There’s seemingly no stopping the equity side of the “Trumpflation” trade in what may be developing into an epic year end blow-off top. The euphoria which took the S&P 500, Russell 2000 and the Transports to all-time highs yesterday, and the Dow to less than 500 points away from 20,000 carried over into Asian stocks (+0.8%) as they followed bullish trend, while European stocks rose for a fourth day. The exception was Shanghai, despite better-than-expected Chinese trade data, which suggested strengthening domestic and global demand, and thus a lower likelihood for future stimulus. November exports rose 0.1% (October -1.4%) year-on-year versus the consensus forecast of -5.0% and imports rose 6.7% (October -7.3%) versus consensus of a 1.3% fall.

As the title suggests, all eyes are on Draghi and the ECB which in very soon will provide a glimpse into how the ECB's QE program will continue into 2017: “Today’s ECB meeting is expected to settle on an extension of asset purchases beyond the March 2017 end-date - perhaps for a further six months - but the decision to extend exceptional monetary support may not be unanimous,” Davy Research’s David McNamara writes in note. “Mario Draghi may signal the ECB’s intention to begin tapering when conditions allow, although explicit forward guidance is unlikely at this point. The rhetoric rather than the policy may therefore be the most interesting element of the announcement.”

Needless to say, the market has been optimistic that anything Draghi says will be favorable for risk assets. A good summary of prevailing sentiment came from Ayako Sera, strategist at Sumitomo Mitsui, who told Bloomberg that globally, “we’re seeing a euphoric state continue, and investors will also be heading into the Christmas break soon, so we’re seeing some final moves to get into the market or close off positions.” 

Markets remain optimistic that Draghi will extend the ECB’s €80BN a month of bond buying at today’s ECB meeting, although technical difficulties associated with the bond purchases and new economic forecasts could complicate the ECB’s justification. Walking this tightrope will present a challenge for Draghi, with memories of last December’s debacle still in the mind (when market expectations of “more” were temporarily dashed, sending the Euro soaring).

Indeed, perhaps getting a case of cold feet, bonds dipped in the 11th hour on concern Mario Draghi may fail to deliver after all on stimulus

that’s already priced into the market. The euro gained for a second day. Italian bonds retreated after a rally sent 10-year yields to a three-week low ahead of Thursday’s European Central Bank meeting where it may announce it will prolong unprecedented quantitative easing.

“The market is just in general a little bit nervous whether Draghi will actually get this extension of QE through and whether it will be the same amount as before,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “So we see a bit of anxiety ahead of the decision but it has been quite volatile. The liquidity right now is not great. A lot of people are sidelined, so I don’t think it takes big trades to move the market.”

Perhaps driven higher by worries of a surprise tightening hint, the euro approached a one-month high against the dollar on a closing basis. A gauge of European stocks moved higher toward a three-month peak while S&P 500 Index futures fluctuated after closing at a record high.European stocks opened firmer this morning, led by the DAX (+0.50%) and Spain’s IBEX (+0.5%). US equity futures are marginally higher (+0.07%) in early European trade.

The dollar index (DXY) briefly dipped back beneath 100.0 level as the Yen continued to recover from its recent low of 114.72. The sagging dollar also helped to revive gold after its recent trip to the woodshed, which saw it fall from $1,305/oz to a low of $1160/oz. It was trading at $1,176/oz. in the European open.   

Bond markets in Asia Pacific were generally stronger, led by Australia and South Korea, although the yield on 10-year JGBs was 1.4bp higher at 3.6bp. European bond markets are opening up weaker, but only marginally with yields up 1-2bp. Following the British Parliament’s vote to back PM Theresa May’s decision to trigger Brexit by 31 March 2017, Gilts are bucking the trend. The yield on the 10-year Gilt is 5.8bp lower at 1.354%. The yield on 10-year Italian bonds climbed seven basis points to 1.95 percent at 10:45 a.m. in London. The euro advanced 0.3 percent to $1.0790. The Stoxx 600 increased 0.3 percent after trading little changed and S&P 500 futures added less than 0.1 percent. Oil traded near $50 a barrel in New York. Spain’s 10-year bond yield increased five basis points to 1.47 percent and Germany’s was three basis points higher at 0.38 percent. Yields on Treasuries due in a decade rose three basis points to 2.37 percent, after falling five basis points on Wednesday.

