Rumors of the Trumpflation rally's death have been greatly exaggerated, and not only is the Dow 20,000 back on the radar, following a 124 point surge in Dow futures, bringing the "key psychological level" back within 100 points, but European stocks rose for a third day and entered a bull market, rising 20% from their lows set last February, following strong Chinese manufacturing and services PMI data, both of which ended 2016 on robust notes well inside expansion territory.

While much of Europe had been open on Monday, it was the first day back for its biggest stock market, Britain's FTSE 100 and it wasted no time in hitting a new record high of 7,196 points with a 0.7% gain. Germany's DAX and France's CAC 40 climbed too and among individual stock movers, Italian banks were back amongst the top risers, with newly-merged Banco BPM up 4.6 percent on its second day of trading.Overall, the Stoxx Europe 600 Index advanced 0.8% at 8:33 a.m. in London, with 18 of 19 industry segments climbing. The benchmark index, up 20 percent since a low last February, will confirm a bull market should the day’s gains hold into the close. The U.K.’s FTSE 100 Index, trading for the first time in 2017, is up 0.7 percent and heading for a record close.

US equity futures on the S&P 500 Index rose 0.7 percent, back over 2,251, while the Dow Jones was set to open back over 19,900.

In a reversal from the first trading days of 2016, when a selloff in Chinese equities roiled markets globally, the world’s second-largest economy has been a source of strength at the start of 2017. Weekend reports showed China’s official factory gauge steadied while services remained robust, capping a year of improvement in both indicators. A private manufacturing measure released Tuesday came in better than anticipated.

“A year ago, the Chinese markets kept everyone on their toes,” said Jingyi Pan, a market strategist at IG Asia Pte. “A year later, the outlook certainly appears to be more optimistic, though we may have to bring back the catchphrase of ‘cautious optimism’ going into the new year as we search for clarity.” "I don’t think that we will see a repeat given that the global economy has a better foothold compared to a year ago," Pan said.

Overnight in Asia, MSCI's broadest index of Asia-Pacific shares rose 0.6 percent as most regional markets reopened after the New Year holiday although Japan's Nikkei was still closed. Australian shares were the best performers in the region, closing up 1.2 percent. Hong Kong's Hang Seng .HSI rose 0.7 percent while in China, both the CSI 300 index and the Shanghai Composite .climbed 1 percent.China was Asia's worst performing major stock market in 2016 with a 11.3 percent loss in its worst year in five.

Commodity-linked stocks jumped 1.3 percent as oil and metals prices cheered the China data that had showed output from the country's giant manufacturing sector reaching a near six-year high. It bolstered the 'reflation' theme that dominated the latter stages of 2016 and helped get currency and bond markets back in their pre-break rhythm after a mixed recent run. The U.S. dollar racked up its biggest rise in almost three weeks against a basket of the world's other major currencies to leave it just 1 percent off December's 14-year high. As shown in the chart below, the Dollar Index (DXY) jumped as US yields moved sharply higher, w/ 10y yields rising from 2.4350% to over 2.51%.

In commodities, oil prices jumped over 2% in Europe as the China data fed into a market that is being buoyed by hopes a deal including OPEC and non-OPEC producer countries will drain the recent global supply glut. Oil was the world's best-performing major asset class in 2016, with a gain of around 50 percent and global benchmark Brent was up 2.7% at $58.31 by 0945 GMT as U.S. crude topped $55 a barrel.

"Markets will be looking for anecdotal evidence for production cuts," Ric Spooner, chief market analyst at CMC Markets said. "The most likely scenario is OPEC and non-OPEC member countries will be committed to the deal, especially in early stages."

The positive Chinese news lifted the Australian dollar, which added 0.6 percent to $0.7230, while gold sagged, with the precious metal dropping 0.3 percent to $1,148 an ounce. Back in Europe, the pick ups in Germany and French inflation came on the heels of data on Monday showing manufacturers ramped up activity at the fastest pace in more than five years in December.

In China, Starting on Jan. 1, the number of currencies in the CFETS basket increased to 24 from 13, with new entrants including the Korean won, the South African rand and the Mexican peso. The country's foreign exchange regulator also said it would step up scrutiny of individuals' foreign currency purchases and strengthen punishment for illegal outflows, although the $50,000 annual individual quota will remain unchanged. The renminbi posted its biggest annual loss since 1994 last year, with the dollar up almost 7 percent versus the Chinese currency.

