The historic, post-Christmas rally struggled for a second day, with the S&P still unable to decisively cross the critical 2800 resistance level and sliding in a quiet overnight session, while European shares also faded after a mixed Asian session as investors await fresh catalysts on trade and monetary policy. Meanwhile, the dollar advanced for a sixth day as Treasuries edged higher.

Carmakers fell and miners rose, leaving the Stoxx Europe 600 Index little changed with the DAX underperforming peers as auto names weigh alongside banks and insurance names with markets shrugging off a downbeat global economic assessment from the OECD. European banks were again hit by the ever-widening money-laundering scandal which seems to add more names with every passing day. On Wednesday, RBS said it was looking into allegations of money laundering through certain Dutch banks and reports this may concern an ABN Amro business line acquired by RBS. Investors can now add regulatory penalties to the list of bank sector worries after bank were the second-worst Stoxx 600 performer in 2018, hit by political uncertainty, a flattening yield curve and low rates. That relative peformance has continued to send the price ratio vs the Stoxx 600 lower this year, with the earnings season disappointing and consensus 12-month forward EPS estimates falling almost 4%.

Unable to rise above 2,800 for two weeks in a row, S&P 500 futures had no other choice but to decline. Eminis have now been trading in a tight, 20 point range sine mid-February.

Earlier in Asia, a familiar pattern emerged as Chinese shares once again outperformed as the local stock bubble is rapidly scrambling to recreate its 2015 majesty while Japanese equities dropped. The Shanghai Composite surged another 1.6%, rising above 3,100 after a last hour ramp perhaps the result of China’s National Team attempts to herd even more mom and pop investors into the rising momentum. Volumes were again massive, with over 1 trillion yuan trading on Wednesday.

Elsewhere in Asia, RBA Governor Lowe reiterated his neutral stance nothing that the RBA has flexibility to adjust monetary policy in either direction, probabilities of a rate hike or cut are evenly balanced. He also stated it is hard to imagine a rate hike this year, and it is unlikely inflation will be a problem anytime soon. Lowe added that he is confident inflation will get back to the middle of 2-3% target range, Q3 and Q4 GDP likely to be significantly below trend. The AUD was hit hard when the Australian Real GDP for Q4 printed at 0.2% vs. Exp. 0.3% (YY Q4 2.3% vs. Exp. 2.5%).

Investors remain jittery, looking for hints on what Trump will do next on negotiations with China as trade remains high on the agenda. Meanwhile, the bond market signals more caution and Morgan Stanley is now predicting Treasury yields will drop as low as 2.35% by the end of the year. Traders will also get a jolt from the ECB’s policy decision today when Mario Draghi may announce the long overdue TLTRO.

In rates, traders saw a pop higher in German Bund futures, with 10y and 30y yields initially -3bps as the curve bull flattened, before gains were pared dragging USTs off the highs, while peripheral bonds tightened modestly to core. Gilt yields were ~2bps lower across the curve as Brexit anxiety remains elevated. The Bloomberg dollar index traded in the middle of its overnight range, stronger for the sixth day and defying Trump’s latest dollar bashing.

The pound weakened on speculation U.K. Prime Minister Theresa May could be in for another bruising vote in Parliament on Brexit, and the Australian dollar sank after weak GDP data on the economy spurred bets on interest-rate cuts. Emerging-market stocks gained for a fourth day and currencies were steady.

In Central bank news, BoJ Board Member Harada (Dissenter) opposed the BoJ’s new forward guidance due to the view that guidance must be data-dependent and not calendar-dependent. In his view, forward guidance must have a commitment to keep rate low until inflation beats expectations. He also said underlying inflation weakness could weigh on inflation expectations and delay the acceleration of inflation, and despite the rising household income.

In geopolitical news, North Korea was reportedly taken aback by the sudden end to the Trump-Kim summit; and it will take North Korea some time to review what happened; according to Korean press citing the South Korean government. US National Security Adviser Bolton said US will increase sanctions on North Korea if it does not move towards denuclearisation.

