World stocks hit a four-month high on – what else – hopes of progress in trade talks between the United States and China, even as US equity futures drifted lower, offsetting a rise in European and Asian stocks as traders awaited the release of minutes from the latest Fed meeting. The dollar snapped a 4-day losing streak while the yuan jumped after a Bloomberg report that Trump is asking China to keep its currency stable (and hence less market-determined).

The bullish mood was boosted after Donald Trump said negotiations with China were going well and suggested he was open to extending the deadline to complete them beyond March 1 which is anything but “magical.”

European automakers led an advance in the Stoxx 600 Index, which erased Tuesday’s drop, even as miner Glencore fell on lower-than-expected earnings, while Lloyds rose after it unveiled a 1.75 billion pounds ($2.3 billion) buyback plan. UK. grocer J Sainsbury plunged on antitrust objections to its planned takeover of Walmart’s Asda.

Meanwhile, European banks continued to be pressured by expectations that the ECB will restart a program to provide long-term cheap loans, or TLTROs, to banks to boost a faltering economy, depressing yields, while on Monday the BOJ flagged its readiness to ease further.

Earlier, the MSCI index of Asia-Pacific ex-Japan rose as much as 1.1% to mark its highest levels since Oct. 2. Hong Kong’s Hang Seng gained as much as 1.3 percent to six-month highs, while Korea’s Kospi and Taiwan’s index recovered to levels last seen in early October. Japan’s Nikkei added 0.6 percent to two-month highs.

Boosted by fresh dovish sentiment, emerging-market stocks and currencies jumped the most in three weeks amid optimism that trade negotiations between Washington and Beijing will lead to a deal. The South African rand and Turkish lira bucked the rally.

The yuan led the advance among developing markets, bolstering its Asian peers, after Bloomberg reported that the U.S. is asking China to keep the value of its currency stable as part of the negotiations. The onshore Yuan strengthened as much as 439 pips on Wed to close at 6.7236/USD, its biggest intra-day gain in more than a month, and the highest since the end of Jan, and the biggest rise since Jan 10th. The offshore yuan was last trading at 6.7265 after rising as high as 7.164.

And speaking of China’s currency, Premier Li said that China has not and will not change monetary policy; will not resort to ‘flood-like’ stimulus. RRR cut in January reflected that there is sufficient room for cuts, adding that increasing bill financing and short-term loans may create the potential for risks.

Elsewhere in FX, the dollar snapped a four-day losing streak before the release of Fed January minutes, rising 0.2 percent against the yen after Japan recorded its biggest annual drop in exports in January for more than two years, and on recent dovish Bank of Japan signals.

The pound slipped as Prime Minister Theresa May headed back to Brussels in a last-ditch attempt to save her Brexit deal and as three Conservatives quit to join a new party, while the euro lacked a clear sense of direction after ECB’s Praet said a decision on TLTROs may not be made at the March meeting. The rand dropped before Finance Minister Tito Mboweni’s budget speech on Wednesday.

In rates, European bonds mostly edged up, but Italian notes fell while US Treasuries were unchanged after some mixed trading earlier.

In the latest Brexit news, PM May is reportedly to present the EU with fresh legal proposals to break the Irish backstop deadlock and which will hopefully convince Brexiteers to support her deal. In related news, a spokesperson said PM May and Brexit Ministers updated cabinet on Brexit and that the UK is still looking to reopen the withdrawal agreement. Meanwhile, in a shocking development, UK Tory MPs Heidi Allen, Anna Soubry and Sarah Wollaston have resigned from the Conservative Party and joined the Independent Group; talkRadio’s Kempsell confirms, with the news sending cable to session lows.

Prior to this, ITV’s Peston tweets that if, as he expects, four Tory MPs quit the party today to become independent, PM May’s minority government will become even more of a minority, with less grips on the Commons, so a general election moves nearer.

