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Authored by Lance Roberts via RealInvestmentAdvice.com,

“No animals were harmed during the writing of this article.” 

If you listen to the media, the shocking and totally unexpected downturn last was unable to be foreseen by anyone. Thankfully, it’s now over and we can get back to the roaring bull market. 

Or can we?

Mark Hulbert wrote an interesting piece recently stating:

“The stock market’s recent correction has been more abrupt than you’d expect if the market were in the early stages of a major decline.

I say that because one of the hallmarks of a major market top is that the bear market that ensues is relatively mild at the beginning, only building up a head of steam over several months. Corrections, in contrast, tend to be far sharper and more precipitous.”

His view is a common pushed out in the mainstream narrative as of late, but is based on a potentially flawed assumption the bear market began in October of this past year as shown below.

The decline from “all-time” highs took many of the persistently bullish commentators by surprise.

However, the topping process began long before October and, as shown in the chart below, the market was sending a clear warning that something was amiss.

As shown, the “blow-off rally” in January formed the left-shoulder of what would eventually become a “head and shoulder” topping process. For those not into the technical “mumbo jumbo,” this pattern of prices is similar to throwing a ball up in the air. Initially, the ball has a lot of momentum as it begins it rise. However, at a point, the force of gravity slows the momentum of the rise until, for a brief moment, the ball is motionless before falling back to earth.

Markets work much the same. Eventually, the momentum of the rise in prices becomes too far extended above long-term price trends, which act like gravity, and prices “fall back to earth.” The chart below shows the previous momentum driven rise and fall of the markets.

The yellow-shaded boxes denote the points where price momentum began to struggle to move higher. The lines in the bottom pane denote the change to price-momentum from positive to negative.

It is important to note that in late 2015, and early 2016, the market had begun a topping process that should have evolved into a deeper overall correction. However, just as longer-term trend lines were being violated, global Central Banks leapt into action with a flood of liquidity to offset the risk of a disorderly “Brexit” at a time the Federal Reserve was starting to hike overnight lending rates in the U.S.

While the “Brexit” issue is still ongoing, the risk to the market never actually matured. Therefore, the flood of global liquidity only had one place to go and drove asset prices skyward over the next 18-months.

However, today, that liquidity backdrop has changed dramatically. The Fed has hiked rates from near 0% to over 2%, and are slated to do more this year, and are extracted liquidity from the markets at a rate averaging $50 billion per month. I have shown the following chart before, but given the current environment, it is worth reviewing again.

But it isn’t just the extraction of liquidity from the markets which will likely weigh on the markets over the course of the next year. As I wrote back in April of 2018 there are 10-other reasons weighing on markets:

• Global Central Banks are reducing liquidity flows

• Global economic growth continues to weaken

• “Trade Wars” and “Tariffs” are still a threat

• Valuations remain elevated

• High-yield spreads still remain compressed

• Interest rates are still rising

• Price volatility has picked up sharply

• Investors remain aggressively allocated to equities

• Earnings estimates are still too high and on the decline.

• Debt loads remain extremely high and are vulnerable to exogenous events.

The backdrop of the market currently is vastly different than it was during the “taper tantrum” in 2015-2016, or during the corrections following the end of QE1 and QE2.  In those previous cases, as I stated, the Federal Reserve was directly injecting liquidity and managing expectations of long-term accommodative support. Valuations had been through a fairly significant reversion, and expectations had been extinguished.

None of that support exists currently.

Let me conclude with this quote from John Hussman:

“At its core, investment is about valuation. It’s about purchasing a stream of expected future cash flows at a price that’s low enough to result in desirable total returns, at an acceptable level of risk, as those cash flows are delivered over time. The central tools of investment analysis include an understanding of market history, cash flow projection, the extent to which various measures of financial performance can be used as “sufficient statistics” for that very long-term stream of cash flows (which is crucial whenever valuation ratios are used as a shorthand for discounted cash flow analysis), and a command of the basic arithmetic that connects the current price, the future cash flows, and the long-term rate of return.

At its core, speculation is about psychology. It’s about waves of optimism and pessimism that drive fluctuations in price, regardless of valuation. Value investors tend to look down on speculation, particularly extended periods of it. Unfortunately, if a material portion of one’s life must be lived amid episodes of reckless speculation that repeatedly collapse into heaps of ash, one is forced to make a choice. One choice is to imagine that speculation is actually investment which is what most investors inadvertently do. The other choice is to continue to distinguish speculation from investment, and develop ways to measure and navigate both.

At present, stock market investors are faced with offensively extreme valuations, particularly among the measures best-correlated with actual subsequent market returns across history. Investment merit is absent. Investors largely ignored extreme ‘overvalued, overbought, overbullish’ syndromes through much of the recent half-cycle advance, yet even since 2009, the S&P 500 has lost value, on average, when these syndromes were joined by unfavorable market internals.”

As I discussed previously, there is a reasonably high possibility, the bull market that started in 2009 has ended. If that is indeed the case, the current bounce, which we have been anticipating, will likely not last for long. In other words, it currently looks, and feels, like a “dead cat bounce,” in technical terms.

With the market still oversold in the short-term BUT with a confirmed “weekly sell signal” in place, I want to reiterate that portfolio management processes have now been switched from “buying dips” to “selling rallies” until the technical backdrop changes.

