Global stocks extended the longest winning streak since September, with Asia up 0.8% and Europe rising 0.7% while bonds and credit markets strengthened amid hopes that the European Central Bank will prolong quantitative easing, while optimism an Italian bailout of Monte Paschi will prevent European bank contagion, has pushed European financial stocks higher. US equity futures were little changed.

A note from Goldman's David Kostin overnight perhaps summarized it best: "Large-cap fund managers embrace Hope over Fear." For now hope is certainly in the driver's seat, leading European equities higher for a third day, with the Bloomberg World Banks Index trading at the highest level in more than a year. Bonds rose across the euro area, with the yield on the benchmark German bund falling from the highest in almost three weeks, while perceived investment-grade credit risk fell for a seventh day, the longest run since May. The pound fell after an unexpected decline in manufacturing output.

The Stoxx Europe 600 Index added 0.7% as of 10:46 a.m. in London as mining companies and banks rallied. Credit Suisse AG gained 8 percent, while Banca Monte Paschi rose 7.1 percent after La Stampa reported Italy will ask for a 15 billion euro ESM loan for the lender, among other banks.

Investors' concerns were that a defeat for Renzi in a referendum on constitutional reforms could further undermine faith in the European Union - following Britain's decision to quit the bloc - as well as confidence in the euro currency. Market reaction to Renzi's defeat and his resignations was relatively muted, partly as a consequence of a pledge by the ECB to buy Italian government debt if markets became unsettled. "Despite the fact that the probability of early elections has risen, the market is focusing on the banking sector and the fact the government seems to be showing more urgency in dealing with that problem," Mizuho strategist Antoine Bouvet said.

"People had gone into the referendum with a very pessimistic view and I think the last five years have taught us that, as far as the euro is concerned, political issues often don't have a lasting impact," DZ Bank currency analyst Sonja Marten said.

Ahead of tomorrow's ECB announcement (previewed here), investors are positioned for an extension of monthly asset purchases of 80 billion euros ($86 billion) past March even as uncertainty lingers that Draghi may inject an element of hawkishness and hint at tapering or even ending QE at some point in the future. With overnight volatility on the euro at the highest since the U.K.’s vote to leave the European Union in June, traders are hedging bets that ECB President Mario Draghi will carry on with accommodative policies. Last year he defied weeks of anticipation for more support with underwhelming stimulus that sent bond yields and the euro surging.

“The base expectation is that we are going to get an extension of the stimulus program by another six to nine months,” said Michael Hewson, a market analyst at CMC Markets in London. “Broad sentiment is starting to turn around -- we are getting some repositioning for a better 2017 in terms of growth.”

Japan’s Topix index gained 0.9% in Tokyo as the MSCI Asia Pacific Index added 0.4%. Futures on the S&P 500 Index were little changed after the measure posted a 0.3% advance on Tuesday. The Dow Jones Industrial Average rose 0.2 percent to close at another record.

Brent and WTI rose after the Kremlin said Russian President Vladimir Putin personally agreed to output cuts with the nation’s oil companies. Brent above $54/bbl, WTI above $51/bbl.  “The headlines that Putin personally agreed to the oil output cut sent prices higher,” says Ole Hansen, head of commodity strategy at Saxo Bank. “This adds to the pressure on OPEC to deliver their own cuts.” “The market is taking that at face value and looking for at least half of the 600k b/d non-OPEC cut to be assured.” The one-minute trading volume in WTI hit day-high >1,900 lots at 9:17am London time, shortly after Russia headlines.

One of the biggest movers in the currency markets was the Australian dollar, down 0.4 percent after data showed the Australian economy shrank by 0.5 percent, its biggest contraction since 2008, in the third quarter. Australian stocks, however, closed 0.9 percent higher in anticipation of more fiscal and monetary stimulus. While rate futures imply scant chance of a Reserve Bank interest rate cut in the coming months, prospects of a hike vanished.

China's foreign exchange reserves fell by more than expected last month to $3.05 trillion, their lowest since 2011, the central bank said. The yuan currency last stood at 6.8850 to the dollar compared to a mid-point of 6.8808 set by the central bank. The currency is down 5 percent so far this year.

In rates, Germany’s 10-year bond yield fell two basis points to 0.34 percent, after climbing to 0.38 percent, the highest since Nov. 14. The government plans to sell 3 billion euros of 2018 securities. Italian sovereign debt securities due in a decade advanced for a second day, almost erasing losses suffered in the aftermath of Sunday’s referendum. The nation’s 10-year bond yield fell four basis points to 1.91 percent, adding to a four-basis point drop from Tuesday. Portugal’s 10-year bond yield reached the lowest level since Nov. 15. Treasury 10-year note yields were little changed at 2.37 percent. The Markit iTraxx Europe Index of credit-default swaps on investment-grade companies dropped one basis point to 74 basis points, the lowest since Nov. 9. A gauge of swaps on junk-rated companies fell to a three-month low.

