Hardly a trader had walked into their New York office on Wednesday morning and the session was already enough to exhaust an algo.

In a stark reversal of the Tuesday overnight session where early optimism gradually faded and was replaced by sheer fear and loathing of this week’s trade deal announcement (with Beijing going so far to even threaten to cut off NBA access after a hilarious virtue signalling fiasco), this morning we have moved from trade deal pessimism to growing optimism, when first, shortly after 5am ET, Bloomberg reported that China is open to a “partial trade deal” despite the tech blacklist imposed by the US on Monday. The report added that China would accept a limited deal as long as no more tariffs are imposed by US President Trump, including the two rounds of higher duties set to come into effect later this month and in December and noted that China would offer non-core concessions such as continued purchases of agri products, but would not give in on major sticking points.

This report sent the Emini future up by almost 20 points, when just minutes later, at 545am the FT reported that China had offered to buy an extra $10bln of US goods per year, from $20BN to $30BN, to ease the trade war. This burst of “trade deal optimism” spiked the Emini higher by another 20 points, with S&P futures rising as high as 2,934 before paring all gains after it emerged that the FT itself admitted its report was mostly fake news, when it revised its initial report to say that the Chinese delegation led by Liu He was only offering to boost annual purchases of soy beans to 30 million tonnes from 20 million currently, which would be equivalent to a laughable $3.25BN in additional orders at current rates.

This is “summarized” in the chart below.

Subsequent to this pandemonium of flashing red headlines and FTake news, China’s Global Times editor added to the optimism when he refuted reports that said the Chinese delegation would cut short its stay in Washington noting the Chinese delegation plans to leave Fri night, which means they will complete the scheduled consultation agenda.

This followed a Tuesday report from the SCMP according to which the Chinese delegation was to cut short its trip by one day, framing the in a negative, “doomed from the beginning” light. And while GT’s Hu Xijin tried to play down the importance of the delegations leaving date, saying it has no bearing on the negotiation schedule…

… at this point even the algos had had enough hollow optimism, and refused to move, with the S&P futures last seen trading just below 2,920 which is still nearly 30 points above where the future closed on Tuesday, as it dumped to session lows despite the Fed’s announcement of QE4.

The furious surge in the US as “trade talk optimism”^TM returned quickly spread across the world, with European stocks a sea of green as tech companies and carmakers led a broad-based advance. Earlier in the session, Asian stocks dropped, led by technology firms, impacted by the poor US close on Tuesday as today’s trade headlines had yet to hit. Most markets in Asia closed down, with Taiwan and Philippines leading declines while Shanghai and Mumbai advanced. South Korea’s market was closed for Hangul Day. Japan’s Topix index retreated 0.3%, as electronic and machinery makers weighed on the gauge. Renesas Electronics slumped as much as 6.2% after Mitsubishi UFJ Morgan Stanley said the company’s acquisitions are hurting its finances and growth. The Shanghai Composite Index closed 0.4% higher, supported by large financial firms. China-U.S. relations showed signs of deterioration ahead of a new round of trade negotiations. India’s Sensex advanced 1.2%, with lenders including ICICI Bank and HDFC Bank among the biggest boosts

Of course, for all the posturing and rumors, the high-level U.S.-China trade talks are only set to resume in Washington tomorrow even as relations have deteriorated sharply between the two countries, despite what algos “think.” While a broad agreement seems unlikely, China signaled it’s open to a limited deal, provided no more tariffs are imposed by President Donald Trump, according to an official. In return, Beijing would offer non-core concessions like purchases of agricultural products without giving in on major sticking points. Whether Trump – who has previously said he would not accept a partial deal – would agree to this proposal, remains to be seen.

Trade talk resume just as the Trump administration on Tuesday slapped visa bans on some Chinese officials and placed a number of Chinese technology firms on a blacklist. Bloomberg also reported the White House is moving ahead with discussions about restricting U.S. government pension investments in China.

The latest U.S.-China flare-up overshadowed comments by Federal Reserve Chairman Jerome Powell, who said the central bank will resume purchases of Treasury securities, i.e. launch QE4 just don’t call it QE4, to avoid a repeat of recent turmoil in money markets, while hinting at the possibility of another rate cut. Minutes of the Fed’s last rates meeting will be released tonight, providing further insight into policy makers’ thinking ahead of their next meeting at the end of the month.

