Tag: finance

Blain’s Morning Porridge, submitted by Bill Blain

Points Failure Special

“But instead it just kept on raining, a veil of tears for the virgin’s birth”

This morning is going to be a rant about accountability and responsibility… and yes.. it will eventually feature Brexit and consequences. I could present all kinds of scenario analysis to explain possible outcomes and consequences for Brexit – but, I really don’t have a clue about how its all going to play out. I shall simply say… UK is very volatile at present. Volatility = opportunity. I think the end result will be better than worst case – and it feels the market is pricing to the worst case. At some point… buying boots on!

Instead…. I am going to digress with a little parable about why we are in such a f****** mess. You see, this morning’s very late Morning Porridge comes to you from Hamble, my home down on the Solent, courtesy of “Points Failure at Woking”.

I left the house this morning around 6 am to catch the train up to London. It was cancelled. We waited for the next one – which was packed. It made it as far as Winchester – where it was also cancelled. We received no explanation of why, and staff had no idea when trains might run again, or any knowledge of contingency plans to get passengers to London. We were advised it might take hours and told a train back to Southampton airport would shortly be available. About 40 mins later it turned up. Myself and a chum decided to work from home – I got back here about 9 ish.

That is 3 hours of my life I will never get back. Let’s assume about 50k other people were similarly affected – squandering 17.14 man years. My solution is simple. Someone is responsible and should be held to account. Let’s make it a criminal offence to so inconvenience so many people. Stick the responsible person in Jail for 17 years, and give the job to someone who can do it. And lets stop accepting ministerial excuses and sack these fatherless bairns who think its fair to hike our fares 3% when the service deteriorates on a daily basis.

I was fortunate to be with my mate Nick this morning. He has a properly responsible job running the estate of a major institution in London. He understands all about Infrastructure management. He explained why things like London’s Crossrail have crashed overbudget, and why the mainline train services are going so badly wrong.

In the case of the railways its’ multiple failures of political direction and management. Managers are told how important it is to stick to risk control and compliance guidelines to avoid “Never” events – events which should Never Ever happen. When they do, they become projects for compliance and risk management to rule upon, oversee and ensure they Never happen again. Meanwhile, costs have to be cut – diminishing resources are being pumped into every more cash-consuming compliance and risk management functions, while day to day management and operations are slashed to the bone.

Senior executives understand their tenure is about being seen to comply – so they slash planning and maintenance budgets (on the basis they’ll be receiving their big fat pensions by the time it fails), and feed the compliance and risk management functions. Thus, points fail with increasing regularity because no one is properly planning how preventative replacement and overhaul of signally could avoid crisis.

As a result of this morning’s points failure in Woking, Notwork Rail will spend a couple of million hiring project consultants to look into compliance issues, and to analyse the risk management assessment methodology used to determine responses to points failure. And tomorrow and tomorrow they will fail again.    

Meanwhile, train failure becomes a metaphor for the unsolvable Brexit Crisis. (Proper planning would have prevented the piss poor performance and confusion we’re seeing now…!)

What the f**k were we thinking when asked a Yes/No question on Europe? Brexit was never binary. Compromise is not an option. The politics of Brexit have become impossible:

• 1% of voters are EU spies put here by Juncker to “frame the argument”
• 4% of people want complete political unity with Europe and everyone to learn French, German, Spanish, Italian or whatever…
• 10% of the population think closer political union with Europe is jolly good after Tarquin and Amber had such a marvellous time on their school exchange programmes..
• 27% of the electorate are keen to retain a squishy kind of political unity with Europe that allows us to be simultaneously British and European: 8% of this group say European first, 9% say British first, and the remaining 10%, (mostly Scots and Welsh), want to define themselves as anything but English, and only voted remain because it would upset London. (But they probably hate Brussels just as much…)
• 8% of Brits say we should probably remain in Europe but don’t think its worth arguing about
• 7% of ballot castors think we should probably exit Europe because of the Euro, but lets not get in a tizz about it
• 15% of folk think we should exit Europe politically but remain inside a customs union.  
• 8% of the polity think we should exit Europe and agree selective trade agreements with selective European countries (mainly Merc drivers)
• 12% of gammons think Europe is essentially evil because Poles have taken all their jobs and run off with their wives, but because Brits are fundamentally better than Europeans we should exit everything.  
• 8% of nutters think England should not only leave, but give Europe the Welsh, Scots and Irish to..
• 2% of the gentlefolk want to align with the Minister for the 18th Century and step back in time..  

But about 20% of Brits think the Euro is a “not very good idea”, 40% think its a “very bad idea”, and 30% think its probably going to “be a disastrous idea”. Even more Brits want their bananas to be curved.

