Repeating a pattern that has become a distinct feature to the start of 2019, global markets and US equity futures have been lower ahead of the US cash session (at which point they levitate sharply in the last 2 hours of trading), and today is no exception with the rally that brought global stocks to a 2 month high reversing overnight with China still on Lunar New Year holiday, and the MSCI world equity index last down 0.07% on Wednesday morning.

In the key event overnight, President Trump delivered the State of the Union Address in which he said the state of the union is strong and unemployment has reached its lowest level in half a century. President Trump also noted that he sent a proposal to Congress that includes plans for a physical barrier or wall on the southern border and said that he will get the border wall built, while he also commented that a new trade agreement with China must include end to unfair trade practices, reduce chronic trade deficit and protect American jobs.

Futures on the S&P 500, Dow Jones and Nasdaq all drifted lower. European stocks markets opened slightly in negative territory and then traded mixed as a fresh new batch of earnings failed to lift spirits after Trump’s address touched on trade and budget issues but provided investors with few insights. Banks were the biggest drag on the STOXX 600, with shares BNP Paribas down 1.6 percent after France’s largest-listed lender lowered its profit and revenue growth targets for 2020 after a tough fourth quarter.

Germany’s DAX dropped 0.5% with Daimler weighing after their earnings report, the German carmaker’s cautious tone reigniting concern about global trade. Tech sector is the best performing, banks also trade well. BNP Paribas bucks the trend but trades off worst levels as France’s CAC 40 traded 0.4% lower and Spain’s IBEX fell 0.1%. The eurozone Stoxx 600 blue chip index fell 0.3%.

Further weak data from Europe prompted demand for core euro zone bond yields as investors pushed back expectations that the ECB will hike rate any time soon. Of note, German industrial orders fell unexpectedly on weak foreign demand in December, tumbling 7% in December, the biggest drop since 2012, and a further sign that companies in Europe’s largest economy are struggling with a slowing world economy and trade disputes.

Earlier, Asia saw another muted session as the Lunar New Year holiday continued. Australia’s dollar tumbled after the central bank chief signaled a shift to a neutral stance on policy, and opened the door to a possible rate cut in a remarkable shift from its long-standing tightening bias, a further indication of global economic slowdown.

The policy shift caught some investors off-guard as only just the previous day the RBA had steered clear of an easing signal when holding its official cash rate at a record low 1.50 percent for the 30th straight month. The Australian dollar plunged 1.5 percent overnight and was set for its biggest daily drop since May 2017 after Australia’s central bank became the latest to signal policy easing in the face of global economic headwinds.

Elias Haddad, rates and FX strategist, at Commonwealth Bank of Australia said that while there was a risk the Aussie dollar could test $0.70, a more pronounced downward move was unlikely. “As a bank we have pushed out our call for a 25 basis point rate hike by one year to November 2020 from November 2019,” he said.

With the Lunar New Year holidays tempering volumes across a large part of Asia, and President Donald Trump’s State of Union speech providing limited impetus to markets, the dollar’s rebound was the main driver for assets. Developing-nation currencies extended their decline to the longest streak since September, while stocks showed marginal gains and credit spreads widened.

Donald Trump’s combative SOTU address added to the gloom on markets as the U.S. president unveiled no new infrastructure initiatives and instead raised the prospect of another shutdown should financing not be forthcoming for the wall on the U.S.-Mexico border he wants to build. As such the dollar settled near a two-week high.

In the annual speech outlining his priorities for the coming year, Trump said illegal immigration was a national crisis and reiterated his vow to build the border wall. While Trump’s address offered little direction on trade talks with China, he said a deal would have to reduce the U.S. trade deficit and protect American workers and businesses.

“While the threat of another government shutdown remains, the lack of negative rhetoric on trade should not be seen as a negative for risk environment,” Petr Krpata, a strategist at ING in London said in a note to clients. Investors were watching rate decision in Brazil and Poland, where policy makers were expected to follow Thailand in keeping borrowing costs unchanged.

Sterling meanwhile was a shade lower at $1.2930 after losing nearly 0.7 percent on Tuesday on weak Purchasing Managers Index data for Britain and uncertainty about Brexit talks. U.K. Prime Minister Theresa May will travel to Brussels on Thursday to tell EU leaders they must accept legally binding changes to the Irish border arrangements of Britain’s divorce deal or face a disorderly no-deal Brexit.

