An overnight stock rally fizzled, futures dropped and the pound tumbled, erasing all of its Monday gains as the latest risk-on mood faded away after Theresa May struck a new deal ahead of today’s meaningless meaningful vote, which UK bookies still see May losing resulting in even more confusion over next steps.

European real estate and financial-services shares helped push the Stoxx 600 higher in early trading, although the rally faded away as the session progressed, with the index fading much of its overnight gains…

…. while Asian stocks headed for their biggest gain since January and emerging-market shares jumped. U.S. futures advanced after the S&P 500 and Nasdaq 100 indexes surged a day earlier, helped by news of a technology merger, an upgrade to Apple and signs of stabilization in American retail sales. MSCI’s broadest index of Asia-Pacific shares outside Japan closed up 1%. China’s Shanghai Composite pared early initial gains of as much as 1.9%, sliding back to unchanged, before a last hour bounce sparked perhaps by intervention from the National Team helped China eek out another day of modest gains, even as traders took profits; the CSI 300 Index also trimmed gains after rising as much as 2%, even so the index was up 25% this year while the ChiNext rose 1.1%, close to erasing 2018 losses.

Japan’s Nikkei stock index closed 1.8 percent higher, but Australian shares erased earlier gains to end down 0.1 percent.

A similar fizzle to early enthusiasm was observed on Wall Street futures, where the Emini erased all early losses, while Boeing stock resumed its slide as more countries banned the ill-fated Boeing 737 MAX.

Finally, gains were also faded in the U.K. pound which tumbled 250 pips from its Monday highs after UK’s Attorney General Geoffrey Cox trashed May’s Monday “deal”, saying legal risk of Brexit deal remains “unchanged” following last night’s revisions, though he also says the new deal does “reduce the risk” of the U.K. being locked in the contentious Irish backstop, the provision for avoiding a hard border in Ireland.

Meanwhile, it was not clear if the changes agreed on by May would be sufficient to secure parliamentary support when lawmakers vote around  1900 GMT, having voted down May’s original deal by a record 230 votes in January. “This additional agreement to the existing contract does slightly increase the probability that by tonight the deal will go through, but only slightly increases it,” said Britt Weidenbach, head of European equities at DWS. “The market will probably only react to this in a more positive way once we know what the outcome is going to be. This might not be after tonight, it may be after Wednesday when we have a ruling on No-Deal and prolongation.”

In addition to the Brexit vote outcome, traders will be closely watching today’s US CPI print and Chinese production and retail sales as well as a Bank of Japan policy decision as investors seek to maintain their rediscovered risk apetite. Global stocks have been mostly on the rebound after their worst week since December.

In rates, Germany’s benchmark 10-year government bond yield rose 2.5 basis points to 0.09 percent — moving away from more than two-year lows hit last week in the wake of a dovish European Central Bank meeting. Benchmark 10-year Treasury note yields were at 2.6501 percent compared with a U.S. close of 2.641 percent on Monday.

The dollar index initially shed 0.3 percent before rebounding, while the euro was up 0.3 percent on the day. Cable, as noted, was all over the place.

In commodity markets, WTI (+0.9%) and Brent (+0.9%) futures continue edging higher on the back of heightened risk appetite wherein the former extended gains above USD 57.00/bbl whilst the latter gained a firmer footing above USD 67.00/bbl. Traders will be eyeing tonight’s release of API crude inventories following last-week’s much wider-than-expected build in stocks. Elsewhere, gold (+0.3%) posts marginal gains, aided by a mild pullback in the Greenback, copper (+1.4%) on the hand outperformed on the firmer risk sentiment.

On today’s calendar, expected data include inflation. Dick’s Sporting, Momo, and ZTO Express are among companies reporting earnings.

Market Snapshot

• S&P 500 futures up 0.2% to 2,795.50
• STOXX Europe 600 up 0.1% to 373.98
• MXAP up 1.1% to 158.87
• MXAPJ up 1% to 523.41
• Nikkei up 1.8% to 21,503.69
• Topix up 1.5% to 1,605.48
• Hang Seng Index up 1.5% to 28,920.87
• Shanghai Composite up 1.1% to 3,060.31
• Sensex up 1% to 37,414.86
• Australia S&P/ASX 200 down 0.09% to 6,174.82
• Kospi up 0.9% to 2,157.18
• German 10Y yield rose 2.0 bps to 0.089%
• Euro up 0.2% to $1.1270
• Italian 10Y yield rose 5.6 bps to 2.206%
• Spanish 10Y yield rose 1.3 bps to 1.167%
• Brent futures up 0.8% to $67.10/bbl
• Gold spot up 0.2% to $1,295.95
• U.S. Dollar Index down 0.2% to 97.00