Market Snapshot

• S&P 500 futures flat at 2,232
• Stoxx 600 up 0.2% to 348.3
• FTSE 100 up 0.1% to 6907.8
• DAX up 0.5% to 11,040
• German 10Yr yield up 0.7bp to 0.345%
• Italian 10Yr yield up 3bp to 1.91%
• Spanish 10Yr yield up 3bp to 1.45%
• S&P GSCI Index down 1% to 383.4
• MSCI Asia Pacific up 0.8% to 137.1
• Nikkei 225 up 1.5% to 18,765.5
• Hang Seng up 0.3% to 22,861
• Shanghai Composite down 0.2% to 3,215
• S&P/ASX 200 up 1.2% to 5,543.6
• US 10-yr yield up 1bp to 2.35%
• Dollar Index down 0.2% to 100.0
• WTI Crude futures up 0.1% to $49.82
• Brent Futures flat to $53.07
• Gold spot up 0.1% to $1,176.6
• Silver spot flat at $17.12

Global Headlines

• Europe Stocks Advance as Global Stocks Rally Before ECB Decision           
• Russia Sells $11 Billion Stake in Rosneft to Glencore, Qatar                     
• Draghi’s Stimulus Message Set to Be Scanned for Ultimate QE Plan          
• Samsung Said to Plan All-Screen Design in Galaxy S8 Phones                   
• Volkswagen Engineers Change in the Eye of the Diesel Storm                    
• UniCredit Sells Pekao Stake for $2.6 Billion to Lift Capital                        
• Monte Paschi Asks ECB for More Time to Finish Capital Hike                      
• Sports Direct’s Ashley Waits on Corporate Plane as Profit Slumps             
• U.K.’s Capita to Sell Units, Cut 2,000 Jobs as Brexit Weighs                      
• Glencore Dealmaking King Returns With Wager on Oil and Putin                
• Kremlin Gold Paves Way to Billionaire Fortune for Tito’s Valet

Looking at Asian stocks, the MSCI Asia Pacific Index gained 0.8% to 137.09, its third successive rise. The KOSPI led the way (+1.97%), followed by the Philippines (+1.54%) and the Nikkei (+1.45%). The Shanghai Composite was the only faller, by a marginal 0.21%. In Japan, the TOPIX index closed at a 2016 high of 1512.7 with Financials and Utilities seeing the strongest gains. The resurgent Softbank gained a further 5.5% (highest level for two years and 13% up on the week) in the wake of Chairman Masayoshi Son’s meeting with Donald Trump. Chinese stocks were mixed despite the solid trade data with gains in Financials and Telecoms offset by losses in Industrials and Tech. The strength in Financials was also evident in Australia with ANZ 2.53% better. Rio Tinto was also a strong market, rising 3.12% on optimism regarding dividend prospects.

Asia Top News

• China Exports Snap Seven-Month Losing Streak as Imports Surge                               
• Singapore Suffers Another Market Disruption as Futures Open Late                             
• India Outflow: Deutsche Bank Says You Ain’t Seen Nothing Yet                                   
• Michael Jordan Scores Victory in Legal Battle for Chinese Name                                 
• China Wraps Up 26th Straight Car Sales Record With Month to Go                                 
• China’s Bouyant Appetite for Iron And Copper Bodes Well for 2017                             
• Macau Gaming Watchdog Says Revenue Growth May Revive in 2017                             
• Faster Frappuccinos in China as Starbucks Joins WeChat Payments                             
• In Modest India, This Startup Hawks Edible Body Paint, Lingerie                                 
• China Pays Record Yields on Dim Sum Bond Sale as Yuan Sinks                                  

European stocks are trading in positive territory, albeit marginally, ahead of the ECB. As Bloomberg notes “Traders are pinning their hopes on Mario Draghi to deliver a so-called Santa rally that has eluded European stocks for the past two years.” The European Banks sector (SX7E) is 0.5% higher at 115.1 with Monte Paschi gaining 3.9%. The ECB’s Supervisory Board is expected to discuss extending the capital raising plan – from 31 December 2016 to 20 January 2017 - at today’s meeting. Ericcson’s shares were down slightly after management updated investors on its cost and efficiency programme. The programme is proceeding ahead of plan which is front-loading more of the costs into 2016. In the UK, Sports Direct, the scandal plagued sports retailer, saw its shares fall 7% after it reported a 57% fall in underlying pre-tax profits to £71.6m and a pause in its buyback programme.