In the latest Brexit news, EU and UK Brexit talks ended with no agreement but are to continue on Wednesday; according to sources. Furthermore, an EU official said the talks did not go well. A senior UK minister, who is directly involved in Brexit planning, said: “It’s inevitable there would have to be a technical extension” and added that a month is unlikely to be enough, two months would be needed to get the legislation through, and this is accepted in government. If UK MPs reject PM May’s deal a second time next week, parliament would take control and force a softer Brexit; according to Chief Whip Smith.

Elsewhere, commodities were led lower by oil after API showed a massive buildup in U.S. crude stockpiles.  Brent (-0.2%) and WTI (-0.9%) prices are in the red following the larger than expected build in API Crude Inventories yesterday of 7.4mln vs. Exp. 1.2mln. If the API build is confirmed by EIA data later on today this would be a large contrast to the prior draw. That said, UBS highlighted that a build of this size would not mean a major deviation from the seasonal average within the context of the prior two months data, as such should not result in a lasting impact on oil prices. Elsewhere, China have cancelled Canadian Co. Richardson Internationals registration to ship canola to China; following this, China’s foreign ministry state that harmful pests have been discovered in samples taken from Canadian Canola oil and a serious problem has been highlighted in one Co’s shipments. Although, it is currently not clear which company this refers to. Gold (-0.1%) is approaching the bottom of its narrow USD 4/oz range, but is largely unchanged on the day. Elsewhere, the World Platinum Investment Council stated that the global platinum market will this year experience the largest surplus since around 2013.

Besides the ECB, data on ADP private payrolls, mortgage applications, and the trade balance are due. Earnings include Dollar Tree and Brown-Forman.

Market Snapshot

• S&P 500 futures down 0.2% to 2,786.50
• STOXX Europe 600 unchanged at 375.63
• MXAP down 0.04% to 159.45
• MXAPJ up 0.1% to 526.46
• Nikkei down 0.6% to 21,596.81
• Topix down 0.3% to 1,615.25
• Hang Seng Index up 0.3% to 29,037.60
• Shanghai Composite up 1.6% to 3,102.10
• Sensex up 0.6% to 36,646.46
• Australia S&P/ASX 200 up 0.8% to 6,245.62
• Kospi down 0.2% to 2,175.60
• German 10Y yield fell 1.5 bps to 0.153%
• Euro down 0.04% to $1.1303
• Brent Futures down 0.6% to $65.46/bbl
• Italian 10Y yield fell 3.1 bps to 2.349%
• Spanish 10Y yield fell 1.7 bps to 1.137%
• Brent Futures down 0.6% to $65.46/bbl
• Gold spot down 0.1% to $1,286.42
• U.S. Dollar Index up 0.05% to 96.92

Top Overnight News by Bloomberg

• President Donald Trump is pressuring U.S. trade negotiators to cut a deal with China soon in hope of fueling a market rally, as he grows increasingly concerned that the lack of an agreement could drag down stocks, according to people familiar with the matter
• Wall Street could face fresh restrictions on bonus payments as regulators appointed by President Trump consider dusting off post-crisis rules that have long been on the back burner, according to two people familiar with the matter
• The global economy is suffering more than expected from trade tensions and political uncertainty which are clouding prospects particularly in Europe, according to a gloomy report from the OECD
• Japan’s economy is at risk of sliding into a recession after a demand-sapping sales tax hike planned later this year, despite a raft of government measures to limit its impact, according to Bank of Japan board member Yutaka Harada
• China’s yuan has been the hottest carry trade in Asia this year, thanks to its rapid advance and muted price swings
• When Qatar sells debt, it sells big. The gas-rich nation is planning a three-part issuance less than a year after raising $12 billion in one of the largest offerings in emerging markets. It’s joining a host of borrowers across developing nations that raised $336 billion in 2019, a record on a year-to-date basis, according to data compiled by Bloomberg

