S&P 500 futures are higher, continuing on yesterday's momentum, after European and Asian shares also rose alongside a rebound in oil, as the year-end performance chase appears to be accelerating. There were several different moving parts in a mixed European session, in which early Euro strength gave way to weakness...

... which in turn pushed the Stoxx 600 and US index futures higher, rising above yesterday's session high on negligible volumes. 

Global equity futures rallied with Hang Seng futures outperforming and flash smashing to close the session, after a strong finish for Chinese equities following a report out of MNI that Chinese deleveraging may not be as stringent next year.

European stocks rose this morning (Stoxx 600 +0.3%) as the Euro sank, helped by positive notes out from Goldman Sachs, who are overweight European automakers.  Goldman said in a Europe strategy note that “deep value sectors” (autos, oil, and utilities) will help Stoxx Europe to return 12% in next 12 months. As a result, European automakers outperform led by VW for a second straight day, with the SXAP index advancing as much as 1.9%, best of 19 groups on the Stoxx Europe 600 benchmark (Volkswagen +3.8%, Porsche +2.7%, BMW +2%, Daimler +1.7%).  Additionally, Imperial Brand shares rallied after their CEO change, as analysts speculate that this could increase the likelihood that the company will be taken over by Japan Tobacco. Airliner EasyJet is flying high this morning following strong financial results. Bunds are taking another look at 163.00+ levels having faded rallies above the big figure on several occasions recently.

Stocks have already moved on from this weekend's German government crisis: German President Frank-Walter Steinmeier said Germany was facing its worst governing crisis in the 68-year history of its post-World War Two democracy and pressed all parties in parliament “to serve our country” and try to form a government.

“The events have already been likened to Germany’s Brexit-moment,” said Daniel van Schoot, an economist at Rabobank. “That is perhaps exaggerated, but the German political situation is now very unpredictable, more than in the past three decades.”

Bonds across the region followed a rise in Treasuries after the European Central Bank was said to be likely to make only small adjustments to its guidance on monetary policy next year. EGBs rallied led by gilts which are supported ahead of index extension tomorrow, additionally some focus from European traders on dovish ECB sources piece from yesterday.

The dollar stayed within relatively tight ranges versus its major peers, with average volumes. The euro and the pound edged higher, backed by leveraged interest, only to be capped by their respective 55-DMAs before shedding gains. The Swedish krona led G-10 losses on the back of record low interbank rate fixings, while the Turkish lira pared a drop to an all-time low after the central bank raised borrowing costs. Meanwhile, sterling was steady and gilts advanced amid reports Prime Minister Theresa May has the backing of ministers to offer the European Union more money to break the Brexit deadlock. The Australian dollar dropped to a five-month low after suggestions from the central bank that interest rates will stay lower for longer; EUR/SEK breached 10.00 briefly before fading back. Turkey’s lira hit a new record low against the dollar but pared some of the drop after its central bank tightened liquidity, as the standoff between Erdogan and central bank continues.

In overnight central bank announcements, the Bank of England's Deputy Governor Cunliffe said inflation has been a bit lower than BoE forecast in Autumn and that it’s possible to wait before tightening policy until there is clear evidence that pay growth is responding to unemployment level. Elsewhere, RBA minutes from November 7th meeting stated that any further appreciation in AUD would slow expected pick-up in inflation and the economy. The minutes also stated that there is considerable uncertainty on how fast wages might pick up and add to inflation, while it added that a pass-through to inflation may be delayed by many factors. RBA's Lowe stated that there is 'not a strong case' for near-term change in interest rates with the bank paying attention to soft wage growth.

In the U.S., confirmation that Federal Reserve Chair Janet Yellen will leave the board in February creates a fourth vacancy for President Trump to fill, making it trickier for investors to bet on the central bank’s interest rate trajectory next year. While the Thanksgiving holiday gives traders an excuse to pause, equities are heading into the end of the year near their peaks, with investors optimistic about global growth and company earnings.

Meanwhile, the collapse in the US Treasury curve continued, with 2s10s moving below 60bps, and screaming inversion as soon as early next year.  At the same time, The gap between French and German borrowing costs on Tuesday narrowed to its tightest level since before the euro zone debt crisis of 2010-2012.  Germany’s 10-year yield fell two basis points to 0.34%, the lowest in almost two weeks. Britain’s 10-year yield decreased four basis points to 1.257%, the lowest in almost two weeks. Japan’s 10-year yield dipped one basis point to 0.033%, the lowest in more than a week.

