One day after there was relatively little “trade deal optimism”, overnight futures surged to new all time highs when just after 2am ET,  China’s commerce ministry said – in what may well have been a trial balloon to test the White House’s public response – that it had agreed with the US to roll back tariffs on each other’s goods in phases as the two nations work toward a trade deal, adding fuel to a “trade deal optimism” rally that is now spanning to its fifth straight day.

Treasuries and gold declined, while global stocks and US futures were a sea of green, even though as we noted earlier, a closer translation of China’s statement actually revealed there was nothing new in it, and that futures appear to be higher on what was a mass mistranslation by the mainstream financial media!

In any case, as Reuters adds, an interim U.S.-China trade deal is widely expected to include a U.S. pledge to scrap tariffs scheduled for Dec. 15 on about $156 billion worth of Chinese imports, including cell phones, laptop computers and toys. Tariff cancellation was an important condition for any agreement, ministry spokesman Gao Feng said, adding that both must simultaneously cancel some tariffs on each other’s goods to reach a “phase one” trade deal. And, in an apparent act of goodwill, China also said it was studying the removal of curbs on U.S. poultry imports.

Whether or not Trump actually agreed to this will be made clear at some point today on his Twitter account. Meanwhile recall that the end to trade war is the worst possible thing that can happen to global markets and the world economy, for which “trade war” had become a convenient bogeyman for everything that was going bad.

For now, however, algos were happy to bid up risk some more, and push the S&P to fresh all time highs. Trade-sensitive industrials 3M and Caterpillar rose nearly 1% in the pre-market. Chipmakers with sizeable exposure to China, including Intel Corp, Micron and Nvidia were all up between 1.7% and 2%. Also supporting tech stocks was a 6.1% gain in Qualcomm shares after the chipmaker forecast current-quarter profit above analysts’ estimates. On the other end, Roku plunged 14.5% after posting a wider net loss in the third quarter, as it spent more to attract subscribers to its video streaming platform. Twitter fell 1.4% after Evercore ISI downgraded the stock to “underperform” from “in-line.”

European shares hit a more than four-year high. The European Stoxx 600 index rose as much as 0.4%, with export-heavy Germany outperforming with a 0.7% rise, before fading gains to just 0.1% Among the top gainers across European sub-sectors were automakers and miners, while defensive plays such as telecoms and utilities fell, suggesting higher risk appetite. Siemens gained 3.4%, and was the biggest boost to the STOXX 600, after the German industrial company’s fourth-quarter results beat estimates. As usual, European stocks ignored economic data which showed that German industrial production slumped -0.6%, missing expectations of a -0.4% drop, and far below last month’s +0.4% increase.

Earlier in the session, Asian stocks climbed, led by health care firms, on the news that China and the U.S. agreed to roll back tariffs in phases. Most markets in the region were up, with Australia leading gains and Taiwan retreating. The Topix added 0.2% in a third day of gains, supported by precision-instrument makers and electric-appliance companies. The Shanghai Composite Index closed little changed, as Kweichow Moutai advanced and China Life Insurance dropped. Chinese authorities are considering a sweeping package of measures to shore up smaller lenders and contain bad-loan risks. India’s Sensex rose 0.3%, heading for a fresh record, with Housing Development Finance and Reliance Industries among the biggest boosts.

In FX, the pound tumbled to a one week low after two Bank of England policy makers unexpectedly voted for an interest rate cut.

The Bloomberg Dollar Spot Index slipped for the first time in four days with the dollar declining against all of its G-10 peers except the yen. Norway’s krone led gains followed by the Aussie and Swedish krona

U.S. Treasuries slid with the 10-year yield advancing four basis points to 1.87%. Bonds across Europe, barring Greece, fell while the region’s stocks jumped.

In commodities, WTI rose past $57 a barrel in New York, and a Bloomberg index of commodities advanced.

Expected data include initial jobless claims. Dish, Booking and Disney are among companies reporting earnings

Market Snapshot

• S&P 500 futures up 0.5% to 3,089.50
• STOXX Europe 600 up 0.4% to 406.70
• MXAP up 0.4% to 166.70
• MXAPJ up 0.5% to 537.17
• Nikkei up 0.1% to 23,330.32
• Topix up 0.2% to 1,698.13
• Hang Seng Index up 0.6% to 27,847.23
• Shanghai Composite unchanged at 2,978.71
• Sensex up 0.4% to 40,627.90
• Australia S&P/ASX 200 up 1% to 6,726.63
• Kospi up 0.01% to 2,144.29
• German 10Y yield rose 1.9 bps to -0.314%
• Brent Futures up 1.1% to $62.43/bbl
• Italian 10Y yield rose 3.3 bps to 0.686%
• Spanish 10Y yield rose 2.8 bps to 0.319%
• Brent futures up 1.1% to $62.43/bbl
• Gold spot down 0.4% to $1,485.33
• U.S. Dollar Index down 0.1% to 97.86

