The global market rollercoaster continues, with stocks around the world surging on the back of renewed trade optimism and a Chinese RRR cut one day after a vicious rout hit equities following the unexpected Apple guidance cut and a miserable US manufacturing ISM print.

Stocks climbed in Europe and Asia and U.S. equity futures indicated a sharply higher open after the US and China confirmed fresh trade negotiations next week, while havens slipped, as Treasuries fell, the yen weakening and gold dipped after hitting $1,300 overnight.

After initially trading lower, S&P futures rebounded after news that vice ministers from the two countries are preparing to hold talks starting Monday, and were trading 1.4% higher on Friday morning after tumbling 2.5% on Thursday.

Optimism for a resolution to the U.S. government shutdown and over trade talks could ease two of the major overhangs that have dogged equities in recent days. The talks will be the first face-to-face negotiation between the two countries since President Donald Trump and his counterpart Xi Jinping agreed to a 90-day truce in their trade war last month.

“I wouldn’t be surprised if we get better communication on trade,” said Stefan Hofer, chief investment strategist at LGT Bank. Still, “we have beginning-of-the-year jitters, low levels of liquidity and exaggerated swings, which feed people’s worst fears — which I simply can’t sign up to at the moment.”

The Stoxx Europe 600 Index also rebounded from two days of losses as every sector advanced led by basic resources and commodity stocks, even as activity among euro zone businesses dipped to its weakest in just over four years in December as their already downbeat expectations also turned more pessimistic, a survey showed on Friday. Markit’s Euro Zone Composite Final PMI held above the 50 mark that separates growth from contraction, but fell to 51.1 from November’s 52.7, also below a flash reading of 51.3 (Services PMIs were as follows: Spain 54.0 vs 53.7 est; Italy 50.5 vs 50.1 est; France 49.0 vs 49.7 est; Germany 51.8 vs 52.5 est; Eurozone 51.2 vs 51.4 est.). That will be disappointing news for policymakers at the European Central Bank, who ended their 2.6 trillion euro ($2.95 trillion) asset purchase program – one of the main sources of stimulus for the bloc’s economy – last month.

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IHS Markit PMI™@IHSMarkitPMI

Final Eurozone Services #PMI comes in at 51.2, slightly below flash reading of 51.4 (November: 53.4), pointing to slowest growth in over four years. Germany, France and Italy record notably laggard #PMI prints. Q4 PMI numbers are consistent with growth at around 0.3%qoq.

Earlier, most Asian markets ended higher. Stocks in Japan were the exception, as traders there returned from a holiday, and were catching down to the USDJPY flash crash earlier this week.

Adding to the optimistic tone was a long overdue liquidity injection by the Chinese central bank which cut the required reserve ratio by 1% to release cash into the economy and support rapidly stalling growth. The RRR for banks will drop by 0.5 percentage point on January 15 and a further 0.5 percentage point on January 25, the PBOC said on its website. And yet despite the market’s euphoric take, the PBOC action is far less than meets the eye as the PBOC also announced that its Medium-term Lending Facility loans maturing in the first quarter won’t be rolled over, and the amount of liquidity released will only be able to offset the funding squeeze ahead of the Chinese New Year. So while the cut will release a net 800 billion yuan ($116 billion) of liquidity, it will merely go to replenish liquidity that will be lost to the MLF and continued reverse repo liquidity withdrawals, dousing hopes that “this is it” and China is finally injecting massive amounts of liquidity into the economy.

The latest reduction announced is the first all-inclusive RRR cut since March 2016. China’s top leaders have pledged to keep monetary policy prudent while striking an “appropriate” balance between tightening and loosening in 2019, part of the steps to ratchet up stimulus to support growth. Ahead of the news, which came after China’s markets closed, the Shanghai Composite closed 2.0% higher, while the offshore yuan pared gains slightly to trade 0.1% higher at 6.8763 per dollar.

Traders will now be watching today’s key economic event – the December jobs report – for evidence of how U.S. employers capped a strong year of the scorching US labor market, and as we previewed overnight, should the report surprise strongly to the upside it may be a traditional case of “good news is bad news.”