Therefore, use rallies to:

1. Re-evaluate overall portfolio exposures. We will look to initially reduce overall equity allocations.

2. Use rallies to raise cash as needed. (Cash is a risk-free portfolio hedge)

3. Review all positions (Sell losers/trim winners)

4. Look for opportunities in other markets

5. Add hedges to portfolios 

6. Trade opportunistically (There are always rotations which can be taken advantage of)

7. Drastically tighten up stop losses. (We  had previously given stop losses a bit of leeway as long as the bull market trend was intact. Such is no longer the case.)

There remains an ongoing bullish bias which continues to cling to belief this is “just a correction” in an ongoing bull market. However, there are ample indications, as stated, the decade long bull market has come to its inevitable conclusion.

If the bulls are right, then it is a simple process to remove hedges and reallocate back to equity risk accordingly.

However, if the bull market has indeed ended for now, a more conservative stance in portfolios will protect capital in the short-term. The reduced volatility allows for a logical approach to make further adjustments as the correction becomes more apparent. (The goal is not to be forced into a “panic selling” situation.)

It also gives you the opportunity to buy at deeply discounted values.

For now, we continue to look sell into rallies.

via RSS http://bit.ly/2CiJODp Tyler Durden

Like clockwork, fewer than 30 minutes after President Trump tweeted that US-China trade talks were “going very well”, eliciting a bump in US equities, the top editor at China’s English-language Global Times reported that the US delegation would remain in Beijing for a third day after Tuesday’s talks stretched late into the evening.

China-US trade talks haven’t concluded after two days of tough work. I heard they will continue tomorrow. This sends a signal: The two sides are in serious talks and working hard to solve the disagreements between them. https://t.co/PDunt3xx4Z

— Hu Xijin 胡锡进 (@HuXijin_GT) January 8, 2019

The tweet, and the subsequent BBG headline, prompted futures to take another leg higher.

As @fxmacro pointed out, an extension means there won’t be any material leaks today…so traders can go home and get some rest before Trump’s big speech tonight.

so not sure what we are waiting for now…you can all go home and rest up for Trump show tonight

— FxMacro (@fxmacro) January 8, 2019

And while Trump and the Chinese have preferred to focus on efforts to hammer out disagreements, we can’t help but wonder if the talks have hit an impasse as the mid-level delegations struggle to find an area of agreement to serve as a foundation for the next round of talks?

via RSS http://bit.ly/2sfbsfB Tyler Durden

Gartman made waves, so to speak, on Monday when after months of being vocally bearish, the “world-renowned commodity guru” flipped bullish, and not just bullish but mega-bullish in what he said is a “WATERSHED” shift in his sentiment, saying “We are now of the mind… after having been manifestly and loudly bearish of the global stock markets and most particularly of the US stock market because the Fed had been removing the fuel from the markets and from the economy via its continued and material running off of its balance sheet… that stocks are headed a good deal higher; that the dollar is headed a good deal lower; that commodities… and especially gold… are headed demonstrably higher and that the great game has changed. We do not make this statement often, but Friday was a WATERSHED shift on the part of the Fed and a WATERSHED shift on our part.”

It remains to be seen if he will be right or not, but at least Gartman had enough foresight to anticipate what would happen next:

We are certain we shall be taken to task by the bloggers and others… Zero Hedge being first and foremost… for changing our view as swiftly and as materially as we have and we are prepared for that. But we were consistent with our bearish view of stocks and our bullish view of the dollar as the Fed ran off its assets taking reserves en masse from the system. If that is going to stop… if that has changed, and we believe that it has… then we’ve no choice but to change with it. And so we shall and so we are. We trust we are clear?

However, while his marketwide bullish flipflop has yet to be validated (or refuted), in a far more typical example of Gartman’s  process, in his Tuesday Gartman Letter, he describes his latest investment…. which turned out to be a disaster in just a few days:

As  for our retirement account, late two weeks ago we bought into the market, punting on the banks and on the energy market… but in a very small way. We bought energy via a “sand” supplier necessary for fracking operations and we bought the shares of a local bank here in Tidewater, Virginia. The shares of the “sand” supplier”… Hi-Cross Partners… had fallen from near $15/share five months ago and from $57/share four years ago to near $3.50/share recently, and “reversed” to the upside Wednesday of two weeks ago, so our risk is simply to that week’s lows. We added to that position late last week, adding half again as many shares as we had previously owned.

However, yesterday hurt badly for HCLP reported earnings and sales nearly a month and one half before they were expected. We expected management to report sometime in mid-February but instead it reported yesterday morning instead and the results were devastating. To no one’s surprise, sales were and are down… materially… while the obviously unserviceable dividend was cut entirely. The reason for the poor earnings and sales?  The collapse of crude oil prices, of course, which has resulted in a collapse of drilling efforts here in the US and the concomitant collapse in the “rig count.” Clearly that should not have been surprising.

Nonetheless, the shares gave back much of the nearly 35% rally that they had enjoyed last week and the week previous, falling 16% yesterday. We cut our position by one third on the opening. We know of no other way to trade.

And now, back to Gartman’s “Watershed” call.

 

via RSS http://bit.ly/2H1gwi8 Tyler Durden

US stocks have climbed more than 8% since Treasury Secretary Steven Mnuchin rang up the PPT in the days before Christmas, but President Trump can’t seem to move past the market turbulence that bled into the first trading days of 2019, despite the fact that stocks have climbed during four of the past five sessions.

While economic data in Europe stoked fears of a recession in the Continent’s largest economy, President Trump once again touted Friday’s blockbuster jobs report, tweeting that “Economic numbers looking REALLY good. Can you imagine if I had long term ZERO interest rates to play with like the past administration, rather than the rapidly raised normalized rates we have today.”