Top Overnight News from Bloomberg

• China and the U.S. have agreed to roll back tariffs on each other’s goods in phases as they work toward a deal between the two sides, a Ministry of Commerce spokesman said.
• Chinese authorities are considering a sweeping package of measures to shore up smaller lenders, escalating efforts to contain one of the biggest risks facing the world’s largest banking system. Problematic banks with less than 100 billion yuan ($14 billion) of assets would be urged to merge or restructure under a plan being discussed by financial regulators
• The European Commission cut its euro-area growth and inflation outlook amid global trade tensions and policy uncertainty, warning that the bloc’s economic resilience won’t last forever
• The BOE will probably keep interest rates on hold at 0.75% and cut its growth and inflation forecasts as Brexit questions continue to plague the economy
• Traders across Europe are demanding a shorter day on the equity markets to improve their wellbeing. A 90-minute reduction in trading would also create more efficient markets by condensing transactions, the Association for Financial Markets in Europe and the Investment Association said
• Public debate surrounding the House impeachment inquiry has focused heavily on whether President Donald Trump’s aides withheld military aid to Ukraine as part of a “quid pro quo.” Yet testimony unsealed this week makes clear that an Oval Office meeting between the nations’ leaders was offered if Ukraine announced it would investigate Joe Biden and the Democrats

Asian equity markets traded indecisively as they initially took their cue from the similar performance of their US peers; though strengthened on the later optimistic trade reports regarding the cancellation of tariffs. ASX 200 (+1.0%) was underpinned by outperformance in tech and the top-weighted financials sector with shares in NAB lifted despite a decline in full year profits, as the big 4 bank maintained its dividend unchanged from the interim and also announced top level executives will not receive short-term bonuses this year. Conversely, Nikkei 225 (+0.1%) was pressured by a firmer currency and amid a slew of earnings including SoftBank which posted its first quarterly operating loss in 14 years due to the WeWork fiasco, while Hang Seng (+0.6%) and Shanghai Comp. (U/C) were choppy amid a lack of clarity on the timing and location for the signing of the US-China phase 1 trade deal and after the PBoC skipped liquidity operations again, with gaming stocks also pressured after Galaxy Entertainment and Wynn Macau posted softer revenue figures. Finally, 10yr JGBs were slightly subdued following the recent downturn in prices and amid the lack of BoJ buying today, but with downside stemmed by the inconclusive risk tone and support ahead of the 153.00 level.

Top Asian News

• China’s Gold Buying Spree Comes to a Halt After 10 Months
• Qatar Air Keen to Buy Indigo Stake, Ignores Air India Sale
• Cambodia Warns of Coup, Masses Troops as Neighbors Detain Exiles

Major European Bourses (Euro Stoxx 50 +0.3%) are modestly firmer following positive trade developments on the US/China trade front, with headlines suggesting that China and the US had agreed to cancel existing tariffs in different phases, if they reach a Phase One deal, although further details are for now scant. “as for how much will be eliminated, we will consider the agreement reached in Phase One”, China’s MOFCOM stated. Looking at indices, Germany’s DAX moved as high as 13290, its best levels since early February 2018, while Euro Stoxx 50 came within a whisker of its 2017 high at 3710. Sectors performance is reflective of the markets risk-on feel; defensives lag (Utilities -0.5%, Health Care unch., Staples -0.3%) while the more risk sensitive Tech (+0.3%), Consumer Discretionary (+1.0%), Industrials and Materials (+0.6%) lead the pack. Meanwhile, the Energy (-0.4%) sector has struggled to take advantage of the market rally, weighed on by crude prices which fell substantially yesterday, albeit the sector and energy complex have recoiled off lows amid the aforementioned trade headlines. In terms of individual movers, things are still very much dominated by earnings: Vestas Wind systems (+11.6%) post-earnings and in light of the announcement of a EUR 200mln buyback programme. Lufthansa (+8.1%) rose to the top of its index despite strike threats after earnings topped analyst forecasts with heavy-weight Siemens (+4.6%) a close second following encouraging earnings coupled with a EUR 0.10/shr dividend raise. Other post-earning movers include: UniCredit (+5.9%), ProsiebentSat1 (-5.0%), Scout24 (-4.3%), Commerzbank (+0.3%) and Deutsche Telekom (-2.9%)