Long-term inflation expectations in the euro zone, measured by the five-year, five-year forward rate are near their highest levels in more than a year and close to the ECB's near 2 percent target, as the central bank prepares to pare back the pace of its money-printing scheme. "Until just a few weeks ago, the general consensus was that upside inflation risks were very limited however... the inflation rate scheduled to be published today is likely to reveal a significant uplift," DZ Bank strategist Birgit Figge told Reuters.

So with stocks rising on hopes of a return in inflation, it would mean that rates should dip, and indeed Treasuries dropped, with 10-year yields rising 7 bps basis points to 2.514%. U.S. cash bonds opened in London this morning having been closed since Dec. 30. German bonds fell as regional data showed inflation is accelerating. The yield on the nation’s 10-year securities dropped to the lowest level since November on Monday. French bonds were among the biggest decliners in Europe after the nation was said to mandate banks for the sale of a new Green bond in the 15- to 30-year area. France is due to sell 10-, 20-, 30- and 50-year bonds on Jan. 5.

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Market Snapshot

• S&P 500 futures up 0.7% to 2251
• Stoxx 600 up 0.7% to 366
• FTSE 100 up 0.7% to 7194
• DAX up less than 0.1% to 11603
• German 10Yr yield up 2bps to 0.21%
• Italian 10Yr yield up less than 1bp to 1.75%
• Spanish 10Yr yield up 2bps to 1.36%
• S&P GSCI Index up 0.7% to 400.9
• MSCI Asia Pacific down 0.2% to 135
• Nikkei 225 closed
• Hang Seng up 0.7% to 22150
• Shanghai Composite up 1% to 3136
• S&P/ASX 200 up 1.2% to 5733
• US 10-yr yield up 4bps to 2.48%
• Dollar Index up 0.38% to 103.17
• WTI Crude futures up 1.4% to $54.46
• Brent Futures up 1.6% to $57.71
• Gold spot down less than 0.1% to $1,151
• Silver spot up 0.4% to $16.00

Top Healdine News

• Jain Finds His Second Act as Ex-Deutsche Bank Chief Joins Cantor: Smaller firm hires global bank’s former rainmaker as president
• China’s Sogou Targets IPO at $5 Billion Valuation to Chase Baidu: Listing of about 10% of shares in U.S. may happen this year
• LSE Agrees to Sell Clearing Unit to Euronext for $533 Million: Deal may be completed by the end of the second quarter
•   China’s Factories, Services Cap Year of Gains as Prices Rise: Private manufacturing PMI by Caixin and Markit confirmed the strength in official data
• SpaceX Plans Return to Flight With Jan. 8 Launch After Explosion: Liftoff from Vandenberg Air Force Base first since Sept. 1
• BlackRock (BLK) ETFs Attract Record $140 Billion on Bonds, Smart Beta: Investors added $27 billion to U.S. Core ETF after price cut
• Fiat Chrysler (FCAU) Pauses From Gas-Guzzlers to Show Electric Minivan: Automaker unveils self-driving Chrysler Portal concept at CES
• ‘Rogue One’ Takes in $64.3 Million for Disney (DIS) Over Weekend: Movie industry sets record with $11.4 billion in annual sales
• Pence, House Republicans to Talk Obamacare Repeal Wednesday
• Comcast (CCS), 21st Century Fox Reach Agreement on Fox News: WSJ

Asian equity markets began the first session of 2017 on the front-foot despite last Friday's negative close on Wall St where all 3 major indices finished lower and the DJIA retreated further away from 20,000. ASX 200 (+1.1%) led the Asia-Pac region and posted a fresh 16-month high amid broad based gains, with only the gold sector trading in the red. Shanghai Comp. (+1.0%) and Hang Seng (+0.6%) conformed to the upbeat tone following better than expected Chinese Caixin Manufacturing PMI data which rose to a near 4-year high and printed a 6th consecutive month in expansion territory, although gains across the region have been somewhat reserved amid rising money market rates in China and several market closures including Japan.

Top Asian News

• China Gets Stricter on Forex Transactions to Limit Outflows: Citizens face extra disclosure requirements even as yearly quota of foreign currency was unchanged
• Indonesia Terminates JPMorgan Partnerships After Downgrade: Finance ministry will stop using JPM as primary dealer, underwriter of sovereign bonds
• South Korea Halts Some Nissan, BMW Sales in Emissions Probe: Total fines of $5.9 million slapped on three companies
• Infosys, Wipro Leaders Warn of Challenging Times for Indian IT: Warn that industry faces grave threat from rising political, economic conflict around the world
• China to London Freight Train Kicked Off as Xi Boosts Trade Ties: Train will cover more than 7,000 miles in about 18 days