“Judging from this week’s U.S. onslaught on Chinese firms, trade negotiations are going to prove less constructive than thought, intensifying risks to global growth,” said Nema Ramkhelawan-Bhana, an economist at FirstRand Bank in Johannesburg, in note to clients. “In the absence of fiscal expansion, countries will defer to central banks to cushion the blow by providing further policy accommodation.”

In geopolitical news, US and Kurdish officials expect Turkey to launch an attack on Northeast Syria within the next 24 hours, according to Foreign Policy’s Pentagon Correspondent. Separate reports noted that US officials have informed Syrian Kurds that Turkey is likely to attack on air and ground in the next 24 hours, Turkish attack appears coordinated with Russians, according to Washington Post’s Ignatius citing sources. Turkish President Erdogan’s aid said the Turkish military together with the Free Syrian army will cross the Turkish-Syrian border shortly. US Senator Lindsey Graham warned the Turkish government that it did not receive the green light to enter Northern Syria, and added that “there is massive bipartisan opposition in Congress, which you should see as a red line you should not cross.” Subsequently, were reports that Turkish troops had crossed the Syrian borded although a Official clarifies that the incursion was yet to begin, though they are at the border

Elsewhere, the Bloomberg Dollar Spot Index snapped a two-day advance as algos were once again optimistic on U.S.-China trade talks even amid signs of deteriorating relations between the two sides. The pound climbed toward $1.23 on a Times report that the European Union is ready to make a major concession over the Irish backstop, before paring the entire advance as the report was sternly denied by virtually everyone.

The yuan climbed, helped by trade optimism and a stronger-than-expected fixing of the daily reference rate.

In rates, Treasuries and euro-area bonds dropped as European equities gained.

West Texas crude rose above $53 a barrel. Turkey’s lira fluctuated as the country’s military began crossing the border into Syria as it had previously warned.

Market Snapshot

• S&P 500 futures up 0.9% to 2,919.00
• STOXX Europe 600 up 0.3% to 379.80
• MXAP down 0.6% to 155.26
• MXAPJ down 0.6% to 495.90
• Nikkei down 0.6% to 21,456.38
• Topix down 0.3% to 1,581.70
• Hang Seng Index down 0.8% to 25,682.81
• Shanghai Composite up 0.4% to 2,924.86
• Sensex up 1.1% to 37,953.66
• Australia S&P/ASX 200 down 0.7% to 6,546.73
• Kospi up 1.2% to 2,046.25
• German 10Y yield rose 1.8 bps to -0.576%
• Euro up 0.3% to $1.0984
• Italian 10Y yield fell 0.8 bps to 0.504%
• Spanish 10Y yield rose 1.4 bps to 0.136%
• Brent futures up 0.5% to $58.53/bbl
• Gold spot down 0.2% to $1,502.88
• U.S. Dollar Index down 0.1% to 99.03

Top Overnight News

• China is still open to agreeing a partial trade dealwith the U.S., an official with direct knowledge of the talks said, signaling that Beijing is focused on limiting the damage to the world’s second-largest economy.
• Federal Reserve Chairman Jerome Powell said the central bank will resume purchases of Treasury securities in an effort to avoid a repeat of recent turmoil in money markets, while leaving his options open on interest rates weeks ahead of policy makers’ next meeting.
• The Brexit talks have turned into an angry stalemate, as U.K. and EU leaders focused on blaming each other for refusing to budge. Any hope of a deal now rests with a meeting between Johnson and his Irish counterpart, Leo Varadkar, planned for Thursday or Friday.
• The Trump administration is slapping visa bans on Chinese officials linked to the mass detention of Muslims, the latest in an escalating series of U.S. steps to pressure Beijing over what Secretary of State Michael Pompeo has called “the stain of the century.”
• Turkish troops have begun crossing into northeastern Syria to force back Kurdish militants controlling the border area, a Turkish official told Bloomberg, days after Donald Trump said the U.S. wouldn’t stand in the way.