Top European News

• Vestas Soars as Record Turbine Demand Outpaces Tight Margins
• Rolls-Royce Says Profit, Cash at Lower End on Engine Costs
• UniCredit Profit Gains Momentum as Capital Buffers Improve
• Euronext Is Said to Eye Spanish, Italian Stock Exchanges

In FX, the Cnh and Cny have both been boosted by latest comments from China’s MOFCOM claiming that Beijing and Washington have now agreed to lift tit-for-tat import levies in tandem and step-by-step once Phase 1 of the overall deal is agreed. The offshore and onshore Yuan are back above the psychological 7.0000 mark and extending gains towards key technical resistance around 6.9625 for the former vs the Usd after retreating on Wednesday and pulling back further when reports about a delay to December from this month for the Trump-Xi meeting to sign part one of the pact broke.

• AUD/NZD – The main beneficiaries of the more positive China-US trade talk, with the Aussie back on the 0.6900 handle and Aud/Usd also boosted by much wider Australian trade surplus, while the Kiwi has bounced firmly from circa 0.6350 towards 0.6400 vs the Greenback, but lagging its Antipodean peer as the Aud/Nzd cross rebounds from around 1.0800 to 1.0825+.
• EUR/CAD/GBP – Also firmer against the Buck, as the DXY dips a bit further from another 98.000+ venture that topped out just short of Fib resistance again, with the single currency also spurred on by hawkish ECB rhetoric via Holzmann and back above a key chart support level within a 1.1055-92 range. The Loonie has pared post-Canadian Ivey PMI declines from almost 1.3200 to probe bids/support ahead of 1.3150 and Cable has bounced off the 21 DMA (1.2839) through 1.2850 and not far from the 10 DMA (1.2881) in the run up to the BoE from high noon.
• CHF/JPY – Narrowly mixed and hampered by another reversal in sentiment/positioning in favour riskier currencies and assets, as the Franc retreats below 0.9900 vs the Dollar and Yen reverses from 108.66 to 109.19.
• SEK/NOK/EM – In stark contrast to the above, renewed risk appetite has propelled the Scandi Crowns to revisit recent and/or register fresh peaks, with Eur/Sek having another look under 10.6500 and Eur/Nok breaching 10.1000 to expose the next major downside chart level at 10.0610 following stronger than forecast Norwegian manufacturing output. Elsewhere, most Emerging Market currencies are getting carried by the revived US-China trade narrative, but the Lira is lagging on deteriorating US-Turkish relations and increasingly dovish CBRT expectations.

In commodities, crude markets are staging a recovery, with positive developments on the US/China trade front (US & China agreeing to roll back existing tariffs) acting as a tailwind. However, WTI Dec’ 19 and Brent Jan’ 2020 futures are still well off of yesterday’s USD 57.83/bbl and USD 63.30/bbl highs, after the complex was hit by a bearish EIA crude inventory report and concerns about a delay to the signing of the US/China Phase 1 trade deal – WTI is now consolidating just shy of the USD 57.00/bbl handle, Brent just beneath yesterday’s pre-EIA Inventory data lows at USD 62.39/bbl, which is acting as resistance. In terms of the metals; Gold price were hit by haven outflows on the back of positive trade related developments, falling to lows of USD 1486/oz from above USD 1490/oz. Copper, meanwhile, was buoyed and managed to reclaim the USD 2.700/lbs level.

US Event Calendar

• 8:30am: Initial Jobless Claims, est. 215,000, prior 218,000
• 8:30am: Continuing Claims, est. 1.68m, prior 1.69m
• 9:45am: Bloomberg Consumer Comfort, prior 61
• 3pm: Consumer Credit, est. $15.0b, prior $17.9b

DB’s Jim Reid concludes the overnight wrap

It feels like markets are a bit starved of fresh catalysts at the moment. Indeed that was no more evident than yesterday when US equities ebbed and flowed with no great conviction. When the main story is a senior official in the Trump administration saying that a meeting between President Trump and President Xi to sign a phase one US-China trade agreement could be delayed until December then you know it’s a bit of a slow-moving day.

That being said the official did describe a deal as more likely than not, saying that they believed China saw a quick deal as their best chance for favourable terms on account of Trump’s re-election campaign next year and the impeachment inquiry (per Reuters). The article also said that China’s attempt to get more tariffs rolled back wasn’t expected to derail progress towards a deal. As expected with the initial delay news, trade-exposed stocks were hit the most, with the Philadelphia semiconductor index down -0.84%, while technology stocks also lost ground, with the NASDAQ closing -0.29% lower. The S&P 500 recovered to finish +0.07%, up from an intraday low of -0.28%, while the Dow Jones closed unchanged.

