European shares decline led by a plunge in Pearson shares, S&P futures were modestly in the green as Asian and EM stocks gained. The dollar rebounded against most major currencies after retreating 1.3% on Tuesday to the lowest in a month following Trump's "strong dollar" comments and halted a seven-day drop against the yen.

Asian traders said shares were helped by hopes that the concerns about a stronger dollar expressed by the U.S. President-elect at the weekend, would be beneficial to emerging markets where companies have borrowed heavily in dollars. Asia's MSCI's ex-Japan Asia-Pacific shares index rose 0.3%, just shy of a three-month high hit last Thursday. Energy and cyclical stocks were the chief gainers. Short-covering also helped, especially in China where stocks tumbled more than 4% last week as traders took some money off the table before Trump's inauguration on Friday. European stock markets were fractionally in the red steady after a choppy start, banking shares under pressure as investors chewed over details of the impact of regulatory fines on Deutsche Bank.

"You've seen the banks ease, everything has taken a breather after the strong start in January for stocks," Andy Sullivan, a portfolio manager with GL Asset Management in London told Reuters. "The last few days have been choppier and for the rally to be sustained, we need to see earnings growth start to come through."

The Yen and gold retreated for the first time in eight days. Bonds edged lower before Thursday’s ECB meeting, where few surprises are expected. Oil reversed course after earlier gains, slipping below $52 a barrel.Sterling, which soared more than 3 percent on Tuesday after Prime Minister Theresa May's Brexit speech, fell back 0.7 percent.

"Everything is just a partial reversal of the price action yesterday," said RBC Capital Markets currency strategist Adam Cole, arguing that the greenback's weakness had been primarily driven by excessive positioning at the end of last year.

Ahead of today's December CPI report in the US, strengthening inflation in the U.K. and eurozone will likely underpin confidence in a growth rebound, however concerns about the policies of Trump and looming elections in Germany and France are among issues clouding the outlook according to Bloomberg. That’s taken the edge off the so-called reflation trade, with strategists starting to rethink bets on returning inflation and a stronger dollar.

“We need to see what the next steps from central banks will be, what policy action will follow the inauguration,” said Peter Schaffrik, the head of European rates strategy at Royal Bank of Canada. “We’ve had a lot of news flow. Markets need to see some concrete action.”

Meanwhile, the MSCI index of global share prices reached its highest since mid-2015 on Friday and, driven by a bounce in expectations for U.S. inflation and growth since Trump's election, is within sight of all-time highs. But worries about the new U.S. president's attitude to trade and politics, with relations with China in focus, have begun to show up more in some asset prices since the start of the year. As a result, with doubts growing about the sustainability of the "Trump trade" - higher stocks and a stronger dollar - investors' favorite safe havens for capital have been in demand.

The Stoxx Europe 600 Index fell 0.2 percent. Pearson Plc plunged 27 percent to the lowest since 2009 after cutting its profit forecast for this year. The MSCI Emerging Markets Index rose 0.3 percent, poised for the highest closing level since Nov. 8. Futures on the S&P 500 added 0.1%. The underlying gauge lost 0.3% on Tuesday. 

The Bloomberg Commodity Index halted a five-day rally, retreating 0.4 percent. West Texas Intermediate crude slumped 1.5 percent to $51.67 a barrel, the most in a week. Gold lost 0.3 percent, snapping a seven-day winning streak that was the longest since November.

In rates, yields on 10-year Treasuries climbed three basis points to 2.36 percent, after falling seven basis points on Tuesday. Gilts yields rose, with the 10-year benchmark trading one basis point higher at 1.32 percent.

Market Snapshot

• S&P 500 futures up 0.1% to 2265
• Stoxx 600 down 0.2% to 362
• FTSE 100 down less than 0.1% to 7219
• DAX down less than 0.1% to 11537
• German 10Yr yield up less than 1bp to 0.32%
• Italian 10Yr yield down less than 1bp to 1.91%
• Spanish 10Yr yield up less than 1bp to 1.39%
• S&P GSCI Index down 0.8% to 397.5
• MSCI Asia Pacific up 0.3% to 140
• Nikkei 225 up 0.4% to 18894
• Hang Seng up 1.1% to 23098
• Shanghai Composite up 0.1% to 3113
• S&P/ASX 200 down 0.4% to 5679
• US 10-yr yield up 2bps to 2.35%
• Dollar Index up 0.24% to 100.57
• WTI Crude futures down 1.5% to $51.70
• Brent Futures down 1.5% to $54.66
• Gold spot down 0.2% to $1,215
• Silver spot down 0.3% to $17.15

