One day after US and global equities were rocked and rolled by a barrage of non-stop optimistic and pessimistic trade deal headlines, Friday has been relatively calmer with global stocks inching solidly higher Friday, lifted by China’s renewed offer to work out a trade pact with Washington, but gains were limited by uncertainty over how the 16-month-old trade war plays out and how much it may undermine the world economy.

The lackluster gains put MSCI’s index of world shares on course to snap a six-week streak of gains, with disappointing economic data and rising political risks in the United States and Britain also casting a pall on sentiment.

“The market is looking for some bullish signal that things aren’t going to get worse and that we’re not going to see further deterioration in trade talks between the U.S. and China,” PIMCO portfolio manager Erin Browne told Bloomberg TV. “They just don’t want to see further escalation.”

European shares opened firmer, rising off three-week lows touched on Thursday when it seemed that U.S. legislation on Hong Kong would undermine planned trade talks between the world’s two largest economies. Miners and energy companies helped lead the Stoxx Europe 600 Index higher after oil’s strongest close since September. The early gains, however, faded following another round of disappointing Eurozone PMI data as Europe’s economic gloom just refuses to go away, as manufacturing did beat expectations modestly but raised concerns over the health of the larger services sector. Specifically, while the Eurozone manufacturing PMI printed at 46.6, beating expectations of 46.4, and up from 45.9, it was the Services component that missed and neared contraction, at 51.5, down from 52.2, and below the 52.5 expected.

A similar pattern was seen in the latest German PMIs, where the manufacturing index rebounded for a second consecutive month, although it was the service PMI that dropped to a new multi year low.

Elsewhere, a speech by ECB President Lagarde failed to deliver any material revelations.

Wall Street futures too were marked slightly firmer after China said it was willing to work with the United States to resolve core trade concerns, and the Wall Street Journal reported China had invited U.S. trade negotiators for a new round of face-to-face talks in Beijing. The mood soured, however, around 6am when futures dipped after a Global Times tweet outlined how Washington needed “some tariffs rollback” to complete the deal. Global Times also said if Washington “chooses to raise more #tariffs and escalates trade war, China will fight back and retaliate.”  The good news is that the pace of updates on the trade front appeared to have slowed down somewhat, giving equity markets a breather from the prior day’s whipsaw action.

Asian stocks kicked off the overnight session by edging higher, led by energy producers, as investors assessed the likelihood of an initial China-U.S. trade deal amid conflicting signals. Markets in the region were mixed, with Singapore leading gains while China retreated. The Topix advanced, driven by electronic firms and retailers, as Japan’s key gauge of price growth ticked up slightly following last month’s sales tax hike. The Shanghai Composite Index slid, with Kweichow Moutai and China Life Insurance weighing on the gauge. Easing trade tensions and cautious policy support will help stabilize China’s economy next year, according to Goldman Sachs Group. India’s Sensex dropped, dragged down by Infosys and Tata Consultancy Services. Prime Minister Narendra Modi is putting the flagging economy back on center stage after announcing the biggest privatization drive in more than a decade.

“Markets are being held hostage by news – positive or negative – coming out of the United States or China. Even if the phase one agreement materialises there is no way I would believe that’s the end of the story, it will just move to German cars or Japanese exports,” said Marie Owens-Thomsen, chief global economist at wealth manager Indosuez.

Meanwhile, concerns lingered, with President Trump expected to sign into law two bills backing protesters in Hong Kong after the U.S. House of Representatives voted 417-1 for the “Hong Kong Human Rights and Democracy Act”, which the Senate had passed unanimously a day earlier. “If he’s going to be forced to sign it, then it brings another (element) of uncertainty to this phase one trade deal, which then pushes back into next year,” said GAIN Capital analyst Matt Simpson, adding that in the absence of major news on trade, rangebound market moves are “quite reflective of the small headlines coming through.”

In rates, yields on US and German government bonds were initially a shade higher before dipping lower, after the European PMI prints disappointed with 10-year Treasury yields sliding to 1.7483%, dwon from its U.S. close of 1.772% on Thursday.