To be sure, in addition to rock-bottom rates, the Obama Administration also had help from $3.8 trillion in QE.

If that were the case, Trump argues, his job (which in his view apparently boils down to maintaining record-high equity prices) would be “SO EASY!”.

And although many analysts are still skeptical about whether we have already seen the bottom from the latest bout of market volatility, Trump took the opportunity to remind America that markets are up “BIG since 2016 Election!”

Economic numbers looking REALLY good. Can you imagine if I had long term ZERO interest rates to play with like the past administration, rather than the rapidly raised normalized rates we have today. That would have been SO EASY! Still, markets up BIG since 2016 Election!

— Donald J. Trump (@realDonaldTrump) January 8, 2019

As if to underscore his point, Trump tweeted that “talks with China are going very well,” eliciting a bump in S&P 500 futures.

Fortunately for Trump, the government shutdown has delayed several economic data releases, including trade data initially slated for release on Tuesday, allowing him to bask in the glow of Friday’s jobs report for a while longer.

via RSS http://bit.ly/2TDaMfW Tyler Durden

Retail giant Sears has asked a US bankruptcy judge to liquidate its assets after a last-minute bid by Chairman Eddie Lampert failed, reports Reuters. The move will affect approximately 50,000 employees and 425 stores. 

Sears Holdings rejected Lampert’s $4.6 billion package backed by Bank of America, Citigroup and the Royal Bank of Canada. The three institutions offered to provide a $950 million basset-backed loan and $350 million revolving line of credit to back Lampert’s bid.

As we noted on Sunday, Lampert’s financing package had gaps, and the plan would not have provided enough cash to cover bankruptcy-related costs. It also undervalued inventory and other assets compared to what liquidators were promising to pay. 

Part of Lampert’s bid relied on the forgiveness of $1.3 billion of Sears debt held by his hedge fund, ESL Investments Inc.

The retailer started laying the groundwork for a liquidation after meetings Friday in which its advisers weighed the merits of a $4.4 billion bid by Lampert’s hedge fund to buy Sears as a going concern, said the people, who asked not to be identified because the discussions are private. If the 125-year-old retailer does die in bankruptcy — like Toys “R” Us in 2018, and Borders Group Inc. in 2011 — it would mark the largest fatality yet in the retail apocalypse prompted by a shift to online shopping. –Bloomberg

Unfortunately for Eddie, much of his bid relied on him assuming ownership of the reorganized business – however the validity of his debt has been called into question after several creditors challenged ESL, while no cash backstop was provided in case this fell through. 

Sears closed about 140 stores back in October when it initially filed for Chapter 11 bankruptcy protection with $11.34 billion in debt. The retailer also announced in November that it would close an additional 40 unprofitable stores by February 2019. It was the second largest bankruptcy ever, according to Bloomberg, following that of real estate firm Capmark Financial Group with $21 billion in liabilities. The Toys “R” Us bankruptcy ranks third at around $8 billion in debt. 

Developing…

via RSS http://bit.ly/2SJagwO Tyler Durden

Blain’s Morning Porridge, submitted by Bill Blain

“It’s very simple – what most people in this country want is the Single Market..”

Take deep breath. Repeat. Say loudly: “There is nothing to worry about except worry itself.. everything will be alright.” Repeat 3 times.  I find it helps…

Actually… the threat board is curiously calm this morning. The Chinese and Americans are making positive noises about solving the trade disputes. The Fed is being terribly helpful. The market didn’t puke yesterday – but, since I can’t get my Bloomberg to work… who knows….

It certainly feels like the world is slowing down. A host of articles from learned economists, traders and hedgies say so. It’s no wonder clients are telling me they’ve been trying to bid for cheap credit paper, but finding everyone else is also back in the frame and also bidding. I suppose it’s what might be construed as a functional market. More than a few folk think bonds offer good value here.

I’m not so sure about stocks. The recent relief rally feels a little bit desperate and too reliant on the Fed continuing to pony up – meaning its vulnerable to an equally swift repeat selloff if the bad news mounts again. Chartists are more succinct: the numbers say stocks are overbought!

* * *

Let’s move on to Brexit: Rumours Theresa May might have a piece of paper in her hand from Ireland saying “Peace in our time”? Excellent dramatic device to move the debate to a successful conclusion… Dream on…

Who else watched Channel 4’s Brexit: Uncivil War last night? The reviews are slating it, but it was fascinating stuff. It reduced the “end-of-British-civilisation-as-we-know-it” to pantomime buffoonery – but how could you avoid it when Boris Johnson and Michael Gove are main characters…? Every one, absolutely every one, of the central players came out looking stupid – which, if my memory serves me well, is pretty much exactly how it happened.

The key issue on how social media data was trawled, engineered, targeted and wielded with such precision should be at the core of Modern Politics 101 – yet, the programme skated over these critical details, preferring to target cheap laughs at Farage, Banks et al. The programme presented Brexit as a classic British underdog drama; the well-meaning, establishment with hearts-in-the-right-place, correct but essentially amateur Remain campaign floored by the professional, dark and dirty Leave campaign. We should all feel robbed….

No. We should all understand why and how.. and then move on accordingly. 

