US futures jumped and world stocks rallied to a six-month high following the latest dose of daily “trade deal optimism” when the FT reported what everyone already knows (but algos, who have a 10 millisecond memory, have forgotten), namely that the US and China have already resolved most of the easy issues standing in the way of a deal to end their long-running trade dispute but are still haggling over the difficult parts, namely how to implement and enforce the agreement.

That, coupled with some more reassuring economic data, helped S&P futures jump 14 points, fast approaching their Sept all time highs, pushed Germany’s 10-year bond yield back above zero percent, hit the dollar as the euro strengthened for the first time in seven sessions as oil neared the key $70 per barrel mark — a multi-month high — on supply concerns.

“We’re being told that we’re 90 percent of the way there which is obviously encouraging but the final 10 percent — which apparently includes the enforcement mechanism and the removal of tariffs — could take some time to iron out,” said Craig Erlam, senior market analyst at Oanda in London. “Investors are happy to be patient here in the hope that the two sides get this right and put an end to a trade war that has clearly taken its toll on markets.”

And since algos quickly calculated that 10% is less than 90% and ignored the actual politics behind the calculus, they promptly activated buy programs and U.S. equity-index futures rose and the Stoxx Europe 600 index jumped, led by miners, as the latest batch of Service PMI data from Italy to Germany also helped ease some of the concern over the euro area’s growth outlook.

Europe’s Stoxx 600 index rose almost 0.8% to their highest since August. German stocks rose 1 percent to its highest level since October, while in Paris, French stocks scaled a similar high.

Europe’s strong session followed overnight gains in Asia where MSCI’s broadest index of Asia-Pacific shares outside Japan climbed to a seven-month peak, buoyed by stronger-than-expected Chinese services data as China’s Caixin Services PMI printed stronly in March, at 54.4 vs. Exp. 52.3 (Prev. 51.1), the highest since January 2018.

Hopes for a deal to end the trade war between the world’s two largest economies were also prompted by fresh comments from White House economic adviser Larry Kudlow that Washington expects “to make more headway” in talks this week. To be sure, analysts were giddy at the prospect of an imminent deal:

• “What we’re seeing is that markets have climbed a world of worry but there is progress on trade, a recession is unlikely, central banks have made nods to more dovish policy,” said Chris Bailey, European Strategist at Raymond James. “If you put that into the mix I’m not surprised risk assets have moved up.”
• “We are going to get a deal done in China and the U.S.,” said Luke Hickmore, senior investment manager at Aberdeen Standard Investments. “That, with the stimulus China has put in place, and a slightly calmer tone in the U.K. as well, I think is stoking a market that’s wanted to run hotter than it has done for a while.”

Not only have they moved up, but the MSCI World index is now just shy of a bull market from its December lows.

Generally strong world stocks and hopes of a softer Brexit sparked a sell-off in safe-haven government bonds, pushing yields off recent lows. U.S. 10-year Treasury yields rose almost 4 basis points to 2.52%. Germany’s benchmark 10-year German Bund yield rose back above 0, printing at 0.005%. A week ago it hit a 2-1/2 year low at around minus 0.09 percent on concern about the weak economic growth backdrop.

One fly in the Fed’s “rate hike pause” ointment is that oil prices stood near multi-month highs amid concerns about supply. Brent crude rose to as high as $69.92 per barrel, its highest since November and near the psychologically important level of $70 per barrel. It was last up 0.6 percent at $69.80. U.S. West Texas Intermediate (WTI) crude rose 0.34% to $62.79 per barrel. As Reuters noted, news that the US is considering more sanctions against Iran, the fourth-largest producer of the Organization of the Petroleum Exporting Countries (OPEC), and the halting of production at a crude terminal in Venezuela threatened to squeeze supply and pushed oil prices up on Tuesday.

As oil prices surge, the Fed will be hard pressed to explain why it is ignoring what is arguably the biggest cause of consumer anger aimed at higher prices and instead focusing solely on boosting stock rices.

