Tag: news

One way – the simple way – of describing market action this morning is that the relief “trade truce” rally has fizzled (again).

The slightly more convoluted way is to say that “the ongoing collapse in UST yields along with concerns therein surrounding the nascent inversions in the front-end of the UST curve (3s5s, 2s5s, 2s5s swaps, 1m USD OIS 2Y-1Y fwd spread) have markets again “reverse-engineering” a growth-scare. This fear in-turn is at least partially contributing to “risk-renter only” behavior with signs of widespread monetization of tactical G20 upside trades in everything from SPX (upside call- and call wing- vol was crushed yday) to EMFX tactical longs.”

The latter description of events in the past 12 hours is what Nomura’s Charlie McElligott uses to explain why the euphoric rally observed on Monday after this weekend’s “historic” dinner date between Trump and Xi – and which concluded with even more questions than answers – has ended, and the gap is on its way to be filled, while the yield curve inverted at two key front-end junctions, the 2s5s and 3s5s, signaling that either a policy mistake or a recession may be imminent.

But it’s not just the market recoil on the realization that little was achieved over the weekend – adding to the selling pressure are increasing signs that the global economy is headed for a slowdown as overnight we saw South Korea and Taiwan Mfg PMIs slump into “contraction” alongside declines from Singapore, Indonesia and Malaysia over the weekend, which in turn has slammed Australian 10Y bond yields which are nearing lows while Chinese 10Y bond yields currently sit at 20 month lows and, according to Nomura’s Charlie McElligott, “reflecting the severity of the growth slowdown.”

Meanwhile in the US, the next big scare is that the inflation bogeyman is about to go gentle into that good night, after a rapid decline in US inflation expectations has been a key part of this “growth scare” concern, with US Breakevens tumbling – alongside crude – and now sitting at 16m lows. This was confirmed by Monday’s ISM Mfg Report, which revealed that input costs are slowing dramatically, with the 60.67 print from the prior 71.6, a 17 month low and the largest decline in four years.

Takikng a step back to admire the big-picture, McElligott writes that with UST Term Premium again melting to lows last seen in September, “the risk is that a negative feedback loop develops where the ongoing rally in USTs is viewed both as 1) confirming a US slowdown and 2) “pulls forward” the already extraordinarily heightened market concerns surrounding the timing of a US recession.”

And sure enough, between the “perception risk” of the collapsing – and inverting – yield curve and the impact of collapsing crude and broad inflation expectations, the market is again at risk of the old “we have already tightened ourselves into a slowdown” mentality – discussed earlier by Nomura’s Bilal Hafeez who noted that Fed policy is now too tight – gaining further foothold and bleeding sentiment, which in-turn is accelerating the “end-of-cycle”/”policy failure” optics discussed over the weekend by JPMorgan.

And here a startling observation by McElligott, who points out that due to this shift in sentiment and collapse in growth indicators, instead of simple de-risking, he has seen macro hedge fund client “pivots” inquiring about transitioning from “end-of-cycle” trades into forward looking actual slowdown and outright recession trades (low-strike receivers / receiver spreads and maintaining their forward curve caps / fwd steepeners), to wit:  

I am receiving increasing inquiries from macro funds inquiring on more defined “end-of-cycle” trades to play or hedge against the coming slowdown or outright recession looking out 1 to 2 years—low strike receivers / receiver spreads, with many maintaining their forward curve caps / forward steepener bets

Finally, the cross-asset strategist observes that his Risk Parity model also shows that the market’s most important strategy is in “de-risking” mode as the economic cycle turns sharply:

In a positioning confirmation / “nod” then to this growth- and inflation- slowdown scenario, it is finally worth noting that we see our Risk Parity model having added enormous notional size in global Government Bonds (USTs and JGBs) over the past month, against very large selling of global Equities and Credit.

While subjective, here is Nomura’s model showing how much stocks Risk Pars have sold in the last month…

… offset by buying of gov’t bonds.

Whether this means that risk parity is done liquidating stocks, or just beginning, remains to be seen.

 

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Via Global Macro Monitor,

Interesting double-top, double bottom W forming in the S&P500.   In honor of George H.W. and George W.?  Hmmm……

The futures were rejected right at key resistance in overnight trading, making a high at 2814.0 during in early morning pre-trading and it now down 31 handles in Asia trading.   The cash market was repelled today right at 2800 (2800.18 if you’re counting)

Doji City

The cash S&P made another well-formed Doji candlestick today.  Notice during this Q4 correction, the Doji stick has signaled major reversals.   It is important the cash S&P closes above 2817 in the next few days in order to set the stage for the Christmas rally.

The S&P had rallied 6.43 percent from the Black Friday/Thanksgiving low below succumbing to profit taking today.  Calling short-term market moves is a mug’s game but we suspect they are gonna pull out all the stops to rally ‘em.  Follow the indicators on your panel as it’s foggy and there is some significant event risk.

Stocks For The Medium-Term

You know our medium-term view on the U.S. stock market, which is reflected in the following chart.

The chart is Warren Buffet’s favorite stock market valuation metric.  Just stare at it a few moments and try and internalize it, folks.  Then make your own inferences of what it means for future stock market returns.

Cow Dung

If you read our Month In Review post last night, you would have noticed we are very skeptical of the fundamental factors which have driven the recent rocket ride in stocks.  The Powell cave was a disgrace, in our opinion.

Take a look at the following chart, which graphs the 64 months where the civilian unemployment rate has been under 4 percent over the past 70 years with the real effective Fed Funds rate (using monthly yoy CPI inflation) in that particular month.