The central deranged character, Dominix Cummings’ final warning that this has only just begun is particularly pertinent. Populism will change the world. The closing credits hinted it was American money that underlay the social engineering that won Brexit, testing it for Trump’s campaign. It’s not only how we fix a politically broken Britain, but look to European Elections in May.. (Sound of crashing minor chords..)

* * *

All of which segues neatly into my major concern this morning. What’s to like about European bonds? There is a note in the FT suggesting Italy has to raise about Euro 1 bln every working market day through 2019. Headlines this morning are about German industrial production tumbling in November. There are analyst comments about diminishing potential demand for European sovereign debt when Europe is drifting back into recession without ever having got out of the last one. I even noted one piece (which I can’t find this morning..) warning Germany is using the wrong currency which will create massive crisis domestically.

If the ECB can’t buy European bonds…. Who can?

Why would I buy bonds yielding the square root of nothing, backed by promises from governments using someone else’s currency, where the underlying economies are underperforming and mired in red-tape, unreformed institutionalism, and austerity? Just asking… (I would love to quote you European unemployment numbers – but my Bloomberg is still FU. Suffice to say, unlike the Fed, the ECB does not have to worry about an overheated labour market.)

Last week, the Fed demonstrated a nimble set of wheels when Powell announced he’d slow the pace of rate rises – clearly cogent of the economic and confidence risks of a continued stock market meltdown. This morning, the People’s Bank of China slashed reserves ratios to pump money into the system to boost spending in an effort to stimulate the slowing economy. Both the Fed and BoC have the power to do more – slash rates, margins and even relaunch QE.

Compare and contrast with the ECB. Europe’s Central Bank can’t actually change a lightbulb without first commissioning a wait and see if it’s actually broken policy review. It then requires a 80% majority vote to actually change the bulb, before referring it to the LBRA – The Light Bulb Replacement Authority – based in a new purpose built HQ in Lithuania. Heaven help Europe and the Euro if the globe slides into recession or a slowdown.

QE sort of worked in the UK (before we bazooka’d ourselves over Brexit). It worked in US because the Fed made it work alongside everything else it did to get banks lending and the economy working. It utterly failed in Europe because QE became an arbitrage game for the market, while austerity enforced Euro rules ensured it failed across the continent. Doing “”Whatever it Takes” is not a policy – it became a phrase to cover bureaucratic inertia!

Other blogs note the ECB can’t cut rates because they are cut already. They can’t buy more Govt bonds because Italy is a hair’s breath away from Junk and German isn’t issuing enough bonds, so the quotas are full. Its caught and stopped.

I ask again.. why should I buy European bonds?

FINAL QUESTION – Any readers or readers with offices in Sydney? Need a favour, please drop me an email!

via RSS http://bit.ly/2C6B6rE Tyler Durden

Mere hours after German Economy Minister Peter Altmaier assured the German public that the country’s economy will continue to expand despite a recent raft of discouraging economic data, official data – unlike the US, Germany’s government is open and economic data continue to be reported – showed German industrial activity plunged the most since 2009, confirming a weak factory orders print from Monday and sparking fresh fears that Europe’s largest economy may have entered a recession during Q4 just as Mario Draghi was preparing to end the ECB’s purchases of government bonds.

According to Bloomberg, industrial production fell for a third month in November (-1.9% m/m, and -4.9% y/y) with weakness in everything from consumer goods to energy. In another warning sign for the bloc, the data was released alongside a eurozone-wide sentiment reading which showed that economic confidence had slumped late last year. 

The dismal IP reading confirmed a just as ugly German factory orders print from Monday which tumbled far more than expected in November. Orders slid 1% from October, and posted a year-on-year decline of 4.3%, the biggest drop in more than six years

The data raise the possibility that while European Central Bank President Mario Draghi was assuring investors in December that the Continent’s economy had enough momentum to justify tapering the central bank’s asset purchases, its largest constituent may have been sliding into a recession.

For what it’s worth, Germany’s central bank said Tuesday it’s “looking through the volatility of monthly economic data” and wouldn’t comment on individual reports. The bank has been hoping for a rebound from the German economy’s Q3 contraction, arguing that the shrinkage was due to temporary factors like new auto emissions rules.

One economist said that even if the German economy manages to avoid a recession, it’s looking likely that industrial output probably contracted in the fourth quarter.

“The latest data, even assuming a bounce back in December, mean industrial output probably contracted in the fourth quarter. The decline is big enough to have a meaningful impact on GDP growth, and creates a risk that the economy shrank again.”

But in a reflection of the bad-news-is-good-news dynamic that reasserted itself in the US on Monday, German stocks rallied on the news, while German bund yields climbed but soon pared their move.

via RSS http://bit.ly/2CXOErf Tyler Durden

S&P futures, European equities and Asian stocks all jumped as investors awaited a positive outcome from trade talks between the US and China economies, ahead of a televised address by President Donald Trump in which he is expected to use emergency powers to announce the construction of a border wall, while the US government shutdown enters its 18th day.

Chinese authorities plan to give a statement following the latest round of U.S. trade talks which ends today in Beijing, after both sides signaled progress toward resolving a conflict that has roiled markets, Bloomberg reported. “The talks are still underway and I believe we will release a detailed readout after they are concluded,” Chinese foreign ministry spokesman Lu Kang told reporters at a regular briefing Tuesday in Beijing.

While no timing was given and it wasn’t immediately clear if the U.S. would release a statement, on Monday Commerce Secretary Wilbur Ross expressed optimism, telling CNBC that “there’s a very good chance that we’ll get a reasonable settlement.” This took place after China’s Vice Premier Liu He made an unexpected appearance at the talks on Monday in a sign the Chinese were also pushing for a positive outcome.