Unfortunately, Europe is not a pick and choose…

Parliament is even more fractured. No one has a clue what they want.. Except it probably isn’t Theresa May. And since that’s something we all agree on, its likely she will stay in Power.. See how that works? It kind of makes sense…
Actually… while everyone is saying how steadfast she is… she’s really not made any good decisions with this Prime Minister thingy has she?

So yesterdays no vote decision, and the likelihood Europe is not going to give us any change to the current agreement, and Derivative Contracts to be settled in 90 days time will need somewhere to settle… and its clear we’re in a horrible mess.

EXCELLENT!

No idea where we go from here – except to say UK assets are now glaringly cheap – pricing in a worst case that is still highly unlikely to happen. So if I was to say we’re getting close to the moment for buying sterling bonds, UK property, UK domestic stocks, and sterling, its because its time to be contrarian.

via RSS https://ift.tt/2GbPtjG Tyler Durden

Yesterday, when the Dow was more than 400 points and traders were shaken by what appeared to be a market that could not bounce no matter the newsflow, Nomura’s Charlie McElligott – who had correctly foreseen last week’s market slide – made a contrarian forecast: due to dismal positioning by CTAs and fund, he warned the next move was likely an explosive “blast to the upside.”

Less than 24 hours later, and 700 Dow points higher, this prediction has come true, and much more may be coming according to McElligott’s latest note.

First, a snapshot of where we currently stand.

As already covered earlier, futures are “smocking” higher this morning following overnight news of a call between Chinese Vice Premier Liu He and US Treasury Sec Mnuchin and Trade Rep Lighthizer to discuss timetables and “road map” on trade talks, followed by a report that China is set to “move on US car tariffs”, both of which ramped risk assets and sent spoos above yesterday’s higher, triggering stop-losses from dynamic hedgers with and more than 80 handles higher from yesterday’s lows.

Adding to the suddenly euphoric mood is the drop in the dollar, which is boosting commodities, emerging markets and inflation expectations, while higher Treasury yields are also forcing a modest rotation into risk, with the Eurodollar curve steepening, a “further indication that the worst of the Rates “stop-outs” are behind us.”

Fundamentals are also in the bulls’ favor: i) the Fed’s dovish pivot further eases “forward-guidance” while also removing the “policy-error” left-tail scenario as well, ii) US financial conditions have actually EASED via the curve’s recent / power bull-flattening; iii) financial conditions are likely to “ease” even more going-forward with increasingly limited US Dollar upside into 2019 and beyond; iv) the weaker dollar drives a “virtuous” feedback loop of firming Commodities (with US Ags as further catalyst on Chinese resumption of buying as trade-war “olive branch”), in turn boosting the S&P’s largest positive macro factor sensitivity being US (higher) inflation expectations.

But while the newsflow and fundamentals are surely setting up the market for a nice move higher – absent any more executive arrests of course – it is positioning that remains the big wildcard and the key catalyst for a potential move higher.

As McElligott explains, continuing the correct argument he first laid out yesterday, “the tactical positioning dynamics are now even more acute, as both Systematic Trends have (as documented here yesterday) again pivoted “max short” Fri / Mon across most global Equities index futures, while Fundamental funds have been in “net-down” mode by selling longs and “grossing-up” shorts in single name / ETF and index futures—in turn, creating the kindling for a massive short-squeeze over the next month via both this implicit- and explicit- “negative gamma.”

And just in case it was unclear – especially for various other Wall Street “quants” who have taken offense at McElligott’s predictive success – he repeats that “the largest near-term catalyst for a crushing Equities move higher remains fund positioning, which is creating an enhanced-risk of positioning squeeze, as it builds “fodder” for a violent bear-market rally which nobody owns—ESPECIALLY into the final weeks of a horrible 2018 performance backdrop with zero appetite for further drawdowns—thus, negligible net length.”

Here are the details on why virtually all funds are now caught offside by what is now an almost 100 point swing higher in the S&P in less than 24 hours.

• Fundamental strategies increasing their “net-down” in recent days via slashing longs while “pressing” / grossing-UP their shorts (US Equities 1Y Momentum Shorts -8.8% in the past 5d), while CFTC data (through last Tuesday’s trade) shows that leveraged funds added to shorts in S&P Futures last week by a notional +$5.8B to grow the net short to -$15.1B
• The Nomura QIS Systematic CTA Trend model shows nearly consensual “Max Shorts” across global Equities now (SPX, Russell, Estoxx, Nikkei, DAX, FTSE 100, CAC, Hang Seng CH, ASX, KOSPI) which is at risk of seeing forced-cover / deleveraging with “buy triggers” now in reach on this gap move higher from yesterday’s lows
• Specifically with global risk bellwether S&P, trigger levels to flip from short to covering and turning outright long again are easily within reach, as the current “Max -100% Short” would pivot to “+26% Long” at the 2666 level (as the longer-term 1Y model horizons turns from “short => neutral => long ”)

And with futures easily levitating above 2,666 following today’s stronger than expected core PPI data, it appears that the next leg of the market’s violent whiplash is upon us, as active traders scramble to reposition from being max short to as long as they possibly can… at least until the next flashing red headline unleashes the next panic selling round.