Elsewhere, as the Brexit chaos continues, UK Tory Lawmaker Letwin said the process of seeking an Article 50 extension will go ahead as planned, adding that we can work with the government now; adds that Labour leader Corbyn is ‘someone we can do business with’ regarding Brexit. If negotiations with Labor collapse, PM May is said to consider asking lawmakers to rank Brexit outcomes. Separately, the EU is preparing to offer PM May a long Brexit extension with strict conditions including taking part in European Parliament elections and a possible “gentleman’s agreement” regarding Britain’s conduct (e.g. potentially abstaining from taking part in important decisions over the EU’s future), according to FT. Finally, French President Macron has led other EU leaders in warning that UK PM May’s apparent move to take no-deal Brexit off the table offers no guarantees UK will not crash out of the EU on April 12th. In any case, this shitshow isn’t ending any time soon, and certainly won’t end by fulfilling the will of the majority as May will do everything in her power to prevent or delay an actual Brexit.

In FX, the dollar was pressured as risk sentiment improved amid fresh hope for progress in U.S.-China trade talks and better-than-expected services PMI data in all four of the euro-area’s largest economies. The euro rose as stops were triggered. Sterling extended its gains after British Prime Minister Theresa May said late on Tuesday she would seek another Brexit delay to agree an EU divorce deal with the opposition Labour Party leader, raising hopes of a “softer” Brexit.  The Australian dollar led a risk-on rally, boosted by expectations for a U.S.-China trade deal; New Zealand dollar and Scandinavian currencies followed suit while the allure of traditional havens, such as Treasuries and the yen, faded.

Bitcoin, which inexplicably surged 18.7 percent on Tuesday following a major order by an anonymous buyer, extended its gains by another 1.6 percent to $4,977.48. Spot gold dipped 0.08 percent to trade at $1,291.31 per ounce.

On the macro side, data includes ADP employment change as well as Markit services and composite PMIs.

Market Snapshot

• S&P 500 futures up 0.5% to 2,882.25
• STOXX Europe 600 up 0.7% to 387.70
• MXAP up 0.8% to 162.76
• MXAPJ up 1% to 541.18
• Nikkei up 1% to 21,713.21
• Topix up 0.6% to 1,621.77
• Hang Seng Index up 1.2% to 29,986.39
• Shanghai Composite up 1.2% to 3,216.30
• Sensex up 0.3% to 39,170.16
• Australia S&P/ASX 200 up 0.7% to 6,285.05
• Kospi up 1.2% to 2,203.27
• German 10Y yield rose 4.5 bps to -0.004%
• Euro up 0.3% to $1.1235
• Brent Futures up 0.7% to $69.84/bbl
• Italian 10Y yield rose 1.8 bps to 2.171%
• Spanish 10Y yield rose 1.8 bps to 1.134%
• Brent Futures up 0.7% to $69.84/bbl
• Gold spot down 0.06% to $1,291.66
• U.S. Dollar Index down 0.3% to 97.10

Top Overnight News from Bloomberg

• U.S. and China officials have resolved most of the issues surrounding the deal though they have yet to agree on what happens to existing U.S. duties on Chinese goods and the terms of an enforcement mechanism to ensure China keeps to the trade deal, Financial Times said, citing people briefed on the talks
• China’s Vice Premier Liu He will resume negotiations with his U.S. counterparts in Washington Wednesday as both governments push towards an agreement to end their trade dispute
• A woman carrying two Chinese passports illegally entered President Trump’s Mar-a-Lago resort in Palm Beach, Florida, Saturday and lied to a Secret Service agent, according to court documents filed in West Palm Beach
• Larry Kudlow said the president stands by his choice of Stephen Moore for an open seat on the Fed Board despite recent reports about the possible nominee’s failure to fully pay taxes and alimony
• U.K. Prime Minister Theresa May on Tuesday abandoned her strategy of making Brexit a project of her Conservative Party and Democratic Unionists and asked Jeremy Corbyn, leader of the opposition Labour Party, to rescue her
• Crude advanced to the highest this year after a further reduction in supply from OPEC signaled that global markets are tightening
• Prime Minister Scott Morrison’s government pledged sweeping tax cuts and forecast Australia’s first surplus in more than a decade in a budget aimed at engineering a come-from- behind election victory
• China is drafting rules for overseas investments to be considered part of President Xi Jinping’s Belt and Road Initiative, according to people familiar with the matter, marking the first attempt to better define his signature policy
• Attorney General William Barr hasn’t discussed any part of Mueller’s report with the White House, according to a Justice Department official, but plans to rely instead on his own judgment in deciding whether some details in the report should be withheld under executive privilege
• Cryptocurrency traders may not know what caused the abrupt surge in Bitcoin on Tuesday, but they’re going along for the ride anyway; the virtual currency climbed to a fresh 2019 high on Wednesday, building on a spike yesterday that many market participants struggled to explain