This was enough to push futures on the Dow, Nasdaq and S&P 500 to session highs, with the Dow pointing to a 200 point gain with the S&P over 20 points higher, and nearly 11% higher from the Christmas Eve plunge when Steven Mnuchin activated the Plunge Protection Team.

China’s Foreign Ministry said Beijing had the “good faith” to work with the United States to resolve trade frictions, but many analysts doubt the two sides can reach a comprehensive agreement on all of the issues before a March deadline. “Various concerns markets had earlier are receding for now. Still, there’s no denying that U.S. (company) earnings momentum is slowing,” said Hirokazu Kabeya, chief global strategist at Daiwa Securities. “Ultimately we need to see whether upcoming earnings reports can dispel market concerns.”

European stocks also stormed higher, led by retailers and real estate companies, with the Stoxx Europe 600 Index over 1.1% higher…

… after shrugging off a shockingly weak German industrial production drop, the biggest since the financial crisis, and worsening euro-area consumer confidence to advance.

“I think the market has been quite extreme in pricing recession risks, so I think we have value now in both the equity and bond markets,” SEB investment management’s global head of asset allocation Hans Peterson said. “The discussions between the U.S and China will take some time but I think the markets are prepared to move in the right direction on positive signals.”

Earlier, MSCI’s broadest index of Asia-Pacific shares ex-Japan reversed early gains however to end down 0.2%. It was dragged lower by falls in South Korea due to Samsung and in China where government bond yields also saw their biggest daily gain in 9 months.  Japanese shares and Hong Kong stocks closed higher, though equities slid in South Korea while China’s Shanghai Composite closed closed down after flirting with gains and losses despite renewed promises of more easing by Beijing.

Korean stocks were impacted after Samsung Electronics surprised the market on Tuesday with a 29% drop in quarterly profit, blaming weak chip demand in a rare commentary issued to “ease confusion” among investors already fretting about a global tech slowdown. The South Korean firm also said profit would remain subdued in the first quarter due to difficult conditions in memory chips, but that the market is likely to improve in the second half of the year as customers release new smartphones. Weaker earnings at the world’s biggest maker of smartphones and semiconductors adds to worries for investors already on edge after Apple last week took the rare move of cutting its quarterly sales forecast, citing poor iPhone sales in China.

Dollar bulls got a breather as Treasuries steadied before a televised address by President Donald Trump, while the dollar gained for the first time in four days as investors dialed back some of the bets taken over the past week; rising stocks damped demand for the yen and short-covering in USD/JPY also bolstered the greenback. The euro retreated after touching 1.1485 as an unexpected fall in German industrial output for the third straight month helped to weaken the euro zone currency. The pound retreated after earlier touching a one-week high against the dollar amid supportive cross flows as traders assessed chances that the European Union will offer fresh assurances to U.K. PM Theresa May on the Irish border. Elsewhere, the Canadian dollar hit one-month highs, having gained 2.7 percent in the past five days on gains in oil prices and on speculation the Bank of Canada will raise interest rates again this week. It last stood at 1.3272 per U.S. dollar. Emerging-market currencies lost steam while oil extended its advance. 

Treasuries held steady and European bonds fell. Large short positions in bunds were covered through option trades amid another set of soft data out of the euro area that kept the euro offered. Stocks traded globally in the green, while euro-area bonds drifted lower.

In the latest Brexit news, UK and EU leaders are reportedly in talks regarding possibly extending Article 50 past March 29th amid fears that a Brexit agreement will not be struck in time, according to the Telegraph. However, a UK Downing Street spokeswoman later stated that UK PM May has always said we would leave the EU on March 29th and that we would not extend Article 50. Instead, UK PM May is said to be pinning her hopes on a last-minute offer from Brussels to avoid her Brexit deal suffering a defeat at the House of Commons on the 15th January. Furthermore, UK PM will today be urged ‘play hardball’ with the EU by offering UK lawmakers a vote on her deal with the condition that they would be able to decide at a later date whether or not to enter the Irish backstop.

In the latest geopolitical developments, we reported earlier that Turkish President Erdogan said that he cannot accept US National Security Advisor Bolton’s comments on Syria, and that he has made a serious mistake, adding that he has agreement with US President Trump, but the administration are stating different things.

Oil traded near $49 a barrel in New York, with Brent (+1.6%) and WTI (+1.5%) in the green, trading within a range of around USD 1.0/bbl as there have been no new major catalysts. Positive risk sentiment is predominantly fuelled on trade talk optimism between the US and China. The Iranian Deputy Foreign Minister says he hopes India will seek another US waiver on Iranian sanctions. Separately, the Arab Petroleum Corp expects oil prices to trade between USD 60-70/bbl by the middle of the year.

Gold (-0.4%) is down as the dollar recovered lost ground overnight, alongside an improvement in risk sentiment as markets are optimistic that a deal can be reached between US and China. Separately, China have restarted their gold purchases following a two-year break; with 0.32M/oz of the yellow metal added to their reserves in December 2018. Canadian sources state that the US and Canada are not currently, or scheduled to begin, negotiating to lift metal tariffs; despite reports that discussions had been held on steel tariffs.

Expected data include NFIB Small Business Optimism Index, while the publication of trade-balance figures has been postponed by government shutdown. Helen of Troy is among companies reporting earnings.