Top Overnight News

• Theresa May didn’t get the power to unilaterally exit the much- hated backstop arrangement aimed at preventing a hard Irish border. Nor did she get a time limit placed on it; European Commission President Jean-Claude Juncker urged the U.K. parliament to approve the revised terms. “It is this deal, or Brexit may not happen at all,” he wrote on Twitter
• China’s Vice Premier Liu He and his American counterparts decided on arrangements for the next stage of trade talks, state-run Xinhua News Agency reported; Liu, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin also held specific negotiations over critical issues about the wording of an agreement in the phone call this morning, Xinhua said, without giving further details
• The European Central Bank’s latest stimulus action remains a sketch that could keep investors guessing for months on its true potency
• Hong Kong authorities have never failed to keep the local dollar at its peg, or since 2005 within a set band against the dollar, yet that hasn’t stopped someone from writing options on a black-swan event
• BOJ’s Amamiya says rates, asset buys, monetary base among BOJ options; will carefully watch impact of sale tax hike; BOJ should do utmost to hit price goal

Asia equity markets traded mostly higher as the region took impetus from the M&A inspired tech-led rally on Wall St and with sentiment also underpinned on Brexit related optimism after UK PM May’s last-ditch effort to reach an agreement with the EU resulted in legally binding changes that is said to strengthen and improve the withdrawal agreement. ASX 200 (+0.1%) was led higher by the energy sector following recent strength in oil prices but with gains eventually pared by weakness in gold miners and financials, while the Nikkei 225 (+1.9%) outperformed with the JPY-risk dynamic in full swing. Elsewhere, Hang Seng (+1.0%) and Shanghai Comp. (+1.8%) conformed to the heightened risk appetite and tech-kindled momentum, while China’s tax commissioner reiterated to enact significant tax cuts and there were also reports that top US and China trade negotiation officials discussed key issues and set the next steps in working arrangements over the phone. Finally, 10yr JGBs were initially subdued with demand sapped as focus was centred on riskier assets and with participants tentative ahead of a 5yr JGB auction, although prices then found mild support on return from the lunch break and after the auction results printed relatively inline with the previous.

Top Asian News

• Mahathir Is Weighing Shutdown or Sale of Malaysia Airlines

European equities are somewhat mixed having waned off opening highs [Euro Stoxx 50 Unch] following a relatively upbeat Asia-Pac session. Sector wise, energy stocks lag their peers alongside telecom names, whilst consumer discretionary outperforms. FTSE 100 (Unch) has been fluctuating with the Pound ahead of tonight’s Brexit Meaningful Vote (analysis available on the headline feed).UK banks are faring well with RBS (+1.5%), Lloyds Group (+2.5%) and Barclays (+1.0%) shares all higher on the latest Brexit developments where PM May secured “legally binding” assurances on the NI backstop. Upside in UK homebuilders [Persimmon +3.9%, Taylor Wimpey +2.7%] are also attributed to Brexit progress. Elsewhere, German Union Verdi has disapproved the proposed merger between Deutsche Bank (-1.4%) and Commerzbank (-1.4%), although share prices were little moved as the news hit the wires. Volkswagen (-0.7%) reported their final numbers which were largely in-line with the prelim report. Finally, State-side, Boeing (-2.0%) shares resumed its decline after Australia became the latest country to ground the Boeing 737 Max 8.

Top European News

• Shell Says It Can Be World’s Top Power Producer and Make Money
• Germany Paralyzed by Trump’s Attacks on World That Made It Rich
• VW Boosts EV Plan to 22 Million Cars as Key Brands Squeezed

In FX, first we look at GBP where some volatility around the raft of UK data that was mostly better than expected, but ultimately it’s all about the looming Meaningful Vote after PM May managed to secure last minute legally binding assurances to the Irish backstop. Sterling remains elevated across the board, though some way off best levels as Cable pivots 1.3200 vs almost 1.3290 at one stage and Eur/Gbp rebounds from circa 0.8475 lows towards 0.8550 awaiting several potentially key and game-changing events before the debate starts in Parliament and the ballot begins from 19.00GMT. In terms of the aforementioned major factors that could have a bearing on the outcome, the Attorney General’s verdict on the addendums to the WA appear paramount and are expected before 11.30GMT when the ERG is scheduled to meet and formulate opinions. On that note, independent legal advice for the Group concludes that the assurances still fall short of providing the UK with a get out from the contingency arrangement, but the DUP decision could sway the ERG’s final judgement.

