After a lackluster start to global markets on the last day of the week following the conclusion of yet another indecisive round of trade talks between the US and China where nothing was resolved aside from reports of a possible MOU to lay out “next steps” in the ongoing negotiations, global markets rebounded as ye olde “trade deal optimism” returned after China’s president said trade talks would continue in Washington DC  next week (as if there was any other option with the March 1 deadline looming). This helped reverse overnight stock losses, with US equity futures jumping almost 20 points from session lows, just as Europe opened for trade, with the Stoxx 600 rising 0.8% on “hope.”

“Negotiations between both sides have achieved important progress in another step,” president Xi said after the 6th trade talks wrapped up in Beijing, quoted China’s Xinhua News Agency. “Next week, both sides are going to meet in Washington. I hope you keep up the good work, and push for a mutually-benefiting and win-win agreement.”

Xi said he values the “good working relationship” with President Donald Trump very much, and is willing to keep in touch with him in various ways. He added that China was “willing to solve the bilateral economic disputes and frictions through cooperation, and push for an agreement that both sides can accept. But cooperation has principles.”

Echoing the upbeat mood from the meeting, Treasury Secretary Steven Mnuchin sounded a positive note on Friday, saying he and U.S. Trade Representative Robert Lighthizer held “productive meetings” with China’s Vice Premier Liu He. They both also met Xi later in the day.

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Steven Mnuchin

✔@stevenmnuchin1

Productive meetings with China’s Vice Premier Liu He and @USTradeRep Amb. Lighthizer.

Adding to the optimism was Trump’s uber trade hawk, Robert Lighthizer who said “We feel we have made headway on very, very important and difficult issues,” adding that “we have additional work we have to do but we are hopeful.”

Trade tensions between the U.S. and Beijing continue to dictate sentiment as the two sides race to reach a deal that would avert a tariff increase on Chinese goods by March 1. Growth concerns have also plagued investors after China’s factory inflation decelerated on softening demand.

And even though the two sides remained far apart this week on structural reforms to China’s economy that the U.S. has requested, according to three U.S. and Chinese officials quoted by Bloomberg, who said it would likely take a meeting between Xi and Trump to seal a deal, kicking the can was all algos needed to unleash global buying programs, and world markets were once again a familiar sea of green as we close out the week.

Propped up by this can-kicking optimism, European stocks burst out of the gate, with banks and media stocks pushing the Stoxx Europe 600 Index higher after a slow start, and wiping out all of Thursday’s losses. Even so, European car stocks, a bellwether for the continent’s economy, fell 1 percent as sales dropped for the 5th month in a row, and the deadline approached for a U.S. Commerce Department that could lead to the imposition of tariffs.

Sectors in Europe were mixed in early trading, with some outperformance seen in telecom names, after Telecom Italia (+6.0%) are towards the top of the Stoxx 600 after Italy’s state holding CDP said the board has authorisation to increase their stake to 10% in the next 12 months. Other notable movers include, Vivendi (+7.6%) who are topping the Stoxx 600 following their earnings release and comments that Bollore is to step down from the Co’s board in April. Separately, RBS (+1.3%) are in the green, following a beat on Q4 pre-tax operating profit and a special dividend for 2018. EDF (-4.6%) are near the bottom of the Stoxx 600, after their earnings release this morning.

Meanwhile, Asian shares retreated, perhaps because today’s “trade deal optimism” emerged too late to push Asian stocks higher, with Chinese stocks falling as weak factory prices highlighted the tough environment for industrial profitability, adding to other disappointing economic data. China’s CPI inflation eased further to 1.7% Y/Y in January from 1.9% in December, below consensus expectations (in month-on-month terms, headline CPI prices continued to decline by 0.6% in Jan). At the same time, year-over-year PPI inflation moderated further to 0.1% yoy in January, the lowest since October 2016, with prices down 4.7% mom s.a. ann in January. The petroleum industry still saw the largest deceleration in inflation, followed by chemicals and ferrous/nonferrous metals.

Asia-Pacific shares outside Japan fell 1.1 percent as market in Seoul, Tokyo and Shanghai all lost ground. Worries about the United States, which many considered a bright spot in the world economy, offset some optimism over trade talks in Beijing between the United States and China.