Oil prices rose on expectations of an extended OPEC-led production cut, although rising output in the United States capped gains. Brent crude futures were up 0.78 percent to $62.72. West Texas Intermediate crude fell 0.6 percent to $56.09 a barrel. Gold increased 0.3 percent to $1,280.39 an ounce. Copper gained 0.3 percent to $3.13 a pound, the highest in more than a week.

Expected economic data include Chicago Fed National Activity Index and existing home sales. Companies including Medtronic, Lowe’s, Salesforce, Analog Devices, HP Enterprise and HP Inc. are reporting earnings.

Bulletin Headline Summary from RanSquawk

• EU bourses firmer this morning with auto names racing away amid a positive note from Goldman Sachs
• FX price action fairly tepid thus far.
• Looking ahead, highlights include US existing home sales, APIs, ECB’s Coeure and Fed’s Yellen

Market Snapshot

• S&P 500 futures up 0.2% at 2,586.75
• STOXX Europe 600 up 0.3% at 387.49
• MSCI Asia up 0.9% to 171.57
• MSCI Asia ex Japan up 1.1% to 565.37
• Nikkei up 0.7% to 22,416.48
• Topix up 0.7% to 1,771.13
• Hang Seng Index up 1.9% to 29,818.07
• Shanghai Composite up 0.5% to 3,410.50
• Sensex up 0.4% to 33,492.20
• Australia S&P/ASX 200 up 0.3% to 5,963.52
• Kospi up 0.1% to 2,530.70
• German 10Y yield fell 1.7 bps to 0.346%
• Euro down 0.08% to $1.1724
• Italian 10Y yield fell 2.7 bps to 1.543%
• Spanish 10Y yield fell 2.4 bps to 1.491%
• Brent futures up 0.8% to $62.69/bbl
• Gold spot up 0.3% to $1,280.53
• U.S. Dollar Index little changed at 94.08

Top Overnight News

• U.K. Prime Minister Theresa May won the backing of ministers on both sides of her divided cabinet to offer the European Union more money to break the Brexit talks deadlock; Barring some major breakthrough, global banks will implement their relocation plans early next year to guarantee they’re able to have new offices inside the EU running by the time the U.K. exits
• German Chancellor Angela Merkel said she’s ready to face voters again to break the country’s political stalemate, betting they won’t blame her for failed talks on forming a coalition
• Germany: FDP chairman reaffirms rejection of four-party talks; SPD reiterates they will not be part of a grand coalition
• Putin held a surprise meeting with Syria’s Bashar al-Assad, kicking off a diplomatic drive this week to outline the terms of an end to the Middle Eastern country’s civil war; Putin will speak by phone with Trump later Tuesday, the Kremlin said
• The ECB is likely to make multiple small adjustments to its guidance on monetary policy next year rather than any major change in language as it ends quantitative easing, according to euro-area officials familiar with the thinking of policymakers
• BOE: Cunliffe says CPI will peak in 4Q 2017, it’s possible to wait before tightening; McCafferty says equilibrium unemployment rate may be below 4.5%
• RBA’s Lowe: no strong case for a near-term adjustment in policy, more likely that next move in rates will be higher; increasingly likely that inflation will be subdued for some time yet
• MNI: PBOC deleveraging campaign may ease somewhat in 2018; PBOC will continue to manage currency and capital controls for at least another decade, according to people familiar
• Turkey Central Bank: has decided to provide all funding from its late liquidity window effective Wednesday, which will raise the weighted average cost of funding by 25bps
• Nestle Is Said to Be Among Potential Hain Celestial Suitors
• AT&T, U.S. Prepare to Battle in Court Over Time Warner Merger
• Cannabis Grower Aurora Plans to Go Hostile With CanniMed Bid
• ECB Is Said Likely to Take Small Steps in QE Exit Guidance

