European and Asian shares rose again and S&P futures were little changed, as world stocks were set for a weekly gain and held near 16-month highs on Friday, while the euro steadied after swings following the European Central Bank’s decision to extend its stimulus program. Oil rose a second day before a meeting between OPEC and other major producers on output cuts, industrial metals gain.

The MSCI World index was up 0.1%, on track for a gain of 2.7 percent for the week. The index was just 0.1 percent below Thursday's peak, which was its highest level since August 2015. European shares hit their highest level for 11 months, and were set for their best week since February, following the ECB's decision to trim the size of its asset purchase program while also extending it for longer than many analysts had expected.

It’s never simple with Mario Draghi and yesterday he delivered a revised ECB policy which was simultaneously an extension/enlargement and a taper to the QE programme. Or, as it was later dubbed, a “dovish (non) taper”. This appeared to confuse the algos and after an initial fall on the announcement the dollar surged, taking the dollar index (DXY) back over 101.0. There it remained in Asian trading and after the open in Europe. 

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A stronger dollar and a stronger VIX still can’t dent the equity euphoria. While the Hang Seng Index was dragged down by Macau casino stocks, most Asian bourses took the positive lead from Wall Street. The MSCI Asia Pacific Index (below) rose a further 1.1% to cap off a strong week.  

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The “Trumplation” trade rolls on with bond weakness being the mirror of equity strength. The yield on 10-year Bunds rose 10bp to 45bp at its peak yesterday as the ECB announcement led to a sharp steepening in the yield curve.

Analysts said that signs the ECB would continue to provide monetary support for as long as needed complemented the promise of fiscal stimulus in a welcome cocktail for investors. "Markets already excited by the prospect of a fiscal stimulus wave via a Trump election look in-line to get more of both fiscal and monetary stimulus from next year," said Mike van Dulken, head of research at Accendo Markets.

Asian bond markets also felt the pain with Japan’s 10-year yield 1bp higher at 0.05%, Australia’s 8bp higher at 2.81% and South Korea 7bp higher at 2.19%. 

Asian shares edged down on Friday but were on track for weekly gains. MSCI's broadest index of Asia-Pacific shares outside Japan dipped 0.2 percent, and was poised for a weekly gain of 2 percent.

Japan's Nikkei stock index .N225 ended 1.2 percent up at its highest closing level since December 2015. The Nikkei earlier topped the 19,000-level for the first time in a year, as investors saw both the weak yen and prospects of U.S. President-elect Donald Trump adopting reflationary policies benefiting Japan's major exporters.

"The U.S. market's strength is giving a boost to Japanese shares," said Eiji Kinouchi, chief technical analyst at Daiwa Securities.

Notwithstanding a firm dollar, WTI clawed its way back above $51.0/bbl on positive sentiment ahead of Saturday’s meeting between OPEC and up to 14 other nations in Vienna(although only 5 have confirmed their attendance so far). What boosted oil were reports Saudi Arabia was said to have started telling customers it will reduce crude shipments from next month. 

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“The immediate focus for the market is the discussions between OPEC and non-OPEC members this weekend,” said Jonathan Barratt, chief investment officer at Ayers Alliance Securities in Sydney. “The sweet spot for prices is around $55 a barrel. Anything higher and the market will see more supply.”

Inflation data from China confirmed a reflationary trend, especially in producer prices which rose at their fastest pace for 5 years. The November 2016 PPI rose 3.3% year-on-year versus a forecast of 2.2% and October 2016’s 1.2%. At the retail level, higher food prices led to a 2.3% year-on-year rise in the CPI versus the 2.2% consensus and the previous month’s 2.1%. Food prices were 4.0% higher versus the previous year.

European stocks opened little changed with the Stoxx 600 0.1% higher, the Footsie flat and the DAX down 0.1%. The S&P Future was 0.13% lower at 2,240.0 in early European trade.