Asian stocks tracked losses on Wall Street where the DJIA decline over 300 points, but are ultimately mixed, as optimism surrounding US-China trade talks diminished further after the US imposed Visa bans on Chinese individuals related to the abuse of China’s Uighur community, which the Chinese Embassy said undermines China’s interests. Stocks in Asia then showed a mild recovery amid an indecisive risk tone ahead of this week’s key risk events. ASX 200 (-0.7%) was pressured by losses in large-cap miners, whilst Nikkei 225 (-0.6%) was dragged lower by chipmakers following downside in US peers, although the index pared some losses amid favourable JPY action. Elsewhere, Hang Seng (-0.8%) and Shanghai Comp (+0.4%) were choppy with gains in the Hong Kong capped by Real Estate stocks as the ongoing anti-government protests continue to impact the domestic housing market, whilst Mainland China was cushioned by industrial and machinery names on the back of favourable base metal prices. As a reminder, South Korean markets are closed due to a public holiday.

Top Asian News

• Trouble Is Brewing in China Shadow Banking’s Darkest Corner
• Elliott Questions Japan Firm Unizo’s Actions in Bidding War
• Bank Permata Shares Jump After DBS Said to Consider Bid
• China May Restrict U.S. Visas With ’Anti-China’ Links: Reuters

Major European Bourses (Euro Stoxx 50 +0.9%) are higher on reports that China is open to a partial trade deal despite the tech blacklist, marking a turn-around from a broadly negative AsiaPac session. This report comes against the grain of a number of recent negative US/China trade headlines and developments ahead of this week’s talks, although the report does appear in fitting with recent commentary, in that it also suggested that China is not willing to make concession on issues such as IP, Industrial subsidies or policies. The positive reaction appeared to be more related to the fact that, despite recent escalations by the US (the US had been refraining from attacking China over its treatment of the Uyghars until yesterday), China is still be willing to do a “mini deal”. Unsurprisingly, in light of the recent negative developments, market expectations had been revising themselves lower heading into the talks, with participants looking for a something closer to a tentative truce at best. In that vein, a “mini deal” would exceed expectations, however, US President Trump has repeatedly insisted that the US wants a full deal. Sectors reflect a risk on configuration; the risk sensitive Tech (+0.7%) and Industrials (+0.7%), while the more defensive Utilities (-0.3%), Consumer Staples (+0.2%) and Health Care (+0.2%) lag. In terms of individual movers; Airbus (-0.6%) shares fell after the Co. issued a warning to staff regarding challenges in hitting their cashflow target in 2019, said sources. UK gambling names were supported after GVC (+2.9%) announced an increase to its FY EBITDA guidance and a successful refinancing of debt. Repsol (+0.4%) shares opened lower, but managed to pare the worst of the losses as the market moved higher, after the co. announced Q3 production at 712kBPD (vs. Prev. 694kBPD). EDF (-1.7%) fell on the news of an increased the cost estimate for the energy producer’s delayed Flamanville nuclear plant, and continued to see downside as the utilities sector came under pressure as risk sentiment improved.

Top European News

• Italy Draws $10 Billion of Orders for Rare Sale of Dollar Bonds
• Telecom Italia CEO Accelerates Overhaul With Data Center Spinoff
• EDF Cost Blowout at French Plant Piles Pressure on Nuclear Giant

In FX, NZD/CNH/AUD/EUR/GBP/CAD – All firmer vs the Greenback amidst a broad revival in risk appetite spurred mainly by reports that China is still willing to negotiate a partial trade accord with the US even though Washington has blacklisted Chinese tech companies. Meanwhile, sentiment was also boosted on the Brexit front with the EU said to be preparing a significant Irish backstop offer to the UK, but the euphoria relatively short-lived given that the DUP reiterated its opposition to a double majority NI veto compromise regardless of any set timeframe and subsequent EU sources denied any major concession in the offing. The Antipodean Dollars are outperforming close to 0.6750 and above 0.6300 respectively, while the offshore Yuan has bounced from recent lows through 7.1300, Euro consolidates between 1.0950-90 and Loonie pares more losses around the 1.3300 handle. However, the Pound has been pulled from pillar to post due to the initial Stormont climbdown by Brussels boost and ensuing fall from grace on the rejection before complete retraction or blank denial. Indeed, Cable has reversed from just shy of 1.2300 back towards circa 1.2200 lows, albeit still holding above fib support at 1.2197 and Tuesday’s 1.2195 base, as Eur/Gbp remains capped ahead of 0.9000.

