Call it the “Satan rally.”

Global markets are set to end a miserable week, one where stocks were expected to levitate into the holidays on the back of a belated Christmas rally, in a sea of red with S&P futures sliding and Asia and Europe sharply lower.

Sentiment is so dismal that not even an explicit promise of fiscal and monetary stimulus from China evinced more than a shrug from traders who barely responded to the overnight news of “significant” tax cuts and more monetary stimulus from Beijing which was released after the annual Economic Work Conference concluded in Beijing on Friday.

Perhaps this is the result of fears that the trade issue won’t be resolved any time soon given the latest U.S. accusations over spying. whatever the reason for the muted reaction, markets no longer see mere promises out of China for “more” as anything more than just failed attempts at jawboning, especially after last night’s terse official statement by China’s foreign ministry that the Chinese government has never participated or supported any stealing of trade secrets, and urged the U.S. to correct its own cyber espionage wrongdoings and withdraw indictment of Chinese nationals.

Meanwhile, traders were far more focused on the rising threat of an extended U.S. government shutdown which together with further hikes in U.S. borrowing costs compounded investor anxieties over the trajectory of global economic growth.

“China is cooling and the euro zone is slowing down, and some of the economic indicators from the U.S. have been a bit soft recently, but yet the Fed hiked rates and suggested that two more interest rate hikes were lined up for 2019,” said Michael Hewson, chief markets analyst at CMC Markets in London who added that speculation the U.S. economy could be headed for a recession has picked up, dampening global sentiment. “Fear about a U.S. government shutdown is playing into the mix too.”

European shares opened in negative territory, following in the footsteps of Thursday’s U.S. rout and sharp drop in Asian markets. The European STOXX 600 index fell over half a percent, continuing its slide towards lows not seen since the end of 2016, and is less than 2% away from a bear market.

Most European bourses and industry indexes were in the red after the S&P 500 fell overnight, heading for its worst quarter since the days of the financial crisis in late 2008, with a loss of 15% so far. The Nasdaq, which briefly entered a bear market on Thursday, has shed 19.5% from its August peak.

Earlier in the session, the MSCI All-Country World index was down 0.2%. It was set for its worst week since March. In Asia, Japan’s Nikkei lost 1.1% to close at its lowest since mid-September last year, after giving up 5.6% this week. Australian stocks slipped 0.7% , hovering just above a two-year trough hit earlier in the session. Meanwhile in China, China’s Shanghai Composite lost 0.8% after the United States accused Beijing of orchestrating the hacking of government agencies and companies around the world.

After the Fed sparked the biggest Fed-announcement day selloff in over a decade with a not-dovish-enough-hike, markets were further spooked when President Trump refused to sign legislation to fund the U.S. government unless he received money for a border wall, thus risking a partial federal shutdown on Saturday.

“Political brinkmanship in Washington is further heightening market uncertainty,” said Westpac economist Elliot Clarke. “Friday will be a tense day in Washington, and for financial markets, as a last-minute compromise is sought.”

Making things worse, political pundits now say that the government shutdown may last far longer than some suspect, potentially impacting risk assets as well.

Adding to the sense of crisis was news U.S. Defense Secretary Jim Mattis had resigned after Trump announced a withdrawal of all U.S. forces from Syria and sources said a military pullback from Afghanistan was on the cards.

The brittle mood culminated in another bloodbath on Wall Street where the Dow ended Thursday with a loss of 1.99%, the S&P 500 dived 1.58% and the Nasdaq closed 1.63% lower.

The mood change has triggered a rush out of crowded trades, including massive long positions in U.S. equities and the dollar and short positions in Treasuries. Lipper data showed investors pulled nearly $34.6 billion out of stock funds in the latest week and were heading for the biggest month of net withdrawals on record.

In rates, yields on the 10-year U.S. Treasury were back up to 2.795% after hitting their lowest since early April at 2.748% on Thursday’s bid to safety. As recently as October, they had been at a seven-year top of 3.261 percent. The gap between two- and 10-year yields was back up to just 12 bps, after flattening to single digits overnight.