One remarkable aspect of the overnight session that was ignored by some traders was the record surge in China’s total aggregate financing, which exploded higher by a record 4.64 trillion yuan in January, far above the 3.31 trillion yuan expected, and nearly three times greater than December’s 1.59 trillion total. While New Loans beat expectations only modestly, printing at 3.23 trillion Yuan, the surge in aggregate credit was enough to push M2 from record lows, rising 8.4% from December’s 8.1%, and above the 8.2% expected.

With China’s credit creation by far the most important variable for the global economy, keep a close eye on this series for the next few months to see if Beijing can reflate markets.

In Washington, Congress sent President Donald Trump legislation he said he’ll sign to avoid another government shutdown as a new dispute looms over his decision to declare a national emergency to get more federal money for a border wall.

In the latest Brexit news, PM May’s officials are reportedly preparing to compromise on their demands to re-write the Brexit agreement and tell the EU it doesn’t want to renegotiate the agreement. EU and UK Brexit discussions are reportedly planned for Monday in Brussels where Brexit Secretary Barclays will meet with EU’s Chief Brexit Negotiator Barnier. Sky News’ Tamara Cohen tweets “Dominic Grieve says a dozen pro-European ministers would resign if we were heading for no deal at end of Feb – including several in cabinet.”

In currencies, the Japanese yen and other safe-haven currencies made gains as the market awaited developments in the trade talks. The dollar remained fairly robust in spite of the U.S. retail figures, trading up 0.2 percent at 97.1 against a basket of major currencies. The euro was 0.2 percent lower at $1.1278 and headed for a second week of losses. It is down by 1.7 percent so far this year after discouraging economic data from the euro zone. In the U.K., the pound saw choppy trading after Parliament refused to endorse Prime Minister Theresa May’s approach to resolving the Brexit deadlock.

In rates, the 10-year U.S. Treasuries yield fell to 2.6483 percent, wiping out most of its rise this week. Italian bonds pared declines as equities rebound, while core bonds are steady to slightly outperform semi-core. Spain is little moved by PM Sanchez calling a snap election for April 28.

Elsewhere, oil climbed on supply cuts and reduced output. Brent (+0.5%) and WTI (+0.5%) are firmer as markets received updates on US-China trade talks. Despite being firmer, prices are off session highs with Brent slipping back below USD 65.0/bbl after moving past this level for the first time this year earlier in the session Elsewhere, Saudi Arabia has suspended production at its Safaniyah offshore oilfield which is the world’s largest offshore oilfield with a capacity of up to 1.5mln BPD; production may be suspended until March. However, this is not expected to significantly impact Saudi Arabia’s supply level, with Saudi Aramco subsequently confirming that their facilities, including this one, are safe and normal. Looking ahead we have the Baker Hughes Rig count which last week say total rigs increase by 4. Gold (+0.3%) is largely unchanged in spite of the cautious risk environment and some dollar strength ahead of the 2nd largest SOMA day with USD 23.3bln of liquidity being drained.

Market Snapshot

• S&P 500 futures unch at 2,742.00
• STOXX Europe 600 up 0.2% to 364.57
• MXAP down 0.9% to 155.73
• MXAPJ down 1.1% to 509.67
• Nikkei down 1.1% to 20,900.63
• Topix down 0.8% to 1,577.29
• Hang Seng Index down 1.9% to 27,900.84
• Shanghai Composite down 1.4% to 2,682.39
• Sensex down 0.4% to 35,741.69
• Australia S&P/ASX 200 up 0.1% to 6,066.10
• Kospi down 1.3% to 2,196.09
• German 10Y yield fell 0.6 bps to 0.097%
• Euro down 0.2% to $1.1278
• Italian 10Y yield rose 1.9 bps to 2.444%
• Spanish 10Y yield rose 1.1 bps to 1.253%
• Brent futures up 0.3% to $64.78/bbl
• Gold spot up 0.2% to $1,315.38
• U.S. Dollar Index up 0.1% to 97.04