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Is this one of the “severe” reprisals threatened by Beijing when it summoned Canada’s ambassador to Beijing for a meeting over the weekend?

According to Reuters, former Canadian diplomat Michael Kovrig has been detained in China. Kovrig’s employer, International Crisis Group, is working to secure his “safe” release.

The reason for Kovrig’s detention wasn’t immediately clear, and Beijing has refused to comment on his detention. However, Reuters noted that the arrest of Huawei CFO Meng Wanzhou has “stoked fears of reprisals.”

It was not immediately clear if the cases were related, but the arrest of Huawei CFO Meng Wanzhou in Vancouver has stoked fears of reprisals against the foreign business community in China.

“International Crisis Group is aware of reports that its North East Asia Senior Adviser, Michael Kovrig, has been detained in China,” the think-tank said in a statement.

“We are doing everything possible to secure additional information on Michael’s whereabouts as well as his prompt and safe release,” it added.

China’s Foreign Ministry and Ministry of Public Security did not respond immediately to questions faxed earlier about Kovrig’s detention.

The exact reason for the detention was not immediately clear.

The Canadian embassy declined to comment, referring queries to Ottawa.

Kovrig, a Mandarin speaker, has been working for the ICG as an in-house “expert” since February 2017. Prior to that, he served as a diplomat for the Canadian government between 2003 and 2016, with stints in Hong Kong and Beijing.

And while it’s possible that the timing of Kovrig’s arrest is purely coincidental…the timing is certainly very suspicious.

 

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After rebounding in October, Final Demand Producer Prices grew slower in November (at 2.5% YoY, and the weakest since August 2017). 

However, Core PPI surged to 2.7% YoY – near its highest since September 2011…

 

Under the hood, Energy prices plunged as food costs jumped…

Final demand services:

Most of the November advance in prices for final demand services can be traced to margins for fuels and lubricants retailing, which jumped 25.9 percent. The indexes for health, beauty, and optical goods retailing; cellular phone and other wireless telecommunications services; airline passenger services; food wholesaling; and truck transportation of freight also moved higher. Conversely, prices for guestroom rental fell 3.5 percent. The indexes for machinery and equipment wholesaling and for portfolio management also declined.

Final demand goods:

Leading the November decrease in the index for final demand goods, gasoline prices dropped 14.0 percent. The indexes for liquefied petroleum gas, electric power, fresh fruits and melons, jet fuel, and primary basic organic chemicals also moved down. Conversely, the index for pharmaceutical preparations rose 1.5 percent. Prices for fresh and dry vegetables and for residential natural gas also increased.   

None of this should be a huge shock as the market’s inflation expectations have collapsed as oil’s price has plunged…

Over to you Jay.

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Authored by Jan-Patrick Barnert and Michael Msika via Bloomberg,

Sure, the number one goal of investors is to make money, but in times like this sometimes all you can do is look for the nearest lifeboat and hang on.

Following yesterday’s slump across Europe, hopes of a year-end rally are now pretty much gone, and with unpredictable political drama in the U.K., France and Italy, it has become nearly impossible for investors to guess what the next day will bring.

The Stoxx Europe 600 index has now erased more than two years of gains and reached an important level both technically, as the market is now in oversold territory, and psychologically, as the benchmark traded around that point during most of 2016.

The visibility is so low that Allianz Global Investors, one of Europe’s biggest asset managers, is saying people should just sell the bounces and trim their exposure to stocks. Any positive surprise aside, markets look set to move sideways and near their lows for the rest of the year with defensive sectors in favor. But as this rotation has been going on for a while this year, protecting capital is becoming more difficult.

“The migration out of the most vulnerable cyclical and lower-quality stocks extends and positional risk is becoming more significant,” Kepler strategist Christopher Potts wrote in a note.

So while sticking to stocks with strong balance sheets and resilient earnings might not make investors immune from losses in a feeble market, some of them have held up well most recently.

Looking at individual sectors, telecoms and utilities have been the best-performing industries on the Stoxx Europe 600 over the past three months, offering superior dividend yields. While European equities trade at 4 percent estimated dividend yield on average, telecoms and utilities trade at 5.6 percent and 5.5 percent respectively. Because, while December is often the time of year when investors can just take stock on their performance, risks remain high in this market.