As Reuters adds, the failure to resolve the trade spat means the world economy is struggling to recover from its slowdown and the Organisation for Economic Cooperation and Development on Thursday forecast growth at a decade-low 2.9% this year and the next. That fragility was underscored by weaker than expected data showing Euro zone business growth almost ground to a halt this month as activity in the dominant services industry increased at a much weaker pace than expected.

In geopolitical news, US Navy warships conducted 2 freedom of navigation operations in the South China Sea earlier this week, while China’s military later stated its navy tracked US ships that sailed near islands claimed by China in the South China Sea, while it urged US to stop provocative actions. Subsequently, China’s Foreign Ministry has lodged stern representation with US after US ships sailed in South China Sea near islands claimed by China.

South Korean Finance Minister will be visiting Japan ahead of the expiry of the South Korean-Japanese Military Information Agreement, according to sources cited by Yonhap. Subsequently, South Korea told Japan it will extend the General Security of Military Information Agreement (GSOMIA) intel-sharing pact, according to NHK; however, Japan says there are no changes to export restrictions on materials for South Korea, according to Japanese trade official.

In currency markets, the euro dipped into negative territory against the U.S. dollar after the release of the disappointing Service PMI data. The Bloomberg Dollar Spot Index was little changed, breaking its three-day streak of gains and heading for its smallest weekly change since the start of August; the pound hit fresh day lows following a miss in U.K. PMI data.

In commodities, oil prices retreated after hitting two-month highs following a Reuters report that the Organization of the Petroleum Exporting Countries and its allies are likely to extend existing output cuts until mid-2020. Brent crude was down 0.31% at $63.77 per barrel. Spot gold edged up 0.3% to $1,471 per ounce.

Looking at the day ahead, the highlights are the release of the preliminary PMIs for November from Europe and the US, along with remarks from ECB President Lagarde. In terms of other data, we’ll get the final November University of Michigan sentiment reading from the US, as well as the November Kansas City Fed manufacturing activity index. Other central bank speakers include Bundesbank President Weidmann and Spanish central bank governor Hernandez de Cos. Finally in Germany, the CDU’s annual conference begins.

Market Snapshot

• S&P 500 futures up 0.2% to 3,110.00
• STOXX Europe 600 up 0.3% to 403.40
• MXAP up 0.2% to 163.79
• MXAPJ up 0.2% to 522.61
• Nikkei up 0.3% to 23,112.88
• Topix up 0.1% to 1,691.34
• Hang Seng Index up 0.5% to 26,595.08
• Shanghai Composite down 0.6% to 2,885.29
• Sensex down 0.5% to 40,386.63
• Australia S&P/ASX 200 up 0.6% to 6,709.78
• Kospi up 0.3% to 2,101.96
• German 10Y yield fell 3.1 bps to -0.356%
• Euro down 0.05% to $1.1053
• Italian 10Y yield fell 2.3 bps to 0.832%
• Spanish 10Y yield fell 1.2 bps to 0.439%
• Brent futures little changed at $64.02/bbl
• Gold spot up 0.5% to $1,471.08
• U.S. Dollar Index little changed at 98.00

Top Overnight News

• Chinese Vice Premier Liu He, the top negotiator in trade talks with the U.S, repeated the Party’s commitment to the market playing a decisive role in the economy, pushing back against a backdrop of increasing scrutiny of the country’s state-led economic model; He highlighted the role of market and non-state players, weighing into the debate about how much of the country’s economy is controlled by the government, a point of ongoing tension with the U.S.
• China’s gross domestic product was more than $270 billion larger than first estimated last year, a revision that added the equivalent of Finland’s output to the size of the world’s second-largest economy.
• The U.K. economy’s performance was the worst since July 2016 this month as uncertainty from Brexit and the snap election weighed on sentiment. Readings for both manufacturing and services moved further into contraction.
• German manufacturers appear to have left the worst of a year-long slump behind. IHS Markit’s Purchasing Managers’ Index for the industrial sector rose to 43.8 in November. That’s the highest in five months and exceeds economist estimates for a reading of 42.8.
• China still has room to adjust its fiscal, monetary and real-estate policies if uncertainty over trade with the U.S. generates further downward pressure on the economy, central bank adviser Ma Jun said
• President Donald Trump signed a four-week spending bill Thursday, putting off a possible government shutdown until Dec. 20. The Senate cleared the measure earlier Thursday in a 74-20 vote
• Boris Johnson’s Conservatives will introduce a 3% land tax surcharge for foreign buyers of U.K. homes in an effort to damp demand, keep a lid on house prices and make it easier for first-time buyers to get a foot on the housing ladder
• Jeremy Corbyn presented his plan for a Labour government. Railways, water supply and broadband infrastructure would be brought into state ownership. The government’s total tax revenue would rise by around 10%. That would fund pay rises for public sector workers, free university tuition, free care for the elderly
• Japan’s key gauge of price growth ticked up slightly following last month’s sales tax hike, but the numbers masked a further weakening of core inflation, illustrating the difficulty the central bank faces in its struggle to boost prices
• Prime Minister Benjamin Netanyahu will stand trial for bribery, fraud and breach of trust, an unprecedented development that could doom his career and shape the political crisis that’s gripped Israel this past year
• The euro-area economy came close to a halt in November as the steep decline in manufacturing there spread further into services.