Global Headline News

• Trump’s Options for Weakening Dollar Extend Far Beyond Tweeting
• By Ripping NATO, Trump Makes Europe Nervous and Arms Trade Happy
• Bayer-Monsanto Pledge Investment, Jobs After Trump Meeting
• Davos Cocktail Circuit Hums With Trump Optimism After Day One
• Amazon (AMZN) Said to Walk Away From $1 Billion Souq.com Takeover Talks
• Fed’s Williams Sees Gradual Hikes to Keep Economy on Track
• Oil Extends Gains Above $52 as U.S. Crude Supplies Seen Falling

Looking at regional markets, Asia stocks were mostly higher as the region shrugged off the negative lead from Wall Street where the financial sector led stocks lower amid an unwinding of the Trump trade. ASX 200 (-0.4%) was today's laggard after weakness in financials dampened the tone, considering the sector's near 50% index weighting and with the Big 4 banks all firmly lower. Nikkei 225 (+0.4%) was initially negative as JPY strength dampened exporter sentiment, although the index then recovered alongside USD/JPY reclaiming the 113.00 handle while Toshiba shares (+2.9%) outperformed on reports the Co. is mulling spinning off its semiconductor business. In China, Hang Seng (+1.1%) and Shanghai Comp. (+0.1%) were higher after another substantial liquidity operation by the PBoC valued at CNY 460BN, while participants also digested the latest Chinese property prices which showed continued stellar advances, albeit at a slightly softer pace. Of course, the "national team" ias now officially intervening, making sure there is no selloff during Xi's Davos visit. Finally, 10yr JGBs saw mild losses amid the improvement in risk appetite and following a paltry BoJ buying operation valued at JPY 710bIn in government bonds ranging from 5yr-25yr+ maturities.

Top Asia News

• China Home Prices Rose in Fewest Cities in 11 Months Amid Curbs
• Hong Kong Regulator Sues StanChart, UBS Over 2009 Timber IPO
• China Stock Volatility Wanes Amid Speculated State Intervention
• Optimism Reigns in India as CEOs, Consumers Look Beyond China
• Diageo Said to Weigh Raising Stake in India’s United Spirit
• China’s Xi Takes on Trump in Rebuttal Against Protectionism
• Top Four Most Expensive Cities Worldwide in Asia, London Fifth

European markets are trading mixed this morning with the EUROSTOXX 600 trading flat and FTSE 100 trading higher after traders and investors digest yesterday's Brexit speech from PM May. In stock specific news Pearson hit limit down following a 27.5% nosedive after the Co. announced they are scrapping 2018 profit target and dividend. Also of note, HSBC today announced bankers generating 20% of HSBC's London revenue may move to Paris which will raise some eyebrows after the aforementioned PM speech yesterday. Price action across fixed income markets have been somewhat subdued with the bund 2-10yr curve flattening by around 1bps. Elsewhere, Italy have begun marketing for their Sep'33 EUR dominated bond.

Top European News

• May’s Brexit Hardball Raises Chances of All-or-Nothing EU Deal
• Pound Rescued by May Faces Choppy Waters as Political Risks Loom
• U.K. Employment Steady, Wages Pick Up in Resilient Labor Market
• UBS’s Orcel Says Market Hasn’t Discounted All Negatives Yet
• Trump’s Barbs Aimed at Merkel Seen Aiding Her Election Pitch
• Chip Gear-Maker ASML’s Quarterly Sales Forecast Beat Estimates
• Sweden’s Biggest FX Trader Warns Rate Hike Could Come Quicker
• Pearson Cuts Forecast on Textbook Slump; to Sell Penguin
• Burberry Gives Fresh Boost to Luxury as Sales Beat Estimates
• Maersk Is Most Likely to List Energy Units Separately, CEO Says
• German Jobless Mystery Explained as Refugees Hide in Statistics

In currencies, the Bloomberg Dollar Spot Index added 0.4 percent at 11 a.m. London time, after retreating 1.3 percent on Tuesday to the lowest in a month. The pound dropped 0.8 percent to $1.2311 after surging 3.1% on Tuesday. The euro slipped 0.3 percent to $1.0684 while the Russian ruble gained 0.3 percent. The yen weakened 0.7 percent to 113.35 per dollar, after soaring 3.9 percent over the previous seven days. FX markets have been range bound this morning, with the USD rebounding but showing no signs of resuming its uptrend, but current levels still look corrective as yet. The US 10yr looks to have found a near term base at 2.30%, and this looks to have placed a bid in USD/JPY in the mid 112.00's, but stock market risk continues to unnerve the market, prompting ongoing caution just yet despite the overwhelming yield differentials with signal a buy. EUR/USD looks to be finding plenty of selling interest on spikes above 1.0700, but the pullbacks are extremely shallow as the ECB meeting ahead still carries modest risk on any mention of tapering. USD/CHF is still hovering above parity as a result, but recoveries here are lacking in any traction to suggest further consolidation (or another setback) in the near term. For GBP, it looks as though the post PM speech honeymoon is over, as talk of City job losses to the continent have taken the shine off GBP. The domestic jobs report showed another healthy earnings rise of 2.7%, while the unemployment rate stays at 4.8%.