Market Snapshot

• S&P 500 futures up 0.5% to 2,562.50
• STOXX Europe 600 up 0.7% to 345.23
• MXAP down 0.04% to 148.36
• MXAPJ down 0.1% to 478.51
• Nikkei up 0.8% to 20,204.04
• Topix up 0.4% to 1,518.43
• Hang Seng Index up 0.2% to 25,875.45
• Shanghai Composite down 0.3% to 2,526.46
• Sensex up 0.4% to 35,990.11
• Australia S&P/ASX 200 up 0.7% to 5,722.44
• Kospi down 0.6% to 2,025.27
• German 10Y yield rose 1.8 bps to 0.239%
• Euro down 0.1% to $1.1459
• Italian 10Y yield unchanged at 2.538%
• Spanish 10Y yield rose 3.0 bps to 1.53%
• Brent futures up 1.3% to $58.09/bbl
• Gold spot down 0.5% to $1,283.19
• U.S. Dollar Index up 0.2% to 95.87

Top Overnight News from Bloomberg

• The Trump administration expressed optimism it can reach a “reasonable” trade deal with China as President Xi Jinping dispatched a top aide to the negotiations. China is said to buy more U.S. soyPrime Minister Theresa May is considering a move that could water down her threat to crash Britain out of the European Union without a deal, according to a person familiar with her thinking
• President Donald Trump plans to deliver a prime-time televised address on Tuesday before he travels to the U.S.-Mexico border later in the week as he battles Democrats over his proposed border wall
• A dramatic plunge in German industrial activity late last year raised the risk that Europe’s largest economy will slip into recession. Production fell for a third month in November and posted its worst year-on-year drop since the end of the financial crisis
• Donald Trump’s national security adviser will tell Turkish leaders on Tuesday that the planned withdrawal of U.S. forces from Syria has morphed into a slower and more complicated exit with the prospect of an indefinite American footprint in the war-torn country
• Kim Jong Un is making his fourth visit to China, in a sign that the North Korean leader is seeking Chinese President Xi Jinping’s counsel ahead of a possible second summit with Donald Trump
• Declines in euro-yen hedging costs and Japan’s yields mean that investors from the Asian nation could pick up at least 10 basis points when buying currency-hedged 10-year French bonds instead of 30-year JGBs, a benchmark comparison. As recently as November, they would suffer a loss
• Former Federal Reserve economist Nellie Liang withdrew from consideration for a seat on the central bank’s board of governors, the White House said. Liang dropped out of her own accord and wasn’t pressured, said a person familiar with the matter
• Italy’s populist government has flagged its readiness to help cash-strapped Banca Carige SpA, approving state guarantees on any future bond issues and signaling its support for a possible precautionary recapitalization.
• Oil notched its longest stretch of daily gains in more than 17 months
• Samsung Electronics Co.’s quarterly profit and sales missed estimates on sputtering demand for memory chips during the last three months of 2018

Asian equity markets traded mixed as the region failed to take full advantage from the performance on Wall St where US-China trade hopes saw all US majors extend on recent gains. ASX 200 (+0.7%) and Nikkei 225 (+0.8%) got a tailwind from their counterparts stateside where focus centred on the resumption of trade talks between the world’s 2 largest economies which was surprisingly attended by Chinese Vice Premier Liu He who is a top economic adviser to President Xi, while recent currency flows were also favourable for Japanese stocks. Conversely, KOSPI (-0.6%) lagged following disappointing preliminary Q4 results from index giant and tech heavyweight Samsung Electronics, while Shanghai Comp. (-0.3%) and Hang Seng (+0.2%) were indecisive after another liquidity drain by the PBoC and with weakness seen in auto names led by Geely following a near-40% decline in December sales. Finally, 10yr JGBs were subdued amid gains in Japanese stocks although strong results at the 10yr auction, later provided a floor for prices

Top Asian News

• North Korea’s Kim Visits China Ahead of Possible Trump Summit
• SoftBank Is Said to Plan Smaller $2 Billion Investment in WeWork
• Bayer Gets Rare Monsanto Reprieve With India Cotton Seed Ruling
• Nomura to Switch to Merit-Based Pay for Japan-Based Brokers

Major European indices are in the green [Euro Stoxx 50 +0.9%] with gains generally broad-based. The FTSE 100 (+0.9%) is in the green with Ashtead Group (+3.7%) in the green after being upgraded at UBS and Tesco (+3.2%) in the green as their sales in the 12 weeks to December 30th increased +0.6% vs. Prev. -0.1% according to the Kantar update. Sectors are also in the green with some underperformance in energy and material names. Other notable movers include Morrisons (-3.4%) who are towards the bottom of the Stoxx 600 after Kantar data showed lower sales in the 12 weeks to December 30th of +0.1% vs. Prev. +0.5%; with the Co also reaffirming their 2018/19 targets. Unilever (-0.2%) are in the red after being downgraded at UBS.

Top European News

• Bang & Olufsen Shares Gain as Luxury Hi-Fi Maker Calls Bottom
• Brexit- Wary U.K. Shoppers Keep Lid on Holiday Grocery Spending
• ‘Beast From the East’ Chill May Boost Energy Demand in Europe
• Goldman Sees Three Routes to Europe Capital-Goods Outperformance

In FX, it was a choppy day for the dollar as the index recovered lost ground overnight and tested 96.000 (vs. intraday low 95.620) to the upside before pulling back to around 95.750 as markets await further details on US-Sino trade-related dialogue and US CPI later in the week. The dollar has re-gained traction in EU trade to retest the big figure ahead of US President Trump’s speech on the Southern border at 2100EST/0200GMT.

