Whether it is due to overnight news that much of the recent rally may have been due to one specific fund's "gamma trap" and rapid cover of a synthetic "short SPY" trade, or just because algo traders have gotten a case of overbought robotic vertigo, S&P futures dropped 0.2% in early Thursday trading as risk appetite fizzled and European shares dropped on concern the longest rally since July 2015 went too far, while the yen, bonds and gold advanced as the dollar fell.

Europe's Stoxx 600 declined, snapping a seven-day rally with Nestle SA dropping by the most this year after saying it will target lower growth. The dollar depreciated against G10 peers even as traders increased bets for higher U.S. interest rates following faster-than-expected U.S. inflation.

Despite the early weakness in US futures, world stocks hit an all time high on Thursday on renewed growth expectations and hopes that major economies like the United States will soon be serving up large helpings of fiscal stimulus: in this regard China has already done its share injecting a record $540 billion in credit last month. MSCI's All Country World index, which spans 46 countries, notched the milestone as Wall Street hit its latest record and Asia and Europe consolidated the roughly 10 percent gains both have made since mid-December.

As showed on Valentine's Day, global stocks have jumped in value to more than $70 trillion after Trump’s November victory. As further discussed, the 30-day relative strength index for the MSCI broadest measure of global equities crossed a level that indicates to some traders its due for a correction. The odds for a U.S. rate hike in March jumped to 42 percent from 30 percent two days ago.

“Following the sharp rally we’ve seen in cyclical shares since early November, investors are now getting reluctant to just buy whole sectors such as mining and banks, and are starting to pick the best stocks within the sectors,” Stephane Ekolo, chief European strategist at Market Securities, in London. “These stocks will prove more resilient when the selloff comes.” This despite strong economic data reports which showed surges in exports from Indonesia and Taiwan, falls in unemployment in Europe from Sweden to the Netherlands while stronger U.S. retail sales and inflation data on Wednesday came as Donald Trump again promised mass tax cuts.

Another reason for the upbeat mood has been that, unlike in recent years, the prospect of U.S. interest rate rises does not seem to be spooking markets. While monetary policy has taken a back seat to Trump's fiscal promises, overnight Fed's Dudley (Voter, Dove) stated the Fed would end bond reinvestments and reduce Fed portfolio when they are confident the economy can withstand it and added reducing the balance sheet could stretch out the rate hike path. Dudley also commented the economy is growing slightly above trend and that he expects Fed to raise rates gradually a little further in the months ahead if forecasts pans out.

The dollar is still down for the year despite a strong run over the last couple of weeks, while Treasury yields, have barely risen, which has helped propel emerging market bonds, stocks and many currencies higher. As Reuters notes, the dollar hit the brakes again on Thursday as the glow of the previous day's upbeat data faded. U.S. government bond yields eased too, taking German Bunds and Europe's other benchmarks with them. Upcoming elections in the Netherlands, France, Germany and possibly Italy, have kept investors interested in "safe" government bonds particularly with anti-euro and anti-EU sentiment on the increase throughout the continent.

Overnight oil prices recovered from a knock from data showing record high U.S. crude and gasoline inventories. Brent and U.S. crude both inched up 0.3 percent to $55.92 and $53.28 a barrel respectively, while gold prices also rose as the dollar drifted down. Industrial bellwether copper, which has surged 30 percent since late October, eased however to $6,028 a tonne after China's overseas investment weakened. China is the world's top copper user, but prices were supported by the prospect of supply disruptions in Chile and Indonesia.

The mildly weaker metals prices meant European shares couldn't quite hold their ground either despite the sentiment boost from the new record high in global stocks. The STOXX 600 index was 0.3% lower by 1000 GMT - the first decline since Feb. 6, with only technology, healthcare and telecommunications shares eking out gains -but this year's rally has been underpinned by the fact European company earnings are expected to grow 14% this year, according to Thomson Reuters I/B/E/S data.

Asia had no such problems overnight. MSCI's main Asia index rose 0.2 percent to its highest since July 2015 after Wall Street had again pushed relentlessly into record-high territory. Chinese shares traded in Hong Kong continued a rally and the Hang Seng climbed to the highest since August 2015.The MSCI Asia Pacific Index added 0.5%, though more stocks fell than rose.