The uncertainties surrounding Brexit are just mounting. By canceling the Parliament vote to go back to Brussels and try to get some final reassurance regarding the Ireland border, Prime Minister Theresa May has taken a big gamble. There is no date for the final vote and no guarantee she will get anything else from the EU, risking a no-deal crash-out. Looking at the pound trading 1.255 to the dollar and 1.106 to the euro, this is the risk currently being assessed.

As for France, the efforts made by French president Emmanuel Macron to defuse the “Yellow Vest” crisis are likely to weigh hard on the French budget. According to newspaper Les Echos, they come with a price tag of about 11 billion euros, and may leave the country will a budget gap of 3.5 percent of GDP in 2019.

So much for the Italian budget debate.

Potts puts it this way:

“The conversion of the investor community to the bearish interpretation of the investment world is proceeding more rapidly than we appreciated.”

In his view, many market participants are just itching to sell on any decent year-end rally to cut risk just as long as so much uncertainly prevails. And if one looks at European Autos, that may be exactly what is happening…

The China car tariff headline ramp lifted European Autos to Friday’s close – but selling has returned.

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Lawmakers are furiously negotiating to try and strike a compromise that would avert a partial government shutdown (what would be the third since Trump’s inauguration), but President Trump is digging in his heels and demanding that any funding bill set aside at least $5 billion for his promised border wall.

And just in case Democratic leaders were hoping they could push through another compromise capitulation (like they did earlier this year), Trump issued a series of browbeating tweets Tuesday morning warning accusing Democrats of hypocrisy by reminding the world that both Nancy Pelosi and Chuck Schumer voted to fund the construction of a border barrier back in 2006 (they voted for a bill that, as Politifact reminds us, wasn’t all that different from what Trump has proposed).

Between the Wall prototypes and the renovations that have already been approved by Congress and the Trump Administration, Trump said many Americans don’t realize how much of the wall has already been built. And if Democrats don’t give Trump what he wants, the president said he’s prepared to do an end-run around Congress and order the military to build the wall.

Despite the large Caravans that WERE forming and heading to our Country, people have not been able to get through our newly built Walls, makeshift Walls & Fences, or Border Patrol Officers & Military. They are now staying in Mexico or going back to their original countries…….

— Donald J. Trump (@realDonaldTrump) December 11, 2018

…..Ice, Border Patrol and our Military have done a FANTASTIC job of securing our Southern Border. A Great Wall would be, however, a far easier & less expensive solution. We have already built large new sections & fully renovated others, making them like new. The Democrats,…..

— Donald J. Trump (@realDonaldTrump) December 11, 2018

….however, for strictly political reasons and because they have been pulled so far left, do NOT want Border Security. They want Open Borders for anyone to come in. This brings large scale crime and disease. Our Southern Border is now Secure and will remain that way…….

— Donald J. Trump (@realDonaldTrump) December 11, 2018

…..I look forward to my meeting with Chuck Schumer & Nancy Pelosi. In 2006, Democrats voted for a Wall, and they were right to do so. Today, they no longer want Border Security. They will fight it at all cost, and Nancy must get votes for Speaker. But the Wall will get built…

— Donald J. Trump (@realDonaldTrump) December 11, 2018

….People do not yet realize how much of the Wall, including really effective renovation, has already been built. If the Democrats do not give us the votes to secure our Country, the Military will build the remaining sections of the Wall. They know how important it is!

— Donald J. Trump (@realDonaldTrump) December 11, 2018

 

Trump is expected to meet with Pelosi and Schumer on Tuesday for face-to-face budget talks as the Dec. 21 deadline is less than two weeks away.

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As if Brussels didn’t have its hands full already with Italy and the UK, the European Union will soon be forced to rationalize why one of its favorite core members is allowed to pursue populist measures to blow out its budget deficit to ease domestic unrest while another is threatened with fines potentially amounting to billions of euros.

When blaming Russia failed to quell the widespread anger elicited by his policies, French President Emmanuel Macron tried to appease the increasingly violent “yellow vests” protesters who have sacked his capital city by offering massive tax cuts that could blow the French budget out beyond the 3% budget threshold outlined in the bloc’s fiscal rules.

Given the concessions recently offered by Italy’s populists, Macron’s couldn’t have picked a worse time to challenge the bloc’s fiscal conventions. As Bloomberg pointed out, these rules will almost certainly set the Continent’s second largest economy on a collision course with Brussels. To be clear, Macron’s offered cuts come with a price tag of about €11 billion according to Les Echos, and will leave the country with a budget gap of 3.5% of GDP in 2019, with one government official said the deficit may be higher than 3.6%.