Asian equity markets eventually traded mixed after the region’s early attempts to shrug-off the headwinds from the losses on Wall St. proved to be short-lived, as trade uncertainty remained the state of play. ASX 200 (+0.5%) and Nikkei 225 (+0.3%) were higher with outperformance in Australia’s tech and energy sectors prevailing over the lacklustre tone in financials and weakness in gold miners, while Japanese exporters coat-tailed on the gradual upside seen in USD/JPY and with SoftBank mildly benefitting from reports the Co. is in discussions to reduce the WeWork offer and payout to its founder. Hang Seng (+0.5%) and Shanghai Comp.(-0.6%) initially conformed to the improved risk appetite after some of the recent trade rhetoric added to cautious optimism including comments from MOFCOM that they will strive to reach a phase one deal and after source reports suggested the US may delay the December 15th tariffs even if a trade pact is not reached. However, the mainland gradually deteriorated due to the lack of trade clarity and with the recent freedom of navigation operations by the US in the South China Sea also irking China, while Hong Kong kept afloat with the city set to proceed with local elections on Sunday. Finally, 10yr JGBs were lower amid spill over selling from USTs, with prices also weighed by the somewhat improved risk appetite and following weaker demand at the enhanced liquidity auction for longer-dated JGBs.

Top Asian News

• Japan, South Korea Agree to Last-Minute Deal to Save Intel Pact
• Saudi Arabia’s Oil Heartland Is Calm and That’s Bad for Iran

Major European bourses (Euro Stoxx 50 +0.2%) are modestly firmer, with the bulk of the gains coming right after the European cash open, before the indices proceeded to give back some gains following downbeat EZ PMI data, which saw manufacturing beat expectations but raised some concerns over the health of the larger services sector. Elsewhere, a speech by ECB President Lagarde failed to deliver much by way of a bang, while the pace of updates on the trade front also appears to have slowed down somewhat, giving equity markets a breather from the prior day’s whipsaw action. Most notably, the news of further freedom of navigation operations by the US in the South China Sea, nor the news of the Trump Administration mulling alternative trade investigations against the EU appears to have changed the dial much. Sectors are all in the green; energy (+0.7%) and materials (+0.6%) are for now the outperformers, while Utilities (+0.3%) and Consumer Staples (+0.3%) lag. In terms of the notable stock movers; Edenred (-2.2%) are at the bottom of the Stoxx 600 table after the Co. stated that it is still investigating the extent of a malware infection and has contacted relevant government authorities and regulators. Elsewhere, Wirecard (-0.1%) nursed earlier losses after Uber (UBER) denied reports that it was considering hiring Wirecard as its main payments partner.

Top European News

• Worst of German Factory Slump May Be Past as Confidence Improves
• Weak European Services Output Casts Shadow Over Economic Outlook
• Vivendi Is Said to Be Ready to Sell 20% Stake in Mediaset
• Huawei Makes Case for Avoiding German 5G Network Ban in Advert