Asian stocks were mixed following a muted lead from Wall Street in which the Dow, S&P and Nasdaq all closed just below breakeven. ASX 200 (+0.7%) shrugged off poor economic data and advanced as the material and mining sectors lead the gains, while Nikkei 225 (-0.6%) underperformed as the index is weighed on by a marginally firmer domestic currency alongside China-exposed sectors after China’s announcement of tax cuts yesterday. Elsewhere, Shanghai Comp. (+1.6%) and Hang Seng (+0.2%) gained momentum following yesterday’s NPC announcement alongside effects from the MSCI upgrade last week. RBA Governor Lowe reiterated his neutral stance; RBA has flexibility to adjust monetary policy in either direction, probabilities of a rate hike or cut are evenly balanced. He also stated it is hard to imagine a rate hike this year, and it is unlikely inflation will be a problem anytime soon. Lowe added that he is confident inflation will get back to the middle of 2-3% target range, Q3 and Q4 GDP likely to be significantly below trend. Australian Real GDP QQ SA Q4 0.2% vs. Exp. 0.3% (Prev. 0.3%) Australian Real GDP YY SA Q4 2.3% vs. Exp. 2.5% (Prev. 2.8%).

Top Asian News

• Trump Is Said to Push for China Deal With Market Gains in Mind
• U.S., China Trade Deal Leaves Currencies as Fighting Ground
• Midea Is the Latest China Stock to Near Foreign Holding Limit

Major European indices are moving towards being unchanged [Euro Stoxx 50 -0.1%] after opening lower and subsequently extending losses; in spite of largely stronger performance overnight. The FTSE 100 (+0.1%) is marginally outperforming its peers boosted by strong performance in DS Smith (+4.1%) after the Co. announced they are selling their plastics division for GBP 585mln. Additional support for the index stems from heavyweights British American Tobacco (+3.8%) and Imperial Brands (+1.3%) in the green following FDA Chief Gottlieb resigning, as his tenure was highlighted by a high-profile push to lower youth smoking including e-cigarettes; this may have also result in some upside for US tobacco names such as Phillip Morris. Other notable movers include Schaeffler (-8.4%) at the bottom of the Stoxx 600 following the announcement of a restructuring program and issuing a warning about a challenging and demanding auto market ahead. Separately, Subsea 7 (+3.7%) are higher after they were awarded 3 contracts by Woodside, describe as major contracts, which may exceed USD 750mln in value.

Top European News

• Not Enough Votes Yet as Brussels Talks Continue: Brexit Bulletin
• Greek Stocks Party Like It’s 1999 as No-Growth Era Seen Over
• L&G Tumbles as Cash Boost From Retirement Business Disappoints
• Biggest Fortune in EU’s East Gets Caught Up in Huawei Scandal

In FX, the DXY hovers just shy of the 97.000 handle and Fib resistance a whisker above (97.004 vs Tuesday’s 97.017 peak). Usd/Jpy is back below 112.00 after what appears to have been a false break-out to circa 112.12 yesterday (and also a fleeting Fib breach), but the pull-back could be shallow given 1.2 bn option expiries running off from 111.80-112.00 at the NY cut. The Franc is holding just off 1.0055 lows and pivoting 1.1350 vs the single currency, while Eur/Usd remains anchored around 1.1300 with 1.1305 eyed as a key chart point on a closing basis and expiries also in the mix as 1 bn resides at the 1.1300 strike.