By comparison, Italy’s initial projections put its deficit target at 2.4%, a number which Europe has repeatedly refused to consider.

Macron’s promises of fiscal stimulus – which come on top of his government’s decision to delay the planned gas-tax hikes that helped inspire the protests – were part of a broader ‘mea culpa’ offered by Macron in a speech Monday night, where he also planned to hike France’s minimum wage. 

Of course, when Brussels inevitably objects, perhaps Macron could just show them this video of French police tossing a wheelchair-bound protester to the ground.

Already, the Italians are complaining.  Speaking on Tuesday, Italian cabinet undersecretary Giancarlo Giorgetti said Italy hasn’t breached the EU deficit limit. “I repeat that from the Italian government there is a reasonable approach, if there is one also from the EU a solution will be found.”

“France has several times breached the 3% deficit. Italy hasn’t done it. They are different situations. There are many indicators to assess.”

Still, as one Guardian columnist pointed out in an op-ed published Tuesday morning, the fact that the gilets jaunes (yellow vest) organizers managed to pressure Macron to cave and grant concessions after just 4 weeks of protests will only embolden them to push for even more radical demands: The collapse of the government of the supremely unpopular Macron.

Then again, with Brussels now facing certain accusations of hypocrisy, the fact that Macron was pressured into the exact same populist measures for which Italy has been slammed, the French fiasco raises the odds that Rome can pass any deficit measure it wants with the EU now forced to quietly look away even as it jawbones all the way from the bank (i.e., the German taxpayers).

“Macron’s spending will encourage Salvini and Di Maio,” said Giovanni Orsina, head of the School of Government at Rome’s Luiss-Guido Carli University. “Macron was supposed to be the spearhead of pro-European forces, if he himself is forced to challenge EU rules, Salvini and Di Maio will jump on that to push their contention that those rules are wrong.”

While we look forward to how Brussels will square this circle, markets are less excited.

Exhausted from lurching from one extreme to another following conflicting headlines, traders are already asking if “France is the new Italy.” The reason: the French OAT curve has bear steepened this morning with 10Y yields rising as much as ~6bp, with the Bund/OAT spread reaching the widest since May 2017 and the French presidential election. Though well below the peaks of last year, further widening would push the gap into levels reserved for heightened political risk.

As Bloomberg macro analyst Michael Read notes this morning, it’s hard to see a specific near-term trigger blowing out the Bund/OAT spread but the trend looks likely to slowly drift higher.

While Macron has to fight on both domestic and European fronts, he’ll need to keep peace at home to stay on top. Remember that we saw the 10Y spread widen to ~80bps around the May ’17 elections as concerns of a move toward the political fringe played out in the markets, and the French President’s popularity ratings already look far from rosy.

And just like that France may have solved the Italian crisis.

via RSS https://ift.tt/2EpHRbs Tyler Durden

After several days of precipitous market drops, and following yesterday’s dramatic Apple-led intraday rebound, the biggest since February, S&P futures and European stock markets are sharply higher even as Asian shares slipped, as investor sentiment was boosted by fresh prospects of a thaw in the trade war following overnight news that Chinese Vice Premier Liu He discussed a timetable for trade talks with Treasury Secretary Steven Mnuchin, coupled with a report this morning from Bloomberg that China is moving toward cutting its trade-war tariffs on imported U.S.-made cars, a step which had previously been brandished by President Donald Trump as a concession won during trade talks in Argentina.

The big news overnight was a report according to China’s Mofcom which said Vice Premier Liu He spoke by phone with US Treasury Secretary Mnuchin and Trade Representative Lighthizer in which both sides exchanged views on implementing consensus reached by their leaders, while they also exchanged views on pushing forward timetable and road map for next stage of trade discussions.  The news – taken as a positive sign for trade war de-escalation – sent S&P futures as much as 20 points higher, shrugging off losses in the Asian benchmark and a drop in Japanese equities…

… while Europe’s Stoxx 600 was trading at session highs, up over 1.5% as a result of a late catch up with yesterday’s S&P rebound, led by THE construction, basic resources, builders and telecom sectors even with today’s rebound it was still heading for its worst year since 2008.

European automakers also surged following the Bloomberg report that China is said to be moving on the US auto tariffs reduction that US President Trump has previously tweeted on. The proposal has been submitted for review, however, the decision has not been finalised and still could change.

Yet investors also have an eye on the continuing flap over Canada’s arrest of the chief financial officer of Huawei Technologies Co. And among a plethora of political risks, the U.K. is seeking reassurances from European partners over Brexit and fears linger over the possibility a French protest movement could escalate further.