• NZD/CHF/EUR/AUD All firmer vs the Greenback that remains soft in wake of Monday’s mixed US retail sales release and due to Sterling’s extended recovery from sub-1.3000 lows, as the DXY straddled 97.000. The Kiwi is hovering just below 0.6850 and Franc is back above 1.0100, while the single currency has consolidated its comeback from post-ECB levels under 1.1200 to trade nearer the top of a 1.1245-90 range. Note, several big option expiries in Eur/Usd are close enough to influence trade into today’s NY cut, with 1.4 bn at 1.1250, 2.2 bn at 1.1225 and 1.9 bn at 1.1200 vs 1 bn at 1.1300. The Aussie has also benefited from a general improvement in risk sentiment within 0.7058-80 parameters, but still lagging its NZ peer as the Aud/Nzd cross remains capped ahead of 1.0350.
• SEK/NOK Mixed fortunes for the Scandi Crowns as softer than forecast (overall) Swedish inflation data contrasts with recent Norwegian CPI and the Nok also derives momentum from firm oil prices along with an upbeat Norges Bank regional survey. Hence, Eur/Sek sits around 10.5700 vs Eur/Nok circa 9.7350, +0.15% and -0.15% on the day respectively

In commodities, WTI (+0.9%) and Brent (+0.9%) futures continue edging higher on the back of heightened risk appetite wherein the former extended gains above USD 57.00/bbl whilst the latter gained a firmer footing above USD 67.00/bbl. Traders will be eyeing tonight’s release of API crude inventories following last-week’s much wider-than-expected build in stocks. Elsewhere, gold (+0.3%) posts marginal gains, aided by a mild pullback in the Greenback, copper (+1.4%) on the hand outperformed on the firmer risk sentiment.

US Event Calendar

• 8:30am: US CPI MoM, est. 0.2%, prior 0.0%; CPI YoY, est. 1.6%, prior 1.6%
  • US CPI Ex Food and Energy MoM, est. 0.2%, prior 0.2%; CPI Ex Food and Energy YoY, est. 2.2%, prior 2.2%
• 8:30am: Real Avg Weekly Earnings YoY, prior 1.93%; Real Avg Hourly Earning YoY, prior 1.7%
• 8:45am: Brainard Speaks at Community Reinvestment Conference in DC

DB’s Jim Reid concludes the overnight wrap

I get home last night to hear screaming and crying from the bathroom. I wondered upstairs to see what all the fuss was about only to hear Maisie scream that she didn’t want her hair washed. My wife was getting increasingly exacerbated and eventually said, “Maisie! You have to have your hair washed otherwise it will all fall out and you’ll end up looking like Daddy. You wouldn’t want that would you?” As unnecessary as I thought it was it seemed to do the trick and we had a deal.

I don’t believe Mrs May and Mr Juncker’s negotiations progressed in quite the same manner yesterday but something seemed to click after a day where the omens looked very bad indeed. By late last night, the two politicians had finally agreed on a new deal, which includes three new documents intended to provide additional legal guarantees that the UK can’t be trapped indefinitely inside the backstop arrangement. The new deal doesn’t give power to the UK to unilaterally exit the Irish backstop arrangement nor does it place a time limit on it as many Brexiteers wanted. It does however include a unilateral declaration by the UK regarding the backstop which, which Mrs May suggests has the same legal power as the existing framework. The new addition will give the UK some authority to walk away if the EU doesn’t do enough to replace it with a full trade deal. It gives the independent arbitration panel (comprising senior judges) authority to rule that the EU is acting in such a way as to make the backstop last indefinitely and in the case of “persistent failure” to comply with a ruling “it may result in temporary remedies” for the UK. However, Attorney General Cox’s formal opinion is due later this morning. Pro-Brexit MP and deputy ERG leader Steve Baker  has criticised the deal overnight, saying it falls “far short” of what he was looking for. The key now will be the position of the DUP, with Deputy Leader Dodds saying last that “all of this will need to be taken together and analysed very carefully.” So we’ll have to see how the new deal is received by parliament, but the initial reception from the financial markets has been positive, with the pound trading +0.418% stronger overnight after its +1.04% rally during yesterday’s trading session.

So the main event today will be the vote on the Withdrawal Agreement and its new accompanying unilateral declaration by the UK. It will likely be voted on shortly after 7pm London time (3pm New York). May’s coalition has a 16-vote majority, so she can afford to lose up to 15 votes before her deal fails. She lost 128 votes, split between her own Conservative Party and the DUP, in the last vote on her deal. So a tall order, and I’d imagine that she may still lose but if so can she reduce the loss to a manageable total her deal still may have some legs.