Top Overnight News

• Treasury Secretary Steven Mnuchin sounded a positive note on Friday as U.S.-China trade talks drew to a close in Beijing, as both sides tried to reach a deal that would avert a tariff increase on Chinese goods by March 1. China and U.S. will continue trade talks with the same group of people next week, SCMP reports, citing an unidentified person
• In closed-door sessions this week, the U.S. and China have failed to narrow the gap around structural reforms to China’s economy that the U.S. has requested, according to three U.S. and Chinese officials who asked not to be identified because the talks were private. They said it would likely take a meeting between Xi and President Donald Trump to seal a deal
• U.K. Brexit Secretary Stephen Barclay privately told the EU’s chief negotiator, Michel Barnier, the U.K. doesn’t need to re-open the divorce agreement and would accept other ways to address British concerns, a person familiar with the talks said
• Spanish Prime Minister Pedro Sanchez called a snap election, pitching the country into a period of fresh political uncertainty after a parliament veto of his budget laid bare his minority government’s inability to pass key legislation
• Europe equity funds saw outflows of $5.9b in the week to Feb. 13, their second largest weekly outflows on record, according to BofAML strategists citing EPFR Global data
• The combined units of Pimco and Allianz Global Investors faced 31 billion euros ($35 billion) of outflows from their funds in the final three months of the year, helping to drive assets under management down by 51 billion euros. Net outflows at compared with inflows of 27 billion euros in the third quarter
• British Prime Minister Theresa May’s officials are preparing to compromise on their demands for a re-write of the Brexit agreement, according to a person familiar with the matter
• Donald Trump plans to use unilateral authority to spend more than $8 billion to construct physical barriers along the U.S.-Mexico border, according to a White House official, a maneuver that risks provoking a lengthy legal battle over presidential powers. Congress sends Trump bill to avert shutdown amid emergency plan
• China’s factory inflation decelerated for a seventh month, adding to concerns about the return of deflation and the impact that will have on already weak corporate profits
• The Australian dollar has been buffeted by cross-currents at home and abroad, but its decline has provided some support to growth, Reserve Bank of Australia Assistant Governor Christopher Kent said Friday
• Oil headed for its biggest weekly gain in a month as the OPEC+ coalition’s supply cuts overshadowed renewed concern over whether the world’s two largest economies will be able to reach a trade deal

Asian equity markets traded mostly negative following the weakness of their counterparts in US, where sentiment was dampened by a surprise contraction in Retail Sales. Furthermore, participants were also wary due to events in Washington where Congress passed the government funding and border security bill, which President Trump is expected to sign but is also anticipated to declare a national emergency. ASX 200 (+0.1%) and Nikkei 225 (-1.1%) were lower from although the Australian benchmark later recovered led by strength in telecoms and energy, while losses in Japan were exacerbated by a firmer currency. Elsewhere, Hang Seng (-1.8%) and Shanghai Comp. (-1.4%) weakened after further PBoC inaction resulted to a liquidity drain of CNY 680bln for the week and as participants digested softer than expected CPI data, while ongoing trade talks further added to the cautious tone with US and China said to be far apart on reform demands. Finally, 10yr JGBs tracked the recent gains in T-notes as the risk averse tone spurred a flight to safety, although some of the gains were eventually pared following a softer 10yr inflation-indexed auction.

Top Asian News

• Khazanah Said to Raise $102m Selling BDO Bank Shares at Bottom
• Hillhouse Dumped Tech Stocks Just as They Were Headed for Rally
• Philippine Stocks Upgraded to Overweight at Daiwa on Inflation
• China’s Slowing Factory Prices Add to Deflation, Profit Concerns

Major European equities have drifter higher from the open [Euro Stoxx 50 +0.7%] amidst trade optimism between the world’s two largest economies. Initial underperformance was experienced in the Dax (+0.4%) weighed on by the likes of Wirecard (-0.6%) alongside auto-names with Daimler (-0.5%), Volkswagen (-0.3%) and BMW (-0.8%) in the red following poor new EU27 car registrations data this morning, though optimistic trade developments somewhat supported sentiment. Both sides have expressed progress in talks, though dialogue is set to continue next week as not enough was agreed on to seal a deal. Sectors are similarly mixed with some outperformance seen in telecom names, after Telecom Italia (+6.0%) are towards the top of the Stoxx 600 after Italy’s state holding CDP said the board has authorisation to increase their stake to 10% in the next 12 months. Other notable movers include, Vivendi (+7.6%) who are topping the Stoxx 600 following their earnings release and comments that Bollore is to step down from the Co’s board in April. Separately, RBS (+1.3%) are in the green, following a beat on Q4 pre-tax operating profit and a special dividend for 2018. EDF (-4.6%) are near the bottom of the Stoxx 600, after their earnings release this morning.