Market Snapshot

• S&P 500 futures up less than 0.1% to 2211
• Stoxx 600 up 0.7% to 347
• FTSE 100 down less than 0.1% to 6742
• DAX up 0.1% to 10698
• German 10Yr yield up less than 1bp to 0.34%
• Italian 10Yr yield down 7bps to 1.92%
• Spanish 10Yr yield down 6bps to 1.5%
• S&P GSCI Index down 0.1% to 389.6
• MSCI Asia Pacific up 0.8% to 136
• Nikkei 225 up 0.5% to 18361
• Hang Seng up 0.8% to 22675
• Shanghai Composite down 0.2% to 3200
• S&P/ASX 200 up 0.5% to 5429
• US 10-yr yield down 1bp to 2.38%
• Dollar Index unchanged at 100.09
• WTI Crude futures down 0.4% to $51.59
• Brent Futures down less than 0.1% to $54.91
• Gold spot up 0.1% to $1,172
• Silver spot up 0.4% to $16.82

Global Headlines

• Credit Suisse Steps Up Cost Cuts as Revenue Eludes CEO Thiam: Lowers target for operating costs by 1 billion francs
• Linde Chairman Said to Pitch Praxair Merger Plan to Board: Jobs in Germany said part of deliberations about Praxair plan
• JPMorgan, HSBC, Credit Agricole Fined $521 Million Over Euribor: Banks fined by the European Commission for rigging the Euribor benchmark
• Shell and Total Said to Sign Initial Oil Deals With Iran: Deals for S. Azadegan, Yadavaran, Kish fields, oil official says
• Lilly Threatens Sanofi’s Dominance in Insulin With Knockoff Drug: Novo sees U.S. drugmaker as its ‘most formidable’ rival ahead
• Blackstone to Buy Solvay’s Acetow Business for $1.1 Billion: Buyout firm agreed to pay about seven times earnings for a business supplying materials for cigarette filters
• Western Digital in Samsung License Deal, Boosts 2Q Forecast: CFO Mark Long spoke in analyst day presentation
• FirstEnergy Seeks to Sell $885 Million Worth of Power Plants: AE Supply unit looking to sell gas-fired, hydro power plants
• Exxon Sees 175 Million Ton LNG Shortage by 2030 Without Spending: Financing challenges seen for new LNG developments
• Pfizer, Flynn Fined Record $113 Million Over Epilepsy Drug: U.K. CMA imposes record fines for abusing dominant position

Asian stocks markets traded mostly higher following a positive lead from Wall St where strength in financials and telecoms underpinned sentiment and resulted in the Dow posting a second consecutive record close. ASX 200 (+0.9%) outperformed despite a poor GDP release as the recent slew of weak data keeps prospects of future easing alive, while Nikkei 225 (+0.7%) was also higher led by SoftBank shares after reports it is to invest USD 50bIn in the US and create 50,000 US jobs. Markets in China conformed to the tone, although upside in the Shanghai Comp (+0.7%) was capped after the PBoC conducted a poor liquidity operation for the third consecutive day, while Jakarta stock markets were negative after Indonesia was hit by a magnitude 6.5 earthquake. 10yr JGBs traded with marginal gains despite the mostly heightened risk appetite in the region, as the BoJ were present in the market for over JPY 1.3trl under its bond buying program, while participants also digested unwaveringly dovish comments from BoJ Deputy Governor Iwata. PBoC injected CNY 30bIn 7-day reverse repos, CNY 20bIn in 14-day reverse repos and CNY 20bIn in 28-day reverse repos. PBoC set the mid-point at 6.8808 (Prey. 6.8575). BoJ Deputy Governor Iwata stated that the BoJ will continue to expand monetary base, while he also added that they will not hesitate to take further measures if required and that yield control can only be achieved by large JGB buying by the central bank.

• Asian Top News
• Hong Kong Faces Housing Risks as Fed Tightening Looms, IMF Says: Stretched property valuations mean Hong Kong’s economy is vulnerable if interest rates rise faster than expected
• Investors Lose 99% as Hong Kong Rights Offerings Go Badly Wrong: Repeat rights issuers under scrutiny as bourse link expands
• RBA Will Look Through Australia’s Economic Shocker, Traders Bet: Swaps still see more than 75% chance RBA on hold through 2017
• Chinese Regulators Fined Medtronic $17 Million for Price- Fixing: Penalties for fixing prices with dealers extending to 2014
• Jho Low Family Digs in to Stop 1MDB Asset Seizure by U.S.: Relatives seek to replace trustees who refused to fight U.S.
• Soros Alumnus Shiozumi Says Bears on Abenomics Have It All Wrong: Shiozumi, T. Rowe Price’s Ciganer see Japan stock rally

European stocks trade in positive territory this morning (Euro Stox: +1.2%) as Santa gives an early Christmas present to Banca Monte Paschi (+7.9%) in the form of source reports of the state taking a controlling stake in the Co. for EUR 2bIn as soon as this weekend. As such, the Italian bellwether lifted sentiment for financials across the continent. Material names were also among the best performers, while energy names outperformed amid positive reports suggesting Russia could be on board with the OPEC production cuts. Elsewhere, fixed income markets remain relatively muted, with the German 10Y continuing to hover just above the 160 level and trading in a tight range throughout the morning.