In FX, both the EUR, GBP were softer with the Single Currency subdued in wake of the EZ PMIs which show a clear spillover effect into the services sector from the manufacturing recession, thus negatively effects domestic demand. Services and Composite missed, and Manufacturing showed a mild bounce, but remain damped (albeit participants may have expended more of a rebound given the French and German metrics). Further, the GDP tracker pointed to a Q4 QQ rate of just 0.1%, down from 0.2% in Q3. Elsewhere, Lagarde’s first speech as ECB President was far from a fanfare release; she noted of a strategic review of monetary policy policy in “the near future” and reaffirmed her call for fiscal policy. EUR/USD took its cue from the PMIs and currently resides towards the bottom of its 1.1048-87 band (just above its 10 DMA at 1.1047) having earlier eclipsed its 100 DMA at 1.1085 on the initial French and German manufacturing bounce backs. The pair now eyes around EUR 1bln of options expiring at strikes 1.1040-60, although the next notable tranche could also come into play in later trade (EUR 1.3bln between 1.1075-90).  Similarly, UK’s Flash PMI debut missed expectations across the board and showed Services tipping over the fence into contraction. Further, IHS noted the data points to a 0.2% drop in GDP in Q4, which would usually be associated with BoE stimulus, albeit the Central Bank did downplay the credence it gives to this release at its latest MPR. Cable resides at the bottom the current 1.2873-2927 intraday parameter.

• DXY, Yuan – DXY has reversed overnight losses, albeit more on EUR weakness as there is little by way of new substance on the US-Sino trade front. President Xi overnight sang from the same hymn sheet as Chinese officials, highlighting that China is not afraid of trade conflict but will actively try to avoid a trade war and called on increased communication. DXY is comfortably in the green in having surpassed 98.00 to the upside and attempted multiple breaches of its 100 DMA at 98.04 with no success. USD/CNH remains firmer, although mostly on the back of a stronger Dollar with the pair at session highs and eyeing its 100 DMA (7.0441) vs. an intraday low of 7.0264.
• JPY, CHF – Safe-haven FX trade relatively flat in early hours, potentially as overall downbeat EZ PMI counter the positive geopolitical developments in Japan-South Korea relations, with the latter two agreeing to extend its intelligence-sharing pact which was due to be eradicated amid their deteriorating bond. USD/JPY meanders 108.50 and remains near the bottom of a tight 108.50-70 range. The Franc meanwhile sees downside bias, with EUR/CHF just under 1.1000 having early briefly breached the mark after clocking a 1.0980-1.1010 daily band thus far.
• AUD, NZD – Both modestly firmer albeit off highs with the Kiwi outperforming its Aussie counterpart, which seems more of a technical move as AUD/NZD fell through 1.0600, with traders on the lookout for any pertinent US-Sino trade headlines for impetus.

In commodities, crude markets are mixed but off lows in consolidative Friday morning trade, after ECB President Lagarde’s speech and mixed EZ PMI data failed to give direction to broader macro sentiment, and amidst a lack of fresh crude specific fundamental drivers. WTI Dec’ 19 futures are languishing below the USD 58.50/bbl mark, off overnight lows around USD 58.10/bbl. Brent Jan’ 20 futures meanwhile have made slightly better progress from USD 63.50/bbl overnight lows, coming within a whisker of yesterday’s high just above the USD 64.00/bbl level. In terms of the metals; gold has been on the front foot, with upside seen alongside European bonds after EZ PMI data raised concerns about service sector weakness despite a stronger than expected recovery in manufacturing. The precious metal managed to reclaim USD 1470/oz to the upside, ahead of yesterday’s USD 1476/oz high. Meanwhile, copper has also seen upside since the European open; given its status as an industrial metal, better than expected EZ manufacturing PMI results may be providing some support, while there has also been positive news on the South Korea/Japan trade front – both important industrial hubs and consumers of the red metal.

US Event Calendar

• 9:45am: Markit US Services PMI, est. 51, prior 50.6
• Markit US Manufacturing PMI, est. 51.4, prior 51.3
• Markit US Composite PMI, prior 50.9
• 10am: U. of Mich. Sentiment, est. 95.7, prior 95.7; Current Conditions, est. 111.2, prior 110.9; Expectations, prior 85.9
• 11am: Kansas City Fed Manf. Activity, est. -2, prior -3

DB’s Jim Reid concludes the overnight wrap

Earlier in the week I informed you that we nearly had a crisis at home last weekend as one of the twins locked themselves in the downstairs toilet and was then in hysterics for over 20 minutes as he didn’t know how to unlock it and get himself out. Well, what a difference a few days make when you are two. My wife informed me last night that the twins now understand the locking system and now deliberately lock themselves in the toilet together when my wife wants to leave the house with them and laugh at the top of their voices. They only let themselves out when they are good and ready. It’s caused my wife great problems over the last two days and she’s been late dropping my daughter to school as a result. With this rate of progress what they’ll be doing in a week is anyone’s guess.