In commodites, moves have been largely muted, but for the erratic moves seen on Oil prices, though price action all inside established ranges, to suggest traders looking for sizeable orders either way. Focus on the USD keeps Gold supported for now, with equity markets also showing vulnerability ahead of the presidential inauguration at the end of the week to add a safe have bid under the yellow metal. The Bloomberg Commodity Index halted a five-day rally, retreating 0.4 percent. West Texas Intermediate crude slumped 1.5 percent to $51.67 a barrel, the most in a week. Gold lost 0.3 percent, snapping a seven-day winning streak that was the longest since November. Iron ore futures slid 0.6 percent on the Dalian Commodities Exchange, also ending a seven-day stretch of gains. Zinc led industrial metals higher in London, climbing as much as 1.7 percent for the first daily advance this week. S&P Global raised 2017 price assumptions for zinc, copper and iron ore.

Looking at today’s calendar, in the US the headline release is the December inflation report where market expectations are currently sitting at +0.3% mom for the headline and +0.2% mom for the core. Industrial and manufacturing production prints for last month will also be released, followed shortly after by the NAHB housing market index reading for this month. Away from the data, the most notable Fedspeak today will likely be Fed Chair Yellen when she speaks at 3pm ET in a discussion at the Commonwealth Club where she is expected to give an economic assessment. The Fed’s Kaplan will also speak at 9am ET and the Fed’s Kashkari at 4pm GMT. Away from that we’ll also get comments from the ECB’s Nouy while the EU’s Tusk is due to speak at European Parliament. Finally the US corporate reporting calendar today is headlined by Goldman Sachs and Citigroup, who both report prior to or at the US open.

* * *

US Event Calendar

• 7am: MBA Mortgage Applications, Jan. 13 (prior 5.8%)
• 8:30am: CPI MoM, Dec., est. 0.3% (prior 0.2%)
• 8:30am: Real Avg Weekly Earnings YoY, Dec., (prior 0.5%)
• 8:55am: Redbook weekly sales
• 9am: Fed’s Kaplan Speaks in Dallas
• 9:15am: Industrial Production MoM, Dec., est. 0.6% (prior -0.4%)
• 10am: NAHB Housing Market Index, Jan., est. 69 (prior 70)
• 11am: Fed’s Kashkari Speaks on Economy in Minneapolis
• 3pm: Fed’s Yellen Speaks in San Francisco
• 4pm: Total Net TIC Flows, Nov. (prior $18.8b)
• 4:30pm: API weekly oil inventories

DB's Jim Reid concludes the overnight wrap

Given that Brexit discussions are all the rage again at the moment and that the Alps have become a regular holiday destination for me and the family, one wonders what the future holds for travelling to and from the continent. However it appears that perhaps Bronte may have given us residential status. Over the weekend I picked the family up from France after travelling through Europe on business in early January and after a 10 hour drive arrived at pet passport control in Calais only for the officers to refuse to let Bronte through immigration. It was a big shock but apparently her passport hadn't been stamped properly when issued. She's now been over the border several times and this hadn't been picked up until now. After many frantic phone calls we eventually found a back street late night vet open a few miles drive away and they allowed us to get a fast tracked French passport for her after the requisite checks. So Bronte is now effectively a dual citizen without having to sing (or bark) "Le Marseillaise".

While I didn't hear any mention of animal migration rights in UK PM May's hotly anticipated Brexit speech yesterday it was a fairly upbeat attempt at balancing a harder Brexit than the market would like with a commitment to being an open global player. It was a great speech in theory but a lot depends on the goodwill of EU member states for her to get her wishes of a comprehensive free trade agreement in goods and services with the continent. Even with such goodwill, it seems optimistic that this could get done within two years. So this may be a big challenge but there was enough flexibility and openness to the world in the speech and enough fear beforehand for it to be well received by markets. In fact GBPUSD (+3.05%) ended up eclipsing any of the huge daily gains made in 2008 and in fact had the best day since 1993 after closing last night at $1.241, although it has retraced about -0.60% this morning. A decent contributor to yesterday’s surge was the comments from President elect Trump to the WSJ on concerns over a strong dollar. 