European Top News

•    Ahold Delhaize Plans $1.1 Billion Buyback as Cash Piles Up: Europe’s top retailer forecasts 23% increase in free cash flow
•    PostNL Rejects New Bpost Takeover Bid on Governance Concerns: Belgian state’s role prompted Dutch authorities’ objections
•    U.K. Manufacturing Unexpectedly Drops Most in Eight Months: Total production falls, led by oil and gas extraction

In currencies, the Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, was little changed. The pound dropped 0.6 percent to $1.2597 after industrial production in October fell 1.3 percent, driven by a slide in oil and gas extraction. The euro was little changed at $1.0726 after posting a 0.4 percent drop on Tuesday. Overnight volatility in the common currency versus its U.S. counterpart jumped to 23 percent, the most since June 23, based on closing prices. The Australian dollar traded as low as 74.17 U.S. cents before paring its drop to 0.1% after the statistics bureau said third-quarter gross domestic product decreased 0.5 percent from the prior quarter, the first contraction since 2011. The Reserve Bank of Australia on Tuesday kept interest rates unchanged and Governor Philip Lowe said “some slowing in the year-ended growth rate is likely.”

In commodities, oil traded near $51 a barrel amid speculation a production boost from U.S. shale producers will counter the first output cuts from OPEC in eight years. Copper gained 0.6%, recouping an earlier decline. Steel rebar in China climbed with iron ore to the highest in more than two years, as reports of a crackdown on illegal plants spurred speculation that the government is stepping up supply-side reforms. Spot gold was little changed at $1,171.62 an ounce.

Looking at the day ahead, we got the October industrial and manufacturing production reports for the UK, which both missed sharply printing -1.1% and -0.4% YoY, on expectations of a 0.5% and 0.2% rebound respectively. It’s fairly quiet in the US where we'll get the October JOLTS job openings report along with the October consumer credit print. China released November foreign reserves which showed a surprisingly steep drop of $70 billion, the biggest since January. We’ll also get central bank decisions today from the Reserve Bank of India, which unexpectedly kept rates unchanged even as it warned the economy would slow down.

US Event Calendar

• 7am: MBA Mortgage Applications, Dec. 2 (prior -9.4%)
• 10am: JOLTS Job Openings, Oct. est. 5.50m (prior 5.486m)
• 10:30am: DOE Energy Inventories
• 3pm: Consumer Credit, Oct., est. $18.650b (prior $19.292b)

DB's Jim Reid concludes the overnight wrap

Although there is little uncertainty in the alpine weather forecast this morning, I must admit to being quite confused by financial markets this week. In our 2017 credit outlook we suggested that we like European financial over non-financial credit as the outlook has changed markedly since the sector's nadir in late summer where it priced in almost permanent negative yields and flat yield curves. Rising yields and a steeper yield curve partly due to Kuroda's new policy framework helped. President-elect Trump has since given this trade a further boost with additional hopes on easier regulation ahead. However we've been struggling with reconciling our optimistic view with our thoughts that a 'no' was likely in the Italian referendum and a period of turbulence possible for the sector given the country's banking sector problems. We thought it would be more difficult to solve them quickly and safely with a 'no'. However we decided to ride out this expected volatility and take any near-term stresses and losses that this would entail. Given yesterday's price action we needn't have even bothered getting stressed as European financials saw a remarkable day in spite of (or perhaps strangely because of) the speculation of imminent government intervention in the sector that might be necessary after the 'no' vote.

Indeed the Stoxx 600 Banks index rallied to the tune of +5.61% yesterday for its biggest one-day gain since April. The main driver was that remarkable rebound for Italian Banks. Unicredit (+12.81%), Mediobanca (+9.94%), Unione di Banche Italiane (+9.70%), Banco Popolare di Milano (+9.03%), and Intesa Sanpaolo (+8.16%) all more than wiping out the previous day losses. With those moves the FTSE Italia All-Share Banks index rallied +8.97% and had its best day since July while the FTSE MIB closed up +4.15%. That compares to gains of +0.97% for the Stoxx 600 and +0.34% for the S&P 500.