Top European News

• EDF Declines as 2019 Profit Outlook Falls Short of Expectations
• U.K. Retail Sales Jump As Discounts Spur Spending on Clothing
• Spain’s Sanchez Calls Snap Election for April 28 After Stalemate
• Europe Car Sales Drop Signaling Trouble for Region’s Economy
• Scout24 Gets $5.5 Billion Boost to Rival Axel Springer, Ebay

In FX, GBP is back on the 1.2800 handle, albeit barely, and Eur/Gbp has slipped back towards 0.8800 in wake of a much bigger than forecast rebound in UK retail sales. However, Brexit remains at the fore and PM May suffered another heavy defeat in Parliament ahead of the next meaningful vote at the end of February, so the Pound is still prone to set-backs in the run up to March 29, at least.

• JPY – Usd/Jpy has pulled back further from Thursday’s new 2019 high, and an even more pronounced reversal could bring big option expiries into play at the 110.00 strike (2.6 bn). The rationale, less euphoria/optimism on the US-China trade front as talks in Beijing ended on a promising note, but with core issues still unresolved and more negotiation now scheduled to take place in Washington next week as the clock ticks down to March 1’s tariff deadline (unless that date is extended).
• CAD/NZD/AUD/EUR/CHF – All narrowly mixed against a relatively static Greenback, as the DXY nestles just above the 97.000 level, with the Loonie pivoting 1.3300 after yesterday’s weak Canadian data trumped US retail sales, claims and PPI misses against the backdrop of stalling oil prices. Meanwhile, the Kiwi continues to outflank the Aussie down under, as Nzd/Usd hovers just below 0.6850 and Aud/Usd clings to 0.7100, with the cross sticking close to recent lows circa 1.0375. Note, comments from RBA’s Kent hardly helped the Aud, as he essentially welcomed the weaker currency on the grounds that the domestic economy has slack and inflation is low. Elsewhere, the single currency remains heavy on rebounds through 1.1300 and also has hefty option expiry interest to contend with as 1 bn sits between 1.1250-60 and 1.3 bn from 1.1270-80, while SOMA positioning could add even more downside pressure, as today is the 2nd largest on record (Usd23.3 bn). The Franc is still meandering off recent lows within a tight 1.0070-50 range and equally restrained vs the Eur between 1.1355-35.

In commodities, Brent (+0.5%) and WTI (+0.5%) are firmer as markets received updates on US-China trade talks, in the form of a memorandum of understanding, while recent reports indicate that talks have concluded. Despite being firmer, prices are off session highs with Brent slipping back below USD 65.0/bbl after moving past this level for the first time this year earlier in the session Elsewhere, Saudi Arabia has suspended production at its Safaniyah offshore oilfield which is the world’s largest offshore oilfield with a capacity of up to 1.5mln BPD; production may be suspended until March. However, this is not expected to significantly impact Saudi Arabia’s supply level, with Saudi Aramco subsequently confirming that their facilities, including this one, are safe and normal. Looking ahead we have the Baker Hughes Rig count which last week say total rigs increase by 4. Gold (+0.3%) is largely unchanged in spite of the cautious risk environment and some dollar strength ahead of the 2nd largest SOMA day with USD 23.3bln of liquidity being drained. Elsewhere, Vale’s CEO says that the miner’s safety procedures have not worked; while researchers at World Mine Tailings Failures have stated that these events are becoming more frequent.