In currency markets there was also a sense of capitulation as the dollar dived 1.1% on the yen on Thursday to hit a three-month trough at 110.80. However, the dollar rebounded on Friday, rallying to a session high in early London hours, snapping four days of losses against the euro. Still, the dollar was headed for its worst week in nine months, before a plethora of U.S. data releases and hefty expiries in the majors currencies.

The euro dipped 0.1 percent to $1.1430, having jumped to its highest in over six weeks at $1.1485. The pound was steady, even as data showed the U.K. current-account deficit stood at its highest in two years in the third quarter. The yen also held its ground; the Japanese currency headed for its best week versus the dollar since February. New Zealand and Australian dollars were the worst performers; the Aussie headed for a third straight weekly loss, the longest run since July.

Oil prices, which slid just over 4 percent on Thursday, continued their slide: Brent (-2.0%) and WTI (-1.0%) have seen a further decline in prices amidst ongoing concerns over global growth and excess supply. Recent news flow has seen comments from  Russian Energy Minister Novak that they are sticking to plan to cut oil production by 228,000 BPD with Russian oil producers confirming their readiness to cut output.

Gold prices which remained steady for much of the session dropped into the red as the dollar strengthened, although the yellow metal is still within a narrow USD 5/oz range on the day. Elsewhere, Chinese aluminium producers are estimated to cut more than 800,000 tonnes of capacity each year according to Antaike although no specific time period is given; for reference Chinese smelters have closed over 3.2mln tonnes of capacity in 2018.

In terms of data, all eyes will be on U.S. inflation numbers due later on Friday, day, which include the Federal Reserve’s preferred measure of core inflation. Expected data include GDP, durable goods orders, and personal income and spending. CarMax is reporting earnings

Market Snapshot

• S&P 500 futures down 0.7% to 2,468.75
• STOXX Europe 600 down 0.7% to 334.12
• MXAP down 0.7% to 145.05
• MXAPJ down 0.3% to 472.46
• Nikkei down 1.1% to 20,166.19
• Topix down 1.9% to 1,488.19
• Hang Seng Index up 0.5% to 25,753.42
• Shanghai Composite down 0.8% to 2,516.25
• Sensex down 1.8% to 35,765.37
• Australia S&P/ASX 200 down 0.7% to 5,467.64
• Kospi up 0.07% to 2,061.49
• German 10Y yield rose 1.4 bps to 0.242%
• Euro down 0.2% to $1.1420
• Italian 10Y yield fell 3.4 bps to 2.379%
• Spanish 10Y yield rose 0.6 bps to 1.38%
• Brent futures down 1.1% to $53.73/bbl
• Gold spot down 0.1% to $1,258.24
• U.S. Dollar Index up 0.3% to 96.60

Top Overnight News

• China’s top policy makers said ‘significant’ cuts to taxes and fees will be enacted in 2019, and signaled an easier monetary policy stance, as the government tries to put a floor under the economic slowdown
• The U.S. government is just hours away from a partial shutdown with Congress at an impasse over funding President Donald Trump’s border wall
• Italy’s government is expected to seek a key vote on its 2019 budget bill in Rome late on Friday, according to a Senate official
• U.K. Prime Minister Theresa May’s senior team are wrestling with the question of what to do if her Brexit divorce deal is thrown out by lawmakers. In private, the options on the table include postponing the divorce, calling another referendum or even announcing fresh elections