Now. try and convince us, or anyone, for that matter,  the Fed Funds rate, which is currently negative in real terms,  is “just below the broad range of estimates of the level that would be neutral”  with an unemployment rate at less than 4 percent.   He blinked to the president’s bullying.

Cow dung.

Incredible China Trade Deal

Then there is the China Trade Deal, supposedly cut in Buenos Aires.  “It’s an incredible deal. It goes down, certainly, if it happens, it goes down as one of the largest deals ever made.”  Note the “if” and a big if, to say the least.

Then this last night that got the S&P traders really, really lathered up.

China has agreed to reduce and remove tariffs on cars coming into China from the U.S. Currently the tariff is 40%.

— Donald J. Trump (@realDonaldTrump) December 3, 2018

The Washington Post reports,

But China’s readout of what happened in Argentina is different. China seems to believe that the only real movement was an agreement to halt additional tariffs and a mutual commitment to reduce the ones Trump and Xi put into effect this year.

In other words, Trump makes it sound like China is starting to cave to his demands. Top Chinese officials make it sound like the only thing that’s about to change is that U.S.-China trade relations would go back to where they were in January — before Trump unleashed his tariff war.  – Washington Post

Cow dung!

The financial academics are going to have to develop a new theory and a “bullshit discount factor.”

Upshot

Today’s Doji stick makes it more tricky to call a Christmas rally.

Moreover, Mr. Mueller appears he is about to deliver to the White House his Christmas present.  Will it be a shiny new bicycle and clean political bill of health or a Russian lump of coal?  This will determine the mood of the tweets in the coming month, and,  we know,  tweets move markets in the short-run.

Yield Curve Inverts

Have a look of this year’s Treasury auctions compared to last year.

With 2 and 3-year Treasury issuance growing at 30 percent and the belly and the 10-year growing at last than 10 percent, it doesn’t take a genius to understand why the yield curve is behaving the way it is.  Are we wrong?

The Treasury seems to be running their own version of the Fed’s “Operation Twist.”

We think it was a mistake the Fed did not announce the unwind of Operation Twist, the manipulation of the yield curve pushing longer rates lower when it began to normalize interest rates and the balance sheet.   Now market participants fret over distorted meaningless signals of Christmas past, which could, through reflexivity, have a real impact on the real economy.

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They say that if you repeat the same lie often enough, you will start to believe it.

Ever since the prospect of a second Brexit referendum  – affectionately called “the People’s vote” – first found traction among pro-European Labour and Conservative MPs, UK Prime Minister Theresa May has categorically denied that this would ever be a viable option. But at the same time, she has also intimated during speeches that, if her deal with the EU is defeated in Parliament, it could mean “no Brexit at all”. The motivation behind this inconsistency shouldn’t be hard to spot: May needs a cudgel to browbeat defiant European Research Group MPs into supporting her plan – even as her government has chosen to withhold the attorney general’s full legal interpretation of the draft deal, stoking suspicions that May is trying to cover up some of the less popular attributes of the deal, like the possibility that it could leave the UK permanently yoked to the EU customs union without the representation to help shape trade rules that it enjoys presently. 

This hasn’t stopped Wall Street banks from pricing in a relatively high likelihood of a second referendum (Deutsche Bank recently put the odds at 30%, while others have put it higher).

With opponents of her government threatening contempt or censure proceedings if she refuses to cave, May is swiftly running out of options to try and drum up support for her draft deal (though a handful of key cabinet ministers have come out in support of her “imperfect” deal).

Fortunately, on Tuesday, the purportedly “politically independent” European Court of Justice has just handed her a new tool that could come in handy during the debate over the deal as May works to whip up votes. To wit, the ECJ issued an advisory opinion on Tuesday that May would be allowed to legally reverse the triggering of Article 50 of the LIsbon Treaty – a decision that would effectively reverse the Brexit process.

While the opinion is “purely advisory”, the Court typically follows this type of guidance in its rulings.

While the opinion is purely advisory, the Luxembourg-based court usually follows such advice. A date for a final rulings hasn’t been set yet but could still come this month, potentially even before the U.K. Parliament’s Dec. 11 vote on May’s Brexit deal.

To be sure, it’s certainly possible that, if May had tried to reverse the invocation of Article 50 unilaterally, UK court would have backed her up. But by offering its advisory opinion, the ECJ is effectively handing May an ‘out’. If the UK is careening toward a ‘no deal’ exit during the days before Brexit Day, May could rely on this opinion to justify threats that there will be – as she said the other week – “no Brexit at all” – if MPs don’t vote for her deal.

Bloomberg hinted at this in its story about the ruling:

“The possibility continues to exist” to revoke the Brexit notice “until such time as the withdrawal agreement is formally concluded,” Advocate General Manuel Campos Sanchez-Bordona of the EU Court of Justice said in a non-binding opinion on Tuesday.

This opinion – fought hard by May’s government – could actually turn out to be a weapon she can use to her advantage as the country heads into uncharted Brexit territory. The possibility that the U.K. can go back on its decision will be alarming to Brexit hardliners, encouraging them to grudgingly support May’s much-maligned roadmap for how the country should quit the block.

Then again, BBG reasoned that using the ruling as a cudgel could backfire by encouraging pro-European lawmakers to push for the cancellation of Brexit.

Still, a decision saying that Article 50 can be unilaterally revoked favors those who want to remain in the EU and could help those campaigning to thwart Brexit with a second referendum. It could also encourage some wavering pro-EU lawmakers to vote against May’s deal.

It would put “the decision about our future back into the hands of our own elected representatives – where it belongs,” pro-Remain lawyer Jolyon Maugham, who brought the lawsuit, said on Twitter. “On this critical issue, I’m sure MPs will now search their consciences and act in the best interests of our country.”