Ahead of this crucial vote, the good news is that markets have kicked off the new week in a decidedly better mood compared to the last few days thanks to a bit of M&A and some green shoot signs in the latest US retail sales data. Indeed the S&P 500 rose +1.47% yesterday after declining every day last week and also in eight of the last nine session prior to yesterday. We’re now back to only being down -0.46% since the start of that negative run. NVIDIA (+6.97%) was the biggest mover on a percentage basis after agreeing to buy chipmaker Mellanox. Other chipmakers also rallied, with the Philadelphia semiconductor index up +2.40%. The NASDAQ also rose +2.02% while the DOW (+0.79%) lagged behind after Boeing (-5.33%) fell by the most since October after select airlines grounded flights in the wake of the tragic weekend crash in Africa. Shares were down as much as -13.40% at the open so in fairness they recovered well, and we should also add that the share price is only back to where it was early last month. Cash bonds were fairly calm too, with the 2.8% 24s down less than half a point. In any case, when it was all said and done, yesterday turned out to be a decent case study of the difference in performance of a (nonsensically) price weighted index versus a market cap weighted index. The outperformance of the S&P over the DOW, at 0.68% yesterday, was the most since January 31st this year (which was impacted by a big fall for DowDuPont), however it’s a pretty rare occurrence to see as big a divergence, with only eight such instances of such outperformance since 2010.

The tone was better in Europe too although it played second fiddle somewhat to deciphering what on earth was going on in and around Downing Street. The STOXX 600 closed up +0.78% and European Banks rebounded +2.06%, which pares the month to date loss to a slightly more palatable -4.32%. HY credit spreads were -3bps tighter in Europe and -4bps tighter the US while rates were a bit less active. Bunds touched what would’ve been a new 29-month low of 0.059% but closed unchanged around 1bp higher. Treasuries were up +1.1bps post the latest retail sales data, while BTPs (+5.7bps) also underperformed following comments from Salvini warning against “colonizing Italy”. EM FX (+0.29%) also had a better day with the wider risk on move, although was also helped by the move for oil with WTI (+1.37%) boosted by reports that Saudi Arabia was to extend deep supply cuts into next month.

Overnight markets in Asia are also moving higher following Wall Street’s lead with the Nikkei (+1.95%), Hang Seng (+1.40%), Shanghai Comp (+1.81%) and Kospi (+0.87%) all up. Elsewhere, futures on the S&P 500 are up +0.26% and 10y treasury yields are up +1.6bps. In other news, China’s state-run Xinhua News Agency reported that China’s Vice Premier Liu He and the US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin have decided on arrangements for the next stage of trade talks while adding that they also had specific negotiations over critical issues about the wording of an agreement in a phone call this morning.

Looking back on the US data from yesterday now. Headline retail sales in January rose +0.2% mom which was slightly ahead of expectations for a flat reading, however there were notably bigger beats for the core (+1.2% mom vs. +0.6% expected) and control group (+1.1% mom vs. +0.6% expected) readings. That said, the data did come with significant downward revisions to the prior two months. Our US economists made the point that the decline in retail control in December, at -2.3% mom, is now the second largest on record and the biggest since January 2000. So that should weigh on Q4 GDP by 0.1 to 0.2 percentage points, but at least it points to improvement moving forward.

Prior to this in Germany the January industrial production print disappointed at -0.8% mom (vs. +0.5% expected) however there was a decent upward revision to the data in December. Staying with data, we should also note that yesterday Turkey entered a technical recession following a second consecutive negative quarter on quarter GDP reading (-2.4% qoq for Q4). The Turkish Lira was little changed which goes to show that a slowdown is fully priced in.

Also yesterday, President Trump’s administration released their budget blueprint for the 2020 fiscal year. It included a $54 billion cut to discretionary spending, a cut of around 9% versus this year’s budget. The proposal would also cut social spending on healthcare programs, and shift funding to the departments of Homeland Security and Defense. With Democrats in control of the House, his proposal is basically irrelevant to the budget process. That said, it does provide a useful window into President Trump’s priorities and reelection campaign strategy, which looks likely to focus on national security and immigration.

While Brexit developments might dominate much of the spotlight today, there is also US CPI data to watch out for this afternoon. The consensus expects a +0.2% mom core reading which would be enough to likely hold the annual rate at +2.2% yoy for a fourth consecutive month. Away from this we’ll get the February NFIB small business optimism reading (+1.2pts to 102.5 expected) while in the UK this morning we’ll get the January trade balance, as well as the latest industrial production print and latest monthly GDP reading. Away from the data the ECB’s Lautenschlaeger is due to speak this morning while the Fed’s Brainard speaks this afternoon. The European Parliament is also due to vote on a measure tied to Huawei called “Security Threats Connected with the Rising Chinese Technological Presence”.