Market Snapshot

• S&P 500 futures up less than 0.1% at 2,240
• Stoxx 600 up 0.1% to 352.3
• FTSE 100 flat at 6930.0
• DAX down 0.1% to 11,172
• German 10Yr yield down 1.1bp to 0.366%
• Italian 10Yr yield up 1.8bp to 2.01%
• Spanish 10Yr yield up 2bp to 1.52%
• S&P GSCI Index up 1% to 387.0
• MSCI Asia Pacific up 0.8% to 137.1
• Nikkei 225 up 1.2% to 18,996.4
• Hang Seng down 0.4% to 22,761
• Shanghai Composite up 0.5% to 3,232
• S&P/ASX 200 up 0.3% to 5,560
• US 10-yr yield up 1bp to 2.42%
• Dollar Index down 0.04% to 101.1
• WTI Crude futures up 1.1% to $51.41
• Brent Futures up 0.8% to $54.31
• Gold spot down 0.1% to $1,170.5
• Silver spot flat at $17.03

Global Headlines

• Trump Team’s Memo Hints at Broad Shake-Up of U.S. Energy Policy         
• South Korea President Park Impeached Over Corruption Scandal              
• Oil Advances With Asian Stocks While Bonds, Korean Won Decline              
• Draghi’s Anti-Taper Keeps ECB Stimulus Live to Tackle 2017 Risks           
• Trump Renews Criticism of China as State Media Warns on Taiwan            
• Europe’s Next Big Currency Opportunity Probably Just Got Closer             
• HKMA Expresses Concern After Report of DBS Arrests in Hong Kong          
• Sibanye Gold to Buy Stillwater Mining for $2.2 Billion in Cash                   
• Shale Revolution That Shocked U.S. Markets Heads to Japan                     
• Wall Street’s Party, Fed Put Gold on Worst Losing Streak in Year              

In Asian markets, the MSCI Asia Pacific Index gained 1.1% to 138.59, for a fourth successive daily rise. The Nikkei was 1.2% higher and Shanghai 0.5%, while the Hang Seng and South Korea’s KOSPI bucked the positive trend. In Japan, the Mining (+4.2%) and Oil (+3.6%) sectors led the advance, supported (again) by Financials. In Shanghai, the Property sector rose a further 3.7% and is now 13.5% higher in the last month versus the 3.3% rise in the Shanghai Composite.Reports that ATM withdrawals would be limited in Macau, the world’s largest casino hub, saw casino stocks in Hong Kong fall more than 10% in early trading. Losses were pared after analysts from Sanford Bernstein and Union Gaming Group questioned the accuracy of the report in the South China Morning Post.In South Korea, President Park Guen-hye was impeached following a parliamentary vote. According to Bloomberg “The vote came after some of the biggest street protests since the nation became a democracy in 1987. Thousands of people, some holding banners, outside parliament cheered at the news. Park will now be suspended from power with Prime Minister Hwang Kyo-ahn taking over as interim leader until the constitutional court rules on the motion within 180 days. If the court agrees to remove her from power, a special presidential election will follow in 60 days.” In India, plans are taking shape for the $1.5bn IPO of the National Stock Exchange of India, which will be the nation’s largest since the Coal India IPO in 2010.

• Asia Top News
• South Korea President Park Impeached Over Corruption Scandal
• Hong Kong’s Leader Announces Decision Not to Seek Second Term
• Macau Casinos Pare Losses as Analysts Reject ATM Cap Report
• Asia Stocks Rise for 4th Day as ECB Extends Asset-Buying Program
• Trump Renews Criticism of China as State Media Warns on Taiwan
• India’s Biggest Bourse Said to Prepare $1.5 Billion IPO Filing
• Offshore Yuan Shows Depreciation Stress as Fed Rate Hike Looms
• Southeast Asia Advances in Talks to Dismantle Trade Barriers
• BOJ’s Yield Suppression Seen Laying Groundwork for Bond Meltdown

European markets were little changed on the open with the Stoxx 600 0.1% higher at 352.3, while the DAX, FTSE MIB and the IBEX were down marginally. Europe’s largest appliance maker, Electrolux, gained 3% after issuing a statement on its restructuring programme. However, the company also noted weakness in some markets including the U.K. In 2017, European demand for appliances is expected to grow by 1%, down from this year’s 2-4%. In the UK, Capitafell 8.0% to 449.6 after analysts from Stifel and Canaccord Genuity downgraded the stock. The recent sharp rally in the Banks sector saw a modest reversal of just under 1% in early trading. Bank of Ireland fell 5.3% as Hamblin Watsa announced that it would sell 415m shares. The “terrible twins”, Deutsche Bank (down 0.6%) and BMPS (down1.7%), were both lower.