Former UKIP leader Nigel Farage argued that the recommendation is just the latest sign that “every effort” to stop Brexit is being made on both sides of the channel.

ECJ says the UK can revoke Article 50 without permission. Every effort is being made on both sides of the Channel to stop Brexit.

— Nigel Farage (@Nigel_Farage) December 4, 2018

After the ruling, a spokesman for May’s government reiterated that “it remains a matter of firm Government policy that Article 50 will not be revoked.”

And while that may be true for now, if May’s draft deal doesn’t pass during next week’s vote, forcing both sides to step up preparations for a ‘no deal’ Brexit, the political calculus could swiftly change.

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Submitted by Nomura’s Bilal Hafeez

Market thinks neutral rates are lower = Fed policy is tight

Leaving aside whether US curve flattening or inversion signals a US slowdown, it does at the very least suggest a lower market implied Fed neutral rate. This means that the market is struggling to believe that US neutral rates will revert back to pre-2008 levels.

The Fed has also been grappling where the true neutral rate (r*) lies and it seems we are at or in the vicinity of it. What follows then is that US policy rates are above the market implied neutral rate.

Put another way, this means that US policy is tight. This should make the Fed more cautious on hikes and adds to the Fed moving out of auto-pilot mode.

Watch (falling) US inflation

What is helping this overall theme is the recent weakness in inflation. Yesterday’s ISM report, while strong at the headline level, contained a plunge in the prices component. Moreover, the last PCE inflation  report showed a drop in core inflation as well as services inflation.

The latter being the one obvious source of inflation in the US. Inflation trends, rather than growth, may therefore be the key data points to observe in the coming months.

G20 has hurt USD, but low yields need for it to persist

As for FX, we have seen a big bounce in CNY since the G20 summit (see fourth chart). A trade truce should help China, but it could imply an implicit currency accord (CNY strength in return for the trade truce). US Treasury Secretary Mnuchin implied as much in comments yesterday. Scandi FX and the South African rand also appeared to have been boosted by G20. Others like AUD, NZD, KRW appear to be continuing their trend from before. On the other side, recent winners like INR and TRY have suffered – no doubt hurt by the bounce oil. But the combination of a trade truce and lower US yields would likely benefit other low yielders like the JPY, EUR (and SEK).

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With his popularity rating at record lows (recent polls put it at around 26%, on par with Hollande), his capital city burning and the populists he defeated during his stunning electoral victory last year making serious electoral inroads, French President Emmanuel Macron finally caved, and on Tuesday ordered a six month suspension of planned ‘fuel taxes’ which spurred widespread and destructive protests across France over the past three weeks.

After reportedly weighing declaring a state of emergency that would have cleared the way for an unprecedented crackdown on dissent, Macron decided that such measures would only intensify the popular opposition to his government. And according to Reuters, Prime Minister Edouard Philippe has declared a suspension of the staggeringly unpopular tax.

“No tax deserves to endanger the security of the nation,” Philippe said in a televised address, who on Monday held separate meetings with opposition party leaders, in which they demanded the scrapping of the planned increase in fuel taxes. The same day striking students closed down 100 high schools and rising fuel shortages were reported in some parts of the country.

A freeze of planned fuel tax increases was one of a number of measures called for in an editorial by 10 self-proclaimed gilets jaunes representatives published on Sunday in the Le Journal du Dimanche newspaper. They also demanded the holding of countrywide consultations over taxes.

The decision marked the first time that Macron has backed down from implementing an unpopular policy in his 18-month presidency as a result of the furious public response, and is set to unleash even more protests as the emboldened French people now realize that taking to the streets will results in success.

The suspension has come in the form of a “time limited moratorium”. Though a permanent suspension remains a possibility (particularly since demonstrators are already planning another round of violent rallies where 120,000 protesters were expected to try and reenact the storming of the Bastille). But there’s a catch: If taxes must be cut, then public spending will also be scaled back, Macron said; in other words once the smoke clears the anger will be even greater as social welfare programs are slashed.

The PM also explained natural gas tariffs won’t increase this winter.

The “yellow vest” movement – which kicked off with paralyzing protests on Nov. 17 as word of the protests spread on social media – has won a crucial victory in its attempt to force Macron to reverse a policy that many have decried for squeezing household spending at a time when France’s economy (and indeed economies throughout Western Europe) is struggling with tepid growth. The protests have even had a negative impact French shares.

The movement was named for the highly visible “yellow vests” that all French motorists are required to store in their cars. Macron justified the gas tax by saying it was essential for combating climate change. But his decision to suspend the tax marks a deeply embarrassing moment for the president, who is in Poland this week to discuss actions to combat climate change with other European leaders.

Meanwhile, amid the pervasive dissatisfaction with Macron and his policies, the fuel tax protests morphed into a broader anti-Macron movement, as the French people have criticized him for policies that they believe favor the rich over the working and middle-class.

Already, a handful of deaths have occurred during protests over the past few weekends, further stoking the public’s anger. Acts of violence were widespread during the latest rally, as the Arc de Triomphe was defaced and roads off the Champs Elysees were damaged. The demonstrations have reportedly hurt retail spending and damaged the French economy during a holiday season that many retailers had been depending on to help push them into the black.

Macron successfully marketed himself as a pragmatic centrist during the 2017 French election. But a series of gaffes, scandals and policy missteps have helped him earn a reputation as the “President of the Rich” (before serving as president, Macron was a former economy minister and investment banker). To help combat this negative perception ahead of European Elections next year, Macron said he’s considering other “populist” policies like raising the minimum wage.

While it wasn’t immediately clear if Macron’s decision to suspend the tax would be enough to placate the seething anger of the French people – and it is safe to say his caving has merely emboldened the French to demand even more – but party officials have cautioned that he might need to back down on other policy “reforms” like cutting pension benefits.

