Following the torrid surge in crude in the past 4 days, overnight oil price have taken a step back - if only until the "newer normal" 2:30pm ramp into the Nymex close -  with both Brent and WTI down nearly 3%, with yesterday's latest API inventory data showing another massive crude build when it was released after the close, which in turn is pressuring futures modestly if decidedly, and not even the surprise PBOC RRR-cut (which many had seen as likely if only in advance of the liquidity sapping Chinese New Year) which hit the tape an hour ago managed to push ES into the green, at least for now. Curiously, not even the now standard low volume levitation in the USDJPY in recent trading has had any impact on US futures, which appear to have found a new correlation regime for the time being, one which tracks what oil does more than any other asset class.

As noted above, the main reason for the oil decline is that yesterday API data showed U.S. crude inventories up 6.1m bbl last wk, including 2.6m at Cushing. Later today we get EIA data at 10:30am ET, which has a Bloomberg median est. +3.25m. "Limiting the recent price increase was yesterday’s weekly oil inventory data from API, which showed another large build in crude; though not as huge as previous week,” according to Global Risk Management oil risk manager Michael Poulsen. "Distillates and gasoline also showed builds, now the official EIA report will be watched closely for confirmation of this trend."

As a result Brent and WTI futures have come off their highest levels since January 2nd, to retrace after WTI crude was seen up as much as 24.5% and Brent 24.72% from Thursday’s lows. Overnight WTI fell 2% following lacklustre Chinese data and API's crude inventories continuing to show a glut in supply. Elsewhere, precious metals found support from the PBoC announcement to cut RRR, with copper also benefitting on the potential for higher demand from the world’s largest copper consumer.

Sure enough, European equities trade in the red, dragged lower by the session’s laggard, the energy sector, with indices weighed on by falling oil prices after recent highs. As has been the case over the last week, the market was also looking closely at Greece, with PM Tsipras meeting EU’s Juncker while finance minister Varoufakis had a `fruitful` exchange with ECB’s Draghi, with Varoufakis stating that Syriza does not accept the logic of Troika but that does not mean they cannot cooperate. Varoufakis also stated that Greece has started talks with the IMF over plans to swap debt for growth linked bonds, however markets did not find strength from these broadly positive comments and remain unable to shake off the effects of falling oil prices.

Over in Asia, equity markets trade higher across the board led by energy stocks amid the ongoing rebound in oil prices which subsequently led to a positive Wall Street close (S&P 500 +1.4%). Nikkei 225 (+1.98%) and Hang Seng (+0.5%) also rose, as participants shrugged off poor HSBC composite and services PMIs. Expect these to trade even higher today following the digestion of the unexpected Chinese RRR cut.

FX markets have seen strength in AUD, with the Asia session seeing the commodity benefit from recent gains in the commodity complex, retracing all of the losses post RBA rate, before going on to strengthen further after the PBoC announced a cut to the RRR during the European session, with AUD/USD rising 64 pips immediately, before paring these gains shortly after as the move from the Chinese central bank was widely expected, with speculation rife that China would reduce the RRR due to tighter liquidity conditions, and forecasts the PBoC to cut their RRR by Lunar New Year (Feb 19th). AUD’s antipodean counterpart saw NZD paring overnight gains seen as a result of better than expected labour participation rate (69.7% vs. Exp. 69.1%, Prev. 69.0%), while European Services and Composite PMIs failed to move the market, following on from yesterday’s gains which saw EUR/USD trading at its highest level since January 22nd.

This morning also saw UK Services PMI, which printed better than expected figures of 57.2 vs. Exp. 56.3 (Prev. 55.8), seeing GBP/USD strengthen, with Gilts falling on the news. GBP/CAD reached highs of over 100 pips on the day after the UK service PMIs, combined with the weakening of CAD, which fell in tandem with oil prices.

In terms of today’s calendar, focus this morning in Europe will be on the services and composite PMI prints for January with the final readings due for the Euro-area as well as regionally in Germany, France and first readings for Italy and Spain. We also have the preliminary readings for the UK due as well as retail sales for the Euro-area. Across the pond this afternoon, the ADP employment change print for January will be closely watched given the payrolls release due on Friday. Services and composite PMI’s are also due for the US as well as the ISM non-manufacturing reading. The Fed’s Mester is also due to speak