Europe Top News

• Draghi’s Anti-Taper Keeps ECB Stimulus Live to Tackle 2017 Risks                             
• OPEC’s Historic Deal Won’t Be Enough to Drain Oil Stockpiles                                      
• Some ECB Governors Said to Have Pushed for 12-Month QE Extension                         
• Natixis Seeks Asia Growth as StanChart, Barclays Scale Back                                      
• SoftBank’s $100 Billion Tech Fund Opens HQ in London’s Mayfair                                
• No Regrets for Billionaire Wiese Even After Wrongway Brexit Bet                                
• Electrolux Says Seeing Signs of Slowdown in Europe Post-Brexit                                 
• Peugeot Scouts for Startups to Counter Silicon Valley Car Threat                                
• FCA Signals Crackdown on Crowdfunders After Finding Deficiencies                             
• Europe’s Next Big Currency Opportunity Probably Just Got Closer                               
• Farage Predicts ‘Norwegian-Style’ Deal for Britain Post-Brexit                                   

In currencies, the major story is the renewed strength in the dollar following yesterday’s ECB meeting. The DXY is marginally higher in early European trade at 101.2. The rise in US Treasury yields helped to buoy the dollar at the expense of the Yen, currently 114.47, as the latter continues to track returns on the carry trade. The slight strengthening in the RMB in the last few days evaporated and the flatlining in the CNY overnight points to PBoC defence of 6.90 (currently 6.8999. Yesterday’s sharp fall in the Euro is stabilising slightly above the 1.06 level, which is leading to renewed weakness in Sterling – currently $1.257 versus a high of just over $1.270 following the ECB announcement. 

In commodities, the Continuous Commodity Index was 0.60 lower at 424.3 and has essentially been flat since the middle of July in spite of the oscillations in the oil price. Traders are optimistic that Saturday’s meeting between OPEC and non-OPEC nations will solidify the agreement to cut output in the first half of 2017. Bloomberg is reporting that a Russian official is expressing doubts that OPEC will adhere to its commitment after increasing output last month. It occurred to us that OPEC could be forgiven for expressing similar concerns about Russia. The gold price is down slightly at $1,168.6/oz. in early London trading as it struggles to reverse the recent sell-off. In China, the rebar price corrected marginally by CNY2.0/tonne to CNY3,452/tonne. Thanks, in part, to Chinese speculators the price is 72.5% higher year-to-date, easily outpacing the 43.0% rise in Dalian iron ore futures.

Looking at the day ahead, you can sense that it’s going to be a fairly quiet day when the most read story on Bloomberg concerns ex-PIMCO now Janus “bond king” Bill Gross’s divorce (our best wishes to the man himself). On the roster is University of Michigan Consumer Sentiment and Wholesale Inventories/Sales.

US Event Calendar

• 10am: Wholesale Inventories m/m, Oct F, est. -0.4% (prior -0.4%)
• 10am: University of Michigan Sentiment, Dec. P, est. 94.5 (prior 93.8)
• 12pm: Monthly World Agriculture Supply and Demand Estimates
• 1pm: Baker Hughes rig count

DB's Jim Reid concludes the overnight wrap

If you're out in London tonight be warned that I'm having my annual Xmas night out with my old school friends and we're hunting down a karaoke bar. In my pomp one of my favourite karaoke songs to sing was Marvin Gaye "What's going on?". In this week of surprises I'll think I'll dust that one down tonight.

So in a week where the Italian referendum result had the opposite impact to what most would have expected, yesterday the ECB confounded consensus to announce a €20bn reduction in asset purchases to €60bn a month from April but extended the program to December 2017. On reflection it was a clever way of scaling back, especially as they made it quite clear that they could increase it at any point to respond to events. However, in regards to the tone of Draghi's press conference I can't help thinking that he was trying too hard to ensure that the market saw this as dovish as his interpretation of vocabulary and arithmetic could certainly be open to heavy scrutiny. Indeed he made it quite clear on more than one occasion that this certainly wasn't a 'taper'. However a quick glance at the Oxford English Dictionary suggests that taper means to "diminish or reduce thickness towards one end". He also said that ECB staff economic forecasts for euro-area inflation averaging 1.7 percent in 2019 were “not really” close to their mandate of just under 2 percent. Clearly a hard man to please.
So another way to look at it is that they've announced tapering and that it wouldn't take a lot of change in the inflation outlook for them to accelerate this in 2018 and announced before hand. Nevertheless for 2017 the ECB will be buying a minimum of €240bn (Jan-Mar) + €540bn (Apr-Dec) which equals €780bn.

So still lot of QE for 2017 but now they've tapered once and if inflation prospects edge up by the time we get to the second half we'll likely see a lot of speculation as to a more aggressive slow down in purchases. So a lot now rests on euro inflation in 2017 and we think yesterday's news gives plenty of ammunition for our increased rate vol story from our 2017 outlook.