US Event Calendar

• 8:30am: Empire Manufacturing, est. 7, prior 3.9
• 8:30am: Import Price Index MoM, est. -0.2%, prior -1.0%
• 8:30am: Export Price Index MoM, est. -0.1%, prior -0.6%
• 9:15am: Industrial Production MoM, est. 0.1%, prior 0.3%;
• Capacity Utilization, est. 78.7%, prior 78.7%
• Manufacturing (SIC) Production, est. 0.0%, prior 1.1%
• 10am: Mortgage Delinquencies, prior 4.47%; MBA Mortgage Foreclosures, prior 0.99%
• 10am: U. of Mich. Sentiment, est. 93.5, prior 91.2; Current Conditions, est. 111.6, prior 108.8;  Expectations, est. 85.5, prior 79.9
• 4pm: Net Long-term TIC Flows, prior $37.6b
• 4pm: Total Net TIC Flows, prior $31.0b

DB’s Jim Reid concludes the overnight wrap

Wow. That was the hottest Valentines’ Day I’ve experienced since I was in my early 20s. I was even dripping with sweat last night as a result. Yes in the U.K. yesterday an “African plume” made it the warmest February 14th since 1988 and I’ve just chosen this week to start cycling to the station again so given I was dressed for deep winter I got home dripping with sweat. If this warm weather carries on all weekend they’ll only be one outcome…… Chronic Hay-fever!!

After hot markets of late, a little bit of cold water has been poured on bourses over the last 24 hours. We saw the double-whammy of soft data releases in Germany and the US, and some negative trade headlines to dampen the mood. Just on the former, Germany posted 0.0% qoq growth in Q4 (vs. +0.1% expected) although in unrounded terms this was ever so marginally positive at +0.02%. This equates to an output increase of €150m versus Q3. In other words, Germany was €150m away from a recession if we use the usual definition of two consecutive negative quarters. For physical comparison, that’s about one and a half of Airbus’s short-haul A320 planes or just over a third of an A380 jumbo jet (albeit the final assembly of the latter is done in France). Kudos to our European Economics team for that stat. Today’s EuroMillions draw is in the region of €160m too for an alternative perspective. Win that and you could be worth an amount equivalent to the increase in output in Q4 of a country of 82.5m people.

Meanwhile, yesterday’s retail sales figures in the US might result in a few more ‘r’ words being bandied around such was the extent of the weakness. Headline sales in December tumbled -1.2% mom compared to expectations for a +0.1% mom rise. It was even worse for the core readings with ex auto and gas sales down -1.4% mom (vs. +0.4% expected) and the control group down -1.7% mom (vs. +0.4% expected). A reminder that the latter is an input into the GDP accounts. In fact the control group reading was down by the most in a single month since January 2000. So not particularly pretty any way you cut it. The talk amongst our economists was that the data was a bit of a head scratcher in that it belies other reliable data sources. Nevertheless the Atlanta Fed Q4 GDP tracker is now down to 1.5% from 2.6%. Not to be ignored also was the weekly initial jobless claims reading (239k vs. 225k expected) which rose 4k from the week prior. That puts the four-week moving average at 232k and the highest since January 2018. There’s some suggestion that weather had an impact but it’s proving hard to ignore the sustained tick up in recent weeks despite the external issues impacting the data. Overnight our US economists pushed back their Fed call by 3 months to a hike in September 2019 and one in March 2020. They’ve also removed a additional final hike that originally was expected in 2020. See here for the rationale.

In terms of markets, the big moves were reserved for rates where 10y Treasuries touched a low of 2.641% intraday, before closing slightly off that at 2.650%, albeit still -5.2bps down on the day. In Europe we saw Bunds flirt with the 10bps level again before closing at 0.103% (-1.9bps). OATs rallied -2.2bps and Gilts -2.7bps while Italy (+1.9bps) and Spain (+0.6bps) were weaker. As for what that meant for equity markets, the S&P 500 (-0.27%) snapped its four-day winning run with financials (-1.16%) the real laggard on a sector basis. The DOW and NASDAQ closed -0.41% and +0.09% respectively while the STOXX 600 – which in fairness was little moved post the Germany data – pared gains of as much as +0.57% to close -0.32%. European Banks were down -1.48% while the DAX (-0.69%) unsurprisingly underperformed. Meanwhile in currencies, the USD didn’t really know how to react and instead ebbed and flowed over the course of the day before ending -0.08%. Commodity markets were quiet with oil a shade higher by the end of play.