Meanwhile, in addition to Trump’s comments, yesterday at the World Economic Forum in Davos, Anthony Scaramucci – who is a member of Trump’s transition team – added further weight to the argument by saying that “we have to be careful about a rising dollar”. The USD index finished last night down -0.86% and is now actually down -3.40% from the 2017 high mark already. Coming back to the Trump interview for a second, another comment from the President-elect which appeared to gain some traction was his one calling a so called border tax “too complicated”. The reaction in US equity markets following all this seemed to imply that there are growing doubts about what policies Trump might actually follow through on. With Treasuries continuing to unwind after the 10y yield fell 7.1bps yesterday to close at 2.326% and the lowest since November, it was financials that were most under pressure yesterday with the S&P 500 financials index tumbling -2.28% for its worst day since June last year. Amazingly that was despite another strong set of bank earnings yesterday with Morgan Stanley the latest to beat market expectations at the profit line after posting the biggest Q4 profit since the financial crisis. The S&P 500 and Dow both ended -0.30% while prior to this in Europe the Stoxx 600 had closed -0.15%. The FTSE 100 (-1.46%) was the standout underperformer though and clearly weighed down by that huge rally for Sterling.

This morning in Asia bourses have generally bounced back from a soft start. There’s been gains for the Hang Seng (+1.19%), Shanghai Comp (+0.45%) and the Nikkei (+0.60%), while the Kospi is little changed. Currencies in the region are generally stronger while rates markets are also fairly mixed. There’s also been some data out of China this morning with the December house price series. It showed that new home prices, excluding government subsidized housing, rose in 46 of the 70 main cities last month which compares to 55 in November, suggesting a cooling down in the market.

Staying with China, it was interesting to hear from China President Xi Jinping yesterday when he made his debut at the annual Davos shindig. While refraining from mentioning Trump by name, Xi said that “countries should view their own interest in the broader context and refrain from pursuing their own interests at the expense of others”. He also warned that “no one will emerge as a winner from a trade war” and referred to the Paris agreement as being a “hard-won achievement” and one that “all signatories should stick to”.

Moving on. The most notable data for us over the course of yesterday was the ECB’s bank lending survey. The survey reported that credit standards for loans to enterprises in the Euro area tightened in Q4 2016 for the first time in three years. While current conditions have tightened, the recent rally in European bank equities does indicate that a slowdown in lending may still be avoided and this was reflected in the survey with expectations of lending standards easing over Q1 2017. We published a Credit Bites report on this survey yesterday where you’ll find some more detail.

Away from that we also got the latest inflation numbers out of the UK. Headline consumer prices in December were reported as rising more than expected during the month (+0.5% mom vs. +0.3% expected) and helped to push the YoY rate up to +1.6% from +1.2%. The core also rose to +1.6% yoy from +1.4% and is now at the highest level since August 2014. Headline retail prices also rose a bit more than expected (+0.6% mom vs. +0.4% expected) although PPI output prices did miss (+0.1% mom vs. +0.4% expected). Meanwhile in Germany the January ZEW survey revealed that expectations rose 2.8pts during the month to 16.6 although that was slightly less than what the consensus estimate was pegged at (18.4 expected). In contrast, the current situation component surged to 77.3 (vs. 65.0 expected) from 63.5 and is at the highest level since 2011. Across the pond the NY Fed’s manufacturing survey weakened 1.1pts to 6.5 this month.

Before we look at the day ahead, there was also some interesting Fedspeak to mention yesterday. NY Fed President Dudley probably didn’t help the Dollar sell-off by saying that “the risk that the Fed will snuff out the expansion anytime soon seems quite low because inflation is simply not a problem”. He also said that “the economy is not growing much above its sustainable long-term pace”. Meanwhile the usually dovish Fed Governor Lael Brainard sounded a bit more hawkish by saying that “if fiscal policy changes lead to a more rapid elimination of slack, policy adjustment would, all else being equal, likely be more rapid than otherwise”.

Looking at today’s calendar, this morning in Europe we’re kicking off in Germany where the final CPI revisions for December will be made. We then turn to the UK where the November and December employment stats will be released, before we then get the final December inflation data revisions for the Euro area. This afternoon in the US the headline release is likely to also be the December inflation report where market expectations are currently sitting at +0.3% mom for the headline and +0.2% mom for the core. Industrial and manufacturing production prints for last month will also be released, followed shortly after by the NAHB housing market index reading for this month. Away from the data, the most notable Fedspeak today will likely be Fed Chair Yellen when she speaks at 8pm GMT in a discussion at the Commonwealth Club where she is expected to give an economic assessment. The Fed’s Kaplan will also speak at 2pm GMT and the Fed’s Kashkari at 4pm GMT. Away from that we’ll also get comments from the ECB’s Nouy while the EU’s Tusk is due to speak at European Parliament. Finally the US corporate reporting calendar today is headlined by Goldman Sachs (GS) and Citigroup (C), who both report prior to or at the US open.