What financial markets are doing in a week might depend a lot on today’s preliminary PMIs for November. One of the consistent themes recently has been broad-based weaknesses in manufacturing, and last month the Euro Area manufacturing PMI was at 45.9, close to a 7-year low, with countries such as Germany (42.1), Spain (46.8) and Italy (47.7) all in contractionary territory. Even looking at the composite PMIs shows weakness, although mostly avoiding contraction, with the Euro Area PMI at 50.6. However, on the plus side there’s been some sign of stabilisation over the last couple of months and hints of better to come in the forward looking components. In terms of what to expect, the consensus for this month is looking for a general uptick in the manufacturing, services and composite readings for the Euro Area, so all eyes will be focused on whether we get that or if further disappointment will instead set the tone as we move towards Christmas.

The second highlight today will be ECB President Lagarde’s speech at 8:30 UK time. Her remarks will be the keynote address at the Frankfurt European Banking Congress, though the exact topic or title of her speech has not been specified. Lagarde’s previous remarks as President didn’t touch on monetary policy, but since then, she has met with her Governing Council colleagues, so she may feel emboldened to make firmer comments if she chooses. In his ECB reaction piece last month, DB’s Mark Wall actually highlighted that we could see a temporary increase in communications volatility at first as the market learns to interpret signals from Lagarde. The initial expectation is that she will be more consensus-driven and less prone to pre-announcing policies than Draghi was, which would likely reduce the scope for any major signal today.

In terms of markets yesterday, equities fell as mixed signals came through on the trade war. In the morning we got the news from Dow Jones that China’s chief negotiator, Vice Premier Liu He, had invited the US negotiators to Beijing for further talks. According to the report, it said that the US negotiators were reluctant to make the visit “unless China makes it clear that it would make commitments on intellectual-property protection, forced technology transfers, and agricultural purchases.” We then heard from the South China Morning Post, who cited someone close to the Trump administration that if a deal weren’t to be reached by December 15, then the tariffs due to come into effect will be postponed as the two sides are close to a phase one deal. That would be positive, but it would be much better to hear the same from US sources instead of Chinese ones.

In the US, the Speaker of the House, Nancy Pelosi, said that a USMCA deal might not be voted on this year. So another trade deal being delayed. Meanwhile, the Trump administration is reportedly considering re-opening an investigation into European auto imports, under section 301 of the Trade Act of 1974 rather than section 232 of the Trade Expansion Act of 1962. That’s the law that Trump has used to impose tariffs on China, which could give him more flexibility. The section 232 review deadline was last week, and while legal experts are divided as to whether the expiry of the review period bars the President from implementing tariffs, it’s likely that the administration wants to maintain the threat of tariffs while it negotiates with the EU.

The main indices all fell back yesterday, with the S&P (-0.16%) and NASDAQ (-0.24%) both closing lower. The trade-sensitive Philadelphia semiconductor index and the auto sector both saw larger falls, down -1.13% and -0.74%, respectively, although US energy stocks were buoyed by oil’s recovery, with WTI up +2.19%. Equities mostly fell in Europe as well, with the Stoxx 600 down -0.40%. Earnings wise, ThyssenKrupp plunged -13.62% after the company proposed suspending dividend payments for the 2018/19 fiscal year and reported a net loss of €260m over the period. As for US corporate news, Charles Schwab (+7.33%) is reportedly considering merging with TD Ameritrade (+16.92%), which would create an enormous pool of assets (around $5 trillion) under one roof. The possible deal could face antitrust hurdles, but investors are already viewing it is negative for the two firms’ competitors, such as E-Trade Financial (-9.33%).