Finally, UK Chancellor Hammond said a no-deal Brexit would be mutual calamity for UK and EU, while he also noted that the most urgent task is to reach an agreement that will protect trading relationship with EU. Furthermore, Hammond said the Malthouse initiative is a valuable effort to allay backstop concerns in the future but added that EU will not consider a replacement to the backstop now.

Looking at key trading catalysts, Bloomberg notes that as the U.S. and China continuing tough negotiations toward a trade deal, focus has shifted to a key campaign promise made by President Donald Trump, namely addressing Beijing’s periodic devaluation of the yuan. Investors will also be preoccupied by the release of minutes from the Federal Reserve later on Wednesday and from the European Central Bank a day later, and they’ll have a glut of German data to contend with toward the end of the week.

“At the start of the year with the upshoot in equities, everything was sort of moving together,” Peter Borish, chief strategist at Quad Capital LLC, told Bloomberg TV in New York. “We are now starting to not see that and that is always the first sign of warning signals in the market place that it might be getting ready for a correction.”

Elsewhere, oil prices hovered near 2019 highs, supported by OPEC-led supply cuts and U.S. sanctions on Iran and Venezuela, but further gains were capped by soaring U.S. production and expectations of an economic slowdown. International Brent crude futures stood at $66.30 per barrel, having hit a three-month high of $66.83 per barrel earlier this week. Gold traded at the highest since April and palladium soared to a record as a shortage started to bite.

Expected data include mortgage applications and FOMC minutes. Analog Devices, CVS, Synopsys and Cheesecake Factory are among companies reporting earnings.

Market Snapshot

• S&P 500 futures down 0.1% to 2,775.50
• STOXX Europe 600 up 0.2% to 369.58
• MXAP up 0.8% to 158.66
• MXAPJ up 1.1% to 519.33
• Nikkei up 0.6% to 21,431.49
• Topix up 0.4% to 1,613.47
• Hang Seng Index up 1% to 28,514.05
• Shanghai Composite up 0.2% to 2,761.22
• Sensex up 1% to 35,688.98
• Australia S&P/ASX 200 down 0.2% to 6,096.49
• Kospi up 1.1% to 2,229.76
• German 10Y yield fell 0.7 bps to 0.098%
• Euro up 0.1% to $1.1353
• Italian 10Y yield rose 2.2 bps to 2.429%
• Spanish 10Y yield fell 0.5 bps to 1.203%
• Brent futures down 0.5% to $66.13/bbl
• Gold spot up 0.3% to $1,345.24
• U.S. Dollar Index little changed to 96.56

Top Overnight News from Bloomberg

• The U.S. is said to have asked China to keep its currency stable as part of a new trade deal, a move aimed at discouraging officials in Beijing from devaluing the yuan to offset the impact of American tariffs. That request is at odds with years of global pressure on China, from the Group of 20 economies in particular, to move toward a free-floating currency
• British government sees Theresa May’s meeting on Wednesday with EC President Juncker in Brussels as a crucial chance to get legally binding changes to the so- called Irish border backstop
• Joan Ryan becomes the eighth U.K. Labour MP to quit the party, accusing Leader Jeremy Corbyn of “presiding over a culture of anti-Jewish racism and hatred of Israel,” according to a tweet from the lawmaker
• Corbyn’s closest ally Shadow Chancellor John McDonnell, says the Labour leader must listen to critics x
• Theresa May faces many problems as she tries to nail down a divorce agreement with the European Union but one looms over them all: pro-Brexit Tories do not trust her.
• Japanese exports fell in January as shipments to China tumbled, adding to signs slowing global demand is weighing on the export-dependent economy
• President Trump said he is no rush to conclude a nuclear deal with North Korean leader Kim Jong Un because he has a strong relationship with the North Korean leader and U.S. sanctions against the country remain in place
• ECB officials will discuss new long-term loans for banks shortly, even though it’s unclear yet whether a decision will be taken, according to Executive Board member Peter Praet
• The British government sees May’s meeting on Wednesday with European Commission President Jean-Claude Juncker as a crucial chance to get legally binding changes to the so-called Irish border backstop, which has proved the biggest obstacle to getting a Brexit deal
• Indonesia’s finance ministry is studying various forms of incentives for sovereign bond holders, including lower tax for those holding the securities for a longer period