Asian equity markets were mostly higher as trade optimism and Chinese PMI data helped the region shrug-off the indecisive lead from the US, where the global stock rally had stalled amid thin volumes, weak durable goods data and ahead of upcoming risk events. ASX 200 (+0.6%) and Nikkei 225 (+1.0%) were positive with Australia led by miners amid strength in iron ore prices which hit record levels in China and as participants also digested the budget which included an upward revision to the first projected surplus in over a decade and proposed AUD 158bln in tax cuts. Japanese stocks were lifted as risk appetite was stimulated by reports US and China are nearing a final trade agreement with most issues resolved but continue to haggle on enforcement and implementation. Hang Seng (+1.2%) and Shanghai Comp. (+1.2%) also benefitted from the trade hopes and after further encouraging data from China in which Caixin Services PMI topped estimates and printed its highest since January 2018. However, the performance of the mainland was somewhat fatigued after its recent bullish streak and with Bank of Communications underperforming on reports China National Council for Social Security Fund plans to sell 1.49bln of Bocom’s A-shares. Finally, 10yr JGBs were lower as trade hopes ensured a lack of safe-haven demand and with selling exacerbated as prices ran through stops at 153.00. SMBC also suggested the BoJ may reduce its purchases today, although this failed to materialize as the BoJ maintained its Rinban amounts which totalled JPY 1.23tln in 1yr-10yr JGBs and which helped alleviate some of the pressure.

Top Asian News

• RBI Has Scope to Cut India Rate by 50Bps on Thursday: Quantum
• Brookfield Said to Consider $2 Billion China Property Deal
• Trio of Troubles Has Malaysia’s IHH Losing $800 Million in Value
• Pound Volatility Curve Retains Inversion Before May-Corbyn Talks

Major European indices are firmer [Euro Stoxx 50 +0.7%] as the positivity continues from overnight where sentiment was driven by US-China trade optimism and positive Chinese PMI data, although the FTSE 100 (Unch) is the exception to this with the index weighed on by the Brexit-related Sterling strength. Sector wise, material names (sector +1.5%) lead the gains as copper and iron prices are bolstered by the seemingly positive trade news alongside supply-side woes. On the flip side, healthcare names lag (sector -0.8%) with heavyweights Novartis (-1.0%) and Roche (-0.9%) weighed on by Walgreen’s cut in guidance yesterday. Elsewhere, the tech sector (+1.3%) is supported by advances in AMD yesterday (+3% pre-market) alongside Taiwan Semiconductor stating that they expect chip orders to pick up.

Top European News

• Lira Drop Helps Dubai Bank Save $400 Million in Turkey Deal
• Euro Extends Advance on Italy PMI Data, Renewed Trade Optimism
• Euro- Area Services Resilience Softens Manufacturing Blow for Now
• Istanbul Vote Recount Outcome ‘Must Be Accepted by All’: Guven
• Suddenly Inflation Isn’t Turkish Central Bank’s Only Worry

In FX, this week’s risk roller-coaster continues, and the latest turn of the ride has lifted stocks and high beta currencies to the detriment of so-called safe havens, like the Dollar and core bonds. Hence, the Greenback has handed back gains made on Tuesday vs most G10 counterparts and EMs, with the index retreating towards 97.000 again from just over 97.500. The catalysts, another strong Chinese PMI and similar beats across the Eurozone/Europe, bar the UK, reports that the US and China are getting close to a trade agreement and Brexit developments raising prospects of some kind of deal as opposed to no deal.