German 10-year government bond yields, the benchmark for the region opened one basis point lower on Wednesday at 0.16 percent, well off the 0.21 percent highs hit on Tuesday. Italian debt was in focus with the Treasury planning to sell a 30-year bond via a syndicate of banks. Italian 30-year government bond yields jumped to three-week highs at 3.678 percent as investors sold bonds to make way for the new issue. 10Y Treasurys were largely unchanged trading just shy of 2.70%.

Despite jittery sentiment, global markets are close to levels not seen since November, thanks entirely to the Fed’s dovish capitulation. Further clues on what 2019 holds may come Wednesday from Chairman Jerome Powell’s first public comments following the January meeting and interest-rate decision.  There’s also the looming meetings in Beijing next week between U.S. Trade Representative Robert Lighthizer, Treasury Secretary Steven Mnuchin and their Chinese counterparts. And in his State of the Union speech, Trump said he will meet with North Korea leader Kim Jong Un in Vietnam at the end of the month.

Elsewhere, in commodities, iron ore continued its recent surge, rallying toward $90 a metric ton after Brazil’s Vale SA declared force majeure on some contracts, raising the prospect of a deficit of the commodity this year.

West Texas oil fell toward $53 a barrel after the latest API report indicated to a rise in U.S. crude inventories. Copper climbed to its highest level this year, helping to boost Bloomberg’s industrial-metals index to near a four-month high.

Market Snapshot

• S&P 500 futures down 0.2% to 2,725.50
• STOXX Europe 600 down 0.07% to 364.75
• MXAP down 0.01% to 157.03
• MXAPJ down 0.1% to 513.74
• Nikkei up 0.1% to 20,874.06
• Topix down 0.05% to 1,582.13
• Hang Seng Index up 0.2% to 27,990.21
• Shanghai Composite up 1.3% to 2,618.23
• Sensex up 1% to 36,997.89
• Australia S&P/ASX 200 up 0.3% to 6,026.15
• Kospi down 0.06% to 2,203.46
• German 10Y yield fell 0.5 bps to 0.165%
• Euro down 0.1% to $1.1391
• Italian 10Y yield rose 5.9 bps to 2.435%
• Spanish 10Y yield fell 0.5 bps to 1.251%
• Brent futures down 1.2% to $61.25/bbl
• Gold spot down 0.1% to $1,313.46
• U.S. Dollar Index up 0.1% to 96.16

Top Overnight News from Bloomberg

• President Donald Trump says he is “making it clear to China that after years of targeting our industries, and stealing our intellectual property, the theft of American jobs and wealth has come to an end”
• Trump announces in his State of the Union address that he will meet with North Korea’s Kim Jong Un in Vietnam on Feb. 27-28
• British Prime Minister Theresa May risked enraging members of her Conservative Party by insisting she wants to keep the most contentious part of her Brexit plan for avoiding a hard border with Ireland
• U.K. growth be sluggish for the next few years even if a Brexit deal is secured, lowering its estimate for growth this year to 1.5 percent from 1.9 percent, according to the National Institute of Economic and Social Research
• Investor appetite for Italian debt is at a record, and the nation is making the most of it. The Treasury surprised the markets Tuesday when it unveiled the sale of 30-year notes, just two weeks after investors put in orders totaling three times the amount it offered by way of 15-year bonds
• European Central Bank officials see no urgent need to offer new long-term loans to banks and aren’t certain to do so at their next policy meeting in March, according to people familiar with the matter
• The search for a way to get Britain out of the European Union with a deal will intensify Wednesday, as Theresa May begins the second day of her visit to Northern Ireland and her Irish counterpart, Leo Varadkar, travels to Brussels to hold his own Brexit talks
• RBA’s Lowe shifted to a neutral policy outlook as he acknowledged increased economic risks at home and abroad, sending the nation’s currency down by more than half a U.S. cent
• Italy pulled in more than 26 billion euros ($30 billion) of offers for its second syndicated sovereign bond of the year, as investor appetite shows little let-up from a record-breaking deal just three weeks ago
• Here are the finance firms cutting jobs after turmoil in markets. Asset managers and banks are under pressure as volatility roils global markets and investors pile into passive, low-fee funds

Asian equity markets traded quietly with most bourses in the region closed for holidays, although the few that opened were kept afloat after the gains of their counterparts in US where earnings remained in focus and the S&P 500 notched a 5th consecutive win streak. ASX 200 (+0.3%) was led higher by tech as it mirrored the sector’s outperformance stateside, although the index was initially pressured and briefly retreated below the 6000 level amid weakness in financials due to profit taking and after its top component CBA posted a decline in H1 net. Nikkei 225 (+0.2%) also benefitted from the tailwinds and with focus centred on earnings releases, which has seen the list of best and worst performing stocks in Japan dominated by recent corporate updates. Finally, price action in 10yr JGBs was contained as the lack of demand due to the positive risk tone in Japan, was counterbalanced by the BoJ’s presence in the market. US President Trump is to meet with Chinese President Xi later this month. In related news, US Trade Representative Lighthizer and Treasury Secretary Mnuchin will visit Beijing early next week for trade discussions, while reports also noted that China is said to have agreed to negotiate on items which were previously off-limits according to a senior administration official.