Asian stocks traded somewhat indecisively following the cautious gains seen on Wall St. ahead of this week’s key events including FOMC minutes and US-China trade talks. ASX 200 (-0.2%) and Nikkei 225 (+0.6%) were mixed with Australia dragged lower by continued underperformance in Consumer Staples after Woolworth shares slumped more than 5% post-earnings, while Tokyo stocks were propped up as the impact of a weaker currency eclipsed the concerns from the steepest decline in Japanese Exports for more than 2 years. Elsewhere, Hang Seng (+1.0%) and Shanghai Comp. (+0.2%) were also varied as the mainland lagged despite the PBoC announcement of its first liquidity injection since before the Lunar New Year, as the amount was a relatively paltry CNY 20bln and with participants also kept tentative ahead of upcoming senior level trade discussions between US and China. Finally, 10yr JGBs were subdued with price action contained by an indecisive risk tone in the region and after having recently hit resistance at 153.00, while the absence of the BoJ in the market also contributed to the lacklustre trade.

Top Asian News

• Zhenjiang Said to Be Mulled for Local Debt Resolution Test Unit
• Hong Kong to Take Back Part of Biggest Golf Course for Homes
• Baht Reaches Highest Since 2013 Amid Broader Dollar Weakness
• India’s Giant IT Industry Rode a Rally in Global Tech Spending

Major indices in Europe have somewhat waned off earlier highs [Euro Stoxx 50 Unch] following a relatively indecisive Asia-Pac session. Sectors are mixed with outperformance in industrials given the price action in the base metal complex, while energy names marginally lag their peers. In terms of notable movers, Sainsbury’s (-16.4%) shares plumbed the depths after the supermarket was dealt a blow by the UK CMA, which stated that the proposed Sainsbury’s-Asda has extensive competition concerns, whilst adding that the two companies will have to shut a significant number of stores or face rejection. The companies now have until 13th March to respond to the CMA’s findings, with a final report by the CMA to be issued by 30th April. Elsewhere, Swedbank (-11.1%) has become the latest financial institute embroiled in the Danske Bank (-1.0%) money laundering scandal, following reports of the Co. being linked to USD 4.3bln in illicit transfers. Finally, regarding earnings-driven stocks, Glencore (-0.5%) gave up initial gains as indices came off highs, while Lloyds (+3.9%) maintained its positive at the top of the FTSE amid a GBP 1.75bln share buyback programme alongside a dividend hike.

Top European News

• Brexit Jobs Boom Has a Flip Side That’s Holding the Economy Back
• Lloyds Unveils $2.3 Billion Buyback Ahead of U.K. Turmoil
• Glencore Plans New Buyback as Trading Profit Disappoints
• Daimler Joins Jumbo Euro Corporate-Bond Rush as Spreads Tumble

In FX, the Greenback has regained some poise after its relatively pronounced downturn late yesterday amidst uncharacteristically dovish comments from Fed’s Mester regarding balance sheet run-offs, as she intimated a willingness to back an end to QT by or even before the end of 2019, albeit keeping options open for a 25 bp hike later this year. However, the index remains depressed and not far off sub-96.500 lows in anticipation that the upcoming FOMC minutes will reiterate the shift in policy guidance to a pause in normalisation and patience before any further adjustments.