• AUD/NZD – The Aussie and Kiwi have benefited most from the resurgence in broad risk appetite, with the former also deriving independent impetus from data in the form of retail sales and trade overnight. Aud/Usd has recovered from near 2019 lows to 0.7100+, but may be hampered by more hefty option expiry interest as 1.6 bn runs off between 0.7100-10 at the NY cut. Meanwhile, Nzd/Usd is hovering just below 0.6800 compared to sub-0.6750 at worst as the Aud/Nzd cross holds close to the upper end of a 1.0495-50 range.
• EUR/GBP/CAD/CHF – All firmer vs the Usd following underperformance yesterday, with the single currency boosted by better than expected Eurozone services PMIs across the board and marginally topping Tuesday’s 1.1250 peak, but capped by layered off said to be sitting up to 1.1270. Cable tested the water and resistance into 1.3200 on the back of the aforementioned Brexit manoeuvres aimed at reaching a pact to trigger an extension from April 12 that could lead to a softer withdrawal agreement or terms. However, the Pound was derailed to a degree by a significantly weaker than forecast UK services PMI as the headline recoiled below 50 and IHS predicted this means Q1 GDP stagnation before a downturn in H2. The Loonie continues to recoup losses vs its US peer post-contrasting manufacturing PMIs/ISM on Monday with the aid of firmer crude prices and the overall rebound in risk sentiment to probe over 1.3300, while the Franc is back up around 0.9960 from parity at one stage on Tuesday, but softer vs the Eur within 1.1177-1.1208 trading parameters after more dovish/intervention talk from the SNB.
• SEK/NOK – The Scandi Crowns are still tracking broader swings in risk, along with technical and fundamental impulses, as Eur/Sek and Eur/Nok retreat towards recent lows and chart support levels circa 10.4100 and 9.6000 respectively.
• EM – The Lira remains embroiled in political uncertainty as the main parties wrangle over regional election results against the backdrop of renewed diplomatic angst between Turkey and the US, while latest inflation data has piled more pressure on the Try and CBRT given a firmer than forecast CPI rate. Unsurprisingly, Usd/Try is holding above 5.6100 vs other Usd/regional pairings that are reversing recent rallies, and even the Rand in wake of a weak SA services PMI.

In commodities, prices are on the front foot amidst the overall risk appetite couple with a falling buck. WTI (+0.1%) and Brent (+0.6%) futures have been grinding higher since last night, shrugging off the surprise build in API crude stocks (+3.0mln vs. Exp. -0.4mln) with the former residing just above USD 62.60/bbl having hit resistance at USD 63.00/bbl. The support the oil complex has seen has mostly been due to supply disruptions rather than demand improvement. Traders will be eyeing the DoE release today, although price action may be muted as Iranian and Venezuelan supply woes/ market risk appetite hold onto the spotlight. Elsewhere, metals across the board are benefiting from the easing buck with spot gold (+0.1%) remaining below USD 1300/oz (for now), whilst copper (+1.2%) surges on trade optimism after reports that US and China are inching closer to a deal, with the Chinese trade delegation heading to Washington today for another round of talks. Furthermore, Barclays noted that copper supply-side disruptions have the potential to boost the red metal to USD 7000/tonne. Finally, Dalian iron ore prices were bolstered to record highs, also hit by supply issues, as damage is calculated from the cyclones in Western Australia. Barclays also raised its 2019 iron ore price forecast to USD 75/tonne (Prev. USD 69/tonne).