Asian equity markets were higher across the board as the region took the impetus from the positive close on Wall St, with Nikkei 225 (+0.9%) underpinned as exporters benefitted from JPY weakness. The benchmark Japanese index briefly broke above the 22,500 level as stocks coat-tailed on the rebound in USD/JPY, with Toshiba reprieved from yesterday’s slump to sit among the biggest gainers. ASX 200 (+0.3%) also traded with broad-based optimism across its sectors albeit to a lesser extent and Chinese markets completed the upbeat picture following another significant liquidity operation by the PBoC, with the Hang Seng (+1.5%) leading on continued gains in its largest weighted stock Tencent which recently became a member of the exclusive USD 500bln market-cap-club. Finally, 10yr JGBs were relatively flat throughout the session with demand subdued by the broad positive risk tone and a tepid longer-dated enhanced liquidity auction, although a mild uptick was seen in late trade as prices broke above 151.00. PBoC injected CNY 130bln in 7-day reverse repos, CNY 40bln in 14-day reverse repos and CNY 10bln in 63-day reverse repos. Net of maturities, the injection was only CNY 10bn however. PBoC also set the CNY mid-point weaker at 6.6356 vs Prev. 6.6271. Elsewhere, the Japanese Government to cut 30 and 40 year JGB supply in FY 2018/2019.

Top Japanese News;

• Top Fund Backs Tencent to Drive Hong Kong Index Even Higher
• China H Shares Jump to Two-Year High as Financial Firms Rally
• Richest Asian Banker Sees Once-in-Lifetime India Opportunity
• Turkey Lifts Bank-Funding Costs as Lira Weakens to All-Time Low

European equities modestly higher this morning (Stoxx 600 +0.2%), with positive notes out from Goldman Sachs, who are overweight European automakers.  Goldman said in a Europe strategy note that “deep value sectors” (autos, oil, and utilities) will help Stoxx Europe to return 12% in next 12 months. As a result, European automakers outperform led by VW for a second straight day, with the SXAP index advancing as much as 1.9%, best of 19 groups on the Stoxx Europe 600 benchmark (Volkswagen +3.8%, Porsche +2.7%, BMW +2%, Daimler +1.7%).  Additionally, Imperial Brand shares rallied after their CEO change, as analysts speculate that this could increase the likelihood that the company will be taken over by Japan Tobacco. Airliner EasyJet is flying high this morning following strong financial results. Bunds are taking another look at 163.00+ levels having faded rallies above the big figure on several occasions recently. The bullish fundamentals and flow/positioning motives are well known and documented, but chart-wise market contacts note that support around 162.86 (rising trendline and Monday’s late Eurex base) held on the downside, prompting some intraday buying for a bounce to  163.06 resistance initially and then 163.16 (yesterday’s session peak) vs a high so far at 163.15. Beyond that, 163.22 needs to be breached to expose 163.40 and this month’s 163.63 peak. However, another retreat and failure to retain grasp of the 163.00 handle will bring 162.82 back into play as support (Monday’s actual intraday low), and on a break, those short-term longs not booking profit at 163.06 are expected to bail. Turning to Gilts, more upside also seen and a return to the 125-plus zone, at 125.29 for a 33 tick gain on the day vs 12 tick loss at one stage, before easing back slightly on larger than forecast UK PSNB shortfalls.

Top European News

• Brexit-Hit Banks Said to Start Moving Staff Abroad in Early 2018
• Paris, Amsterdam Brexit Winners as Coin Toss Assigns EU Agencies
• May Prepares New Brexit Offer After Talks With Ministers
• U.K. Budget Deficit Widens as Inflation Boosts Debt Costs
• Uniper Tells Shareholders to Reject Fortum’s Takeover Offer
• EasyJet Reaping Benefit of Ryanair Retreat as Winter Prices Gain

In FX markets, price action has been relatively contained thus far. The USD index is firmer around the 94.000 handle in thin holiday-impacted trade, with the USD gaining ground vs most major counterparts on a generally more risk-on mood. EUR has been resilient in the face of Germany’s struggles to form a new Government and the threat of another election. EUR/USD continues to find support ahead of stops around 1.1720 and bids at 1.1700, with reported fixing demand in Asia propping the pair, but the 100 DMA around 1.1745-50 capping recovery gains. Elsewhere, AUD has rebounded from overnight lows post-RBA minutes, as Governor Lowe underlined that the next move in rates will be up, although the lead time to any tightening remains lengthy. Meanwhile, GBP was unreactive to the latest public borrowing data as markets look to see whether or not PM May will get the green-light for an enhanced divorce bill offer to the EU.