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Overnight Bulletin Summary from RanSquawk

• European equities trade modestly lower this morning with energy the notable laggard, while defensive sectors such as healthcare outperform
• Further losses suffered in the major USD pairings, with reports of China selling 1yr CNH setting the flowtheme for the day
• Highlights include: US Jobless Claims, Philadelphia Fed Manufacturing Index, ECB Meeting Minutes and comments from ECB's Coeure

Market Snapshot

• S&P 500 futures down 0.2% to 2,347.00
• STOXX Europe 600 down 0.3% to 370.26
• German 10Y yield unchanged at 0.372%
• Euro up 0.3% to 1.0635 per US$
• Brent Futures up 0.3% to $55.92/bbl
• Italian 10Y yield rose 0.9 bps to 2.242%
• Spanish 10Y yield fell 1.2 bps to 1.671%
• MXAP up 0.5% to 145.19
• MXAPJ up 0.4% to 467.88
• Nikkei down 0.5% to 19,347.53
• Topix down 0.2% to 1,551.07
• Hang Seng Index up 0.5% to 24,107.70
• Shanghai Composite up 0.5% to 3,229.62
• Sensex up 0.5% to 28,307.33
• Australia S&P/ASX 200 up 0.1% to 5,816.31
• Kospi down 0.1% to 2,081.84
• Brent Futures up 0.3% to $55.92/bbl
• Gold spot up 0.3% to $1,237.83
• U.S. Dollar Index down 0.4% to 100.73

Top Global Headlines

• China Said Mulling Coal Mining Curbs Again as Winter Ends
• German Steel Lobby Group Warns Against Further U.S. Measures
• GM(GM), PSA Lose Europe Market Share as Carmakers Mull Regional Deal; German Economy Minister to Discuss Opel With French Counterpart
• Cisco (CSCO) Says Improved U.S. Economy Bolstering Corporate Demand
• Nestle Braces for Slowdown as New CEO Plans Restructuring
• Snap Said to Set IPO Valuation at as Much as $22.2 Billion
• Trump’s F-35 Calls Came With a Surprise: Rival CEO Was Listening
• Trump Tax Cuts Could Boost Profit $12 Billion at Big U.S. Banks
• Dakota Access Approval Seals $2 Billion Deal for Energy Transfer
• CBS Sales Dragged Down by Fewer Games; Profit Tops Estimates

Asian stocks traded mostly positive following another record day on Wall St. where all three US majors printed fresh all-time highs once again following strong US data and President Trump reiterating that his tax plans would involve reducing taxes for businesses. ASX 200 (+0.1%) closed relatively flat as upside was capped by the telecoms sector after a lacklustre H1 profit report from Telstra, while Nikkei 225 (-0.5%) underperformed after USD/JPY pulled back from recent gains to a sub-114.00 level. Elsewhere, Shanghai Comp (+0.5%) and Hang Seng (+0.5%) outperformed their regional peers after the PBoC more than doubled its liquidity injection today. Finally, 10yr JGBs saw mild losses despite a negative risk tone in Japan with underperformance in the super-long end following an enhanced liquidity auction for 20yr, 30yr and 40yr JGBs which showed an increase in allotment at the highest accepted spread. PBoC injected CNY 80bIn 7-day reverse repos, CNY 80bIn in 14-day reverse repos and CNY 90bIn in 28-day reverse repos.

European markets trade modestly lower this morning with energy the notable laggard, while defensive sectors such as healthcare outperform. Elsewhere, airlines are flying high this morning, with the likes of IAG and Lufthansa the best performers in their respective indices, in sympathy with Air France after a strong earnings report. Fixed income markets were initially subdued with participants waiting on the sidelines ahead of supply from both France and Spain. Spanish paper moved higher in the wake of the solid auction once the supply had been absorbed whilst their French counterpart was somewhat unfazed by this morning's auction. Of note, with French elections very much in focus, Presidential candidate Fillon will continue to be investigated according to prosecutors, although little reaction was seen to this in the GE/FR 10Y spread.

In currencies, the dollar dropped with losses suffered in the major USD pairings, with reports of China selling 1yr CNH setting the flow theme for the day. Moves have been exacerbated by the aggressive USD buying off the back of a hawkish Fed chair testimony, backed up by strong US inflation and retail sales date out Wednesday. The reversal was pretty rapid, and although continuing this morning, may run out of steam as UST yields hold their ground. Fed rhetoric suggests the FOMC is moving towards 3 rather than 2 rate hikes this year, USD dip buyers will be happy to accommodate these latest moves. USD/JPY has dropped back into the mid 113.00's as EUR/USD tests the mid 1.0600's. If the latter can hold above 1.0615-20 tonight, the USD correction may have more to go. Cable has also benefited from this latest USD fall, with the spot rate taking out 1.2500, but upside set to be limited as the latest jobs report suggests a greater negative impact from rising inflation. This will pale into insignificance at the mere mention of triggering Article 50, and sellers will pounce on GBP rallies into end Q1, though the EUR/GBP picture is muddied by the political tensions across Europe.