After crashing on Monday to a 21 month low as Theresa May postponed a key Brexit vote in parliament, the pound staged a rally, trimming some of Monday’s tumble as the UK Prime Minister tried to convince EU leaders to renegotiate the current Brexit deal.

The broader risk-on sentiment weakened the dollar weakened while Treasuries and European sovereign bonds fell.

With market having been gripped by a growing sense of panic, some – like Nomura’s Charlie McElligott – have warned that the next move could be a furious rally higher as hedge funds scramble to recover some of their YTD losses in the last few days of 2018.

“Markets are highly volatile,” said hedge-fund pioneer Paul Tudor Jones at a conference in New York. “I can easily see a situation in 2019 where all the deleveraging that we’ve experienced in the last month and a half — really, the last four or five months — all that deleveraging gets reinvested back into the market.”

Meanwhile in India’s assets saw a choppy session, with stocks initially roiled by a surprise resignation of the central bank governor on Monday, before posting a recovery as traders mulled the implications for Prime Minister Narendra Modi of regional election results. Emerging-market currencies and shares edged higher. Oil climbed with most metals.

The dollar dropped versus most of its G-10 peers as concerns over a possible deterioration in U.S.-China trade talks persisted, while short-term positioning and U.K. wage data helped lift the pound from a 20-month low. The pound headed for its first gain in three days versus the dollar, having tumbled Monday to its lowest level since April 2017 after the U.K. Prime Minister opted to delay a key vote on her Brexit deal. The yen climbed against major global currencies as U.K. Prime Minister Theresa May’s Brexit vote deferral and weakness in equity markets deterred risk-taking

Brent (+0.9%) and WTI (+1.0%) prices rebounded, despite drifting lower at the start of the session following comments from Russian Energy Minister Novak that Russia plans to cut oil output by 50k-60k BPD in January which is significantly below the 228,000 BPD figure targeted as part of the latest OPEC deal. Novak adds that they will gradually reduce oil output. Separately, high level internal reports are to cut output by 139k BPD following the OPEC deal. Looking ahead today sees the API weekly data release, which saw a crude stocks build of 5.6mln last week. Gold has strengthened on a softer dollar, although the yellow metal is still off of the 5-month high of USD 1250.55/oz reached in the previous session. Separately, exploration by Rio Tinto in Australia has yet to find any economically viable copper ore veins; the site had been touted as being potentially rich in copper.

Expected data include PPIs and small-business optimism index. American Eagle and Pivotal Software are among companies reporting earnings.

Market Snapshot

• S&P 500 futures up 0.7% to 2,662.00
• MXAP down 0.3% to 147.99
• MXAPJ up 0.1% to 477.40
• Nikkei down 0.3% to 21,148.02
• Topix down 0.9% to 1,575.31
• Hang Seng Index up 0.07% to 25,771.67
• Shanghai Composite up 0.4% to 2,594.09
• Sensex up 0.2% to 35,044.71
• Australia S&P/ASX 200 up 0.4% to 5,575.88
• Kospi down 0.04% to 2,052.97
• STOXX Europe 600 up 1.4% to 343.77
• German 10Y yield rose 2.6 bps to 0.272%
• Euro up 0.2% to $1.1383
• Italian 10Y yield fell 2.6 bps to 2.74%
• Spanish 10Y yield rose 1.7 bps to 1.46%
• Brent futures up 0.5% to $60.45/bbl
• Gold spot up 0.3% to $1,248.54
• U.S. Dollar Index down 0.3% to 96.97

Top Overnight News from Bloomberg

• Top Chinese and American trade officials spoke by phone, signaling that dialog between the two nations on trade issues is at least continuing despite a diplomatic row over the arrest of a senior Chinese businesswoman
• Faced with a Brexit vote she can’t win, Theresa May appears to be gambling that running down the clock to a no-deal departure might change the arithmetic in Parliament
• The European Union won’t allow U.K. Prime Minister Theresa May to reopen negotiations over the Brexit divorce deal — but it could offer some of the reassurances she says she wants, officials said.
• In India, Urjit Patel’s shock exit as governor of the central bank roiled financial markets already nervous about early election results showing Prime Minister Narendra Modi’s ruling party losing support in key states.
• OPEC’s surprise output reduction has wrong-footed short-sellers. Hedge funds increased wagers against rising Brent crude prices for a 10th straight week in the period that ended last Tuesday and cut bullish bets on West Texas Intermediate oil to the lowest in almost six years
• Allies of Republican Representative Mark Meadows are pressing for him to be Donald Trump’s new chief of staff as the White House weighed other serious contenders, including U.S. Trade Representative Robert Lighthizer, for the vital leadership post
• Jerome Powell is ramping up Federal Reserve communication to build public trust and help insulate it from political attack
• Indian assets swung as investors weighed Modi’s performance in the polls in states which are key to his reelection bid in 2019