Fed Chair Powell is also due to take part in the American Economics Association annual meeting along with former Chairs Yellen and Bernanke this morning. Powell is not expected to break any new ground but it will be worth seeing if he reiterates the message made by NY Fed President Williams when he flashed out in more granular detail in the Fed’s messaging in the December statement, specifically addressing the slight tweak in forward guidance. Clearly any comments around recent market volatility and also yesterday’s ISM report will be closely watched too.

Elsewhere, the dollar was largely steady while the yen trimmed some of the big jump from a day earlier and the Aussie dollar rallied as China confirmed trade talks with U.S. next week; gold slipped after touching $1,300 overnight. GBP/USD gained in line with risk-sensitive currencies, failing to get a boost from slightly better-than- expected U.K. services data

Treasury yields led most government bond rates higher. Italian bonds bull steepen, while Bunds fell to day lows after PBOC move.

Elsewhere, oil built on recent gains, with Brent crude heading for its biggest weekly advance since 2016 as traders weighed signs that OPEC is following through on production cuts against hints of an economic slowdown. OPEC cut crude output in December, a Reuters survey showed, and the American Petroleum Institute (API) reported a 4.5 million-barrel drop in crude inventories. Brent crude was up $1.25 to $57.20 a barrel at 1113 GMT, while WTI was up 90 cents at $47.99.

“Recent Chinese data is not confirming the doom-and-gloom trend,” said Olivier Jakob, oil analyst at Petromatrix. “And you’ve got OPEC cutting.”

In addition to payrolls, Fed Chair Powell will make first public remarks since Dec. 19 at the annual meeting of the American Economic Association in Atlanta. Expected data include December’s jobs reports, while Lamb Weston, Cal-Maine Foods are due to report earnings

Market Snapshot

• S&P 500 futures up 1.3% to 2,479.50
• STOXX Europe 600 up 1.3% to 338.22
• MXAP down 0.2% to 145.22
• MXAPJ up 0.9% to 469.31
• Nikkei down 2.3% to 19,561.96
• Topix down 1.5% to 1,471.16
• Hang Seng Index up 2.2% to 25,626.03
• Shanghai Composite up 2.1% to 2,514.87
• Sensex up 0.6% to 35,728.09
• Australia S&P/ASX 200 down 0.3% to 5,619.36
• Kospi up 0.8% to 2,010.25
• German 10Y yield rose 2.7 bps to 0.18%
• Euro up 0.2% to $1.1415
• Brent Futures up 1.5% to $56.79/bbl
• Italian 10Y yield rose 16.5 bps to 2.5%
• Spanish 10Y yield rose 1.0 bps to 1.439%
• Brent Futures up 1.5% to $56.79/bbl
• Gold spot down 0.3% to $1,290.57
• U.S. Dollar Index down 0.2% to 96.14

Top Overnight News

• China’s central bank said that it will cut the required reserve ratio by 0.5 percentage point on Jan. 15 and further by 0.5 percentage point on Jan. 25, acting to release cash into the economy to support growth
• China said a U.S. delegation will visit next week for trade talks, confirming the two sides will have their first face-to- face negotiation since President Donald Trump and his counterpart Xi Jinping agreed to a 90-day truce in their trade war last month
• A YouGov poll of Tory members found that in a three-way referendum, 57% of them would prefer to leave EU with no deal, 23% would choose Prime Minister Theresa May’s deal and 15% would choose remaining in EU, Telegraph reports, citing the survey carried out for the Economic and Social Research Council- funded Party Members Project
• The new House Democratic majority voted Thursday to end the partial government shutdown but brought Congress no closer to resolving the impasse over Trump’s demand to pay for a border wall
• Japan’s benchmark bond yield fell to the lowest in more than two years as a stronger yen and a slowdown in global manufacturing spurred demand for the assets as a haven
• The bond market’s aggressive overhaul of its outlook for Federal Reserve policy is creating kinks in the front end of the Treasury yield curve. Yields on the two- and five-year sectors fell relative to shorter-dated maturities Thursday, causing portions of the curve to invert
• President Donald Trump’s trade war with China will force many U.S. companies to join Apple Inc. in announcing lower than expected earnings, the chairman of the White House Council of Economic Advisers said. Among U.S. companies issuing estimates for the fourth quarter, 46 percent have revised the outlook lower
• Gold advanced above $1,300 an ounce to extend a new year rally
• German unemployment fell to a record low, extending its five-year decline, as companies signaled confidence in Europe’s largest economy
• U.K. house price growth slowed to five-year low at 0.5% in 2018, down from 2.6% a year earlier, according to data by Nationwide Building Society