• AUD/NZD – No respite for the Aussie as a disappointing Q4 growth update extends the run of mainly sub-forecast data releases and adds more justification for the RBA’s shift to neutral policy mode. In fact, comments from Governor Lowe in the run up to the GDP update could be construed as more dovish on balance given that he effectively ruled out any prospect of tightening this year, while reiterating equal odds of a hike or cut in terms of the next rate move, and the market certainly took heed as Aud/Usd collapsed from just under 0.7100 to circa 0.7024 amidst a cascade of calls for 2 OCR eases of 25 bp by the end of 2019 in line with Westpac’s pre-emptive downgraded forecasts in February. Predictably, the Kiwi saw some contagion to a low not far from 0.6750 at one stage, but Nzd/Usd has rebounded relatively firmly to 0.6780+ on favourable cross-winds as Aud/Nzd extends losses through 1.0400 to 1.0360. Note, however, Aud/Usd may yet derive some traction and get a reprieve to stave off a more concerted test of 0.7000 via decent option expiry interest between 0.7045-50 (1 bn).
• GBP/CAD – The Pound continues to be buffeted by fluctuating Brexit sentiment after a brief boost courtesy of hawkish-leaning remarks from BoE Governor Carney late yesterday, with Cable back down near 1.3100 and a recent double-base a few pips short of the big figure, while Eur/Gbp has rebounded to the 0.8600 area again. Back to Brexit, and the bottom line remains no further progress after latest high level talks between UK and EU officials and apparently quite terse negotiations in Brussels as the baton passes to less senior personnel today. Turning to the Loonie, another downturn in crude prices and ongoing angst between Canada and China has culminated in Usd/Cad creeping up further towards the 1.3400 level, as offers said to be layered from 1.3375 to the next round number are soaked up, but the looming BoC policy meeting will likely provide more impetus. On that note, options pricing suggest a break-even of 67 pips for the impending event.

In commodities, Brent (-0.2%) and WTI (-0.9%) prices are in the red following the larger than expected build in API Crude Inventories yesterday of 7.4mln vs. Exp. 1.2mln. If the API build is confirmed by EIA data later on today this would be a large contrast to the prior draw. UBS highlight that a build of this size would not mean a major deviation from the seasonal average within the context of the prior two months data, as such should not result in a lasting impact on oil prices. Elsewhere, China have cancelled Canadian Co. Richardson Internationals registration to ship canola to China; following this, China’s foreign ministry state that harmful pests have been discovered in samples taken from Canadian Canola oil and a serious problem has been highlighted in one Co’s shipments. Although, it is currently not clear which company this refers to. Separately, US National Security Advisor Bolton says he is looking at fresh sanctions against Venezuela to increase the pressure on President Maduro. Gold (-0.1%) is approaching the bottom of its narrow USD 4/oz range, but is largely unchanged on the day. Elsewhere, the World Platinum Investment Council stated that the global platinum market will this year experience the largest surplus since around 2013.

US Event Calendar

• 7am: MBA Mortgage Applications, prior 5.3%
• 8:15am: ADP Employment Change, est. 190,000, prior 213,000
• 8:30am: Trade Balance, est. $57.9b deficit, prior $49.3b deficit
• 2pm: U.S. Federal Reserve Releases Beige Book

Central Banks

• 12pm: Fed’s Williams Speaks to Economic Club of New York
• 12pm: Fed’s Mester Participates in Moderated Discussion
• 2pm: U.S. Federal Reserve Releases Beige Book

DB’s Jim Reid concludes the overnight wrap

The “March Flu” lives on with some power but I’m returning to functioning adult duties but yesterday was another day to reflect on getting older and being more out of touch. To set the scene as a music geek there was a time between around 1980 and maybe the early 2000s when I could have probably recited every number one single over the period in the UK in chronological order. However at some point in the last 10-15 years I lost touch with the charts even if I still try to discover new music when I can. Anyway at the beginning of the year I heard this great new song on a random Spotify (venue of some great DB podcasts) playlist and have played it to death on my headphones since. It was my little discovery/secret and made me feel cool that I still had an ear for music. Anyway on randomly flicking through the newspaper yesterday I stumbled across the U.K. singles chart and to my confusion discovered that the song I thought was my little secret is actually number 1 in the charts. Nice to be so out of touch that you’re secretly in touch. The song is called “Someone You Loved” by Lewis Capaldi. To be honest there are a lot of similarities to “Someone Like You” by Adele. So if that song is your bag then please hunt out. If it’s not you probably should avoid. But then again if you’re under 30-35 you probably know all this already.