Asian equity markets were mixed as sentiment in the region only found mild solace from the tech-led recovery on Wall St. ASX 200 (+0.4%) was firmer at the open in which outperformance in the tech sector helped the index pick itself up from around 2-year lows although this later stalled amid weakness in energy and financials, while Nikkei 225 (-0.3%) swung between gains and losses due to a lack of fresh drivers and an indecisive currency. Shanghai Comp. (+0.4) and Hang Seng (unch.) were also choppy on trade uncertainty amid lingering concerns the Huawei situation could spill-over to US-China trade talks, although there were reports that Vice Premier Liu spoke with US Treasury Secretary Mnuchin and US Trade Representative Lighthizer in which they exchanged views on pushing forward the timetable and road map for the next stages of trade discussions. Meanwhile, India markets were initially pressured following the shock resignation by RBI Governor Patel which many viewed to be in protest for government meddling, while the state assembly elections added to the woes for the government with the ruling BJP party on track to lose some states to the main opposition ahead of next year’s general election. Finally, 10yr JGBs were uneventful amid the indecisive risk tone and with participants following mixed results at the 30yr JGB auction.

Top Asian News

• Macau Casino Stocks Jump as Analysts Flag December Revenue Hopes
• Tencent Music Guides Pricing Around Midpoint in $1.2 Billion IPO
• HNA Is Said to Tap Credit Suisse to Revive Sale of Pactera Unit
• Goldman Sachs Buys Minority Stake in Turkey’s Hurriyet Emlak
• India Rupee, Stocks, Bonds Drop as RBI Chief’s Exit Roils Market

Major European Indices are in the green [Euro Stoxx 50 +1.6%], with some outperformance seen in the SMI (+1.6%) bolstered by strong performance in index heavyweight Novartis (+1.6%) after the FDA approved Pear Therapeutics mobile application, which their Sandoz unit will be rolling out in the US. The SMI is also bolstered by LafargeHolcim (+3.6%), which is benefitting from outperformance in the materials sector seen today on the back of US and Chinese representatives planning the next steps in trade discussions. FTSE 100 (+1.3%) is lagging its peers, amidst currency effects from ongoing Brexit developments. Other notable equity movers are WPP (+6.5%) after an update to guidance, and Ashtead Group (+4.2%) after they announced full year expected results to be ahead of expectations.

Top European News

• Amsterdam Brothels to Get a Review by City’s First Female Mayor
• Danske to Sell Swedish Pension Assets to Polaris, Acathia
• Vivendi Urges Telecom Italia to Hold Shareholders Meeting
• Future of ‘Macronomics’ Tested by Violence on French Streets
• Casino Debt Swaps Rise to Record as French Protests Add Pressure

In FX, the GBP is ahead of the pack in terms of broad G10 currency advances vs the Greenback as the DXY ducks back under the 97.000 level. Cable has bounced further from yesterday’s new 2018 low circa 1.2507, through the pre-official cancellation of the Brexit vote base around a big figure higher and just shy of 1.2640, mainly on short covering and consolidation, but also with the aid of strong UK average earnings. Meanwhile, Eur/Gbp has retreated towards 0.9000 having cleared 0.9050 and topped out not too far from 0.9100.

• EUR/CHF/SEK/NOK – The next best majors, with the single currency maintaining its recovery momentum off 1.1350 lows vs the Usd, but capped ahead of 1.1400 and perhaps conscious of hefty option interest between 1.1390 and the bog figure (2 bn). The Franc remains relatively firm within a 0.9905-0.9865 range and above 1.1250 vs the Eur, while the Scandi crowns have clawed back recent losses amidst an improvement in risk sentiment, and with the Sek awaiting Swedish inflation data on Wednesday after significantly stronger than forecast Norwegian CPI metrics yesterday. Eur/Nok is around 9.7000 and Eur/Sek back below 10.3000.
• JPY – Also trying to pare losses vs the Dollar after extending its downturn from 112.25 to 113.35 and extremely close to a Fib level, but unable to rebound through 113.00 where heavy supply is touted and a 1.5 bn option expiry resides.
• AUD/CAD/NZD – Mixed fortunes once again as the Aud reclaims 0.7200+ status vs its US counterpart, albeit just, on more promising vibes regarding US-China trade, which have also nudged the Aud/Nzd cross back up towards 1.0500, as the Kiwi losses sight of 0.6900 vs the Usd. Meanwhile, the Loonie is back on the 1.3400 handle and regaining some composure alongside crude prices.
• EM – The Try continues to underperform on bearish technical rather than fresh fundamental impulses, but did glean support from another upbeat snapshot of Turkey’s current account to trade back near 5.3500 vs the Dollar from 5.4000+ at one stage.