Europe Top News

• European Stocks in Longest Rally in 2 Months With ECB in Focus                                  
• UniCredit Sells Pekao Stake for $2.6 Billion to Lift Capital                                          
• Deutsche Bank Records Said to Show Silver Rigging at Other Banks                            
• Draghi’s Stimulus Message Set to Be Scanned for Ultimate QE Plan                             
• European Stock Traders Look to Draghi to Break Santa Curse                                      
• U.K. House Prices Rise as Supply Fails to Match Demand Growth                                 
• Deutsche Bank May Have Rigged Index in Paschi Deal, Audit Shows                            
• Fingerprint Shares Plunge After Company Cuts Sales Guidance                                    
• At Volkswagen, Engineering Change in the Eye of the Diesel Storm                             
• Glencore Dealmaking King Returns With Wager on Oil and Putin                                   

In currencies, the DXY continued to slip back from its 24 November 2014 high of 101.93 and was trading at 100.11 as European markets opened. The pause in the surge in US Treasury yields helped the Yen (via carry trades) to claw back further ground to 113.60 after its recent sharp fall. The Euro was little changed at 1.076 as markets await Draghi’s comments following today’s ECB policy decision. CNY is essentially flat at 6.879, although we might have expected some modest strength after today’s data. 

In commodities, the Dalian iron ore futures contract rose 1.0% to CNY634.5 after China announced that November 2016 imports jumped to the third highest on record (+12% year-on-year and 14% month-on-month). Oil prices are basically unchanged with WTI struggling to cling on to $50/bbl at $49.92/bbl. The platinum price, along with other precious metals, is clawing back some of its recent sharp losses and last traded at $949.0/oz (versus a recent low of $900/oz. on 1 December 2016. Glencore and Qatar’s sovereign wealth fund have agreed to buy a 19.5% stake in Russian oil producer, Rosneft, for $11.0bn.

Looking at the day ahead, the main event is the ECB policy decision due at 1.45pm Frankfurt time (7.45am EST). Mr Draghi will be speaking 45 minutes afterwards. Despite some hints to the contrary, the consensus expectation is that the Eur80bn QE programme will be extended by a further 6 months to September 2017. However, some amendments to the programme are possible. For example, there could be a reduction in the Eur80bn per month volume, the deposit rate yield cut-off could be removed and the ECB could increase the maximum amount it can buy of any individual bond issue. Furthermore, the ECB will publish economic forecasts for 2019 for the first time today. A 2019 CPI forecast close to the 2.0% target might complicate the justification for extending the existing QE programme. 
On the US Events Calendar, we have Weekly Jobless Claims which are expected to come in at 257k versus last week’s 268k.

Global Event Calendar

• 7:45am: ECB Refinancing Rate decision, est. 0% (prior 0%)
• 8:30am: Initial Jobless Claims, Dec. 3, est. 257k (prior 268k); Continuing Claims, Nov. 26 (prior 2.048m)
• 9:45am: Bloomberg Consumer Comfort, Dec. 4 (prior 44.9)
• 10am: Freddie Mac mortgage rates
• 10:30am: EIA natural-gas storage change
• 12pm: Household Change in Net Worth, 3Q (prior $1.075b)

DB's Jim Reid concludes the overnight wrap

Given the size of the Santa Claus rally these last couple of days one wonders where markets would be today if the Italian referendum had actually seen a 'yes' vote. It seems the market was short financials and Italian risk going into the vote and when nothing much happened immediately after we've seen a very big squeeze. Italy’s FTSE MIB rose +2.10% yesterday (+6.34% over two days) and once again outperformed other benchmarks across Europe including the Stoxx 600 +0.91% (+1.88%) and the DAX +1.96% (+2.83%). It’s all about the banks however and while the Stoxx 600 banks index edged up an impressive +2.46% (+6.94%) yesterday the FTSE Italia All-Share Banks index rallied another +4.46% (+13.83%). The positive sentiment didn’t stop in Europe however as we saw both the Dow +1.55% (+1.73%) and S&P 500 +1.32% (+1.66%) rally to fresh all time highs.

It’s a similar story in credit markets where yesterday we saw the iTraxx Senior Fins index tighten another 2bps (-9bps over two days) and the Sub Fins index rally -12bps (-19bps). Picking out the Italian constituents, within the Sub Fins index yesterday we saw Unicredit (-18bps), Generali (-16bps), Intesa (-15bps) and to a lesser extent Mediobanca (-3bps) storm tighter. In doing so it takes the two-day move for those names now to -36bps, -32bps, -30bps and -11bps respectively. Much like the performance across equity markets, US credit indices surged tighter too with CDX IG another 1.5bps (-3.9bps) tighter. Meanwhile 10y BTP yields were also down another 5.7bps yesterday at 1.883% and so meaning yields are 10bps lower in the last two days.