• GBP – A volatile day for the Pound as vague and contradicting Brexit reports emerge with initial upside in Sterling seen following comments from Irish PM Varadkar, who stated that the EU are willing to offer fresh written assurances on the backstop, ahead of House of Commons meaningful vote next week. Subsequently, Cable rose to levels just shy of 1.2800 shortly before retreating to around 1.2750 amid lack of clarity on the so-called assurances alongside the EU repeatedly stating that Brexit negotiations are not to be reopened and Brexiteers desiring an overhauled deal. GBP has been relatively indecisive overnight as Telegraph reports that UK and EU leaders are said to be in talks over extending Article 50 were shortly shot down by a Downing St. spokesman. Brexit Minister Barclay emerged during early EU trade to also deny the aforementioned Telegraph reports, whilst also adding that the process of the A50 extension is too complex. From a technical perspective, Cable resides just below its 50 DMA (1.2773) while options see 353mln expiring at 1.2770 at today’s NY cut.
• EUR – On the backfoot following a dollar-dominated Asia-Pac session as the single currency was slightly dented by the release of disappointing German industrial output which ING and Lloyds highlight increases the risk of a German recession. This saw EUR fall from levels just shy of 1.1450 to a low print of 1.1433. In terms of technicals, the pair’s 100 DMA lies at 1.1477 while a large 1bln in option expiries rests between 1.1425-35, potentially diluting some upside.
• AUD, NZD –The antipodeans are the marked G10 underperformers, also falling victim to the greenback, with the Aussie initially pressured upon the release of a narrower than expected trade surplus overnight. As EU trade went underway, the NZD and AUD lost more ground to the buck with the former retreating further below 0.7150 to lows in close proximity of its 50 HMA around 0.7120. Meanwhile the latter sits nearer to the bottom of a 0.6730-60 range with its 100 DMA around 0.6680.
• TRY– The Lira weakens for a second consecutive day amid comments from Turkish President Erdogan who rejected US National Security Advisor Bolton’s statement that the withdrawal of US troops from Syria depend on certain conditions, including Turkish assurances that the Kurds in Northern Syria would be safe. Given the possible repercussions on the relationship between Turkey and the States, USD/TRY rose past 5.4000 to a high print of 5.4767 (vs. low of 5.3800) ahead of the next psychological level at 5.5000.

In commodities, Brent (+1.6%) and WTI (+1.5%) in the green, trading within a range of around USD 1.0/bbl as there have been no new major catalysts. Positive risk sentiment is predominantly fuelled on trade talk optimism between the US and China; where Chinese Vice Premier Liu He unexpectedly attending the talks, which were scheduled to be held at a vice-ministerial level. Elsewhere, the Iranian Deputy Foreign Minister says he hopes India will seek another US waiver on Iranian sanctions. Separately, the Arab Petroleum Corp expects oil prices to trade between USD 60-70/bbl by the middle of the year. Gold (-0.4%) is down as the dollar recovered lost ground overnight, alongside an improvement in risk sentiment as markets are optimistic that a deal can be reached between US and China. Separately, China have restarted their gold purchases following a two-year break; with 0.32M/oz of the yellow metal added to their reserves in December 2018. Canadian sources state that the US and Canada are not currently, or scheduled to begin, negotiating to lift metal tariffs; despite reports that discussions had been held on steel tariffs.

Looking at the day ahead, we’ve got the November trade balance, JOLTS job openings and consumer credit prints. Away from all that US-China trade talks are expected to continue while the World Bank should release its latest global growth forecasts at some stage today.

US Event Calendar

• 6am: NFIB small business optimism, est. 103, prior 104.8
• 8:30am: Trade balance data postponed by government shutdown
• 10am: JOLTS job openings, est. 7,050, prior 7,079
• 3pm: Consumer credit, est. $17.5b, prior $25.4b

DB’s Jim Reid concludes the overnight wrap

Compared to the relentless barrage of headlines in the last few sessions, the past 24 hours has either been dull or a welcome breather depending on your position. The good news though is that US equities made further headway on Friday’s employment report and Powell inspired gains yesterday. The S&P 500 closed up +0.70% last night, DOW +0.42% and NASDAQ an even more impressive +1.26%. To put a bit of context around the last couple of sessions, this has been the biggest two-day percentage jump for the S&P, excluding the outsized Boxing Day rally session, since August 2015.US HY spreads also rallied another 20bps in cash terms which puts the two-day move at an impressive -60bps, the best two-day stretch since June 2009. Amazingly the range for US HY spreads in the whole of H1 2018 was just 51bps. So we’ve easily eclipsed that in just a few sessions already. Treasury yields had actually nudged lower during the European session as risk stuttered a bit (eventually culminating with the STOXX 600 down -0.15%) however then weakened as the US walked in with 10y yields back up to 2.697% (+2.7bps on the day) and 2s10s curve slightly flatter at 15.1bps. WTI Oil climbed another +1.17% which certainly helped risk while the USD index (-0.53%) hit its lowest since last October.