Top Asian News

• SoftBank’s Son Seeks to Close Valuation Gap With Share Buyback
• Indonesia’s Economy Shows Resilience as GDP Beats Forecasts

Major European equities are in the red [Euro Stoxx 50 -0.2%], with the exception of the AEX (+0.4%) following earnings from ING Groep (+5.3%). Sectors are broadly in the red, with the exception of IT names who are outperforming slightly following on from their strong performance in the US and overnight. Other notable movers include, CYBG (+15.2%) who are at the top of the Stoxx 600 after the Co. guides their net interest margin to the upper end of their prior range. Also firmly in the green after a 13% increase in their Q4 non-IFRS revenue are Dassault Systemes (+8.6%). This mornings significant earnings came from BNP Paribas (-2.0%) and Daimler (-3.2%) who are both in the red after lowering guidance and missing on Q4 EBIT respectively. At the bottom of the Stoxx 600 are Ocado (-7.9%) as yesterday’s fulfilment enter incident will lead to a sales growth reduction until capacity can be increased elsewhere. Separately, GlaxoSmithKline (-1.5%) are expected to report their earnings today at 12:00 GMT. In recent news flow the proposed merger between Alstom (+2.1%) and Siemens (-0.5%) has been rejected by the EU.

TRop European News

• Nordea Bonuses Slump 31% as CEO Sees No Reason to Lead on Pay
• ING’s Hamers Moves Past 2018 Missteps With Gains on Profit, Cost
• Ocado Plunges as Fire Shuts Automated Warehouse, Curbing Growth
• France Hits Out at EU’s Expected Veto of Siemens-Alstom Deal
• Santander CoCo Bonds Jump as Dollar AT1 Bond Sale Said to Begin

In currencies, having rallied in relief after the RBA policy meeting yesterday, the Aussie has recoiled sharply following comments from Governor Lowe signalling a shift in rate guidance via the omission of tightening as the next move and a cut now on the agenda if the jobs market and economy overall weakens. Aud/Usd is now at risk of filling bids ahead of 0.7100 and then 0.7075, while Aud/Nzd is hovering just above 1.0400 vs 1.0500+ in the immediate aftermath of Tuesday’s RBA decision and statement, even though the Kiwi has been dragged down with its Antipodean peer – Nzd/Usd now hovering around 0.6850 from circa 0.6900 overnight. Note, the delayed GDT auction could help the Nzd pare some losses if prices rise again per indications via futures, but a decline after 4 increases in a row cannot be ruled out.

• CAD – Another G10 underperformer and victim of a broad downturn in risk sentiment that has spread to oil, with the Loonie retreating further from sub-1.3100 highs vs its US counterpart and now testing support near 1.3200. Ahead, Canadian building permits may provide some independent impetus along with comments from BoC’s Lane not long after the data.
• JPY – Bucking the overall trend of losses against the Greenback, as the DXY consolidates above 96.000, after another failure to sustain gains above 110.00, has seen the headline pair pull-back towards 109.50 again, and with hefty option expiries between 109.50-65 (2.2 bn) also a potential draw.
• GBP/CHF/EUR – All narrowly mixed vs the Dollar, but with the Pound paring losses on the back some technical buying as Cable based around 1.2925 for a 2nd time and leverage accounts reportedly took profit on short positions instigated from 1.3050 to 1.3000 yesterday. Recovery high 1.2973, just shy of the 21 DMA at 1.2975. Meanwhile, the Franc remains anchored around parity and the single currency probed a bit further below 1.1400 to test bids at 1.1380 before regaining some composure ahead of 1.1375 Fib support. However, Eur/Usd still looks fundamentally bearish amidst yet more disappointing German data/surveys (factory orders and construction PMI).