In commodities, Brent (+0.9%) and WTI (+1.0%) prices have strengthened, despite drifting lower at the start of the session following comments from Russian Energy Minister Novak that Russia plans to cut oil output by 50k-60k BPD in January; which is significantly below the 228,000 BPD figure targeted as part of the latest OPEC deal. Novak adds that they will gradually reduce oil output. Separately, high level internal reports are to cut output by 139k BPD following the OPEC deal. Looking ahead today sees the API weekly data release, which saw a crude stocks build of 5.6mln last week. Gold has strengthened on a softer dollar, although the yellow metal is still off of the 5-month high of USD 1250.55/oz reached in the previous session. Separately, exploration by Rio Tinto in Australia has yet to find any economically viable copper ore veins; the site had been touted as being potentially rich in copper.

US Event Calendar

• 8:30am: PPI Final Demand MoM, est. 0.0%, prior 0.6%; PPI Ex Food and Energy MoM, est. 0.1%, prior 0.5%
• 8:30am: PPI Final Demand YoY, est. 2.5%, prior 2.9%; PPI Ex Food and Energy YoY, est. 2.5%, prior 2.6%

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Conflicting trade war headlines have flooded out of Beijing over the past week, complicating analysts’ attempts to parse exactly how the arrest of Huawei CFO Meng Wanzhou has impacted the prospects for a future deal. But amid the chaos, a headline that hit the tap a few minutes ago could set the stage for US stocks to build on yesterday’s late-day rebound.

According to Bloomberg, China is moving to cut its trade-war tariffs on US autos. US equity futures spiked on the news, mirroring their reaction from last Monday after Trump bragged about the concession twitter, only for Treasury Secretary Steven Mnuchin and advisor Larry Kudlow to pour cold water on the president’s boasts by saying that the cuts had merely bee “discussed”.

Bloomberg said Chins is planning to cut tariffs on US-made cars to 15% from the current 40% has been submitted to China’s Cabinet to be reviewed in the coming days. China boosted tariffs on US-made cars to 40% as part of a raft of retaliatory measures against the US imposed over the summer.

While US automakers will undoubtedly benefit from the move, Bloomberg pointed out that European automakers like Mercedes-Benz and BMW will be the biggest beneficiaries after both companies – which have sizable manufacturing operations in the US – warned about lower profits this year.

European auto stocks have posted the largest gains on the news:

Here’s a roundup of headlines from BBG:

• Faurecia stock rises 5%
• Volkswagen stock jumps 4.3%
• VW controlling shareholder Porsche SE gains 4.7%
• Stoxx Europe Automobiles & Parts Index rises 2.9%, 2nd-biggest jump on broader index
• Among car suppliers, Continental +3.7%, Valeo +3.5%
• Daimler +3.1%, PSA +2.5%

Unless something goes seriously wrong in the next two-and-a-half hours, expect stocks to rip higher at the open:

Now an insane rally on China looking to cut tariffs on US cars.

— Jim Cramer (@jimcramer) December 11, 2018

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Authored by Bloomberg markets commentator and former Lehman trader, Mark Cudmore

Until the end of the year, the only good risk-reward opportunities are for those scaling gradually into long-term views.

Many asset valuations look excessively discounted relative to long-term fundamentals, but those metrics won’t be a major driver of markets again until the new year.

Speculative traders are mentally broken and still struggling to adjust to the new higher-volatility paradigm. Liquidity can only deteriorate as holidays take over and market-makers focus on year-end window- dressing.

Many of the core macro uncertainties don’t have the greater clarity that was anticipated at this stage — the trade war, Brexit and Italy are the most obvious cases where decisions have been delayed. The uncertainty around the 2019 Fed rate path has actually increased and it doesn’t support risk appetite that the committee is due to hike next week.

The fundamentals show that the consumer is strong, corporate profits are at record highs in many countries, global growth is still solid if slowing, U.S. yields and the dollar topped out four weeks ago, easing global financial conditions, China is again providing stimulus for its economy, oil prices are about 30% cheaper than they were two months ago and so energy costs are collapsing.

All those factors may make long-term macro investors excited but they’re currently dominated by the powerful forces of fear and confusion.

There are many risk assets, particularly in emerging markets, that are likely to trade at a significantly stronger level six months from now. The real problem is having any conviction around the next 5% and the next two weeks — and that’s what matters for most market participants.

That’s why the macro fundamentals are only relevant to those looking to incrementally build into investment positions. Those investors have the luxury of seeing short-term volatility as an excellent opportunity to improve the average cost of entry while simultaneously shaking out the weak bulls and enhancing the technical picture. They are the lucky minority.

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