• AUD/JPY/NZD/GBP – All on the backfoot vs the Usd, or paring gains to be more precise, as Aud/Usd eases back towards 0.7150 from circa 0.7175 at best in wake of moderately softer than forecast Q4 Aussie wage data overnight. Meanwhile, a bigger than expected Japanese trade deficit due to the worst export showing since October 2016 compounded post-BoJ Governor Kuroda Jpy weakness as it slips a bit further towards 111.00, but again could glean some traction from option expiry interest given 1.1 bn rolling off between 110.75-85 at the NY cut. Indeed, the Kiwi and Pound are marginally underperforming as Nzd/Usd hovers near the bottom end of a 0.6885-63 range and the Aud/Nzd cross consolidates recovery gains above 1.0400, while Cable runs out of steam ahead of 1.3100 having spiked from sub-1.2900 through 1.3000 in double quick time on Tuesday and topping out around 1.3075 ahead of today’s UK PM May-EU Juncker showdown later today.
• CAD/EUR – The Loonie continues to reap the most from pre-Fed minutes US Dollar defensive positioning and remains close to multi-week peaks above 1.3200 even though crude prices have encountered more offers/resistance around 2019 highs, while the single currency has formed a firmer base over 1.1300 having closed above a 1.1313 Fib and now eyeing another resistance level at 1.1362 for a stronger bullish technical signal.
• EM – Contrasting performances for the Yuan and Rand, as the former draws momentum from a stronger PBoC fix, fresh liquidity and positivity surrounding US-China trade talks to test 6.7200 levels vs the Usd, but pre-budget jitters hit the latter with the Zar down to 14.1500 at one stage.

In commodities, Brent (-0.4%) and WTI (-0.3%) prices are subdued after being rangebound throughout the Asia session where WTI reached 2019 highs of USD 56.39.bbl, as markets await today’s FOMC minutes and the beginning of high-level US-China trade talks tomorrow with USTR Lighthizer. The EIA forecasts that US total shale regions oil production will average 8.3938mln barrels in March, which is 84mln barrels above February’s estimate of 8.31mln barrels. Separately, there have been reports of a fire at a PDVSA crude pumping station, which has a 300k BPD capacity; although, as details surrounding the fire are sparse the impact on production is currently unclear. Looking ahead, API’s weekly inventory numbers are to be released today due to the US market holiday on Monday, market expectations are that US crude oil inventories increased over the prior week by 3.1mln barrels. Note, some abnormality may be observed today in WTI trading due to the expiration of the March WTO contract. Gold (+0.1%) is trading within a thin USD 5/oz range, as the yellow metal follows cautiousness seen in the dollar ahead of today’s FOMC. Elsewhere, spot-Palladium has convincingly moved above the USD 1500/oz level reaching USD 1504.46/oz; as the metals 7-month rally, which has been driven by a supply shortage, continues. Separately, German inspection frim TUV SUD has stated that it will no longer certify Vale owned tailings dams, following a Vale owned dam bursting last month.

Looking at the day ahead now, while there’s no data due in the US, we will get the FOMC meeting minutes from the January meeting. Expect the minutes to shed more light on how the Fed’s domestic and global growth outlook may be evolving and the lens through which the Committee may view incoming inflation data in the near term. Expect some focus on the balance sheet normalisation program too, which may reiterate Brainard’s view that the Fed will likely end the roll-off of maturing securities by year-end. Away from that, we’re due to hear from the ECB’s Praet this morning and Fed’s Kaplan this evening, while the US-China trade meetings and meeting between UK PM May and EC’s Juncker should also be a big focus for the market.

US Event Calendar

• 7am: MBA Mortgage Applications, prior -3.7%
• 2pm: FOMC Meeting Minutes

DB’s Jim Reid concludes the overnight wrap

Last month I highlighted the strange occurrence where over the course of a week my Spotify account was seemingly hacked as obscure French/Moroccan music was mysteriously added to my library. If you missed that one you can review it here . Well today it’s our turn to hack into your Spotify account as DB has just launched a new podcast series called Podzept. We have a selection of articles at our launch including one from me on “What the history of populism can teach us today”. They are available on Spotify, Apple Podcast and Stitcher. Feel free to search for Deutsche Bank Research, Podzept or simply follow the links to these sites on this page http://www.dbresearch.com/podzept . We’d be interested to hear from readers (and listeners) whether this is an interesting medium on which to receive research. On public sites like this there is a regulatory restriction on the type of research we can provide so the EMR is at this stage unlikely to be a candidate. However if there is large enough demand for it we’ll look into how we might be able to do it in the future. So all thoughts on whether some research works as a podcast are welcome.