In commodities, a relatively downbeat session in the energy complex thus far, with WTI (-0.7%) and Brent (-0.6%) pressured by the overall risk-averse sentiment, alongside a firmer dollar and latest release of the API crude stocks. US crude stocks increase by 2.514mln barrels last week, a wider build than the expected 2.200mln barrels while distillate fuel oil inventories printed a surprise build. News flow has been light for the complex, though prices failed to gain any lasting support from reports that all Libyan oil exporting ports are shut due to adverse weather conditions. Looking ahead, participant will be eyeing the DoE crude inventory at 15:30GMT today alongside US production numbers which remained at a record for three consecutive weeks. Elsewhere, metals are mixed with spot gold (-0.2%) largely dictated by Dollar moves rather than the risk-sentiment. Meanwhile, iron ore May’19 futures rose in excess of 3% after Brazilian mining giant Vale declared a force majeure on some contracts, including one affecting 30mln tonnes of iron ore production a year, amid health and safety concerns. Finally, copper prices found some support amid hopes of easing trade tensions after US President Trump said he is to meet with Chinese President Xi later this month.

US Event Calendar

• 7am: MBA Mortgage Applications, prior -3.0%
• 8:30am: Trade Balance, est. $54.0b deficit, prior $55.5b deficit
• 8:30am: Productivity Release with Limited Data Due to Shutdown
• 6:05pm: Fed’s Quarles Speaks on Bank Stress Testing
• 7pm: Fed Chairman Powell to Host Town Hall Meeting with Educators

Looking at the day ahead, we get the US November trade balance, the Fed’s Quarles is due to speak late this evening on bank stress testing while Fed Chair Powell is due to host a town hall meeting with educators. Given the venues of both, it would be a surprise if either was particularly market moving. Meanwhile the earnings highlights today include MetLife and General Motors.

DB’s Jim Reid concludes the overnight wrap

Over the past month social media has been awash with the ten year photo challenge where you post a picture of you now and one of you 10 years ago. I shunned this but have only just realised that the photo you all see at the top of all our research is one that was shot in 2009. Maybe this brings into question the credibility of research when I can masquerade as a fresh faced, innocent, naive 34/35 year old. Is there anyone out there with an older corporate mug shot? Taking this a step further if you want to see what I’ll look like in 10yrs have a look at the front cover of our Konzept in June here . One common theme transcends the past, present and future…….. Baldness!!!

What we would all give to know exactly where markets will be in one month let alone ten years. For the moment though markets continue to be in risk-on mode after another day of broad-based gains. Indeed the S&P 500 closed up +0.46% last night which means it has now closed up for the last five sessions. In fact the index is up on 18 out of 24 trading days so far in 2019 with YTD gains of +9.20%. Only 5 other years in history have matched or beat this in terms of least number of negative days to this point in the year. 1954, 1961, 1965 and 1971 saw the same number, while only 1967 saw less negative days (5) through February 5th. The S&P is now up +16.43% since its Christmas Eve trough, advancing on 21 of 28 days since then. That’s the best such streak since November 2017. Remarkable momentum no matter how you slice it.

Overnight, President Trump’s State of the Union address mostly met expectations, with a wide-ranging discussion of policy issues. On the topics most relevant for markets, Trump did not declare a national emergency or give a firm signal on whether he plans to push for another government shutdown when funding lapses next week. He spoke positively about trade talks with China, but he also endorsed the success of his tariff policy. Trump also announced a new summit with Kim Jung Un for February 27-28. S&P 500 futures, the dollar, and treasuries traded mostly flat while he spoke and futures on the S&P 500 (+0.05%) are continuing to trade flat a couple of hours later. Elsewhere, Dow Jones reported that the US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are going to lead the trade talks in Beijing starting early next week with it likely to pave the way for a meeting between Mr Trump and China’s President Xi Jinping subsequently. The report also added that China has agreed to widen areas of discussion for trade talks to include hacking.

This morning in Asia markets are largely heading higher following Wall Street’s lead with the Nikkei (+0.29%) and Australia’s ASX (+0.41%) both up. The outperformance by the ASX has been largely on account of a surprise shift in communication from the RBA Governor Philip Lowe. He indicated that monetary policy will now shift to a neutral stance from a long period of flagging prospective tightening ahead. This also led the Australian dollar to weaken by -1.11% and sent the yield on Australia’s 10y sovereign paper down by -6.2bps. Markets in Hong Kong, China and South Korea continue to remain closed for holidays.

Back to yesterday and as discussed it was a fairly broad based rally although the NASDAQ (+0.74%) did marginally outperform which puts the five-day return for the index at an impressive +5.32% (+11.56% YTD). Banks were one of the sole laggards on the day, with the S&P 500 banks index sliding -0.33% as yields fell and the curve flattened. In Europe, the STOXX 600 closed +1.41% and is quietly up for six days in a row for the first time since September last year with the FTSE 100 (+2.04%) also clocking up a sixth successive rally (with the index up +6.38% in that time) boosted yesterday by BP’s results. Chinese markets remained closed for the lunar new year.