I find it ironic that the market has been desperate for some kind of private sector recapitalisation for months and stressing for sometime about whether this could get done, especially if we had a 'no' vote at the weekend. Ironic because the market response in the last couple of days has indicated that a government/EU bailout is suddenly even better news. The latest twist appears to be the ESM aid story which came out early yesterday morning. While it was subsequently downplayed by the Italian Treasury, La Stampa newspaper reported that the Treasury was preparing to apply for a loan, suggested to be worth €15bn, from the ESM to support the country’s banking system. The positive aspect of the report was that it referred to multiple banks suggesting a possible systematic solution rather than specifically targeting one financial lender. Clearly it would also send a positive signal about European institutions’ willingness to support as well. Remember that a similar bailout from the ESM to Spain was made in 2012. So while it was downplayed, we’d note that there’s no smoke without fire so it’s worth following.

Separately there was also some focus on an FT report that Italy had requested more time from the ECB’s supervisory arm (specifically to mid-January) to complete a private recapitalization. If that wasn’t enough then late in the evening we got the announcement that rating agency Moody’s had revised the outlook on Italy’s Baa2 rating to Negative from Stable post the rejection of the referendum.

Plenty of moving parts then. Today’s focus however will switch over to the outcome of the ECB Governing Council meeting. As a reminder, our economists expect the ECB to announce a 6 month extension of the current €80bn QE programme from March 2017 to September 2017. They also expect this to be complemented by a move to improve the supply of eligible bonds, for example, the removal or softening of the yield floor. This would as a result facilitate a steeper yield curve. An extension seems to be the wider consensus view in the market too. A Bloomberg survey conducted November 29th to December 2nd found that 89% expect the ECB to take action today and 64% to extend QE at the current pace. 86% expect the QE parameters to be changed.

Ahead of the meeting, in Asia this morning the positive sentiment from Europe and Wall Street yesterday has continued into this morning. The Nikkei (+0.82%), Hang Seng (+0.65%), Kospi (+1.24%) and ASX (+1.23%) are all up. The exception is China where bourses are unchanged despite export data surprising to the upside. Boosted by the weakening currency, exports in USD terms rose +0.1% yoy in November, bettering expectations (-5.3% expected) and up from -7.3% in October. Exports in CNY terms were also up more than expected (+5.9% yoy vs. -1.0% expected; -3.2% expected). A surge in imports however has seen the trade surplus in both USD and CNY terms shrink. Meanwhile in Japan late last night Q3 GDP was revised down at the final reading from +0.5% qoq to +0.3%.

With regards to the rest of the politics based newsflow yesterday, as had been expected UK PM Theresa May won the backing of her fellow MP’s to start the process of the UK leaving the EU by the end of March next year but only after allowing for Parliament to scrutinize the details of her plan first. How much of her negotiation tactics she gives away though remains to be seen. Meanwhile in France the chief of the National Front and presidential election candidate, Marine Le Pen, confirmed in a televised interview that should would call for a referendum on France’s EU membership. Across the pond, President-elect Trump vowed that he would ‘bring down drug prices’ which weighed unsurprisingly on the healthcare sector yesterday. Indeed the Nasdaq Biotech (-2.91%) index was the notable underperformer.

Moving on. The data continues to take a bit of a backseat but for completeness, in the US yesterday we learned that JOLTS job openings in the month of October declined to 5.53m (vs. 5.50m expected) from 5.63m in the month prior. Despite declining, openings continue to hover around elevated levels however while the details revealed that both the job openings rate and quits rates held steady at 3.7% and 2.1% respectively. Meanwhile, consumer credit rose by a seasonally adjusted $16.0bn in October versus the prior month, although that was a little less than expected (vs. $18.7bn expected). That put the annual growth rate at +5.2% in October which is down from +7.1% in the month prior.

Over in the UK yesterday there were some notable misses in the October industrial and manufacturing production reports. Industrial production printed at -1.3% mom for the month (vs. +0.2% expected), with the fall largely driven by the energy sector and which has had the effect of lowering the YoY rate to -1.1% from +0.4%. Manufacturing production was also down (-0.9% mom vs. +0.2% expected) and as a result also dragged the YoY rate into negative territory at -0.4% from +0.1%. Sterling (-0.43%) edged down for a second consecutive day following that data. Meanwhile in Germany we learned that industrial production rose +0.3% mom in October which was also a miss versus the consensus (+0.8% expected). Our economists in Europe noted that the data corroborates their argument that that the massive rise in October orders strongly overstated underlying demand.

Looking at the day ahead now, this morning in Europe the only data due out is from France where we’ll get the final revision to Q3 non-farm payrolls and also the Bank of France business sentiment reading. Thereafter all eyes turn to the aforementioned ECB meeting at 12.45pm GMT. It’s a quiet afternoon for data in the US with the only release due being the latest weekly initial jobless claims print.