In commodities, in light of the recent comments from OPEC that production cuts have followed last year's agreement to a larger degree (over 90% at last measure), as well as the inexplicable buying algos which appears 15 minutes after the DOE report, the rise in inventories is having minimal impact on Oil prices of late, with hopes that these will be addressed on the pass through effects further down the line. As such, WTI remains well camped inside the USD50-55 range, and unless we break out of these limits, Oil prices will stay out of the limelight. Notable gains in Gold prices as the yellow metal pulls back to USD1240.00 — this as a pure impact of the USD sell off which has had a marginally positive impact on Oil but perhaps less so on base metals. Copper prices have balanced out a little, with marginal losses on the day in the likes of Zinc and Lead, but base metals set to stay on a firm footing as China demand is forecast to continue.

Looking at the day ahead in the US we’ll get January housing starts and building permits data (expected to print at 0.0% mom and +0.2% mom respectively), initial jobless claims and the Philly Fed manufacturing survey for February. Away from the data we’re due to hear from both the EU’s Juncker and Moscovici at various stages, while the ECB’s Coeure speaks this afternoon and Fed’s Fischer and Williams also.

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US Event Calendar

• 8:30am: Housing Starts, est. 1.23m, prior 1.23m; MoM, est. 0.0%, prior 11.3%
• 8:30am: Building Permits, est. 1.23m, prior 1.21m; MoM, est. 0.16%, prior -0.2%
• 8:30am: Initial Jobless Claims, est. 245,000, prior 234,000; Continuing Claims, est. 2.05m, prior 2.08m
• 8:30am: Philadelphia Fed Business Outlook, est. 18, prior 23.6
• 9:45am: Bloomberg Consumer Comfort, prior 47.2; Bloomberg Economic Expectations, prior 56

DB's Jim Reid concludes the overnight wrap

Treasuries have been playing snakes and ladders over the last few weeks as as soon as we've got to the top of the recent yield range we've rallied hard. Well yesterday the stronger US data (especially CPI - see below) saw USTs back up near to the top of their 2017 range only a week after being near the bottom of it. Indeed the 10y closed up another 2.3bps yesterday at 2.493% having touched 2.324% just over a week ago. That’s feeding through into Fed pricing too and it’s hard to ignore the recent jump in the probability of a March hike now which, based on Bloomberg’s calculator, is up to 44% from just 28% last Friday (and a 25%-35% range for much of this year). There’s been a lot of chatter from Fed officials recently and also Yellen’s testimony where she kept the possibility of a March move open. Our US economists still peg the June FOMC meeting as the most likely timing. Still, it’s been a fairly significant shift this week.

Meanwhile the incredible surge for equity markets also continues to hog the spotlight. Yesterday was another day of record highs for the big 4 US indices with the S&P 500 (+0.50%), Dow (+0.52%), Nasdaq (+0.64%) and Russell 2000 (+0.54%) all up as US Banks surged to a +1.23% return. Just on the S&P, yesterday’s move was the 7th day in a row that the index has finished up which is the longest run since September 2013 when the index also closed up 7 times on the trot. You have to go back to July 2013 to find the last time the index was up 8 days in a row. The other remarkable stat is the last time the index closed with a move up or down by more than 1%. That run now stands at 47 consecutive sessions (the last time was December 7th). April to July 2014 was the last time we had a longer run - at 62 days in a row - so there is still some way to go to match that. In fact yesterday also saw global equities (based on the MSCI all-country world index) rally +0.57% and in turn record a new fresh record high after overtaking the previous highs from May 2015. We’ve run a chart of that index going back a couple of decades which you can find in the PDF. Also of note, yesterday there was a rare recent double digit surge for the VIX (+11.45%) which is only the second double-digit rise since November last year. That said it doesn’t take away from the fact that the index is still stuck in the midst of what is just a 4.7pt range (based on intraday values) in 2017. Finally it’s worth noting that the Greenback (-0.07%) finally snapped what had been a run of 10 consecutive daily gains.

Coming back now to that CPI data in the US yesterday which followed some higher prints in Europe earlier this week. Headline CPI came in at a higher than expected +0.6% mom (vs. +0.3% expected) which had the effect of increasing the YoY rate to +2.5% from +2.1% and to the highest since March 2012. The core reading also came in a bit above market at +0.3% mom (vs. +0.2% expected), helped by rising goods prices, which pushed the YoY rate up one-tenth to +2.3% and so matching the post financial crisis high. So fairly impressive all round. As we refresh our screens the momentum for equities seems to have faded a bit in Asia this morning. While Chinese bourses have risen (Shanghai Comp +0.19%, CSI 300 +0.36%) along with the Hang Seng (+0.36%), Japanese equities are struggling for traction (Nikkei -0.57%) – not helped by the Yen (+0.28%) being the best performing currency this morning - while the Kospi (-0.10%) and ASX (-0.08%) are also both down, albeit modestly. Elsewhere the Dollar (-0.21%) and Treasury yields (10y yield -1.3bps) are a both a bit lower despite NY Fed President Dudley saying overnight that he expects the Fed to “snug up interest rates a little further in the months ahead”.