• JPY/CHF – Understandably, the safe-haven Yen and Franc are underperforming in wake of latest US-Sino trade news, embellished by Beijing sweetening the mood ahead of talks with a pledge to buy an additional Usd10 bn agri goods per annum, with Usd/Jpy rebounding to 107.40 from a few pips under 107.00 and Usd/Chf easing back from the psychological 0.9900 level.
• NOK/SEK – Notwithstanding the overall upturn in sentiment and firmer crude prices, Scandi Crowns continue to depreciate on a combination of bearish chart and fundamental impulses, with Eur/Nok climbing further above 10.0000 and Eur/Sek crossing fresh decade highs over 10.9200 following NIER Swedish GDP and CPIF forecast downgrades.
• EM – Usd/Try also remains on an upward trajectory as the Lira braces for imminent Turkish military incursions across the border with Syria and investor/international reverberations. The pair is currently hovering near the upper end of 5.8455-8180 parameters after false reports implying that Turkish forces have already started operations, but troops are seemingly poised to strike.

In commodities, crude markets are trading with gains of approx. USD 0.50/bbl, as sentiment receives a boost from the updates to the US-China situation that are outlined above. Elsewhere, the geopolitical situation continues to escalate with Turkey reportedly beginning their incursion into Northern Syria, although officials subsequently denied the reports. Either way, expectations are for the assault to commence soon, and the attack appears to be coordinated with the Russians. Meanwhile, separate reports suggested that Iran was carrying out unannounced military exercises near the Turkish border… Looking ahead, further impetus is likely to come in the form of EIA Weekly Crude Inventory data, Fed’s Powell & Minutes and further US/China trade updates; particularly a response from the US side. As a reminder, API inventory data showed a larger than expected build of 4.1mln barrels (exp. +1.4mln), however, Gasoline posted a much larger than expected draw at -5.9mln barrels (exp. -0.3mln). Expectations are for a 3.1mln barrel headline build in the EIA’s Weekly Crude Inventory data, with gasoline seen drawing 0.228mln barrels. In terms of metals, spot gold has slipped to the bottom of the day’s range though is yet to breach the USD 1500/oz mark to the downside while copper is buoyed just below the USD 2.60/lb mark on the improving trade outlook.

US Event Calendar

• Oct. 9-Oct. 11: Monthly Budget Statement, est. $93.0b, prior $119.1b
• 10am: JOLTS Job Openings, est. 7,250, prior 7,217
• 10am: Wholesale Trade Sales MoM, prior 0.3%; Wholesale Inventories MoM, est. 0.4%, prior 0.4%
• 2pm: FOMC Meeting Minutes

DB’s Jim Reid concludes the overnight wrap

Thanks to the numerous responses I had yesterday to my golfing woes. It seems most people think it’s all in the mind though. However my response would be that if this was the case all it would take to be top of the world rankings would be a meditation course. It’s not that simple. However there were lots of inspirational tales from readers about their sporting perseverances though, including a weight lifter changing his technique and lifting 35% more after 18 months, tennis players remodelling their backhand, runners going through injuries to beat their PBs and lots of golfers who have gone through a complete swing change like me. When I win the club champs next year I’ll thank you all for the inspiration.

Markets could do with a bit of a swing change at the moment with yesterday feeling like a day where many of the recent risks that have been building up to challenge the world order of the last four decades decided to rear their head together. US/China trade newsflow seemed to take a backward step ahead of important talks this week and UK/EU Brexit talks not only unravelled but the relationship between the two sides seems to be in danger of breaking down completely. That will be a big problem for the prospect of any future deal if the current government uses this conflict as a tool to win a majority in the next election. So the obvious cracks that have been appearing over more than four decades of globalisation are in danger of widening significantly in the days and weeks ahead.