In short order he made changes to the labour code to make hiring and firing easier, he took on the rail unions by forcing through changes to the national rail company, and he cut wealth taxes in a bid to stimulate investment.

However, in the process he earned the tag “president of the rich” for seeming to do more to court big business and ease the tax burden on the wealthy. Discontent has steadily risen among blue-collar workers and the middle-class struggling to make ends meet.

The government’s decision to push ahead with an increase in fuel taxes from January, part of a longer-term effort to discourage fossil fuel use, angered people in rural or outer urban areas who use their cars more.

It was not immediately clear if suspending the tax rise would be enough to placate the “yellow vests” or head off a repeat of the violence that erupted in Paris on Saturday, which officials said was driven by extreme groups on the far-left and far-right, such as the Black bloc and anarchist factions.

Recent polls have shown that most of France supports the cause of the yellow vests. Similar protests have broken out around Europe, spreading to Belgium, Italy and the Netherlands.

Meanwhile, more protests are scheduled: Christophe Castaner, the French interior minister, said on Sunday that measures under consideration by the government include the imposition of a state of emergency and the deployment of soldiers to help contain the next protests, which are scheduled for Saturday.

 

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So much for the trade truce rally.

One day after it emerged that nobody in the Trump administration has any clue about what was actually agreed upon during Saturday’s historic “dinner date” between Trump and Xi, Monday’s market “sugar rush” hopium fizzled and as we previewed yesterday, has turned into a vicious hangover, with US equity futures dropping and European shares tracking declines in Asia despite a modest recovery from Chinese stocks into the close as investors curbed their enthusiasm over any breakthrough in the trade war.

S&P 500 futures indicated U.S. shares would give up much of their Monday’s gains at the New York open, while the Stoxx Europe 600 Index slipped led by the same automakers which surged yesterday on a Trump tweet about China dropping car tariffs, which has since been largely disproven.

Markets slumped across the globe, with world stocks knocked off a three-week high as a result of dashed hopes of a swift resolution in the US-China trade war after media appearances from Trump administration officials shed little light on the specifics of any Sino-American trade agreement, while growing fears the U.S economy could be headed for recession sooner than expected weighed on the dollar.

As Bloomberg notes, the optimism that drove Monday’s gains quickly dissipated as investors scrambled to figure out exactly what, if anything, was agreed between the U.S. and China on trade at the weekend. Treasury Secretary Steven Mnuchin and President Donald Trump’s top economic adviser, Larry Kudlow, dialed back expectations and added qualifiers when asked about the outcome of talks between Trump and Chinese President Xi Jinping. China’s government did not help the mood as it was unable to formulate its response to the trade summit – three days after its conclusion – as senior officials are still out of the country with President Xi Jinping. China has said nothing about the commitment to remove car tariffs flagged by the U.S., nor did its statement mention the 90-day timeline for talks the Americans have specified.

Following declines on Asian bourses, where Japan’s Nikkei stock index closed 2.4% lower, even as shares in Shanghai and Hong Kong fared better, fluctuating before ending higher as the yuan climbed, the mood was somber in Europe with the wider blue chip index slipping 0.3 percent. Frankfurt’s DAX and Paris’ CAC 40 fell 0.6 percent while MSCI’s index of world stocks declined 0.1 percent.

“The initial relief rally was never going to last. Investors need more detail now in order for that risk on sentiment to survive,” said Jasper Lawler, head of research at London Capital Group. “So far that detail has not been coming through and investors have more questions than answers.”

Adding to market woes, was an inversion of the short end of the U.S. yield curve which foreshadowed the end of the Federal Reserve’s tightening campaign and raised the specter of a possible U.S. recession. The curve between U.S. three-year and five-year and between two-year and five-year paper inverted on Monday – the first parts of the Treasury yield curve to invert since the financial crisis, excluding very short-dated debt; meanwhile the closely watched 2s10s just 13 basis points from inversion.

On Tuesday, the yield on benchmark 10-year Treasury notes dropped as low as 2.94%, sliding below its 200DMA for the first time since September 2017.

“The focus is now shifting to the inverted U.S. bond yield curve which has negative connotations, while implying the U.S. economy is heading towards what was only a few weeks ago an improbable economic slowdown,” said Stephen Innes, head of trading for APAC at Oanda. “Now, even recessionary fear is starting to raise its ugly head.”

German/U.S. yields moved in tandem, with curves bull flatten as the focus on curve inversion gains momentum. Long-dated Gilt yields drop 3bps, dragging peers lower, short dates underpinned by steady demand at the 2024 auction, although attention remains squarely on Brexit developments.

As yields dropped and the curve inverted, the USD weakened against all G-10 currencies, weakening 0.8% against the Japanese yen and fell more than 0.5% to its weakest level since September against the offshore Chinese yuan to 6.83 yuan, with the Bloomberg dollar index sliding back under 1,200…

… while the cable rallied back above 1.2800 after the European Court of Justice offers a non-binding opinion on the possibility of an Art. 50 reversal. This was a bounce back from two-month lows it hit in early trade against the dollar on concern about British parliamentary approval for a proposed Brexit deal. The pound last stood 0.7 percent firmer at $1.2814 while weakening 0.2 percent against the euro to 89.10 pence. The South African rand strengthened after a surprise GDP beat, putting in the best performance in EMFX. WTI crude pushes higher through $54, but knocked off best levels after Saudi Energy Min tempers hopes for an OPEC+ production cut

Fed Chairman Jerome Powell was scheduled to testify on Wednesday to a congressional Joint Economic Committee, but the hearing was postponed because of a national day of mourning for U.S. President George H.W. Bush, who died on Friday.