In commodities, WTI and Brent crude futures have continued to climb through the European session with energy-related newsflow on the light-side as prices retrace some of the declines seen in the early stages of yesterday’s session. Energy markets are looking ahead to next week’s OPEC meeting, however, markets are firmly expecting an extension to existing production cuts in lieu of recent rhetoric from the cartel. In metals markets, gold only managed to nurse some of yesterday’s losses overnight as a broad positive risk tone kept safe-haven demand subdued. Copper maintained most of the prior session’s gains with prices supported by the risk appetite and amid gains in Chinese steel and iron ore prices on optimism for increased demand following the winter season.

Looking at the day ahead, central bank speakers will likely be the centre of attention again with Fed Chair Yellen due to speak in the evening as part of a series with former BoE governor Mervyn King, while the ECB’s Coeure chairs a panel in Frankfurt in the afternoon. Datawise, UK public sector net borrowing and CBI trends data for October and November are due, while in the US the Chicago Fed national activity index and existing home sales data for October is due.

US Event Calendar

• 8:30am: Chicago Fed Nat Activity Index, est. 0.2, prior 0.2
• 10am: Existing Home Sales, est. 5.4m, prior 5.39m
• 10am: Existing Home Sales MoM, est. 0.19%, prior 0.7%
• 6pm: Fed’s Yellen Speaks at Stern Business School

DB's Jim Reid concludes the overnight wrap

There wasn't much contagion yesterday after the surprise collapse in German coalition talks late on Sunday night. Over the last couple of years, negative market reaction to political shocks has often been over before you can digest it fully. Examples being the Greek and Brexit referendums and the Trump election results. Although the German coalition talks collapsing is much lower key than these events, it was still interesting that the DAX was only negative for 1 hour 16mins and that the Euro had snapped back into positive territory 37 minutes earlier even if it did soften again as the day progressed closing -0.49% against the dollar. The DAX closed +0.50% (high to low had been as much as +1.23%) and the Stoxx 600 +0.67% (range 0.91%).

Overall it’s hard to see what the solution is to the gridlock in Germany but it’s also hard to see it being that negative for markets other than at the margin. Mrs. Merkel yesterday effectively ruled out a minority government and the SPD continue to rule out a return to a Grand Coalition so unless talks can be reignited, a snap election early next year seems increasingly likely. As an outsider not as familiar with the German election process as many of my readers I can't help wondering how a fresh election will help much with recent polls seemingly not changing that much from the September 24th election. However, perhaps the campaigning would persuade enough voters to change their mind that the coalition math might be easier. Unlikely but possible.

The good news from our economists in Germany is that the political system means there's no power vacuum and thus no time pressure to progress things. This probably helped prevent the market reacting too negatively yesterday although it can’t be too positive at the margin for Brexit talks and for fresh Macron/ Merkel European initiatives in the near-term. For more on the technicalities and options open now see the note "Coalition talks collapsed - unchartered territory ahead" from our German economists yesterday.

Overnight, the Fed’s Yellen has confirmed that she will be stepping down from the Board of Governors once Mr. Powell is sworn into the office. Her vacancy will give President Trump a fourth spot to fill in the new Fed, including the Vice Chairman spot. Elsewhere, Trump has redesignated North Korea as a state sponsor of terrorism and the Treasury Department is expected to announce additional sanctions today. Notably, Secretary of State Tillerson “still hopes for diplomacy” with the State. We wonder whether North Korea will retaliate with some form of defiance after this so watch out for that. This morning in Asia, markets have followed the positive lead from the US. The Hang Seng (+1.30%), Nikkei (+0.93%), Kospi (+0.15%) and Shanghai Comp (+0.40%) are all up as we type.

Turning to Brexit headlines, it seems that in addition to the stalemate on UK’s financial settlement to the EU, there are other unresolved issues before talks can move onto trade and a transition deal. Chief EU Brexit negotiator Barnier has noted that the Irish border will require a specific solution and it’s up to “those who wanted Brexit” to come up with those solutions.  Elsewhere, he has warned “the legal consequence of Brexit is that the UK financial services providers lose their passport (rights to the EU bloc)”. Also press reports last night suggested that PM May has cabinet approval to double the settlement offer from the current EUR20bln.