It was much the same in credit markets. While the iTraxx Main index tightened an impressive 4bps, more eye catching were the moves for the iTraxx Senior and Sub Financials indices which ended the day 7bps and 7.5bps tighter respectively. Within the Sub-Fins constituents, spreads for Unicredit, Generali, Intesa and Mediobanca were 18bps, 16bps, 15bps and 7bps tighter respectively. There was a similar outperformance for BTP’s too where 10y yields ended the day just over 4bps lower at 1.940% which compared to a move of 4bps higher for 10y Bund yields. US Treasury yields on the other hand were little changed around 2.389%.

Although the above suits our sector view I'm still scratching my head this morning explaining the strength of the move given the week's news. All help very welcome with aggressively short covering perhaps a big catalyst. For now then the political focus in Italy turns over to the elections and as DB’s Marco Stringa summarised yesterday in his report, the key question is not ‘when’ Italy goes to elections but ‘how’. In other words which electoral law. Since the weekend this has now become a focal point for investors and yesterday’s report from Marco has helped to summarise some of the key Q&A’s on the more specific details of the process.

Away from all things Italy related there was an important development to note on the Brexit front last night. Yesterday PM May accepted a Labour Party motion which will be debated in the House of Commons today, calling on the government to publish its plans for the leaving the EU prior to triggering Article 50. According to the BBC as many as 40 Tories were said to be prepared to support the Labour Party in demanding more parliamentary scrutiny of the government’s plans. One to watch.

To the latest in Asia now where for the most part bourses in Asia have strengthened and so following the generally positive sentiment over the last 24 hours. Indeed when will we start to hear talk of a Santa Claus rally? The Nikkei (+0.54%), Hang Seng (+0.35%), Shanghai Comp (+0.10%) and ASX (+0.87%) in particular are all firmer although the Kospi (-0.10%) is a touch weaker. Those moves have come despite WTI Oil retreating a further -0.65% this morning which follows the -1.66% decline yesterday and the first down day since the OPEC meeting last week. Meanwhile in FX markets the Aussie Dollar has weakened close to half a percent following a much weaker than expected Q3 GDP print (-0.5% qoq vs. -0.1% expected). In fact it was the first negative quarterly contraction since 2011 and the joint worst since 2008.

Moving on. Just as you might have expected primary issuance to slow down into year end, it was interesting to note the relatively busy day for issuance in the HY energy space yesterday. Indeed Chesapeake, Matador Resources, Rowan Companies and Parsley Energy priced deals after Cheniere Energy had priced a decent sized deal on Monday. The timing follows a decent rally in spreads following the OPEC meeting. Indeed based on DB pricing to the close on Monday, cash spreads for US HY energy are 32bps tighter at 510bps since OPEC. In fact that is now the tightest spread since November 2014 after spreads peaked above 1900bps back in February.

Elsewhere, with regards to the data yesterday, in the US the trade deficit was reported as widening to $42.6bn in October from $36.2bn in the month prior. That was as a result of a -1.8% mom drop in exports while imports were reported as rising +1.3% mom. Meanwhile factory orders rose a slightly above market +2.7% mom in October (vs. +2.6% expected) while durable goods orders were revised down to a still strong +4.6% mom from +4.8% in the initial flash estimate. Elsewhere nonfarm productivity was confirmed at +3.1% qoq in Q3 while unit labour costs were revised up to +0.7% qoq from +0.3%. Finally the IBD/TIPP economic optimism reading for December was reported as rising 3.4pts in December to 54.8. That’s actually the highest reading since November 2006. The Atlanta Fed did downgrade their Q4 GDP forecast to 2.6% from 2.9% yesterday although that reflected the employment and auto sales data last week.

As far as the data was concerned in Europe, Q3 GDP growth for the Euro area was confirmed at +0.3% qoq although the annual rate was revised up by one tenth to +1.7% yoy which left it unchanged versus Q2. The most eye catching print in Europe yesterday was the October factory orders reading in Germany where orders were reported as rising a bumper +4.9% mom (vs. +0.6% expected) and so helping to raise the YoY rate to +6.3% from +2.9%. That was the largest monthly jump since July 2014 although our European economists did warn that a combination of several factors likely overstates the underlying improvement. This includes a very large workday adjustment, the impact of the Paris autoshow during the month, and a post Brexit recovery.

In terms of the day ahead, this morning in Europe the early data comes from Germany where the October industrial production data is due (expected to rise +0.8% mom). Shortly after we’ll get the October trade data out of France before we then get the Halifax house price index data for the UK for last month. We’ll then get the October industrial and manufacturing production reports for the UK where both are expected to have risen +0.2% mom. It’s fairly quiet in the US this afternoon. We’ll get the October JOLTS job openings report along with the October consumer credit print. China is also due to release November foreign reserves data at some stage today. We’ll also get central bank decisions today from the Reserve Bank of India (expected to cut by 25bps) and Bank of Canada (expected to hold).