Prior to the trade news the main talking point had been some positive data out of Europe. Indeed the final October services PMI for the Euro Area was revised up 0.4pts to 52.2 which compared to 51.6 in September. That included a 0.4pt upward revision for Germany to 51.6 and a better than expected reading for Italy (52.2 vs. 51.0 expected). Furthermore, an upside surprise in German factory orders in September (+1.3% vs. +0.1% expected), adds to signs that the contraction in demand is bottoming out. So, some green shoots of optimism perhaps, and European bourses (which had already closed by the time the US-China trade headline was out) advanced further yesterday, with the STOXX 600 (+0.21%) back to its highest level since July 2015.

In spite of the positive data points, 10y Bund yields were -2.5bps lower at -0.338% with yields also down across the rest of Europe. 10yr Treasury yields declined -3.0bps and are down another -2.2bps this morning, falling on the trade headline along with weaker than expected productivity data that showed Q3 productivity contracted by -0.3% qoq (vs. +0.9% expected). That was actually the first negative quarterly productivity print since Q4 2015. In addition unit labour costs were much higher than expected (+3.6% qoq vs. +2.2% expected). Typically unit labour costs lead core CPI by around three quarters.

It’s not been much more exciting in markets in Asia overnight where the Nikkei (-0.08%), Hang Seng (-0.27%), Shanghai Comp (-0.30%) and Kospi (-0.18%) all down. In FX, the Japanese yen is up +0.26% while the onshore Chinese yuan is down -0.30% to 7.0191. Futures on the S&P 500 are also down -0.10%. Oil has steadied following yesterday’s news that OPEC+ producers aren’t pushing for deeper supply cuts.

Moving on. It may have been fairly quiet this week however we do have a central bank policy meeting to look forward to today with the BoE decision due out at lunchtime. No policy change is expected however our economists expect a dovish message, with the BoE dropping its tightening bias and instead moving towards an easing policy stance. They note that domestically, data have deteriorated sufficiently to warrant more supportive monetary policy. Growth has slowed and is tracking below the Bank’s “speed limit” of 1.5% with uncertainty likely weighing further on the near-term growth outlook. Equally, the UK supply side story is also turning softer, with labour market indicators pointing to downside risks for both pay and jobs by Q4 2019 and inflation now expected to remain below target in 2020. As a result our economists no longer forecast a hike next year and instead see an increasing risk of a rate cut at the January Inflation Report – Governor Carney’s final MPC meeting.

Sticking with the UK, the election campaign got formally underway yesterday with the dissolution of parliament, and a couple of further polls out yesterday both had double-digit leads for Prime Minister Johnson’s Conservatives. One from YouGov saw the Tories on 36%, 11pts ahead of Labour, while an Ipsos-MORI poll had them at 41%, 17pts ahead of Labour. Although the polls are showing varying leads across different polling companies, the important thing to pay attention to as the campaign progresses will be the direction of travel from polls by the same company, as this will show which parties are gaining or losing ground.

We also got the surprise news out last night that Tom Watson, Labour’s deputy leader, would be stepping down from politics at the election. Watson was regarded as a figurehead for Labour moderates, so his departure will be seen as strengthening leader Jeremy Corbyn’s grip on the party. Amidst the election campaign, something else to watch out for this morning given the spending promises from each of the parties will be the OBR’s restated version of their March forecasts for the public finances, which will reflect various methodological changes such as the treatment of student loans.

In other news, the Fed’s Evans repeated similar messages from his FOMC colleagues yesterday, saying that the Fed has engineered accommodative policy with a third cut. He also said that he is comfortable with 2.5% inflation in order to build momentum to get it sustainably to the Fed’s target of 2%. Later on, Williams said that monetary policy was “moderately accommodative”, and on the poor productivity release earlier, said that it is “just being consistent with a kind of ongoing longer-run trend of moderate productivity”. Finally, from Europe, Austrian central bank governor Holzmann said in a Bloomberg TV interview yesterday that “Monetary policy seems to have reached its end”, and that “fiscal policy has to take over.” His remarks very much echo the comments made by ECB President Lagarde and her predecessor Mario Draghi, who’ve long-called for fiscal policy to play a greater role.

Looking at the day ahead now, this morning we’re due to get September industrial production data in Germany and Italian retail sales, along with the European Commission’s latest economic forecasts and the ECB’s Economic Bulletin. The BoE policy decision and Governor Carney’s press conference follow before we get jobless claims and September consumer credit data in the US. Elsewhere, we’re due to hear from the Fed’s Kaplan tonight.