Elsewhere oil continued to find support, and extended gains, adding to Monday’s 4 percent surge as investors bet a key OPEC meeting on Thursday could deliver supply cuts in the wake of moves by producers to address a supply glut that contributed to a 15% tumble in West Texas Intermediate prices last month. U.S. crude and Brent crude added 1.6 percent to $53.82 and $62.7 per barrel respectively. Later in the session oil pared some gains after Saudi Oil Minister Khalid Al-Falih said it’s too early to say whether OPEC and its partners will cut production.

Gold hit a session high of USD 1238.83, reaching its highest value since the end of October, as the dollar continues to weaken on a decline in US yields following the positive G20 trade outcomes. Steel futures have hit a 7-month low as prices are pressured by the oversupplied market, this comes after the positive sentiment seen in base metals on Monday from US-China trade developments. Separately, palladium (+1.0%) hit a record high of USD 1221.95 earlier in the session.

On today’s economic calendar, no major economic data are expected. AutoZone and Dollar General are among companies reporting earnings.

Market Snapshot

• S&P 500 futures down 0.6% to 2,774.50
• STOXX Europe 600 down 0.3% to 359.96
• MXAP down 0.6% to 155.59
• MXAPJ down 0.03% to 503.44
• Nikkei down 2.4% to 22,036.05
• Topix down 2.4% to 1,649.20
• Hang Seng Index up 0.3% to 27,260.44
• Shanghai Composite up 0.4% to 2,665.96
• Sensex down 0.4% to 36,113.39
• Australia S&P/ASX 200 down 1% to 5,713.14
• Kospi down 0.8% to 2,114.35
• US Dollar Index down 0.5% to 96.53
• Brent futures up 2.4% to $63.18/bbl
• Gold spot up 0.7% to $1,239.66
• German 10Y yield fell 2.2 bps to 0.284%
• Euro up 0.4% to $1.1398
• Italian 10Y yield fell 6.7 bps to 2.779%
• Spanish 10Y yield unchanged at 1.492%

Top Overnight News from Bloomberg

• President Donald Trump left his top advisers scrambling on Monday to explain a trade deal he claimed he’d struck with China to reduce tariffs on U.S. cars exported to the country — an agreement that doesn’t exist on paper and hasn’t been confirmed in Beijing
• The ECJ opinion was seen as potentially helping both May in getting her EU withdrawal deal through Parliament as it could encourage Brexit hardliners to back the agreement in fear of the U.K.’s exit will be stopped, as well as giving hope to those who want to thwart the process
• China’s government isn’t yet able to formulate its response to the summit on trade with U.S. President Donald Trump as senior officials are still out of the country with President Xi Jinping. China has said nothing about the commitment to remove car tariffs flagged by the U.S., nor did its statement mention the 90-day timeline for talks the Americans have specified. On Tuesday, China announced an array of punishments for intellectual property theft
• French President Emmanuel Macron plans to reverse course and suspend a planned fuel-tax hike that has sent as many as 300,000 protesters into the streets for three weekends in sometimes violent clashes
• U.K. derivatives-clearing giants including a unit of London Stock Exchange Group Plc are pushing the European Union to guarantee that they’ll be able to continue serving the bloc’s biggest banks in the event of a no-deal Brexit, according to people with knowledge of the firms’ positions
• South Africa emerged from its first recession in almost a decade in the third quarter as recoveries in manufacturing and agriculture contributed to an increase in economic growth
• A section of the U.S. Treasuries yield curve inverted for the first time in more than a decade. The spread between 3- and 5- year yields turned negative, and the 2- to 5-year gap soon followed
• Theresa May’s attempt to sell her Brexit deal to lawmakers was torpedoed before it had even begun, as opposition parties were granted an emergency debate on whether her government is in contempt of Parliament for refusing to release legal advice about the deal
• The onshore yuan climbed for a second day, extending its biggest advance in more than two years, as a rally built on a truce in the China-U.S. trade war continues
• The Reserve Bank of Australia left its key rate at a record low Tuesday as it gauges the impact of a housing market slowdown
• Oil extended gains above $53 a barrel as investors held on to optimism OPEC and its allies will strike a deal to stabilize the market. The agreement between Saudi Arabia’s Crown Prince Mohammed bin Salman and Russian President Vladimir Putin raises the possibility of a production accord when OPEC and its partners meet this week in Vienna

Asian stocks traded mostly negative as the relief rally fizzled out in the region with investors quick to book their recent profits. ASX 200 (-1.0%) and Nikkei 225 (-2.4%) were lower from the open in which a pullback in consumer and energy stocks led the downside in Australia and with Japanese sentiment dampened by a firmer currency. An indecisive tone was seen in the Hang Seng (-0.5%) and Shanghai Comp. (-0.2%) amid a lack of fresh drivers and as participants await the next developments of the US-China trade saga with China reportedly considering possibilities of lowering US auto tariffs. In addition, US Treasury Secretary Mnuchin was said to be hopeful for an agreement but warned tariffs will be implemented if a deal fails to materialize, while China reportedly censored a post by the US Embassy regarding the recent trade developments and tariff ceasefire which some have suggested could be a possible effort to avoid looking weak or that it gave in to US pressure. Finally, 10yr JGBs traded higher amid the risk averse tone and as they tracked the overnight gains in T-notes. This coincided with the US 10yr Treasury yield dropping below its 200DMA for the first time in around a year, while the US 2yr/10yr spread continued to narrow to its flattest in over a decade. Today also saw a 10yr auction from Japan, although there was a muted reaction as the auction bore mixed results.