After the trade euphoria that kick started the week, markets have quickly become stuck in a soggy patch with no real catalysts to push them one way or the other with any conviction. The good news is that we’ve got an ECB meeting and a payrolls Friday to look forward to in the last two days of this week so hopefully that will inject a bit of energy back into markets again. In the meantime, equity markets were a little directionless yesterday before the S&P 500 ended -0.11%. That is now five down days in the last six however the cumulative loss during that run is only -0.23% so it’s hardly been a material move. Elsewhere, the NASDAQ (-0.02%) and DOW (-0.05%) also just about closed in the red while the STOXX 600 (+0.15%) managed to finish onside having clawed back earlier losses. Part of the underperformance in the US might have been due to Secretary of State Pompeo talking about Trump being ready to walk away from a trade agreement with China unless he secures a “perfect deal” however the reality is that Pompeo has been less directly involved in talks between the two sides so the comment was taken with a bit of a pinch of salt.

Corporate headlines also impacted markets, the biggest impact coming from comments from GE’s CEO Larry Culp. He said at a conference that he expects free cash flow from the firm’s industrial business to be negative this year, after a healthy positive cash flow of $4.5bn last year. GE stock fell -4.72% and its 2035 bonds traded +10bps. Weakness in GE had weighed on corporate credit last year, but indexes of US IG and HY cash credit closed near flat yesterday. In broader equities, the industrials sector led declines in the S&P 500, dropping -0.64%. On the other hand, a bright spot was the US retail sector, which advanced +0.26% after Target (+4.60%) and Kohl’s (+7.33%) both announced profit projections for this year that topped consensus expectations.

As for government bond markets, well Bunds traded as high as 0.1838% intraday yesterday post the more palatable PMIs (more on the below) but ultimately yields faded as sentiment turned with Bunds eventually finishing just +1.0bps higher at 0.168%. BTPs (-3.1bps) actually outperformed after Italy’s Q4 GDP reading was revised up to a slightly smaller contraction (-0.1% qoq from -0.2%) – albeit one that still left Italy in a technical recession at the end of last year.

Meanwhile, Treasuries also retraced an early selloff of +2.5bps to close the day flat at 2.72% (-1.4bps this morning). A fairly decent ISM non-manufacturing (see below) was offset somewhat by dovish comments from the Fed’s Rosengren. This was a little bit of a surprise given that he was one of the more hawkish officials who had worried about overheating risks in the past. Instead, Rosengren said that “it may be several meetings before the Fed has a clear read on whether economic risks are becoming reality”. So that puts Rosengren more in the patience camp for now.

This morning in Asia markets are trading mixed with the Nikkei (-0.69%) and Kospi (-0.32%) down while the Hang Seng (+0.31%) and Shanghai Comp (+0.94%) are up. Elsewhere, futures on the S&P 500 (-0.28%) are heading lower and the Australian dollar is weak (-0.71%) this morning as Australia’s Q4 GDP came in one tenth lower than expected at +0.2% qoq leading to traders increasing their probability of a rate cut. In other news, the BoJ has increased the buying of bonds in the 5y-10y maturity bucket by JPY 50bn at today’s regular operation (JPY 480bn today vs. JPY 430bn in last week). However, the increase was expected after the BOJ last week tweaked its monthly bond-purchase plan and reduced the number of days it would buy 5-10yr bonds to four in March, from five in February.

Overnight, BoJ board member Yutaka Harada has said that Japan’s economy might slide into a recession after a planned sales tax hike later this year, despite a raft of government measures to limit its impact. He cited the example of the 2014 sales tax hike which hit consumption hard and as a result the BoJ ramped up its stimulus 6 months into the hike. Harada is definitely at the dovish end of the committee.