Markets are quiet this week so no excuse to not download Podzept. Nevertheless, one gets the sense that we are all on tenterhooks to a certain degree, waiting for what could be major developments on trade and the now infamous S232 report on autos and US national security. One of our US economists Justin Weidner did some digging last night into the timeline from last year’s 232 steel report. That report was submitted to the President on January 11th, but was not released to the public (in its redacted form) until February 16th. The President subsequently made a determination on March 8. So if history repeats itself it would suggest that (official) details about the 232 auto report won’t come out until mid-March, or whenever they are done redacting the private information.

However, history may not repeat itself but it’s interesting that Mr Trump has yet to make any comments (even via tweets). This could mean one of three things; a) the above timeline is reasonable, b) the results are market friendly, c) Mr Trump and the administration are being careful not to escalate trade tensions at such a delicate stage of the China talks. Unfortunately, I’ve no idea which is closest to reality but it feels like we’re all now constantly looking over our shoulder with this report lurking on someone’s desk somewhere. It’s very important as with European growth so low it could be the straw that breaks the camel’s back in terms of a recession if it goes the wrong way.

On the other main trade front, news flow has the potential to pick up pace with meetings continuing between the US and China today. Mnuchin and Lighthizer will then join talks with China Vice-Premier Liu He again tomorrow. After Europe closed last night, headlines emerged that the US is asking China to keep the yuan stable as part of the negotiations between the world’s two largest economies to ensure devaluations aren’t used to offset tariff increases. The same article on Bloomberg suggested the two countries are discussing how to address currency policy in a “Memorandum of Understanding” that would form the basis of a deal that ultimately will have to be approved by Mr Trump and Xi Jinping. On the positive side, this story hints that talks are progressing. However, later in the session, top White House economist Kevin Hassett told reporters that there is still a lot of progress to make. The overall feeling is that it is 1 step forward, three-quarters of a step back at the moment. So positive momentum but still fragile. Before we review markets, the other main event today is the latest FOMC minutes. See the day ahead at the end for a preview of what to expect.

Steady incremental US positivity seems to be the theme at the moment with Europe a little more in limbo. Last night the S&P 500, DOW and NASDAQ closed +0.15%, +0.03% and +0.19% respectively. The retail sector outperformed, gaining +0.65%, largely thanks to a bumper earnings report from Walmart (+2.21%), which showed their best holiday season performance in a decade. The report from the world’s largest retail store provided some comfort after last week’s terrible retail sales report for December, as it looks increasingly likely that the poor data was an aberration. Commodity markets were also in focus, as the S&P 500 materials index was the best performing major subindex on the day, up +0.58%. Copper (+2.63%) and gold (+1.07%) both rallied, helping mining firms, aided by the weaker dollar which depreciated -0.41%. Gold hit a 10-month high and is now within 2 percentage points of its highest level in 5 years.

Prior to this, Europe had reversed much of the good progress made on Monday with the STOXX 600 ending -0.22%. High yield spreads closed +3bps wider in the US and flat in Europe, while in bond markets both Treasuries (-2.9bps) and Bunds (-0.4bps) firmed up a bit, which was in contrast to BTPs, which sold-off +2.3bps. Disappointing data (more on that below) appeared to be the catalyst.

Overnight in Asia, markets are trading mixed with the Nikkei (+0.38%), Hang Seng (+0.66%) and Kospi (+0.90%) all up while the Shanghai Comp (-0.15%) is heading lower in directionless trading. China’s onshore yuan is up +0.56% this morning likely on the story above that the US are demanding that China keep its currency stable. However, most EM currencies are generally trading strong against the greenback this morning. Elsewhere, futures on the S&P 500 (-0.07%) are trading flattish. In terms of data, Japan’s January trade balance was released overnight with exports declining -8.4% yoy (vs. -5.7% yoy expected) and imports at -0.6% yoy (vs. -3.5% yoy expected) leading to an adjusted trade balance of JPY -370.0bn (vs. JPY -150.7bn expected). The data highlighted that Japan’s exports have now declined for two months in a row for the first time since 2016 and sent the Japanese yen weaker (-0.18%).

