had looked like we’d finally get a dull pre-Xmas session. However a sharp decline in oil prices late in the European session put pay to this. Indeed WTI and Brent tumbled -5.54% and -7.36%, respectively, sending WTI to $46.21/bbl and the lowest since August 2017. The price is also down almost 40% from the October highs just seven weeks ago. Despite the energy sector struggling (-2.35%), the S&P 500 ultimately closed flat, albeit that was after volatile intraday moves of +1.10% and -0.68%. Yesterday’s flat session at least snaps a losing streak of -3.95% over the previous two sessions, but leaving the S&P 500 still on track for its worst December since 1931. Europe struggled but in fairness was still playing catch up (or down) to the US with the STOXX 600 closing -0.82%. US HY underperformed yesterday with spreads +12bps wider. That means they are now +146bps wide of the October tights, and +88bps wider YTD. As recently as November 9th, spreads were still tighter than where they started this year.

The immediate catalyst for the oil move was the publication of Saudi Arabia’s budget plan, which included ambitious oil revenue targets of $177 billion for next year. To reach that number, the Kingdom is either assuming very unrealistic oil prices of around $80 per barrel, or they plan to pump more than the 10.2 million barrels per day target agreed earlier this month.Since the $80 per barrel figure is around 30% more than consensus estimates, the latter scenario looks more probable, which would equate to a significant increase in global supply and would end up being more bearish for prices.

Now to the Fed which starts a run of three central bank meeting outcomes over the next couple of days. Our US economists expect the Fed to raise rates for the fourth time this year (and a 20bp increase to the IOER) – which is in line with the consensus and market pricing. The more important question for our economists is what signal will the Committee send about its policy path in the coming years. They expect the message to be that the Fed remains upbeat on the outlook and expects to raise rates further in coming quarters, but that the pace of normalization is likely to slow next year from its recent quarterly rate as the Fed becomes more data dependent. Reflecting this, our colleagues expect the statement to modify the forward guidance language by noting that gradual increases remain appropriate in the “near term”. Also worth keeping an eye on is the 2019 median dot which our team expect to fall from three hikes to two. This wouldn’t impact our house view for three hikes for next year and, in fact, if the Fed signals some flexibility around the pace of hikes, while maintaining the overall trajectory for the terminal rate, it could help to ease financial conditions which in turn makes three hikes more likely next year. We’ll know more tonight with the meeting outcome due at 7pm GMT and Powell’s press conference shortly after.

Interestingly, in our yield curve note from last week (link here ) we showed how 2s10s has inverted ahead of each of the last 9 recession. However there was one false positive ahead of the 1970 recession where this measure inverted 48 months before the recession. In our view the main reason for a false positive was due to the Fed easing policy via cutting rates in late 1966/early 1967. This was despite the fact that core inflation was on the rise and accelerated more as the fed funds rate declined, and ultimately therefore can be viewed as a policy mistake given that this uptick in inflation continued into the early 1970s. Curves subsequently steepened again in 1967 once the Fed cut rates, however they inverted once more in 1968 as tightening resumed and the Fed corrected its earlier error. The recession then eventually materialised in 1970 after the second inverted YC signal worked with a more normal time lag. We mention this as there could be parallels to today if the Fed responds dovishly to the recent wobbles in markets and recent softness in inflation. This could delay a slowdown (and curve inversion) but at the expense of exacerbating pressures in the labour market and generating higher inflation further down the line. So food for thought as we hit more challenging times for the Fed.

Ahead of today’s meeting, President Trump reiterated his view that the Fed shouldn’t hike, tweeting yesterday that “I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake. Also don’t let the market become any more illiquid than it already is. Stop with the 50 B’s”. The “50 B’s” reference apparently referred to the balance sheet roll off caps. That tweet did little to move Treasuries with yields lower across the curve – more reflecting the oil move. 10y yields ended -3.4bps lower and the 2s10s curve finished slightly steeper at 16.8bps. It had been a similar story for Europe too where bond yields were broadly 1bp to 2bps lower. Gilts were the exception with yields up 1.6bps however there didn’t appear to be any material new Brexit newsflow from yesterday’s Cabinet meeting.

Also on the cards today is the European Commission meeting to discuss Italy’s budget. Press reports (Bloomberg) suggested that the two sides have reached an informal agreement to avoid a launch of the excessive deficit procedure. Apparently, the deal will include delays to some of the newly planned social spending and a reduction in the size of other programs. Overall the new deficit is reported to be around 2.04% and includes EUR 4bn in cuts versus the original proposal. In an effort to prove their seriousness, the government will also cut their 2019 growth forecasts to 0.9-1.0% from 1.5%. This follows news (Corriere della Sera) that the Commission was still not satisfied by the latest plan presented by the government with the sticking point being that the Commission does not see a sufficient enough reduction in the structural deficit – the important condition to avoiding an EDP. We will find out more today as to whether both sides have indeed reached an agreement.

This morning in Asia markets are continuing to trade mixed with the Nikkei (-0.57%) and Shanghai Comp (-0.25%) trading lower while the Hang Seng (+0.16%) and Kospi (+0.69%) are trading up. In overnight news, the US Treasury Secretary Steven Mnuchin said that the US and China are planning to hold meetings in January to negotiate a broader truce in their trade wars but are unlikely to have any face-to-face contact before then. It’s also worth noting that the three-day annual economic policy-setting meeting of Chinese leaders kicks off today. This could have important policy implications for 2019 and beyond so watch for any headlines. Elsewhere, futures on the S&P 500 are up +0.57% despite FedEx’s stock price being down -5.55% in aftermarket trade as the company slashed its profit forecast for the current fiscal year and decided to pare its international air-freight capacity on account of a darkening view of demand for shipping services outside the US. Interestingly, FedEx has made a U-turn on its guidance just three months after raising it, reflecting an abrupt change in FedEx’s view of the global economy and indicating that the global macroeconomic headwinds are rising.

Meanwhile, yesterday’s data didn’t add a whole lot to the growth debate. The volatile housing starts and building permits series surprised to the upside in November with the former rising +3.2% mom (vs. 0.0% expected) and the latter +5.0% mom (vs. -0.4% expected). However, the rise was concentrated in the south of the US and represented some pay-back from weakness over the last few months, as hurricanes depressed regional activity. In Germany, there was some slight disappointment in the December IFO survey with the business climate reading down 1pt to 101.0 (vs. 101.7 expected) largely due to a drop in the expectations component of 1.4pts to 97.3 (vs. 98.4 expected). That is actually the lowest expectations reading since November 2014 and it appears that the IFO survey is now finally catching up with the slide in the Germany PMIs in recent months.

Looking at the day ahead, the highlight will no doubt be the Fed this evening however prior to that this morning we get November PPI in Germany and the November inflation data docket in the UK. The December CBI trends orders and selling prices survey for the UK is also out just before lunch while in the US we get the Q3 current account balance reading and November existing home sales data. The ECB’s Hansson is also slated to speak today while the other potentially important event to note is the aforementioned European Commission meeting to discuss Italy’s budget and the potential for enforcing the excessive deficit procedure.