In Europe, 2017 has kicked off as 2016 finished, with equities trading higher for much of the morning as the FTSE hits fresh all-time highs (+0.6%). Stock specific news has been relatively light so far today, however notable outperformance has been seen in the financial sector, with energy names also outperforming amid WTI crude futures printing 18-month highs. The Stoxx Europe 600 Index advanced 0.8% at 8:33 a.m. in London, with 18 of 19 industry segments climbing. The benchmark index, up 20 percent since a low last February, will confirm a bull market should the day’s gains hold into the close. The U.K.’s FTSE 100 Index, trading for the first time in 2017, is up 0.7 percent and heading for a record close. The latest data has been supportive of bond yields, with the German 10Y briefly moving above 0.24% amid the higher than previous regional CPIs, which have printed around 1.8-1.9% Y/Y so far. The latest German unemployment figures saw a fall in unemployment, further supporting yields. Elsewhere, Gilt yields have also seen strength this morning in the wake of a significant beat in UK Manufacturing PMI (56.1 vs. Exp. 53.3), seeing the highest reading since June 2014.

Top European News

• Pound Drop Boosts U.K. Manufacturing, Pushes Up Factories’ Costs: Manufacturing grew at the fastest pace in 2 1/2 years in December
• German Unemployment Extends Drop as Economic Growth Picks Up: Unemployment fell by 17,000 versus estimated 5,000 decline
• Paris Eyes Luring 20,000 Bankers From London Amid Brexit Rupture: French lobby group sees banks ‘accelerating’ their planning
• Biggest Swedish Business Group Predicts Weak Krona Won’t Last: Stronger currency could have ‘fast and unpleasant’ effect

In commodities, crude oil rose to $55.24 a barrel in New York, touching the highest level since July 6, 2015, buoyed by hopes that a deal between OPEC and non-OPEC members to cut production, which kicked in on Sunday, will drain a global supply glut. Benchmark Brent crude jumped more than 2 percent to a high of $58.37, up $1.55 a barrel and its highest since July 2015. By 0940 GMT (4:40 a.m. ET), Brent eased slightly to trade at $58.22, up $1.40. Gold added 0.1 percent to $1,148.5. Aluminum increased 0.1 percent to $1,694 per metric ton on the London Metal Exchange, while nickel jumped 1.6 percent to $10,180 a ton and copper rallied 1 percent to $5,593 an ounce.

In currencies, the Dollar Index was up 0.7 percent. The yen slid 0.5 percent to 118.14 per dollar, giving up an earlier advance. The euro erased earlier gains against to trade down 0.4 percent against the greenback. South Korea’s won rose 0.4 percent, while the Australian dollar strengthened 0.3%.

US Event Calendar

• 9:45am: Markit U.S. Manufacturing PMI, Dec. F, est. 54.2 (prior 54.2)
• 10am: ISM Manufacturing, Dec., est. 53.7 (prior 53.2)
• 10am: Construction Spending MoM, Nov., est. 0.5% (prior 0.5%)

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DB's Jim Reid concludes the overnight wrap

A very Happy New Year to all our readers this morning and a warm welcome to 2017. Today’s EMR is a bit of a bumper edition and concludes with the December, Q4 and 2016 performance review at the end. It would probably be an understatement to say that 2016 has been - more than ever - a year in which we’ve all had to put our political analyst hats on. Trump and Brexit were the obvious headline events which characterised 2016 but that’s not to say that Central Banks haven’t been busy too with the Fed, BoJ, ECB and BoE all keeping us busy and laying the platform to what we think will be a volatile year ahead for rates. Commodity markets have also more than played their part, with a number of benchmark commodities hitting record lows early in the year before staging a remarkable rebound into year end. The good news is that the vast majority of assets ended the year on a high in December with 30 of the 39 assets within our sample (excluding currencies) delivering a positive total return last month in USD hedged terms.

As well as this, we’ve also got the usual week ahead preview at the end. Despite it being a holiday shortened week there’s little easing into the New Year with the diary fairly jam-packed with important releases. One of the highlights will be the FOMC minutes from the December meeting, due on Wednesday evening, which could be interesting given the slightly more hawkish than expected elements from the statement and of course the excitement caused by the moves in the dots. Also on the cards for this week is the US December employment report on Friday including the ever-important nonfarm payrolls print. We’ll preview that later in the week. The manufacturing and services ISM prints will also be due out while in Europe we’ll also get a number of December inflation reports due out over the next few days. Away from the data President-elect Trump should also continue to fill in the blanks of his administration ahead of his official inauguration later this month. So plenty to keep us on our toes and to talk about.