Meanwhile, the latest on Brexit is that UK PM May is due to meet with EC President Juncker in Brussels this evening at 5.30pm GMT in what was being billed as a “significant” meeting according to the UK Government yesterday. Bloomberg quoted a source as saying that the meeting is expected to be a “stock-take” of the progress both sides have made ahead of Attorney General Cox potentially setting out his legal position on the backstop tomorrow. Yesterday, we got reaffirmation that the EU will not reopen the withdrawal agreement with the UK and will not accept a time limit on the Irish backstop. So, little sign of any softening of the EU approach, which isn’t a great surprise given next week’s parliamentary vote, which is still targeted for before February 27th. Sterling rallied +1.08% last night for its best session since November, when it rallied +1.93% on positive Brexit momentum and a broadly weaker dollar.

As for other snippets of news, ECB Vice-President Guindos continued the mantra of a more dovish way of thinking between the ECB Council, saying yesterday that policy makers are analysing the slowdown and have a large range of tools to respond with, which includes changing the language on forward guidance. Guindos did add that this wouldn’t happen before a “thorough analysis”. Elsewhere, over in the US, we learned that Bernie Sanders was seeking to run for the 2020 Democratic presidential nomination. Expect there to be more and more newsflow picking up ahead of the next presidential election with tax policy in particular becoming more of talking point. Yesterday, Bloomberg ran a story concerning Elizabeth Warren’s proposal for a universal child care plan funded by a tax on the ultra-wealthy. This higher-tax agenda from the left looks set to run a lot further.

Finally, in terms of the data that was out yesterday, in the UK we saw the unemployment rate hold steady in December at 4.0% as expected, while headline wages missed slightly (+3.4% 3m/yoy vs. +3.5% expected), albeit offset by an in-line core wages reading (+3.4% 3m/yoy). The data was largely in line with BoE forecasts and continues to underscore the divergence between soft survey data and the firming labour market. In Germany, the headline February ZEW survey reading disappointed at +15.0 (vs. +20.0 expected). That represented a drop of 12.6pts from January. Meanwhile, in Italy, as noted at the top, both industrial sales (-7.3% yoy from +0.5% previously) and orders (-5.3% yoy from -2.2% previously) data was very soft.

In the US, the only noteworthy data release was the NAHB home builders market index, which rose +4pts to 62, its biggest jump since 2017 and a potential signal that the real estate sector is bottoming out. A reading above 50 indicates that more builders view conditions as good than poor. The S&P 500 homebuilders index outperformed yesterday, gaining +0.79%.

On the Fedspeak front, NY Fed President Williams said that it would take “a different outlook either for growth or inflation” for him to support additional rate hikes. This isn’t a huge surprise given his previous comments, but it does further solidify the view that policy is on hold for now unless there is a major upside or downside surprise. Cleveland Fed President Mester said that she supports ending the balance sheet runoff by year-end, endorsing the view articulated by Governor Brainard last week. This is certainly a topic that will be discussed more this year, and maybe in the FOMC minutes due later today.

Looking at the day ahead now, the early release this morning comes from Germany with the January PPI report. Later this morning we’ll get the February CBI survey in the UK before the February consumer confidence reading for the Euro Area is out this afternoon. While there’s no data due in the US, we will get the FOMC meeting minutes from the January meeting. Our US economists expect the minutes to shed more light on how the Fed’s domestic and global growth outlook may be evolving and the lens through which the Committee may view incoming inflation data in the near term. Expect some focus on the balance sheet normalisation program too, which our colleagues expect to reiterate Brainard’s view that the Fed will likely end the roll-off of maturing securities by year-end. Away from that, we’re due to hear from the ECB’s Praet this morning and Fed’s Kaplan this evening, while the US-China trade meetings and meeting between UK PM May and EC’s Juncker should also be a big focus for the market.