In terms of markets, before we look at the details, the S&P 500 ended the session down -1.56%. Trade-sensitive stocks were hit hardest, with the NASDAQ down -1.67% while the Philadelphia semiconductor index fell -3.12% (its worst day since August and down to a one-month low). The S&P 500 had attempted to rally in the afternoon, and indeed had gained +0.96% off its lows to trade down ‘only’ -0.46%, but additional negative trade headlines interrupted the rebound and sent risk sentiment even lower (more below). Sovereign bonds rallied with 10yr Treasury yields -2.4bps to 1.536%. The yield curve had flattened early in the day, consistent with the risk off, but ultimately steepened +1.6bps after Fed Chair Powell sparked a front-end rally with his speech (more below).

European bonds also advanced, with bunds (-2.0bps), OATs (-2.5bps) and BTPs (-0.8bps) all benefiting from risk-off sentiment. What was particularly notable was how market dislocations led investors to raise the probability of further easing by central banks, with yesterday seeing the implied probability of a further 25bp cut at the Fed meeting later this month rise from 64 to 74%. Other havens also benefited, with both gold and silver ending the session up +0.679% and +1.66% respectively, but bank stocks were hit hard, with the S&P 500 banks index down -2.36% and the STOXX Banks down -1.30%.

There were a number of catalysts to point to behind the declines. After the US’s blacklist of Chinese technology companies the previous evening, we were told from a foreign ministry spokesman in China to “stay tuned” for possible retaliation, and that “China will continue to take firm and forceful measures to resolutely safeguard national sovereignty, security and development interests.” Adding to the negative newsflow, Bloomberg also reported that the US were looking at limiting investments made by US government pension funds in China. This isn’t actually the first time we’ve heard about this, with another Bloomberg report from late-September saying that officials in the Trump administration had discussed how they could limit portfolio flows from the US to China, with one of the options being limiting exposure to China through government pension funds. As if this wasn’t enough, we also had an article in the South China Morning Post, which had a source saying that the Chinese delegation may leave Washington on the 11th, rather than the initial plan to leave on the 12th. They also said “There’s not much optimism.” Finally, late in the trading session the US announced new visa bans on Chinese officials who are involved with the apparent mass detention of Uighurs in Xinjiang province, another escalation as the trade talks kick off. Remember, all this comes ahead of a planned increase in US tariffs on $250bn worth of Chinese goods from 25% to 30%, due to take place on October 15th.

In the FX markets, sterling was the big loser yesterday, down -0.63% against the dollar as any lingering hopes of a Brexit deal any time soon faded dramatically yesterday leading to sterling falling to its lowest levels again the euro and dollar for a month. The cause was a phone call between Prime Minister Johnson and Chancellor Merkel, which resulted in an incredibly negative briefing from Downing Street afterwards. The BBC’s political editor Laura Kuenssberg reported that a Number 10 source said “talks in Brussels are close to breaking down”. A spokesman for the German Chancellor didn’t comment on the call. Relations between the UK and the EU deteriorated as the day went on it seemed, with European Council President Donald Tusk tweeting to Prime Minister Johnson that “what’s at stake is not winning some stupid blame game.” Importantly, the Irish foreign minister Simon Coveney said in response to Tusk’s tweet “Hard to disagree – reflects the frustration across EU and the enormity of what’s at stake for us all.” The BBC’s Europe editor, Katya Adler, tweeted yesterday afternoon that there was speculation in the EU that Prime Minister Johnson might not even turn up to the EU Council summit next week if there wasn’t the prospect of a deal. Just as we were all throwing in the towel in terms of the prospect of a deal, news came in as London went home that Mr Johnson and Irish PM Varadkar hope to meet in person later this week after a “constructive” call. However it’s not clear what progress can be made given the above. Indeed in an interview with broadcaster RTE, Varadkar said it’s hard to see a deal to break the impasse over Brexit being clinched next week and added that problems remain with PM Johnson’s proposals to take Northern Ireland out of the EU’s custom union, and give the region’s power-sharing assembly a veto over rule alignment with the bloc.

So things are shaping up to be pretty eventful ahead of first next week’s summit, then the October 19th Benn Act deadline for the PM to ask for an extension, and possibly even to the current Article 50 deadline at the end of the month. After that along comes likely elections with hard Brexit versus Jeremy Corbyn as a likely choice for the electorate assuming a deal hasn’t been struck. Staying with the U.K., the productivity statistics showed output per hour fell by -0.5% yoy in Q2, which was the fastest yoy decline since Q2 2014 – so not a great backdrop.