Asian equities were mixed following the slide in US stocks as disappointing ISM manufacturing data added to global growth fears after Apple’s trade-related profit warning. The Dow shed in excess of 600 points while the S&P fell further below the 2500 level and the Nasdaq tumbled 3.0% as the tech sector fell over 5.0%. ASX 200 (-0.3%) and Nikkei 225 (-2.2%) both failed to benefit from the higher base metal prices as the indices bore the brunt of the tech decline on Wall St, while the latter also played catch-up after a week-long holiday. Elsewhere, Hang Seng (+2.4%) and Shanghai Comp. (+2.0%) outperformed after erasing opening losses as almost all Chinese sectors turned green (gains led by oil names and financial firms) on the back of constructive trade developments, with China’s MOFCOM confirming that trade talks with the US are to take place next week, while the release of above-forecast Caixin services PMI exacerbated gains in the bourses.

Top Asian News

• China, U.S. to Hold Vice-Minister Level Trade Talks Jan. 7-8
• Huawei Demotes Workers After Embarrassing Tweet From An iPhone
• India Government Says It’s on Track to Meet Electricity Deadline
• China Stocks Rebound After Bleak Start to 2019; Brokerages Jump

Major European equities are in the green [Euro Stoxx 50 +1.2%] with the SMI (+0.5%) lagging its peers, weighed on by underperformance in the healthcare sector with index heavyweights Roche (-0.2%) and Novartis (-0.1%) in the red. All sectors, including the aforementioned healthcare sector, are in the green with outperformance seen in materials on the back of positive China trade developments. Mining names such as Thyssenkrupp (+3.5%) and Anglo American (+2.8%) sit towards the top of the Stoxx 600. Other notable stories include BMW (+1.6%) and Volkswagen (+1.3%) who are up after reporting increased US December vehicles sales of +0.3% and +5.0% respectively. Elsewhere, Bayer (+3.3%) are higher after the federal judge overseeing lawsuits alleging that their glyphosate-based weed killer causes cancer has granted the Co’s request to split the upcoming trial into two phases.

Top European News

• German Unemployment Falls Despite Mounting Risks to Economy
• Soft Services Expansion Brings U.K. Economy Close to Stagnation
• Ghosn to Get a Day in Court Almost Two Months After Shock Arrest
• Poll Shows Most Tories Would Choose No-Deal Brexit: Telegraph

Price action for FX markets thus far has been significantly more orderly than the JPY-inspired volatility seen on late Wednesday as traders await key macro and central bank updates. Starting with the JPY, the Japanese currency has given back some gains to its major counterparts with USD/JPY hovering around the 108.00 level. The story for USD/JPY is more one of JPY weakness rather than USD strength with the DXY in negative territory, albeit still on a 96.00 handle. From a JPY perspective, Japan MOF’s Currency Head Asakawa stated overnight that he is worried about the volatile FX moves and will take steps on forex if needed. Going back to the USD, given recent disappointing macro data, today’s jobs reports from the US will be one of the more pertinent ones as of late from a Fed-perspective. Given the recent market turmoil, markets now fully price in a rate cut by April 2020 vs. the Fed’s view of two hikes in 2019 and one hike in 2020. Amid the starkly opposing views, an out of line report could have major ramifications for the USD either way. However, with Powell speaking two hours after the release, moves in the DXY may lack some conviction as participants await the latest communication from the Fed Chair.