Moving on and there wasn’t a huge amount to report from President Trump’s meeting with a number of big US retail CEO’s yesterday. According to Reuters there was plenty of discussion about potential tax code revisions as well as infrastructure improvements, while a few CEO’s were said to have urged the President to oppose a proposal for a new border tax on imported goods. That meeting actually came after some bumper retail sales numbers in the US yesterday. During the month of January headline retail sales rose +0.4% mom (vs. +0.1% expected) while there was also a sizeable four-tenths of a percent upward revision to the December data. The ex-auto and gas reading also beat (+0.7% mom vs. +0.3% expected) as did the control group component (+0.4% mom vs. +0.3% expected).

It wasn’t all good news on the US data front yesterday though with industrial production reported as surprisingly falling in January (-0.3% mom vs. 0.0% expected) and capacity utilization edging down three-tenths to 75.3%. Manufacturing production did however nudge up +0.2% mom as expected while the NY Fed’s empire manufacturing index came in at 18.7 for this month which is up from 6.5 in January. Interestingly the Atlanta Fed cut their Q1 GDP forecast yesterday to 2.2% from 2.7% despite the positive retail sales surprise. That cut puts their forecast close to the 2% predicted by our US economists.

Over in Europe there wasn’t a huge amount to report data wise. In the UK the ILO unemployment rate printed at 4.8% in the three months to December which was unchanged while growth in average weekly earnings excluding bonuses slowed to +2.6% from +2.7%. In Sweden the Riksbank left policy unchanged as expected but was fairly (and surprisingly) dovish in their overall outlook.

In terms of markets in Europe yesterday we saw a similar weakness in sovereign bond markets with 10y Bunds edging up another 0.8bps to 0.370% and yields in the periphery also up between 1bp and 5bps. There was a similar positive performance for equity markets with the Stoxx 600 closing up +0.34% too. On that note, in his report “What to do when everyone is bullish?”, DB’s European equity strategist Sebastian Raedler argues that a combination of factors points to a period of consolidation ahead for European equities. He highlights that the equity market has rallied in line with rising global macro surprises, but that these are already in the top 5% of their historical range and have tended to fade back to zero when they were at current levels in the past (which would be consistent with a 5% pull-back in equities). Secondly, the fair-value P/E on his model has dropped to an 18-month low on the back of wider peripheral spreads, also pointing to 5% downside from current levels. Thirdly, a number of sentiment indicators have risen to peak levels, with the US bull / bear ratio, for instance, hitting a 30-year high last week. On the positive side, European earnings continue to recover (they are up 9% from their mid-2016 trough).

Staying in Europe and specifically in Greece, yesterday EU Commissioner Pierre Moscovici confirmed that the “will to get to solution is there” between Greece and its creditors and that talks have made progress but ultimately more steps are still needed. The Commissioner did however say that his goal was for an agreement at the February 20th Eurogroup meeting to conclude the parameters for a deal.

Before we wrap up, yesterday DB’s Marco Stringa also published a note that highlighted the details of ex-PM Renzi’s call for a leadership contest and noted its implications for the broader political and economic situation in Italy. He notes that in accelerating the leadership contest Renzi aims to regain control of a party divided into many factions, while leaving the door open to an early election in September. The probability of a June election has plummeted to about 15%, while the most likely dates now seem to be September 2017 (45% probability) followed by February 2018 (40%). However, while a PD leadership contest in the spring has changed the likely timing of the election, it does not affect the issue of the electoral law under which Italy will head into the next election. The two main options are (i) a new proportional system with a small majority premium for both Houses, or (ii) no compromise reached on amending the current electoral laws or (similarly) the current Lower House electoral law is extended to the Upper House but applied at a regional level. However, both alternatives would mean no significant structural reforms and a continuation of Italy’s sluggish economic growth. Given the present situation, the key events to monitor in the near term are the electoral law parliamentary debate which should start again on 27 February; a break-up of the PD (Probability of 33%) that would further increase political fragmentation; and the NPL systemic issue which has not yet been resolved. We should also highlight that a Dow Jones report said last night that Renzi doesn’t expect elections in June and that a September election is most likely – in line with Marco’s view.

Looking at the day ahead the only data due in Europe this morning comes from France where the Q4 employment data is out. The ECB minutes from last month’s Governing Council meeting are also due. In the US this afternoon we’ll get January housing starts and building permits data (expected to print at 0.0% mom and +0.2% mom respectively), initial jobless claims and the Philly Fed manufacturing survey for February. Away from the data we’re due to hear from both the EU’s Juncker and Moscovici at various stages, while the ECB’s Coeure speaks this afternoon and Fed’s Fischer (11.30am GMT) and Williams(8.10pm GMT) also.