The ECB also gave themselves a wider universe to buy following the announcement that they are decreasing the minimum remaining maturity for eligible securities from two years to one year, and the decision to allow them to buy at yields below the deposit floor. The ECB did suggest that they would only buy below this floor when there was a shortage of paper but this probably becomes inevitable. There were also some tweaks made to bond repo, specifically easing repo conditions.

The surprise moves caused big rates volatility in line with what we think is in store for 2017 as markets swung between initially thinking it was a hawkish move to then considering it as actually a lot more dovish. Indeed 10y Bund yields initially surged and touched an intraday high of 0.451% and about 10bps higher versus Wednesday’s close. Yields then ebbed and flowed and the post announcement low was actually 0.363% before yields eventually settled and finished a little above at 0.377% or +3.7bps higher on the day. What was notable however was the huge steepening effect. 30y Bund yields were +10.2bps higher while the shorter end rallied reflecting some of those technical tweaks. 5y yields dropped -3.6bps meaning the 5s30s curve steepened by the most since 2008. 2y yields also dropped -6.7bps and closed at -0.768% which is just shy of the record low of -0.777%

The periphery was the big underperformer though with yields in Italy, Spain and Portugal finishing +10.9bps, +7.9bps and +22.5bps higher respectively. That’s the worst day for Portuguese bonds since the post Brexit move on June 24th. It’s the intraday ranges which really stood out though at 14.6bps, 13.3bps and 26.0bps respectively. The extent of the volatility wasn’t quite as dramatic for Treasuries although we did still see 10y yields selloff +6.7bps to 2.407% and so putting them back at the top end of the recent range.

Meanwhile the Santa Claus rally continued for equity markets as banks surged on the back of the big steepening across yield curves. The Stoxx 600 banks index closed up +2.32% which takes the week to date move to an extraordinary +10.26%. Elsewhere Italian Banks (+3.60%) had another bumper day yesterday and are now up +15.35% since Friday (bear in mind that that includes a 2% drop on Monday). The Stoxx 600 closed up +1.23%, the DAX +1.75% and the S&P 500 +0.22% to extend its record high. Credit markets were similarly choppy. The iTraxx Main index traded in a 2bp range but ultimately finished little changed which was similar to Crossover (which traded in a 10bp range). Financials were the big winners though with the iTraxx Senior and Sub Fins indices closing 2.5bps and 5.5bps tighter. The Euro also ended the day down -1.28% which was also the worst day since the post Brexit June 24th move.

This morning in Asia it’s looking set to be a largely positive end to a strong week. The Nikkei (+1.20%), Shanghai Comp (+0.69%) and ASX (+0.26%) have all gained however the Hang Seng (-0.23%) is lagging somewhat although has pared heavier losses at the open. That market has been hit by big declines for Macau casino operators (currently down over -5%) following the news that Macau is to impose restrictions on ATM cash withdrawals in more evidence of tightening capital outflows. Meanwhile, the latest inflation numbers out of China have also been released this morning. CPI rose to +2.3% yoy in November (vs. +2.2% expected) from +2.1% in October and so matching the high print made earlier this year. Meanwhile PPI has surged to +3.3% yoy (vs. +2.3% expected) from +1.2% following a surge in mining industry producer prices. That is the highest level since October 2011 and continues the strong momentum since the start of the year for prices at the factory gate. A reminder that PPI was negative for 54 consecutive months before turning positive 3 months ago.

Unsurprisingly the ECB – and subsequent market reaction – was the overwhelmingly dominating theme in markets yesterday but in truth there wasn’t a huge amount more news to report. In terms of the limited amount of economic data we got, in the US initial jobless claims were reported as being down 10k last week to 258k. Our US economists highlighted that the improvement in the labour market is also now being reflected in tax receipts, with smoothed growth in withholding tax receipts now running at 4.6% yoy which is up from the low point of 2.6% in May. Meanwhile, in Europe the only data of note came from France where the November Bank of France business sentiment reading edged up 2pts to 101 and the joint highest this year.

Looking at the day ahead we’ve got a fairly light calendar to finish the week. This morning in Germany we’ll get the October trade report before we then get the October industrial production out of France. We’ll then get October trade data for the UK. Over in the US this afternoon we’ll get final revisions to the October wholesale inventories report as well as the preliminary University of Michigan consumer sentiment survey for this month. Away from the data we’re due to hear comments from the ECB’s Smets this morning.