Asia-Pac stocks were lower across the board as the global stock rout continued into the region following the losses in US amid fears of a government shutdown. The DJIA posted a fifth consecutive session in the red as the index fell to a 14-month low, while the Nasdaq briefly dipped into bear market territory amid weakness in Amazon and Apple, meanwhile the S&P printed its sixth day of back-to-back losses. ASX 200 (-0.7%) hovered at a two-year low as the index felt pressured by financial names as the “Big Four” banks sat firmly in the red, alongside insurance names (ASX 200 Insurance Index -0.8%) amid a large number of claims after severe thunderstorms in Sydney. Nikkei 225 (-1.3%) fell deeper into bear market as regional shares were poised for the worst week since October, with downside exacerbated by the firmer JPY. Elsewhere, Shanghai Comp. (-1.1%) opened with firm losses and extended the decline as the Mainland suffered from losses in financials and real estate names. Hang Seng (+0.5%) rebounded off intraday lows after heavyweight Tencent spiked higher by over 4% after the Chinese government hinted at lifting a nine-month long block on the release of new online games.

Top Asian News

• Tencent, Peers Rally on Reports China Resumes Game Approvals
• It’s Only Getting Worse for Asian Shares Set for 21-Month Low

Main European Indices are in the red [Euro Stoxx 50 -0.7%] with equity markets following the losses seen in Asia. Outperformance is seen in the FTSE 100 (-0.2%) after Anglo American (+1.6%) are up after resuming operations in their Minas-Rio iron ore plant; with other mining names such as Antofagasta (+2.3%), Glencore (+1.2%) and Rio Tinto (+1.0%) also in the green. Sectors are similarly in the red, with some outperformance seen in the materials sector. Other notable movers include Just Eat (+3.9%) who are up in sympathy after Delivery Hero (+9.0%) sold their German assets to takeaway.com. Danske Bank (-1.8%) firmly in the red after issuing their second profit warning for 2019.

Top European News

• Macron’s Little Helper CEOs Spread Holiday Cheer With Bonuses
• London Gatwick Open With Mammoth Backlog as Drones Disappear
• Credit Suisse Pushes On in Wealth Market That UBS Abandoned

In FX trading, the Greenback has rebounded from overnight lows and the index appears to be forming a firmer base above 96.000, albeit thanks in part to counterpart currency weakness as broad risk sentiment remains bleak ahead of the festive break. Indeed, the DXY has ventured back over 96.600 vs 96.241 at one stage and a post-FOMC low of 96.163 ahead of a packed release schedule on the final full trading session of the year.

• NZD/AUD – The Kiwi has extended losses vs its US peer in wake of Thursday’s much weaker than expected NZ GDP data, news that the RBNZ is mulling a 2-fold increase in bank reserve holdings of high grade assets and a call by one prominent regional bank for the OCR to be cut by 25 bp late next year. Nzd/Usd is hovering around 0.6725 and Aud/Nzd is holding above 1.0500 even though the Aussie Dollar has fallen in sympathy and under the weight of broader risk aversion, not to mention another US-China spat that could derail efforts to resolve trade issues. Aud/Usd is pivoting 0.7100 with a hefty 2.1 bn option expiry at the strike perhaps exerting a gravitational pull.
• CHF/CAD/EUR – All succumbing to the latest Usd revival, as the Franc slips back below 0.9900 and Loonie hits fresh, albeit marginal new 2018 lows circa 1.3535 against the backdrop of still precarious crude prices, ahead of top tier and potentially pivotal Canadian data in the form of GDP and retail sales. Meanwhile, the single currency continues to mirror Dollar moves and perhaps respect more technical/flow-related levels with another fade ahead of 1.1500 and the 100 DMA at 1.1482 culminating in a drift back towards 1.1400 where 1.4 bn expiries reside.
• JPY/GBP – Both holding up relatively well, if not quite bucking the overall trend, although the Jpy is displaying its characteristic greater allure in risk-off climes and trades near the top of a 111.05-45 range. Cable is also pretty restrained between 1.2700-1.2645, with a raft of UK data largely shrugged off in the Brexit hiatus and consolidation in vogue before Xmas and New Year.