Top Asian News

• Foreigners Cut China Bond Holdings First Time Since Feb. 2017
• Sri Lanka Court Restrains Rajapaksa Acting as Prime Minister
• China Announces New Punishments for Intellectual Property Theft
• Rich Asians Are Crazy to Live in Shanghai, Luxury Index Shows

European equities have kicked the session off with modest losses (Eurostoxx 50 -0.5%) as markets take a breather from yesterday’s “trade truce” inspired gains. The CAC 40 (-0.6%) is showing some marginal underpeformance relative to its peers in what has been a difficult start to the week for French equities amid domestic protests over the weekend, albeit tensions might show some signs of abating following reports that the French PM is to halt the proposed fuel tax hike. Elsewhere, sectors are relatively mixed thus far with mild outperformance seen in energy names (in-fitting with price action in the complex). Consumer discretionary stocks are a clear underperformer with Volkswagen (-2.2%), Porsche (-2.0%) and BMW (-1.9%) all lower after German car registrations fell 10% Y/Y. Postal names are softer in Europe following a disappointing update from BPost (-20.4%) which has sent their shares to the foot of the Stoxx 600, dragging Post NL (-5.3%) and Deutsche Post (-1.7%) lower in sympathy. In terms of individual movers and shakers have predominantly been the result of broker moves with Rightmove (+1.8%), JC Decaux (-3.3%), BAE Systems (-4.9%) and Continental (-4.0%) all gaining traction as a result of rating action.

Top European News

• Carney Says Worst-Case Brexit Scenario Is Unlikely to Happen
• Danske Has About $2.7 Billion as Buffer Against Fines, CEO Says; Danske Says BlackRock Increases Stake in Bank
• Europe Auto Stocks Drop as Jefferies Downgrades, U.S. Backpedals
• NordLB to Start Discussions With Bidders After Getting 4 Offers
• BT Upgraded to Buy at Goldman, Cost Transformation in Focus

In FX, DXY – On the backfoot again with the index retreating further from 97.000 to trip stops at 96.400 and register a fresh post-G20 low of 96.372. This against the backdrop of broad Dollar losses vs. its major counterpart and a sharp retreat in US Treasury yields with the long-end of the curve outperforming. EUR – Also benefitting from the Greenback’s misfortunes and hopes that Italy vs. EU fiscal friction may be resolved amidst latest reports that PM Conte will deliver another revised 2019 budget draft with deficit circa 2.0%. EUR/USD back above 1.1400 (with 1.234bln option expiries between 1.1400-05) but just stopped short of a key Fib at 1.1424. JPY, GBP – Major G10 outperformers with cable briefly breaching yesterday’s high of 1.2825 (vs. intraday lows of 1.2720), absorbing offers around 1.2800-1.2820 on the way to a peak of 1.2839. The Pound may have derived support from another UK PMI beat (construction) having already gained impetus after the ECJ’s senior advisor stated that the UK can revoke Article 50 unilaterally (under certain conditions). The single currency vs. the pound holding just above 0.8900 vs. lows of 0.8890 with stops reported at 0.8950 (though some distance away). To the downside, 0.8861 is reported to be a support level. Elsewhere, the JPY is taking advantage of the ongoing buck decline and a marked downturn in risk sentiment after initial US-China truce euphoria, with USD/JPY taking out the Tenken line at 113.34, a Fib level at 113.17 and the 55DMA at 113.05 to hit a low of 112.75 (ahead of the psychological 112.50 and the 100-DMA at 112.25). EM –Turkish Lira remains pressured by the ongoing recovery in oil prices (large net importer). USD/TRY trading around 5.30 with concerns that the Central Bank may prematurely loosen policy (aided by the slowdown in CPI) also weighing on investors’ minds. However, the ZAR is the clear EM outperformer amid the latest SA GDP figures showing the country has recovered out of recession, while a rally gold (major producer) is also providing the Rand with impetus. Finally, CNY undergoes another day of strengthening in a continuation from the G20 momentum. USD/CNY trading comfortably below 6.8500 after the PBoC set the strongest Yuan fix since June last year.

In commodities, Brent (+2.2%) and WTI (+2.2%) have continued to rise on expectations for a cut at the upcoming OPEC+ meeting, with any cut likely to take into account the reduction to Canadian output which is also supporting oil prices. Prices came off highs after Saudi Energy Minister Al-Falih stated that it is premature to suggest that OPEC+ will reduce output at the meeting this week, in turn hinting division amongst OPEC members. Initial source reports suggest that OPEC+ are working towards a minimum output cut of 1.3mln BPD from the October levels. However, Russia’s position of a maximum output cut of 150k BPD is the main obstacle to this, as OPEC want a minimum cut of 250-350k BPD. With sources suggest that OPEC may delay cuts if Russia does not agree to a substantial output cut.  Looking ahead we have API data later in the day, with expectations being that crude stocks fell by 2.25mln/bbl for the week; if expectations prove accurate this will be the first crude oil draw since mid-September. Additionally, the weekly EIA release has been pushed back to Thursday at 16:00 GMT, due to the national day of mourning for Former President George H.W. Bush. Gold hit a session high of USD 1238.83, reaching its highest value since the end of October, as the dollar continues to weaken on a decline in US yields following the positive G20 trade outcomes. Steel futures have hit a 7-month low as prices are pressured by the oversupplied market, this comes after the positive sentiment seen in base metals on Monday from US-China trade developments. Separately, palladium (+1.0%) hit a record high of USD 1221.95 earlier in the session.