• Elsewhere, EUR/USD has been able to capitalize on the USD weakness and retain status on a 1.1400 handle within the mid-point of its 2019 range thus far. On the data front, core EZ service PMI readings fell short of analyst estimates who had forecast unchanged readings from the prior report. This was then followed by EZ-wide inflation metrics which revealed a decline in headline CPI Y/Y to 1.6% from 1.9% vs. Exp. 1.8% but did little to place any major weight on the multi-bloc currency.
• GBP is exerting some strength against its major counterparts as GBP/USD continues to extend its post-flash crash ascent with the move pausing for breath after breaching Monday’s low of 1.2682. The Pound was unable to garner much in the way of support despite a beat on the all-important Services PMI (51.2 vs. Exp. 50.7) with Markit suggesting “The meagre service sector expansion recorded in December is indicative of the economy growing by just 0.1% in the closing quarter of 2018”.
• AUD/USD has continued to extend its advance above 0.7000 with traders looking to see if the antipodean can see the week out above the psychological level and thus spur hopes for a near-term recovery. AUD was given a further helping hand briefly after the PBOC announced a 100bps cut to bank’s RRR. However, the move higher will fleeting given it had already been touted by Premier Li and was seen as more of a targeted adjustment to cover the Lunar New Year period rather than an unveiling of major stimulus.

In commodities, Brent (+2.2%) and WTI (+2.2%) prices are higher, with WTI trading around the USD 48.00/bbl level and Brent just above the USD 57.00/bbl level. This support comes after a larger than expected draw in API weekly crude stocks of -4.5mln vs. Exp. -3.1mln, with markets now looking towards today’s EIA release. In addition, the Iraq oil ministry has reportedly taken measures to cut output by 3% from October’s level of 4.653mln BPD. Elsewhere, Energy Intel’s Amena Bakr has tweeted that Saudi Arabia are to announce a jump in oil reserves. Gold (-0.2%) has turned negative as the positive trade news from China improved the risk sentiment, with the yellow metal trading just over USD 1290/oz. Additionally, copper prices have improved on the back of positive Chinese trade news with the metal recovering from a 18-month low hit in the previous session.

US Event Calendar

• 8:30am: Change in Nonfarm Payrolls, est. 183,500, prior 155,000
• 8:30am: Unemployment Rate, est. 3.7%, prior 3.7%
• 8:30am: Average Hourly Earnings MoM, est. 0.3%, prior 0.2%; YoY, est. 3.0%, prior 3.1%
• 8:30am: Average Weekly Hours All Employees, est. 34.5, prior 34.4
• 8:30am: Underemployment Rate, prior 7.6%
• 9:45am: Markit US Composite PMI, prior 53.6; Markit US Services PMI, est. 53.4, prior 53.4

DB’s Jim Reid concludes the overnight wrap

It’s fair to say that the holiday period for markets is well and truly over with the ghost of 2018’s past rearing its ugly head for risk assets yesterday. To be fair it never really felt like markets took a break, given some of the violent price action that we’ve seen in the last couple of weeks, but the early focus yesterday was all about the double whammy of Apple shares crashing following their revenue guidance cut and then the compounding pain of a much worse-than-feared US ISM manufacturing report.

The end result was -2.48%, -2.83% and -3.04% declines for the S&P 500, DOW and NASDAQ respectively. The S&P 500 has now traded down by at least -2% on six occasions in the last month, the worst such streak since September to October 2011. In addition to the two main factors mentioned above, sentiment was further hurt by additional ratcheting up of US-China tensions. White House Adviser Kevin Hassett said in reference to the Apple announcement that “it’s not going to be just Apple” and that “there are a heck of a lot of US companies that have sales in China that are going to be watching their earnings being downgraded next year until we get a deal with China”. Separately, the US State Department issued a travel warning for US nationals in China, further evidencing that the clash may be escalating beyond the realm of trade and tariffs. Overnight we’ve learned that delegations from China and the US will meet for talks on January 7th and 8thin Beijing although the US Chamber of Commerce has already warned not to expect any major breakthroughs. This will be the first set of talks since Presidents Trump and Xi Jinping agreed to a 90-day truce last month.