In all honesty, there wasn’t a huge amount to report. The US-China trade talks haven’t brought about any headlines of particular substance however are still ongoing so it’s worth seeing if anything comes out. Yesterday, US Commerce Secretary Ross said that there is a “very good chance” that a “reasonable” agreement would be reached but “the real issue is what are the enforcement mechanisms, what are the punishments if people don’t do what they were supposed to do?” On the talks, it didn’t go unnoticed that Chinese Vice Premier Liu He unexpectedly attended the discussions yesterday. It was previously expected that only mid-ranking officials would attend, so the inclusion of the top economic adviser to President Xi Jinping is significant insofar as China is attaching importance to the talks. Bloomberg reported yesterday that Liu is expected to meet with US Trade Representative Lighthizer later this month.

Relatedly, our US economists cited trade as the number one uncertainty to the US economy and Fed outlook, which they updated yesterday (link here ). They modestly lowered their 2019 growth forecast by -0.1pp to 2.3%, though they maintain their existing inflation and unemployment projections. They now see a base case for two Fed hikes this year, as the Fed responds to tighter financial conditions with a slower hiking pace. If the US-China trade dispute resolves positively, they see scope for a third hike this year. If tariffs escalate further, they think a recession and rate cuts are possible.

Continuing the Powell-induced trend toward a so-called “relent” and alongside our economists’ new projections, Atlanta Fed President Bostic talked down his rate expectations yesterday. He said that “right now, I’m at one move for 2019,” though he highlighted the possibility that he could support more or fewer hikes, depending on how trade policy develops and how the economy responds. Bostic is not a voter this year, but we’ll hear from voters Evans and Rosengren tomorrow and Bullard, Clarida, and Powell on Thursday. Perhaps equally important for risk sentiment will be President Trump’s planned address to the nation at 9pm ET tonight, where he will comment on the ongoing government shutdown. Midnight tonight is the unofficial deadline for a deal which would still enable furloughed federal employees to receive pay checks this Friday. So, barring a surprise breakthrough, the pain of the shutdown will begin to be felt soon.

Meanwhile, and just in case you’d been missing them, Brexit headlines were back yesterday. However it wasn’t particularly exciting. Speaking to the British press, PM May mostly reiterated the points made over the weekend, specifically that before the debate begins again tomorrow, government will set out further assurances from the EU on the backstop and specific measures for Northern Ireland to alleviate the need for a backstop, as well as seek a greater role for parliament in negotiations on the future relationship. A vote next Tuesday is looking likely now. Yesterday DB’s Oliver Harvey published his latest update in which he reiterated his base case that May fails to secure ratification for the agreement in parliament next week. He attaches a 60% probability to May continuing with the current agreement and losing the vote (or delaying the vote again in the face of defeat) and a 40% chance of May pivoting to a softer Brexit stance and therefore gaining parliamentary support. He sees a 35% chance that article 50 is extended to accommodate more negotiations, new elections, or a second referendum, and a 10% chance of a “crash Brexit.” See this link for the full set of Oli’s further probabilities in the face of losing the vote next week.

It’s been a busy day couple of days for DB research with our European equity strategist Sebastian Raedler arguing that current market conditions resemble the growth scare in late 2015 / early 2016. On both occasions, the rate of change in global PMIs turned sharply negative and markets priced significant further growth weakness on the back of China macro concerns and US recession worries. Back then, the worries were misplaced: PMIs rebounded, leading equities to rally by 20%+ and cyclical sectors to outperform sharply. He thinks the episode offers a good playbook for the current situation. His macro projections are consistent with 10% upside for European equities and 15% upside for cyclical versus defensives over the coming six months. See the link to the report here .

To markets in Asia now where sentiment is more mixed with the Nikkei (+1.49%) and Hang Seng (+0.35%) up fairly comfortably while the Shanghai Comp (-0.23%) and Kospi (-0.10%) are currently in the red. The declines in China and Korea appear to be partly impacted by a much weaker than expected earnings release from Samsung, which follows the latest downgraded guidance from Apple following weak demand in China. Elsewhere, futures on S&P 500 are up +0.47% in early trade today and most Asian currencies are trading weaker against the greenback this morning.

In other news, yesterday’s data wasn’t much of a market mover. The non-manufacturing ISM for December in the US mirrored the manufacturing print in coming below expectations at 57.6 (vs. 58.5 expected and 60.7 previously). However, as it came out after Friday’s employment report it lost some of its usual impact especially with the most significant employment component reading coming in just over 2pts lower at 56.3 (which ironically would have likely heightened concerns ahead of payrolls). The associated text included the usual concern about tariffs that has become more commonplace, however the overall tone indicated further cyclical strength albeit there were some building concerns over labour shortages.

Prior to this, in Europe the highlight of a quiet European calendar had been a softer than expected November factory orders report out of Germany. Orders came in at -1.0% mom (vs. -0.1% expected), albeit distorted by aircraft orders. Still, the year-on-year figure dipped to its lowest level since 2012 at -4.3%. Later in the morning we learned that investor confidence in the Euro Area wasn’t quite as bad as feared with the Sentix reading dropping to -1.5 in January from -0.3, compared to expectations for a drop to -2.0. Note also that DB’s Mark Wall lowered his 2019 euro area GDP forecast -0.2pp to 1.2% on the softer outlook for external demand. Full note available here .

As for the day ahead, early this morning in Europe the focus should be on the November industrial production report in Germany. Not long after that we get the November trade balance for France before we then get December house prices data in the UK and the final December consumer confidence revision for the Euro Area. In the US we’ve got the December NFIB small business optimism reading to look forward to along with November trade balance, JOLTS job openings and consumer credit prints. Away from all that US-China trade talks are expected to continue while the World Bank should release its latest global growth forecasts at some stage today

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