Moving onto central bankers’ commentaries now. The ECB’s Draghi reiterated that despite the sound economic recovery, “underlying inflation pressures are still subdued as labor market slack remains significant….(and that we) still need time to translate into dynamic wage growth”. On non-performing loans in the EU bloc, he cautioned that we need to “…work together to cope with this problem….but at the same time doesn’t create the destabilizing effects that people fear”. On Brexit, he noted it was difficult to properly analyse, mainly because “we don’t have yet a precise or even imprecise view of what the negotiating platform will be”. Notably, he said that the Brexit “transition can be managed in a smooth way…but it should be done without compromising over the integrity of the single market”, although “this is easier to be said than done”.

Following on, BOE policy maker Mr Ramsden has warned that Brexit could put the economy in an “unusual” slow down for years. He noted “given the long horizon over which the effects of Brexit could play out, we’re likely to be on the flat part of the saucer for some time”. On his decision to dissent on the recent rate hike, he noted there may be more room for the economy to grow without price gains, noting “…one must pay close attention to any signs that above target inflation is feeding through to second-round effects in domestic costs…so far, that doesn’t seem to be the case”.

Now recapping other markets performance from yesterday. US equities all strengthened, with both the S&P and Nasdaq up c0.1% and Dow up 0.31%. Within the S&P, telco (+0.97%) and financials stocks rebounded and led the gains, with partial offsets from health care and utilities names. European markets were all modestly higher despite the German political instability.  Across the region, the Stoxx 600 (+0.67%), DAX (+0.50%) and CAC (+0.40%) rose modestly, while the FTSE 100 was the relative underperformer (+0.12%). The modest risk on bias was evident in volatility measures, with the VIX down for the third consecutive day (-6.8% to 10.65) while the VSTOXX also fell -7.05% after spending only 43 minutes higher at the open.

Over in government bonds, core bond yields were mixed but little changed (UST 10y: +2.3bp; Bunds +0.2bp; Gilts -0.3bp), while peripherals outperformed with Italy and Spanish yields down 3-4bp. Elsewhere, the flattening across the Treasury curve has continued with the 5s30s curve c3bp flatter to 68.8bp, marking a fresh 10 year low.

Turning to currencies, the US dollar index and Sterling gained 0.44% and 0.12% respectively, while Euro fell 0.49% following the aforementioned developments in Germany. In commodities, WTI oil dipped 0.58%, in part as investors await potential confirmation of production cuts in the upcoming OPEC meeting on 30th November. Elsewhere, precious metals weakened (Gold  -1.20%; Silver -2.30%), with Gold down the most since late September, while other base metals were mixed (Copper +0.91%; Zinc -0.06%; Aluminium -1.44%).

Away from the markets, DB’s China research team have published another note looking at China’s macro risks. They have noticed new signs of a tightening in fiscal and monetary policies over the past week. For example, on the fiscal front, the Ministry of Finance issued a document to tighten control over public-private partnership projects. On monetary front, the government released draft guidelines on the asset management sector, which from a macro perspective could structurally constrain financial leverage and further tighten credit growth. Overall, the team believes these new measures are positive for China in the long term, but in the next 6 months they will likely cause the economy to slow. 
Elsewhere the latest ECB holdings were released yesterday. Net CSPP purchases last week was €2.33bn and Net PSPP purchases €12.27bn. This left the CSPP/PSPP ratio at 19.0% last week (15.4% over the last 4 weeks vs. 11.5% before QE was trimmed in April 2017). Although we don’t think CSPP will be trimmed much after the January taper last week’s buying seemed anomalous in part as issuance was high over the period and the ECB may have taken advantage of this, particularly as the upcoming holiday season might bring liquidity challenges later on.

Moving to the limited macro data releases from yesterday. In the US, the October Conference board leading index was above expectations at 1.2% mom (vs. 0.8% expected) and 5.2% yoy - the highest since May 2015. In Germany, the October PPI was in line at 0.3% mom and 2.7% yoy. In Japan, we saw a trade surplus of JPY323bn in October, which was modestly larger than expected.

Looking at the day ahead, central bank speakers will likely be the centre of attention again with Fed Chair Yellen due to speak late in the evening as part of a series with former BoE governor Mervyn King, while the ECB’s Coeure chairs a panel in Frankfurt in the afternoon. Datawise, UK public sector net borrowing and CBI trends data for October and November are due, while in the US the Chicago Fed national activity index and existing home sales data for October is due.