Somewhat fittingly, Apple proved to be a perfect example of the feedback from China. Its shares plummeted -9.96% for the biggest drop since January 2013 and to the lowest level since April 2017. Each of Microsoft, Amazon, and Alphabet have all now overtaken Apple in the biggest company in the world table, with Apple’s market cap down -$75bn alone yesterday. The total market value decline since Apple’s peak last October is -$446bn, or the equivalent of Coca-Cola and Pfizer combined. As a result the NYSE FANG index tumbled -3.77% while there were also notable falls for other large caps like Caterpillar (-3.92%), 3M (-3.84%) and DowDupont (-3.63%). In credit markets US HY spreads finished +11bps wider and CDX HY widened +6bps. Benchmark 10-year Treasury yields also rallied -9.2bps from their intraday highs to close -6.7bps lower on the day at 2.554% which is the first time that we’ve seen Treasuries with a 2.5%-handle since January 17th last year. Two-year yields declined -9.0bps to trade below the fed funds rate for the first time since October 2008. The curve steepened slightly to 17.3bps however the 2s5s curve touched a new cyclical low of -4.4bps before retracing to end the session 1.0p lower at -2.3bps. Meanwhile, Gold benefited from the risk off tone to close up +0.75% while Copper shed -2.10%.

The good news is that sentiment has improved in Asia overnight with the Hang Seng (+1.41%), Shanghai Comp (+1.81%) and Kospi (+0.60%) all up as we go to print. The Nikkei (-2.82%) is sharply lower however is playing catch up after markets in Japan were closed for holidays. That news we mentioned earlier about China and the US planning to meet appears to be helping the more constructive tone, as is the stronger than expected Caixin services PMI out of China this morning (53.9 vs. 53.0 expected) and news that China will strengthen its counter-cyclical macro policy adjustment and cut taxes and fees to support small and private companies. Meanwhile, US futures are also up (+0.51%) after the new US House Democratic majority voted to end the partial government shutdown. This still needs to be taken with a pinch of salt as Congress is no closer to resolving the impasse over President Donald Trump’s demand to pay for a border wall.

Brexit headlines are also back with the Telegraph reporting that a YouGov poll of Tory members found that in a three-way referendum, 57% of them would prefer to leave the EU with no deal, 23% would choose Prime Minister Theresa May’s deal and 15% would choose to remain in the EU. Interestingly, if the options are down to two i.e., May’s deal or no deal, only 29% of Tory members said they would vote for May’s deal, while 64% said they would vote to leave without a deal, with the remainder undecided. The poll also found 59% of Tory members are opposed to the current EU Withdrawal Agreement, with just 38% supporting it and the rest unsure.

Back to yesterday, where that ISM manufacturing print that we noted above came in at 54.1 compared to expectations for 57.5 and a reading of 59.3 in November. So that is now the lowest reading since November 2016 and the biggest one-month drop since October 2008. The blame game laid with the new orders component which fell a staggering -11pts to 51.1 and the lowest now since January 2016. The employment component slid a comparatively more palatable -2.2pts to 56.2 while the prices paid component fell -5.8pts to 54.9 and to the lowest since June 2017. The associated statement also highlighted that six industries reported a contraction in December and that “growth appears to have stopped” and “resources are still focused on re-sourcing for US tariff migration out of China”. Trade issues were highlighted numerous times.

The big question now is: what will the Fed do, and could we see them start to shift further from their tightening stance to one closer to neutral? DB’s Alan Ruskin made an important point yesterday though which is that while the latest ISM reading looks weak relative to recent past, it is still consistent with above trend rates of growth. Clearly though, the market will be super sensitive to the next round of data and especially the first round of January prints to see if there’s further downward momentum (US economic surprises are at 16-month negative levels now). It’s worth noting that the market has become so sceptical about the Fed that we’re now down to -18bps of cuts in 2019, or in other words a 75% chance of a full cut. That compares to over 2 hikes that were being priced in for 2019 at the peak in November. So it’s been a remarkable shift in sentiment.