In fixed income, bond yields rose yesterday with 10yr Treasuries +2.6bps, while the 2s10s curve ended up -0.3bps, its 7th straight session flattening, albeit this time only by a small margin. Some of the recent bid to safety may have been slightly alleviated by news that Congress reached a funding deal to delay the task of finalising a full budget while keeping federal agencies funded through December 20, which Trump then signed overnight. In Europe, 10yr bunds (+2.1bps), OATs (+2.2bps) and gilts (+2.4bps) all saw yields rise, though Italy was the exception, with BTPs -2.4bps, as the spread of 10yr BTPs over bunds fell to 150.2bps, its lowest level in over a week.

Asian markets are trading mixed this morning with the Nikkei (+0.44%), Hang Seng (+0.30%) and Kospi (+0.24%) up while the Shanghai Comp (-0.66%) is down. Elsewhere, futures on the S&P 500 are up +0.14%. As for overnight data releases, Japan’s preliminary November manufacturing PMI came in at 48.6 (vs. 48.4 last month) while the services PMI stood at 50.4 (vs. 49.7 last month) bringing the composite PMI to 49.9 (vs. 49.1 last month). So some signs on a big global PMI day of improvements. We also saw Japan’s October CPI data overnight with CPI coming in at +0.2% yoy (vs. +0.3% yoy expected) while core CPI came in line with consensus at +0.4% yoy and core-core CPI at +0.7% yoy (vs. +0.6% yoy expected). Yields on 10y JGBs are up +3.3bps this morning to -0.090%. In other news, late last night Microsoft said that the U.S. Department of Commerce has granted their request for a license to export mass-market software to Huawei.

As we go to print, Reuters has reported Chinese President Xi Jinping as saying that China is not afraid of a trade war and will not flinch from such a fight. He also said that China did not start the trade dispute with the US and says he wants to work out a phase one agreement on trade with the US on the basis of mutual respect and equality before adding that “when necessary we will fight back, but we have been working actively to try to not have a trade war”. These are rare comments from the President on the trade dispute so will get some attention this morning.

Ahead of Lagarde’s comments, yesterday we got the account of Mario Draghi’s last Governing Council meeting as President from October. Notably, the account said that “a strong call was made for unity of the Governing Council”, which comes after the September stimulus measures came under criticism from a number of members. Interestingly, while the minutes said “it was vital for the Governing Council to remain prepared to act by using its full set of instruments if the inflation outlook so required”, they also said that it was “cautioned that due account also had to be taken of the assessment of the possible side effects of monetary policy measures.”

On the UK election, yesterday saw the launch of the opposition Labour Party’s manifesto, which is the most left-wing prospectus put forward by a major UK party in decades. The party said that taxes would increase by £82.9bn, including corporation tax rising to 26% (19% currently) from April 2022, higher income tax on those earning over £80,000, a new second homes tax, a financial transactions tax, reversing inheritance tax cuts, and a windfall tax on oil companies. Various industries would also be nationalised, including the railways, water and energy, while the minimum wage would rise to £10 an hour. However, the latest polls don’t look promising for them, with an Ipsos MORI poll putting the Conservatives on 44%, ahead of Labour on 28% and the Lib Dems on 16%.

Recapping yesterday’s data now, US initial jobless claims rose to 227k last week, which sent the 4-week moving average up to 221k, its highest level since June, though much of the increase was attributable to the data’s seasonal adjustment. We also saw a rise in existing home sales to 5.46m (vs. 5.49m expected), as well as an increase in the Philadelphia Fed business outlook to 10.4 (vs. 6.0 expected), though the details of the report were much worse than the headline, with new orders and employment both falling sharply. From Europe, we got the advance consumer confidence indicator for the Euro Area in November, which rose to -7.2 (vs. -7.3 expected), while in France, the INSEE’s business climate indicator remained at 105, in line with expectations. Promisingly however, the French employment climate indicator rose to 108, its highest level since August 2018. Elsewhere, the OECD released their latest forecasts, which see global growth at 2.9% in 2019 and 2020, before rising to 3.0% in 2021.

To the day ahead now, and as mentioned the highlights will be the release of the preliminary PMIs for November from Europe and the US, along with remarks from ECB President Lagarde. In terms of other data, we’ll get the final November University of Michigan sentiment reading from the US, as well as the November Kansas City Fed manufacturing activity index. Other central bank speakers include Bundesbank President Weidmann and Spanish central bank governor Hernandez de Cos. Finally in Germany, the CDU’s annual conference begins.