In commodities, Brent (-2.0%) and WTI (-1.0%) have seen a further decline in prices amidst ongoing concerns over global growth and excess supply. Recent news flow has seen comments from Russian Energy Minister Novak that they are sticking to plan to cut oil production by 228,000 BPD with Russian oil producers confirming their readiness to cut output. Separately, IEA’s Birol has commented that US oil production will equal the combined production of Russia and Saudi Arabia by 2025. Gold prices which remained steady for much of the session have dropped into the red as the dollar has strengthened, although the yellow metal is still within a narrow USD 5/oz range on the day. Elsewhere, Chinese aluminium producers are estimated to cut more than 800,000 tonnes of capacity each year according to Antaike although no specific time period is given; for reference Chinese smelters have closed over 3.2mln tonnes of capacity in 2018. As according to the International Copper Study Group global refined copper market had a 168,000 tonnes deficit in September compared to 43,000 tonnes in August.

Looking at the day ahead, in the US we’ve got a packed agenda. First up is the third and final Q3 GDP revisions where no change is expected from the +3.5% qoq saar print. Also due are preliminary November durable and capital goods orders data, while not long after that we get the November PCE report. The consensus is for a +0.2% mom reading which would be enough to push up the annual rate to +1.9% yoy. Finally, we’ll get the final December University of Michigan consumer sentiment survey readings and the December Kansas City Fed manufacturing survey. We should note that today is also a quadruple witching day for stock markets, so it wouldn’t be a great surprise to see a pick-up in volatility towards the end of the session.

US Event Calendar

• 8:30am: GDP Annualized QoQ, est. 3.5%, prior 3.5%
• 8:30am: Personal Consumption, est. 3.6%, prior 3.6%
• 8:30am: Core PCE QoQ, est. 1.5%, prior 1.5%
• 8:30am: Durable Goods Orders, est. 1.6%, prior -4.3%; Durables Ex Transportation, est. 0.3%, prior 0.2%
• 8:30am: Cap Goods Orders Nondef Ex Air, est. 0.2%, prior 0.0%; Cap Goods Ship Nondef Ex Air, est. 0.2%, prior 0.3%
• 10am: Personal Income, est. 0.3%, prior 0.5%; Personal Spending, est. 0.3%, prior 0.6%
• 10am: PCE Deflator MoM, est. 0.0%, prior 0.2%; YoY, est. 1.8%, prior 2.0%
• 10am: PCE Core MoM, est. 0.2%, prior 0.1%; PCE Core YoY, est. 1.9%, prior 1.8%
• 10am: U. of Mich. Sentiment, est. 97.4, prior 97.5; Current Conditions, prior 115.2; Expectations, prior 86.1
• 11am: Kansas City Fed Manf. Activity, est. 12.5, prior 15

DB’s Jim Reid concludes the overnight wrap

Welcome to the last EMR of 2018 and shortest/longest day of the year depending on where you’re reading this. 2018 has been like a rebellious teenager suddenly aware of their own mind, independence, and the world around them after years of being guided and cajoled in everything they do. For us, peak QE moving to QT and the Fed raising rates four times this year has been enough to reverse a significant amount of the liquidity-inspired asset price returns of the pre-tightening era. A bit like Road Runner galloping off the cliff only to suddenly look down. In today’s pdf (towards end) we update our chart of the percentage of global assets down on a dollar adjusted basis each year since 1901. 2018 continues to the be the worst year on record on this measure with 93% of assets currently down.

This chart has been the most requested chart we’ve ever been involved in, which hopefully doesn’t say anything about the quality of our previous work. We think 2019 will again be difficult for the same reasons we thought 2018 would be, but believe that, in the short term, markets have overreacted and gone too far too quickly. So we think a Q1 rally could be on the cards, even if the year  ends up being tough. We still think the risks of a 2020 downturn are elevated but think the short-term US economic risks are relative low.