Staying in the region, with China’s NPC into its second day, yesterday our China Chief Economist Zhiwei Zhang outlined his summary of the government’s 2019 work plan which you can find here . Zhiwei believes that the speech sent more signals of policy easing – both fiscal and monetary – and as such he now expects two cuts to the benchmark lending rate of 25bps each in Q2 and Q3.

Back to the PMIs, upward revisions to the core and better than expected non-core readings meant we saw the services reading for the Euro Area revised up half a point to 52.8 and therefore the highest since November. That left the composite at 51.9 which means it finally snapped a run of five consecutive monthly declines. So finally some signs of improving momentum in Europe, or at least in the services sector. Germany’s services reading was revised up from 55.1 to 55.3, France to 50.2 from 49.8 while there were beats for Italy (50.4 vs. 49.5 expected) and Spain (54.5 vs. 54.3 expected). All eyes turn to the ECB tomorrow however one has to expect that the data plays into the wait-and-see message that we’ve been getting from officials of late.

We should also note that the services reading for the UK also surprised to the upside yesterday at 51.3 (vs. 49.9 expected) – up 1.2pts from January. That being said the underlying details were weaker including the employment component. Sterling closed flat, with downside pressure from Brexit headlines offset by positive monetary policy signals. First, Bloomberg headlines popped up just after lunch suggesting that no breakthrough was expected at the Brexit talks yesterday in Brussels. A further story suggested that no agreement was likely on the backstop before the end of this week and that talks could potentially stretch into the weekend (how many times have we said that on both pure EU issues and with Brexit). On the other hand, the pound got some support via comments from Bank of England Governor Carney, who said that “the path of interest rates is not quite high enough,” suggesting that current pricing for the next rate hike for Q4 this year may not be in-line with his own expectations. Staying in the U.K., Bloomberg reported (citing sources) yesterday that the UK PM May’s chief whip Julian Smith is not confident that he has the numbers for March 12th Brexit vote and has predicted that in the votes that follow, a no-deal Brexit would be taken off the table, and the government would be instructed to seek an extension to talks. He also said that he expected lawmakers to put down further amendments that would pass and put the UK on course to staying in the customs union. Sterling is trading weak (-0.32%) this morning as Reuters overnight confirmed the above Bloomberg story that the Brexit talks yesterday didn’t yield any progress and cited an EU official as saying they didn’t go well!

Back to yesterday’s data and as well as the PMIs, we also got the February ISM non-manufacturing reading in the US which looked particularly impressive at a headline level (59.7 vs. 57.4 expected) after jumping 1.7pts and to the highest since November last year. The new orders component also rose 7.5pts to 65.2 and the highest since 2005 however the one small negative was a slight drop in the employment component to 55.2 from 57.8 last month. That said, today’s ADP (190k expected) is likely to be more important for setting payrolls expectations this Friday.

As for the other US data yesterday, new home sales for December printed at 621,000, better than expected but along with a downward revision to the prior month, leaving the overall outlook roughly unchanged. The Treasury’s monthly budget statement showed a surplus of $8.7bn for January, marginally smaller than expected. These statement will become more interesting when we get deeper into tax season over the next few months, to help us better gauge the impact of last year’s tax cuts. Finally, the final Markit composite PMI for February was revised lower by 0.3pts to 55.5, still its highest level since last July.

Finally, in terms of the day ahead, we’ve got no data releases scheduled in Europe this morning while in the US the focus should be on the February ADP employment change reading, and the December trade balance. Later this evening we’ll also get the Fed’s Beige Book while the Fed’s Williams and Mester are due to speak this evening in New York and Ohio, respectively. The BoE’s Cunliffe and Saunders are also slated to speak while the OECD’s interim economic outlook is also due to be released.