Looking at the day ahead, it’s not the most exciting for data releases with the October budget balance for France and October PPI report for the Euro Area the only prints of note. There’s nothing of note in the US however we are due to hear from the Fed’s Williams this afternoon when he holds a press briefing at the NY Fed. BoE Governor Carney is also due to attend a hearing of the Treasury Committee on the Brexit Withdrawal Agreement.

US Event Calendar

• 10am: Fed’s Williams Holds Press Briefing at New York Fed

DB’s Jim Reid concludes the overnight wrap

Also in credit we’ve just published our two monthly chartbooks. The PowerPoint based one on global credit trends including issuance, flows, performance and relval ( link ) and also the excel based US credit strategy one with everything you wanted to know about US credit in a spreadsheet including up to date fundamentals ( link ). Elsewhere in today’s PDF link we’ve updated our PMI vs equities analysis. It shows equities as ‘cheap’ at the moment to current activity levels. Click on the full link for this report at the top for more with the commentary below.

Bourses yesterday closed well off their early highs with the follow through from the trade ceasefire a little disappointing. This reversal has continued in Asia to a large degree with the Nikkei (-1.72%), Hang Seng (-0.52%) and Kospi (-0.95%) all lower alongside most markets while the Shanghai Comp (+0.04%) is flattish. 10yr USTs yields are 11bps lower than their peak yesterday at 2.939% (-3bps this morning) with the curve flattening further (see below). S&P 500 futures are down -0.58% as we type.

Notwithstanding these disappointments, the reality is that yesterday US stocks did continue on what was a strong rebound from last week. Indeed after taking into account the +1.09% jump yesterday the S&P 500 is now up +5.99% over the last six sessions which is the strongest such run since February 2016 and second strongest since 2011. Tech led the way yesterday with the  NASDAQ rallying +1.51% and the NYSE FANG index returning +2.80%. This was after the STOXX 600 finished +1.03% in Europe and the DAX +1.85% – albeit with both also closing off the early session highs. It was a similarly strong day for credit with Euro and US high yield cash spreads tightening -6.5bps and -11.7bps respectively – the latter by the most in a month.

Despite the lack of follow through, there were some outsized winners. President Trump’s tweet about China agreeing to “reduce and remove tariffs on cars coming into China from the US” helped the S&P 500 autos sector to close +2.14% with Euro autos also surging +3.04%. In addition to that, we had the +4.30% jump for WTI oil (an extra +1% in Asia this morning) on the OPEC +/ Alberta production cuts stories we discussed yesterday. Markets are also digesting Qatar’s decision to exit OPEC from January 2019. Qatar has been a member since 1961 and while it’s not a huge volume contributor, the suggestion was that the country’s role as a diplomat had been significant. So a bit more uncertainty in the oil market. A reminder that the much anticipated OPEC meeting arrives Thursday/Friday.

Treasuries also reversed the post G-20 sell-off, which saw a +6.0bp climb this time yesterday result in a flat close. Two-year USTs did rise +3.5bps though leading to the 2s10s curve flattening to only 15bps (down to 13.5bps in Asia with 10yr another -3bps) and to the lowest in the current cycle. There was also some talk of 5 year notes inverting through both 3- and 2-year notes for the first time in this cycle as well. So the curve is getting very flat, especially at this point. As a reminder 2s10s has inverted ahead of all the last 9 recessions. The good news is we haven’t inverted yet and that the average time between the two is 16 months, with the quickest being 9 months. So we have some breathing space if history is your guide. The bad news is that we’re getting closer and closer and a circuit break to this flattening would be helpful to risk and the economy over the medium-term.

Several factors have combined to support the flattening move. The big rally in oil supported near-term inflation breakevens, with 2-year breakeven up +4.7bps and driving the entire move in nominal 2-year yields. Ten-year inflation breakevens were flat, explaining the flattening yield curve. WTI oil prices and 2-year breakevens have a high positive correlation of around 0.75. After both peaked on October 3, the former is down -30.5% and the latter has fallen by -57.0bps. At the long end, a steady flow of real money into Treasuries weighed on yields, possibly just due to rebalancing on the first day of the month after equities outperformed versus fixed income in November.

To a lesser extent, markets continued to focus on communications from Fed officials, though comments yesterday from Fed Board Members Clarida, Quarles, and Brainard broadly met expectations and confirmed the sentiment from Powell’s speech last week (note that Powell’s Wednesday congressional testimony has been cancelled and not yet rescheduled due to the President Bush’s funeral). They reiterated the recent emphasis on data dependency and described the economy as at or near full employment and inflation as at target.

Minneapolis Fed President Kashkari, a known dove who will be a voting member of the FOMC in 2019, departed somewhat from this assessment, saying that the economy “cannot be at maximum employment” if it continues to “create 200,000 jobs a month, month after month.”

In the US, the final manufacturing PMI was revised down 0.1pts to 55.3 however the more important ISM manufacturing printed at 59.3 (vs. 57.5 expected) and jumped 1.6pts from October. That’s still below the 61.3 high made back in August but was clearly reassuring in the face of some more mixed data of late. New orders (62.1 vs. 57.4 previously) and employment (58.4 vs. 56.8 previously) also lept higher, however the softer inflation story was maintained with prices paid falling over 10pts to 60.7 (vs. 70.0 expected). Some suggested that seasonals may have slightly distorted the decline. Another small negative was the fairly benign new export orders reading (52.2) which failed to climb from October.