Overnight in Asia, markets are largely trading lower following Wall Street’s lead with the Nikkei (-0.66%), Hang Seng (-0.68%) and Shanghai Comp (-0.14%) all down. South Korea’s markets are closed for a holiday. Elsewhere, futures on the S&P 500 are up +0.30% and WTI oil prices are down c. -0.30% this morning.

In other news, Kristalina Georgieva, in her first major address as the head of the IMF, said that the fund will cut its growth forecast for both 2019 and 2020 in its next World Economic Outlook due October 15 while adding that the fund estimates that 90% of the world is seeing slower growth in a synchronised slowdown as opposed to two years ago when growth was accelerating across three-quarters of the globe in a synchronised upswing. She also said that “if the global economy slows more sharply than expected, a coordinated fiscal response may be needed,” while adding that, “We are not there” but it’s better to be too early with it than late. On monetary policy, she said central banks should keep interest rates low where appropriate but warned that very low or even negative interest rates can come with “negative side effects and unintended consequences” that can lead to financial vulnerabilities while adding, “Monetary and financial policies cannot do the job alone. Fiscal policy must play a central role.” So the pressure builds on Governments.

Back to yesterday and another market-moving event was Fed Chair Powell’s speech. He has become quite effective at saying as little as possible in his public remarks over recent months, but yesterday he clearly came out with a clear message to communicate. He signaled very strongly that the Fed will announce new plans to grow its balance sheet by purchasing treasury bills. He noted that repo markets had experienced “unexpectedly intense volatility” in September and said that “it is clear that without a sufficient quantity of reserves in the banking system, even routine funding pressures can lead to outsized movements in money market interest rates.” He went on to specifically say that “my colleagues and I will soon announce measures to add to the supply of reserves over time.” T-bills rallied, causing swap spreads to widen, as markets moved to price in the expectation for greater and more imminent fed purchases at the front-end of the yield curve.

Powell took great pains to emphasize that the new balance sheet expansion is just a technical adjustment and is not a new QE program nor a signal about the monetary policy stance. He did touch briefly on the macro outlook, but just reiterated his usual language about acting “as appropriate to support continued growth.” It’s worth noting that he did cite recent Fed staff research on the labour market, which suggests that job growth has not been as strong as would be indicated by the BLS jobs report. Our US economists had flagged that research and we included it in the EMR two weeks ago. Chicago Fed President Evans also spoke yesterday, saying that he “wouldn’t mind another cut” for a bit more “insurance.” He had been leaning hawkish lately so that’s certainly a dovish shift.

Turning to other data releases, expectations for Fed easing this month was supported by the US PPI reading, which fell by more than expected in August to -0.3% mom (vs. +0.1% expected), while core PPI also fell -0.3% (vs. +0.2% expected). German industrial production was more positive however, up +0.3% mom in August (vs. unch expected), while July’s contraction was revised down from -0.6% to -0.4%. It comes after data the previous day showed yet more falls in factory orders. Within the figures, manufacturing saw a +0.7% increase, although energy production fell -1.7%. Finally in Italy, retail sales unexpectedly fell -0.6% mom (vs. +0.1% growth expected).

Before we take a look at the day ahead, the White House said overnight that President Donald Trump and his administration won’t participate in the House impeachment inquiry in a fairly forthright letter to Speaker Nancy Pelosi, calling the proceedings unconstitutional and invalid. A senior administration official said yesterday that the White House would halt all participation in the inquiry, and wouldn’t provide documents, even those sought by subpoena, or make officials available to give testimony. So we have this bubbling in the background too.

Looking at the day ahead, a key highlight will be the minutes from the FOMC’s September meeting coming out later. It’s possible that the minutes will give some hints about the details under consideration for the Fed’s apparent plan to grow the balance sheet with purchases of bills, as Chair Powell signaled yesterday. Later today, we’ll hear from Powell again at a Fed Listens event, along with Kansas City Fed President George. It’s another light day for data, but releases include the Bank of France’s industry sentiment indicator for September, weekly MBA mortgage applications from the US, as well as August JOLTS job openings and final wholesale inventories.