Whether a downturn materialises or not after the end of next year, markets could price it in increasingly as 2019 develops, which would be a problem. However, nothing is preordained and perhaps the most likely way this cycle could be extended for longer is via a policy error from the Fed (not tightening into higher inflation) or if inflation genuinely rolls over here. If they end up not raising rates in 2019 for either reason then this could steepen curves, help risk, and prolong the cycle. So all to play for still. Nothing is set in stone.

As you read this I will be just about to start a 12-hour drive to the Alps which always takes us nearer 18 hours with stops – planned or in response to events! I bought all three of the children very cheap tablets to watch various stuff on with the aim to reduce the crying/travel time at the cost of potentially ruining their upbringing. Thank you for all the support, interaction and for reading this year.  Happy Christmas and NY to all of you and your families from Craig, Quinn, and myself. As a passing note before we review markets one last time I thought I would do my usual list of favourite book, film, TV show and album of the year. Favourite book was “The Spy and the Traitor” – Ben MacIntyre. A remarkable true story of a double agent that reads like fiction. Favourite film was “The Guernsey Literary and Potato Peel Pie Society”. This is utterly sentimental but very sweet and I only watch 5 or 6 films a year nowadays and all at home so not much to choose from. I think the others were “The Darkest Hour”, “Molly’s Game”, “I Tonya”, “Game Night”, and “All the Money in the World”. I enjoyed them all. Best TV was probably “Bodyguard” for its gripping absurdity and the fact that almost everyone in the U.K. watched it. Closely behind were “Better Call Saul”, and “A Very British Scandal”. I fully expect the best TV of 2019 to be the final series of Game of Thrones which hopefully will be out just as I move into my new house with a big new TV in April. Best album is difficult as I only stream things these days but I’d say The 1975 – “A Brief Inquiry into online relationships” or Paul Weller – “True Meanings”. Feel free to send me your lists!!!

The last EMR of the year from us sees markets continuing the recurring nightmare seen of late with no circuit breaker in sight at the moment. Indeed, the S&P 500 tumbled -1.58% and has now dropped -5.10% this week alone and is now down -10.61% in December.The NASDAQ fell -1.63% and on a closing level has now dropped -19.73% from the intraday highs at the end of August, and therefore just shy of closing in bear market territory after trading there intra-day. The NYSE FANG index also tumbled -3.42% (down -28.03% from the YTD peak) while in Europe the STOXX 600 finished -1.45% to close at a fresh two-year low. The DAX, CAC, and IBEX fell -1.44%, -1.78%, and -1.97% respectively to reach new multi-year lows as well. Meanwhile US HY credit ended another +20bps wider yesterday in cash terms which means spreads are 60bps wider this week alone with one day left to play.That’s within two basis points of the worst week of the last four years, which was +62bps in December 2015, which  incidentally was the week before the Fed executed its first rate hike of the cycle, and also came shortly before the Fed ended up walking back its planned pace of rate hikes.

As for the yield curve watch, the US 2s10s touched an intraday low of 9.5bps and therefore eclipsed the intraday lows from December 4th. It nevertheless steepened +2.9bps on the day to 13.6bps however this morning in Asia is trading at 12.2bps. Interestingly, despite the risk off Treasury yields were broadly 2-5bps higher across the curve yesterday. In Europe bond markets were generally stronger yesterday led by BTPs (-3.6bps) while Gold (+1.35%), which has been the other strong performer since the October selloff, also rose.

Back to this morning in Asia where sentiment has failed to improve and markets are continuing to follow Wall Street’s lead with the Nikkei (-1.51%), Hang Seng (-0.25%), Shanghai Comp (-1.09%) and Kospi (-0.35%) all down. Elsewhere, futures on S&P 500 are down -0.30% and oil prices (WTI +0.78% and Brent +0.57%) are up following yesterday’s decline (more on this below). As for the overnight data, Japan’s headline November CPI printed in-line with consensus at +0.8% yoy however there were marginal misses for the core CPI (+0.9% yoy vs. +1.0% yoy expected) and core-core CPI (+0.3% yoy vs. +0.4% yoy expected) readings. Meanwhile, the UK’s December GfK consumer confidence reading was on the money at -14, the lowest reading since July 2013.