Making less of a mark yesterday were the final global November manufacturing PMIs in Europe. Indeed the final Eurozone reading was revised up from the flash reading of 51.5 to 51.8 but was still the lowest since August 2016. That upward revision was helped by modest 0.2pts and 0.1pt upward revisions to Germany (to 51.8) and France (to 50.8), however these readings are also the lowest in 31 months and 26 months, respectively. Italy fell further below 50 to 48.6 and is now at a 47-month low, however, there was better news for Spain (52.6 and 3-month high) and Ireland (55.4 and 2-month high). Greece is even back to a 6-month high at 54.0, which means the 2.2pt differential over Germany is the highest based on data back to 2014. Meanwhile, there was a notable upward surprise in the UK (53.1 vs. 51.7 expected), a jump of 2pts from October and seemingly supported by domestic contracts picking up. In contrast, exports dropped for the second straight month with the report noting external weakness.

Outside of Europe, China catches the eye with the Shanghai Comp actually 27% ‘cheap’ compared to the implied PMI. Interestingly only the S&P 500 is pricing in an implied PMI above 50 with Europe in the 45-48 range and China 46.9. We try not to over-analyse these results, preferring to use them to look at more general levels of global under/over valuations. However, they do support our view that markets have probably got a bit too negative of late.

Over in Italy, two- and 10-year yields fell -17.4bps and -6.8bps yesterday as headlines suggested policymakers were receptive to less confrontational budget deficit targets. Prime Minister Conte is reportedly aiming to convince Salvini and Di Maio to shift the  budget deficit from 2.4% to below 2.0%. The latest economic data (yesterday’s included), which has shown a marked slowdown in growth momentum amid the higher BTP yields, may be incentivising policymakers to back away from their more confrontational stance. However these were all headlines. There’s no firm evidence as yet that the deficit target will be markedly lower but the momentum seems to be moving in that direction.  However last night Ansa reported Italian Premier Conte as saying that he is not trying to cut the budget deficit to below 2%.

Last night in the UK, Parliamentary Speaker Bercow granted an emergency debate to determine whether or not Prime Minister May is in contempt of Parliament over her refusal to release the government’s full legal advice about the proposed Withdrawal  Agreement. The debate will take place when Parliament convenes this morning, and it currently looks likely that May will lose a vote, since lawmakers from both sides of the aisle have expressed their interest to see the information.

As for the day ahead, it’s not the most exciting for data releases with the October budget balance for France and October PPI report for the Euro Area the only prints of note. There’s nothing of note in the US however we are due to hear from the Fed’s Williams this afternoon when he holds a press briefing at the NY Fed. BoE Governor Carney is also due to attend a hearing of the Treasury Committee on the Brexit Withdrawal Agreement.

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For weeks now, members of one of the migrant caravans that traveled from Honduras all the way to the southern border of the US have been stuck in a squalid camp in Tijuana as they await their chance to declare asylum, or otherwise cross the border. But after weeks of waiting – a period that has been marred by violent attacks on border patrol agents and skirmishes with US forces – some have decided that crossing the border to declare asylum in defiance of President Trump’s orders is probably the best course of action, according to Reuters.

These migrants risk “almost certain detention.” Still, many hope that crossing into the US will allow them to declare asylum, even if they are rounded up by some of the thousands of additional troops to the border by President Trump. In recent weeks Trump has championed a policy – “Remain in Mexico” – that would force asylum applicants in the US to stay on the US side of the border until the Court is ready to hear their case.

So far, the policy has been blocked by US courts. Still, Trump has clearly articulated his intentions to tighten immigration restrictions, and it appears migrants on the Mexico side of the border are hoping to find a way to cross into the US before an influx of new resources makes it even more difficult.

To wit, a team of Reuters reporters witnessed groups of migrants bum rushing the border during the pre-dawn hours, hoping to slip past the intense border fortifications and escape into the US under the cover of darkness.

So a number opted to eschew legal procedures and attempt an illegal entry from Tijuana as dusk fell on Monday at a spot about 1,500 feet (450 meters) away from the Pacific Ocean.

In less than an hour, Reuters reporters observed roughly two dozen people climb the approximately 10-foot (3-meter) fence made of thick sheets and pillars of metal. They chose a place in a large overgrown ditch where the fence is slightly lower.

Just before dusk, three thin people squeezed through the fence on the beach and were quickly picked up by the U.S. Border Patrol, witnesses said.

But along the border inland as darkness descended, more and more migrants followed, many bringing children.

Some used a blanket as a rope to help loved ones get over.

Though, in a comical example of media bias, despite the fact that reporters and government agents have confirmed that women and children make up just one third of travelers with the caravan, somehow, all of the people interviewed by Reuters for its story were single mothers.

A mother and her children made it over the first fence and disappeared into the night.

The sight of them climbing the fence encouraged others, even as a helicopter patrolled overhead on the U.S. side.

Earlier, Karen Mayeni, a 29-year-old Honduran, sized up the fence while clinging to her three children, aged six, 11 and 12.

“We’re just observing, waiting to see what happens,” Mayeni said. “We’ll figure out what to do in a couple of days.”

Despite the hostilities along the border, many of the migrants who made it into the US turned themselves in to border patrol agents to officially file an asylum claim. Many still expect that, if they turn themselves in, their asylum cases could be handled more quickly. While migrants can also file their claims by waiting at the official point of entry, the border patrol has partially closed the location and is only allowing 40 to 100 people to declare asylum each day.

Ninety minutes later, she and her family were over the fence.

A number of the migrants ran to try to escape capture, but most of them walked slowly to where U.S. Border Patrol officials were waiting under floodlights to hand themselves in.

And for those migrants who have no intention to declare asylum, getting over the first fence separating Tijuana from California is only the first part of the battle: After scaling the first wall, they must successfully avoid border patrol agents and surmount a second wall separating the border area from California.

Only then can they begin their journey through America:

“Climb up. You can do it! Stand on my head!” one migrant said, egging his companion on.

One child and his mother got over the fence and ran up the hill behind. They turned around and waved to those still on the Mexican side.

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