It’s apt timing then that today we’re got a couple of potentially pivotal events to look forward to. Will the final employment report for the US in 2018 change the tide today, extend the pain, or will markets shrug it aside? The main focus should be on the earnings figure with the consensus currently pegged at a +0.3% mom average hourly earnings print for December with base effects expected to lower the year-on-year reading to +3.0%. That matches the forecasts of our US economists and they also expect average weekly hours to kick up a tenth 34.5 hours. Interestingly they note that this would imply a very healthy +4.9% annual pace of nominal income growth and is one reason why they believe bond market participants may be underappreciating the Fed’s ability to further hike rates this year. As for payrolls, the market is at 180k (vs. 155k in November) while our house view is for 175k. Our team believe that this will be sufficient to lower the unemployment rate to 3.6%.

Shortly after that, Fed Chair Powell is due to take part in the American Economics Association annual meeting along with former Chairs Yellen and Bernanke at 3.15pm GMT. We’re not expecting Powell to break any new ground but it will be worth seeing if he reiterates the message made by NY Fed President Williams when he flashed out in more granular detail in the Fed’s messaging in the December statement, specifically addressing the slight tweak in forward guidance. Clearly any comments around recent market volatility and also yesterday’s ISM report will be closely watched too.

Speaking of the Fed, yesterday we heard from Dallas Fed President Kaplan. Although a non-voter this year, Kaplan advocated for the Fed to take a pause on the tightening cycle “in the first couple of quarters this year” and also added that “my base case would be no action at all”. Kaplan cited the softer global growth outlook, deceleration in interest-rate sensitive sectors, and tighter financial conditions as evidence that a pause is warranted. He also mentioned “there are a number of things we could do” to slow the pace of balance sheet normalization, but stressed that “I’m not there yet.” It’s worth noting that Kaplan has been slightly more dovish that the centre of the committee and also has previously highlighted concerns from some of the signals from markets including the recent flattening in the curve. So although dovish the tone wasn’t a complete surprise.

Jumping ship, in today’s EMR we’ve updated our equity versus PMI charts and table which you can find in the PDF in which we regress PMIs versus year over year changes in equity markets. This follows the latest round of PMIs in Europe and China and the ISM reading in the US. The numbers make for fairly eye watering reading now. While PMIs have dropped from their highs fairly significantly, the plunge in equity markets has far outweighed this and in fact we’re pricing in implied PMIs of between 42.3 and 45.6 in Europe, 43.6 in the UK, 46.0 in China and an ISM of 46.6 in the US. Indeed on this basis equity markets are 18% ‘cheap’ in the US, between 11% (Italy) and 25% (Germany) cheap in Europe and 30% cheap in China. As we always say with this the data it is intended as a guide and best to look over a longer period of time rather than for a particular point but it still makes for an interesting read-through.

Back to yesterday, where for completeness, it wasn’t much better for markets in Europe although bourses did at least hold out better than US markets. The STOXX 600 finished -0.98% while the DAX and CAC were -1.55% and -1.66% respectively. HY cash spreads were +10bps wider while Crossover was +12bps wider. Senior and sub financials also got hit to the tune of +6bps and +14bps respectively. Meanwhile Bunds closed at 0.150% and the lowest since November 2016 while the risk off moves appeared to hit BTPs (in addition to news that Banca Carige was going into administration) where yields rose +16.8bps and the most since September.

Wrapping up the other data that was out yesterday, mortgage applications fell -8.5% last week to their lowest level since 2000. The ADP employment report showed a net increase of 271k jobs last month, more than the 179k expected though the November figure was revised down by 22k. Initial jobless claims ticked up +15k but remain near their cyclical lows. In the UK, the construction PMI softened to 52.8 from 53.4.

Finally to the day ahead, where the highlight no doubt comes this afternoon with the aforementioned US employment report. Prior to that though we get the final December PMIs (services and composite readings) in Europe including a first look at the data for the non-core and UK, as well as the preliminary December CPI reading in France, Italy and the Euro Area. For the latter, the core is expected to hold steady at +1.0% yoy but the headline decline three-tenths to +1.7% yoy as a result of the oil price move. We’ll also get November money and credit aggregates data in the UK. Meanwhile, also out in the US this afternoon are the final December PMIs. A final reminder that Fed Chair Powell speaks today along with Yellen and Bernanke, while the Fed’s Barkin also speaks later this evening.