As for what’s been driving the latest leg lower in markets, the trade war between  the US and China escalated further when the Justice Department indicted two Chinese nationals on hacking charges.According to US prosecutors, the two hackers stole data and intellectual property from 45 government agencies and private companies. The Washington Post reported that “more than a dozen international allies are expected to call out Beijing” over similar concerns in connection with the US move. This is another avenue of conflict between developed markets and China, and it has scope to continue to grow and complicate efforts to achieve a tariff détente.

Moving on. Political events in the US surprised again, as President Trump shifted course on the spending bill, reverting to his original position that he will only sign a bill that includes $5 billion of funding for a border wall. Senate Democrats have resisted this request, and have offered only a shortterm continuing resolution instead. The sides continue to negotiate ahead of this evening’s deadline, at which point funding for around two thirds of the discretionary budget will lapse. If unresolved by Monday, a shutdown would furlough around 380,00 workers and would require 420,000 employees to continue working without pay.

Staying with politics, last night it emerged that Defense Secretary Jeff Mattis has resigned from his role citing differences with President Trump. This comes one day after Trump called for the withdrawal of American forces from Syria.

Meanwhile, in commodity markets and specifically the oil market, Bloomberg reported that OPEC+ will give greater clarity on “their strategy to stabilize oil markets” today by listing production cuts agreed by each country.WTI was down another -2.80% yesterday and therefore undid all (and more) of Wednesday’s bounceback. So the story didn’t seem to help at all.

Here in the UK, as expected the final BoE meeting of the year was a bit of a non-event. It was a unanimous decision amongst the MPC to leave policy unchanged with the main development in the statement being a downgrade around the language on global and domestic growth, and also global financial markets.The MPC also highlighted that “Brexit uncertainties have intensified considerably since the Committee’s last meeting” and that “the monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction”. Having touched as high as $1.2707 intraday (+0.75%), Sterling gave up a decent chunk of that move to end at $1.266 and +0.36% on the day.

Speaking of central banks, it was a landmark day of sorts for the Riksbank following the first rate hike since 2011.The repo rate is still negative (-0.25%) however the move was a bit of a surprise with just 10 of the 24 economists surveyed on Bloomberg expecting a hike. The krona gained +0.73% versus the euro to 10.276.

Prior to the BoE we got a surprisingly strong November retail sales report in the UK.Headline sales were reported as rising +1.4% mom (vs. +0.3% expected) while the core ex fuel sales reading also beat to the upside at +1.2% mom (vs. +0.2% expected). That certainly seemed to contribute to the early rise for Sterling. Meanwhile, in the afternoon the latest Philly Fed print for December was disappointing at just +9.4 (vs. +15.0 expected). The reading was down -3.5pts from November and the lowest since August 2016. On the plus side though, both the new orders and employment components rose, while the prices paid component actually fell slightly, albeit from still elevated levels. In other news initial jobless claims printed slightly higher at 214k but the low levels appear to confirm that the move higher in previous weeks was only temporary.

As for the day ahead, this morning we’ll get consumer confidence data prints in Germany and France along with the final Q3 GDP revisions in the latter. Later this morning in the UK we’ll get the November public finances data and final Q3 GDP revisions. This  afternoon in the US we’ve got a packed agenda. First up is the third and final Q3 GDP revisions where no change is expected from the +3.5% qoq saar print. Also due are preliminary November durable and capital goods orders data, while not long after that we get the November PCE report. The consensus is for a +0.2% mom reading which would be enough to push up the annual rate to +1.9% yoy. Finally, we’ll get the final December University of Michigan consumer sentiment survey readings and the December Kansas City Fed manufacturing survey. We should note that today is also a quadruple witching day for stock markets, so it wouldn’t be a great surprise to see a pick-up in volatility towards the end of the session.

See you in 2019… assuming markets can survive that long!!