For those that took a break over the holiday season, in truth you haven’t missed too much. Markets did reopen in parts of Europe yesterday although unsurprisingly with the usual holiday impacted low volumes. That said it was a decent start for the most part to 2017. The Stoxx 600 kicked off the year by closing up +0.49% with all sectors ending a tad higher while the DAX (+1.02%) and the periphery (IBEX +0.71% and FTSE MIB +1.73%) also closed firmer. European Banks (+0.89%) also started the year stronger while in sovereign bond markets it was BTP’s which outperformed. Indeed 10y BTP yields were 7.3bps lower at 1.735% while 10y Bund yields edged down 1.8bps to 0.182%. The outperformance in Italy likely reflected the better than expected December manufacturing PMI yesterday with the print rising a full point to 53.2 and the highest reading since June. There were no surprises in the final revision for the data for the Euro area at 54.9 while France and Germany were also little changed at 53.5 and 55.6 respectively. Spain however also surprised to the upside after printing 0.8pts higher at 55.3 (vs. 54.6 expected).

Two days ago we also got the official PMI’s for China for last month with the manufacturing PMI down slightly to 51.4 (vs. 51.5 expected) from 51.7 the month prior and the non-manufacturing PMI coming in at 54.5 versus 54.7 in November. This morning we’ve also had the Caixin manufacturing PMI for China which, unlike the official data last week, surprised to the upside at 51.9 (vs. 50.9 expected) from 50.9 in November. As we look across markets this morning, bourses have started the year in a fairly upbeat mode. In China the Shanghai Comp and CSI 300 are currently +0.75% and +0.82% respectively while the Hang Seng is +0.51%. The Kospi is +0.52% and the ASX +1.17%. Markets in Japan are closed for a public holiday. Elsewhere Oil is a shade higher while Gold and other precious metals are up close to +1%. US equity index futures are also pointing to a reasonable start (up around +0.35% as we type).

Much of the remaining news flow this morning and over the past few days revolves around other developments in China and also the tragic terrorist attack in Istanbul on New Year’s Day which follows a number of other geopolitical events in the month of December and which will do little to ease tensions. The Turkish Lira has weakened about half a percent in the last two days since that attack. With regards to the former, there are various reports out there suggesting that China is looking to tighten controls on personal FX transactions in a bid to curb money laundering. According to the FT the $50k resident quota on foreign currency buying was also reset as of January 1st. In addition to this, last week we learned that China has also expanded the currencies included in its official CFETS basket to 24 from 13. The associated statement highlighted that this change is aimed at improving the mechanism generating the RMB index and so making the basket more representative. It also means that the US Dollar’s weighting in the new basket falls to 22.4% from 26.4% and so the lower USD weight means that less USD strength translates into the basket.

Turning over to the week ahead now. This morning in Europe we’re kicking off the New Year in France where the preliminary December CPI report will be released. We’ll also get last month’s CPI report in Germany along with unemployment data while in the UK the December manufacturing PMI is due to be released. It’s a reasonably busy start to the week in the US this afternoon with the main focus likely to be on the December ISM manufacturing print, while the final manufacturing PMI and construction spending in November is also due. Wednesday starts in Japan where the final manufacturing PMI for December is due while China will also release the MNI consumer sentiment print for last month. Over in Europe all eyes will be on the final December PMI revisions (services and composite prints) along with a first look at the data for the periphery. Euro area CPI in December will also be released along with money and credit aggregates data for the UK. In the US tomorrow the lone data release is December vehicle sales before all eyes turn to the FOMC minutes later in the evening from last month’s meeting. Turning to Thursday, Japan and China get the day started again with the remaining December PMI’s (services and composite). In the UK we’ll also get the remaining services and composite PMI’s while PPI data for the Euro area will also be released. In the US we’ll also get those final PMI’s (services and composite) along with the ADP employment change print for last month, initial jobless claims and ISM non-manufacturing for December. We close out the week on Friday in Europe with retail sales and factory orders data in Germany, trade data in France and confidence indicators for the Euro area. In the US we’ll get the November trade balance along with the all important December employment report including nonfarm payrolls. Also due out will be November factory orders and the final revisions to November durable and capital goods orders.

Away from the data there’s also a bit of Fedspeak this week with both Evans and Lacker due to speak on Friday, while over at the ECB Mersch is also scheduled to speak on Friday. Also potentially interesting this week is a planned television interview in France on Thursday with Socialist Party nominee Manuel Valls.