Meanwhile in credit markets cash HY spreads tightened -6bps in both Europe and the US. Despite the one-way traffic for risk Treasuries were actually stronger across much of the curve yesterday with 2y yields -1.4bps lower and 10y yields -2.7bps lower (making the 2s10s curve -1.3bps flatter at 17.3bps). The 10y traded as high as 2.738% intraday (before closing at 2.697%) before a slightly softer January ISM non-manufacturing report saw yields track lower. The headline reading of 56.7 was slightly lower than expected (57.1 consensus) and down 1.3pts from 58.0. Notably the employment component did improve slightly to 57.8 and the associated text in the statement also made plenty of reference to the impact of the shutdown which argues for a rebound perhaps in future months. It’s worth adding that the 54.2 services PMI was unrevised from the flash.

In contrast, bond markets were more mixed in Europe. Bunds briefly went above 0.200% intraday after the final January PMI revisions leaned a bit more positively compared to the flash data (more below) but then tracked the Treasury move in the afternoon to finish -0.7bps lower at 0.170%. BTPs did underperform however with 10y yields +6.0bps higher after the unexpected announcement of a new 30y debt sale, following strong demand at the 15y offering last month. Prior to this, rates in Europe appeared fairly non-fussed by Reuters headlines suggesting that ECB policymakers are reluctant to change forward guidance as it might tie the hands of the next ECB President. The same story also suggested that policymakers saw TLTRO as a priority – which wasn’t a great surprise. To avoid deleveraging, they’ll probably need to announce new credit easing by April, while they can leave their rate guidance on autopilot through the summer if they want.

Coming back to the PMIs, in Europe the composite reading for the Euro Area was confirmed at 51.0 which was a 0.3pt increase from the flash but a very marginal 0.1pt decline from December. That is however the lowest reading in five and a half years. The services reading drove the upward revision, jumping 0.4pts to 51.2 from the flash. Regionally, the services reading in Germany was revised down 0.1pts to 53.0 while France was revised up 0.3pts to 47.8 – albeit a still significantly contractionary reading. Italy (49.7 vs. 50.0 expected; 50.5 previously) disappointed however Spain (54.7 vs. 53.0 expected; 54.0 previously) was the big positive surprise. In fact Spain is now at a 7-month high which contrasts to the 62-month and 50-month lows in Italy and France, respectively. It’s worth noting that the composite PMI for the Euro Area is consistent with around 0.5% annualised growth.

Here in the UK the data didn’t make for particularly great reading. The services PMI dropped 1.1pts and more than expected to 50.1 (vs. 51.0 expected), which when combined with the manufacturing number puts the composite at 50.3. The last time the composite was lower was July 2016 when it temporarily spiked lower after the Brexit vote. The latest data however follows weak construction and manufacturing data in the UK which raises the prospect of the BoE not only revising down GDP forecasts this Thursday, but also sounding a lot more dovish with the biggest risk being a removal of the tightening bias. Nevertheless, market pricing for BoE policy rates did not move much on the weaker data. They continue to discount around 50% odds of a rate hike by year-end.

That data weighed on Sterling, with it falling below $1.300 in the morning and then dropping further in the afternoon to touch a low of $1.2925. In terms of the Brexit latest, yesterday we learned from one of May’s spokesman that the PM is to update the EC’s Juncker at their meeting tomorrow. May isn’t expected to meet Barnier however. The tensions within the governing coalition resurfaced again yesterday, after May told an audience in Northern Ireland that she is only seeking “legal changes” to the Irish backstop and not the scrapping of it. This is certainly the calm before the storm week for Brexit though. Events heat up next week ahead of the February 14 Parliamentary votes.

On the Fedspeak front, ahead of comments from Quarles and Powell tonight, Dallas Fed President Kaplan said that “it would be prudent for the Fed to exercise patience.” This basically reiterates the consensus view of the committee. He went on to say that “I expect we will get some further clarity during the first half of 2019,” which is a bit more explicit in terms of calendar-based guidance for the pause in interest rate hikes than Powell’s comments. Kaplan is one of the more dovish committee members, so these comments were consistent with our economists’ views.

In terms of the day ahead, early this morning in Germany we’re due to get December factory orders while later this afternoon in the US the November trade balance is due to be released. The Fed’s Quarles is due to speak late this evening on bank stress testing while at midnight Fed Chair Powell is due to host a town hall meeting with educators. Given the venues of both, it would be a surprise if either was particularly market moving. Meanwhile the earnings highlights today include MetLife and General Motors.