US Event Calendar

• 7am: MBA Mortgage Applications, prior 8.9%
• 8:15am: ADP Employment Change, est. 175,000, prior 183,000
• 9:45am: Markit US Services PMI, est. 54.8, prior 54.8; Markit US Composite PMI, prior 54.3
• 10am: ISM Non-Manufacturing Index, est. 58, prior 59.7

DB’s Jim Reid concludes the overnight wrap

I visited our new house last night to see how it was progressing with less than three weeks to go of a 9-month renovation project. To say I was blown away was an understatement….. blown away by how much work was needed to be done in 2 and a half weeks! I would say there’s more chance of a Brexit plan being agreed by all parties than it being ready on time but as you’ll see below hopes have been raised on that front last night. Back to the house and the builder told me not to worry and said that it all “usually” comes together at the last minute. Between you and me, the thing I’m most looking forward to is our greatest extravagance. A hot tub? a sauna room? aircon? A wrapping room? No we have none of those… instead the luxury is having designed the kitchen so as to have two dishwashers! Who needs extra cupboard space! Since we’ve had three kids I’ve done more washing up than the rest of my time on this planet. I don’t understand how they can need so many eating and cooking implements and how messy it can get. Life is too short for this so I’m looking forward to opening both doors and shovelling it all in and heading down the golf course instead!

So what will come first, Brexit or me moving in? The chances of the former went up last night as PM May’s press conference after Europe closed was more constructive than expected. Following her marathon cabinet session, May said that she will seek another short Article 50 extension from the EU, will engage with Jeremy Corbyn on an alternative Brexit solution, and will agree to implement whatever solution Parliament passes if these talks break down. This is huge news. She is seemingly now prepared to back down on her prior red lines and also prepared to let Parliament decide on the outcome if she and Mr Corbyn can’t. Recall that the customs union option came within 3 votes of passage on Monday. If parliament could muster the votes to pass that plan or an even softer outcome, PM May has now, for the first time, implied that she would negotiate that with the EU without calling for elections. The removal of that risk and that of hopes of a compromise supported the pound as it rallied +0.88% off its intraday lows after her words. In theory this is very positive news for the pound assuming the Conservative government survives the shrapnel from the internal party in-fighting that this will bring.

In total, the main risks now hinge on the reaction from Labour, the ERG within her own party, from May’s coalition partners the DUP, and from the EU. On the first, opposition leader Corbyn said that he is “very happy” to meet with May, so that’s a positive start. On the ERG, there have been a number of negative comments from members of the group but the worst is probably to come. In a statement, the DUP criticised May’s “lamentable handling” of the negotiations, but said that they will continue to “judge all Brexit outcomes against our clear unionist principles”. That at least leaves open the possibility that the DUP would accept a solution that avoids a border between Northern Ireland and the rest of the UK. Finally, the EU may be unwilling to grant another extension without forcing the UK to participate in EU elections, though we may learn more when Juncker speaks to the European Parliament later today. Donald Tusk seemed to be encouraging patience from his own side.

Prior to last night we learned that there would be no indicative votes today and instead we’re supposed to see MPs debate the new Cooper/Letwin bill, which is designed to prevent a no-deal Brexit next week. We will see if that still occurs given the latest developments. We have until next Wednesday before the emergency EU summit.

Over in markets, it hasn’t quite been so one way in the last 24 hours as it was on Monday with a bit of a lull in newsflow to blame although the Asia session has seen new news. In addition, today’s global non-manufacturing PMIs, tomorrow’s ECB minutes and Friday’s payrolls will also provide us with fresh impetus. We’d expect trade headlines to pick up as China Vice Premier Liu He is scheduled to travel to Washington today to lead a delegation of trade negotiators.