This morning in Asia markets are largely heading lower following Wall Street’s lead with the Nikkei (-1.19%), Hang Seng (-1.64%), Shanghai Comp (-0.62%) and Kospi (-1.54%) all down. On the margin negative trade headlines mentioned below and China’s weaker than expected economic data are weighing on sentiment. Elsewhere, futures on the S&P 500 are also down -0.35%. On the economic data out of China, January CPI came in at +1.7% yoy (vs. +1.9% yoy expected; slowest pace of increase since January 2018) while PPI stood at +0.1% yoy (vs. +0.3% yoy expected; slowest pace of increase since October 2016).

Over in politics, President Trump is reportedly going to sign the funding deal today negotiated by House and Senate lawmakers. The deal would provide additional funding for border security, albeit not a wall as the President has asked for, which will according to Bloomberg headlines prompt him to declare a national emergency in order to divert funding from other sources to wall construction. We got further hints in this direction overnight with the White House spokeswoman Sarah Huckabee Sanders saying in a statement that, “President Trump will sign the government funding bill, and as he has stated before, he will also take other executive action — including a national emergency — to ensure we stop the national security and humanitarian crisis at the border.” Such a move is likely to be challenged in the courts, which will likely take months or years to resolve. More immediately relevant, the funding deal will avert a shutdown, which will allow government programs to continue operating, enable the IRS to continue disbursing tax refunds, and permit statistical agencies to continue their data releases unimpeded.

As for the latest on the US-China trade talks, Mnuchin and Lighthizer are meeting China President Xi Jinping today so all eyes on any soundbites we get from that. At the moment we haven’t heard of any scheduled post-meeting press conferences however that could all change. Yesterday’s comments from Kudlow about there being “no decision” on extending a deadline for imposing higher tariffs on China and the Bloomberg headline about both sides being “far apart on reform demands” appeared to take some of the sting out of markets. The reports suggested that USTR Lighthizer is pushing for strict timelines and specific deliverables to ensure a robust verification mechanism, but China is resisting the measures as an unfair infringement on their sovereignty. In fairness, the stories make sense in connection with other recent reports that the two sides may push for an extension in order to buy more time. In the meantime, the Financial Times has reported overnight that the US and China were scrambling to reach at least a “memorandum of understanding” by the end of today’s meeting so as to pave the way for a meeting between President Trump and his Chinese counterpart Xi Jinping.

In other news, last night’s vote in the House of Commons ended in yet another defeat for Prime Minister May, though this one was not especially significant as she’s promised a vote in two weeks on any revised agreement she gets with EU leaders. If she fails then the likelihood is that Parliament will increasingly take over proceedings. The pound ultimately ended the session -0.33% weaker.

In Fedspeak, the highlight was Governor Brainard’s interview with CNBC, her first remarks since the December FOMC meeting. She said that the “balance-sheet normalization process probably should come to an end later this year,” becoming the first FOMC speaker to lay down such a precise marker. Brainard noted that she would like to maintain a large enough buffer of excess reserves to make it easy for the fed to control short-term interest rates and avoid excess volatility. She also said that “downside risks have definitely increased” and “we’ll have to wait and see what the right move, if any, later in the year is.” So further evidence of a consensus for a near-term rate pause, and given Brainard’s history of being sensitive to overseas headwinds, it’s not surprising that she specifically mentioned “I’m very attentive to the international outlook.”

Coming back to data, the other important release out in the US yesterday was the January PPI report. While the ex food and energy reading actually came in above consensus (+0.3% mom vs. +0.2% expected), it didn’t go unnoticed that the healthcare component – which accounts for about 20% of the core PCE index – was a little on the soft side at just +0.11% mom. That suggests some downside for the core PCE when we get the January reading next month.

Finally, as for the day ahead, this morning in Europe the highlights are January retail sales data in the UK and the December trade balance reading for the Euro Area. In the US we’ve got a busy end to the week with the February empire manufacturing reading (+7.0 expected), January import price index reading (-0.1% mom expected), January industrial production reading (+0.1% mom expected) and preliminary February University of Michigan consumer sentiment survey print (93.5 expected). Away from that it’s the turn of the Fed’s Bostic to speak this afternoon, while over at the ECB we’re due to hear from both Coeure and Angeloni. Expect US-China trade talks to also be a big focus.