Indeed overnight, the FT has reported that the US and Chinese officials have resolved most of the issues surrounding the deal. The only issues which are yet to be agreed on are what happens to the existing US duties on Chinese goods and the terms of an enforcement mechanism to ensure China keeps to the trade deal. This news, along with better than expected Chinese March Caixin services (at 54.4 vs. 52.3 expected – the highest since January 2018) and composite (52.9 vs. 50.7 last month, highest since June 2018) PMIs, sent Asian markets higher. The Nikkei (+0.83%), Hang Seng (+0.86%), Shanghai Comp (+0.23%) and Kospi (+0.52%) are all up. China’s onshore yuan is up +0.17% to 6.7119. Elsewhere, futures on the S&P 500 are up +0.42%. We also saw Japan’s March services and composite PMIs overnight at 52.0 (vs. 52.3 last month) and 50.4 (vs. 50.7 last month), respectively.

Back to yesterday and after European equity markets marched higher, with the STOXX 600 (+0.35%) closing at its highest level since late September, US equities traded in a bit more of a holding pattern yesterday following the decent three-day run prior to this. The S&P 500 was flat and the DOW -0.30% – the latter hurt by a profit warning from Walgreens Boots, which saw shares fall -12.81%. The NASDAQ (+0.25%) outperformed a bit, mostly thanks to a strong session by Facebook (+3.26%). DB’s Lloyd Walmsley published a bullish report on the stock early yesterday morning (link here ).

Over in rates, Treasuries partially retraced Monday’s steep rise, with 10y yields back down -3.2bps to 2.469% after Monday’s +9.6bps rise. The 2s10s curve steepened slightly to 17bps as two-year yields slid -3.4bps. That came despite a +3.2bps rise in 2y inflation breakevens, partially driven by the oil rally (more below), as the move was driven solely by declining real yields. This morning, yields on 2-year and 10-year treasuries are up 2.1bps and 2.7bps, respectively, thereby further steepening the 2s10s curve to 17.8bps. EM currencies retraced a bit of Monday’s rally as well, with an EM FX index down -0.10%. The Turkish lira remains the most volatile currency in EM space, weakening -1.93% yesterday to within 3% of its 6-month lows.

Bunds also fell -2.2bps and are back down to -0.052% again while Gilts fell -4.3bps in tandem with the Sterling move. BTPs (+2bps) underperformed after Juncker warned that the Italian economy “hasn’t stopped regressing”. In credit, HY spreads were -9bps tighter in Europe but +3bps wider in the US, while WTI oil rose +1.64% following the latest OPEC estimates, which suggested production was down in March. Plus, a regulatory filing by Saudi Aramco showed that the Ghawar oil field – the world’s largest – can pump an estimated 3.8mn barrels per day, notably less than prior estimates of almost 6mn. Oil prices are now up to their highest levels in 5 months, with WTI at $62.60 per barrel and Brent at $69.43.

Moving on. Yesterday’s data in the US proved to be mostly a non-event. Headline durable goods orders in February declined less than expected (-1.6% mom vs. -1.8% expected), however, these were offset by a downward revision to January. The opposite was true for core capex orders, which were down -0.1% mom (vs. +0.1% expected) but offset by an upward revision to January. So net-net a bit of a wash. Last night we also got the March vehicle sales data from several major carmakers. For Fiat Chrysler, Toyota, Honda, and Nissan in aggregate, sales fell -5.5% yoy, modestly better than the -6.2% yoy expected, but still consistent with a slight deceleration in economic activity this year compared to last year. GM reported its Q1 aggregate figures and also showed a drop yoy, while Ford will report tomorrow.

Finally to the day ahead where the data highlight is likely to be the remaining services and composite PMI revisions for March in Europe this morning. We’ll also get February retail sales data for the Euro Area while in the US this afternoon we kick off with the March ADP employment change print (175k expected), followed then by the PMIs and March ISM non-manufacturing (58.0 expected). We’ve also got Fed speakers scheduled with Bostic, George and Barkin speaking in the afternoon at an ABA event (I wanted to put an extra “B” in) while Kashkari then speaks this evening. China Vice Premier Liu He is also scheduled to travel to Washington to lead a delegation of trade negotiators while NATO foreign ministers are due to gather in Washington.