Bulletin Headline Summary from Bloomberg and RanSquawk

• China’s PBoC announce an unscheduled cut to the RRR
• Brent and WTI futures come off their highs from overnight, to retrace after WTI crude was seen up as much as 24.5% and Brent 24.72% from Thursday’s lows
• Looking ahead, this afternoon sees US ADP employment data, while participants will also be closely watching the US DoE crude oil Inventories, where a build is expected. In terms of equities, Merck (1200GMT/0600CST), GM (1230GMT/0630CST) and GSK (1200GMT/0600CST) are still to report during the session.  
• Treasury yields edge lower overnight after rising 4bps-12bps yesterday; today’s data releases include ADP employment, ISM; Fed’s Mester will speak.
• China cut the amount of cash lenders must set aside as reserves in a bid to add liquidity to an economy that last year grew at its slowest pace in a generation
• PBOC moved its reference rate for the yuan outside the daily trading band for the first time in 21 months, forcing the currency to strengthen as authorities seek to limit volatility in capital flows
• A gauge of China’s services industry expanded at the weakest pace in six months as a slowdown spreads to areas of the economy that had been outperforming the nation’s flagging factories and sagging property market
• It will cost Germany less to lighten Greece’s debt load now than to force compliance with conditions of its bailout, Greek Finance Minister Yanis Varoufakis said
• Withdrawals from Greek banks may have exceeded €15b ($17.2b) in the run-up to the elections that catapulted Alexis Tsipras and his anti-austerity Syriza party to power, including at least £11b in January
• New Zealand central bank Governor Graeme Wheeler said he will keep rates unchanged for some time amid a wave of policy easings by his peers in the face of global disinflation pressures
• The Japanese government will nominate economist Yutaka Harada for BOJ’s policy board as Ryuzo Miyao’s term comes to  an end in March, Nikkei reported; Harada advocates the kinds of reflationary policies the central bank pursued under Kuroda
• Pimco’s Total Return Fund suffered about $11.6b in withdrawals in January, the 21st straight month of redemptions at the investment fund created and formerly run by bond manager Bill Gross
• Death toll of Ukraine’s separatist conflict jumped at end January, the United Nations said, as civilians fled a battle for a crossroad town and the government and rebels  moved to pour more weapons and men into the fight
• Sovereign yields mixed, Greece 10Y rises ~28bps to 9.80% Portugal, Spain and Italy lower. Asian stocks mixed; European stocks mostly lower, U.S. equity-index  futures fall. Brent, WTI drop; copper and gold rally

US Event Calendar

• 7:00am: MBA Mortgage Applications, Jan. 30 (prior -3.2%)
• 8:15am: ADP Employment Change, Jan., est. 220k (prior 241k)
• 9:45am: Markit U.S. Composite PMI, Jan. final (prior 54.2); Markit U.S. Services PMI, Jan. final, est. 54.1 (prior 54)
• 10:00am: ISM Non-Mfg Composite, Jan., est. 56.4 (prior 56.2, revised 56.5)

The conclusion, as usual, is courtesy of Jim Reid's overnight recap of events around the globe

So February has started off just as volatile as January and the moves over the last couple of days have helped Oil climb into bull market territory with Greek equities only 4% off the same landmark after climbing just shy of 16% in two days. Indeed even the DAX and CAC are only 4-5% short of bull market territory having climbed 15-16% off their early January closing/intra-day lows. As expected QE is yet again doing its trick on the equity markets in which central bank activity increases.

Back to Oil and Brent rose 5.77% yesterday and is now 21% above its cycle lows on January 13th and 25% off the intraday lows on the same day. YTD we're now at +1% after a 9% rally MTD already but still 48% off last June's highs. The moves appear to be a continuation of the hope that US production will be curbed soon and that the market will somewhat rebalance - supported by recent announcements by corporates of significant capex cuts for 2015. Yesterday’s announcement by BP that they are looking to further reduce capex to $20bn this year - $4-$6bn down on initial estimates - lent further support to the argument whilst BP’s CEO Bob Dudley commented post results that oil will probably trade from $40-$60 a barrel for the next three years. The rally in the sector helped the S&P 500 close at its highs of the day (+1.44%) with the energy component (+2.78%) unsurprisingly leading the gains. In fact February’s 2.74% gain so far has helped US equities wipe out a bulk of January’s losses to trade just -0.43% down YTD now.

Away from oil, Greece continues to dominate headlines as Tsipras and Varoufakis continue their European tour (sounds like a very trendy folk act on the road). Markets yesterday in Europe appeared to trade firmer on the back of the ‘debt swap’ story. It might not be a realistic proposal but at least they significantly softened their stance. The Stoxx 600 finished +0.82% and the DAX +0.58% whilst peripheral markets rallied with the IBEX +2.62% and FTSE MIB +2.57%. Yields in the periphery also had a stronger day with 10y benchmark yields in Italy and Portugal 4bps and 9bps tighter respectively. The Euro (+1.23%) had its second strongest day of the year, closing at $1.1481. Interestingly we were at $1.164 minutes before the ECB's QE announcement nearly two weeks ago now.

In terms of the Greek news yesterday, headlines on Bloomberg suggesting that Merkel is said to expect Greek negotiations to drag on for months appeared to catch the attention of the market. In reality however the story highlighted that the German government may well be willing to extend beyond the February 28th deadline and give the Greek government time to settle. Specifically Merkel was quoted as saying that ‘the Greek government is still working on its position’ and ‘that’s more than understandable considering the government has been in office for a few days’. Varoufakis is due to meet Draghi today and German finance minister Schaeuble tomorrow. The meeting could well be the most important of the week so far and the Daily Telegraph yesterday quoted Varoufakis as saying ‘I will try to be as charming as I can in Berlin’ and that ‘he can count on our Syriza movement to clear away Greece’s cartels and oligarchies’. The article also quoted Greece’s finance minister as saying ‘we are going to end the debt-deflation spiral and do what should have been done five years ago, that is not negotiable’. Today also marks the bi-weekly review of the ECB ELA as well as a potential t-bill auction. Yesterday the FT reported that the ECB is unwilling to raise the €15bn ceiling on t-bill issuance a further €10bn as requested by the Greek government with the article quoting a eurozone official as saying that the ‘ECB will play hardball’.

Elsewhere in Europe yesterday, it was a quiet day data wise with just a weaker PPI (-2.7% yoy vs. -2.5%) for the Euro area and soft inflation print out of Italy (-0.4% as expected). With yesterday’s weakness in JGB’s, 10y Bunds (0.346%) are now actually trading inside 10y JGBS’s (0.368%) for the first time in decades. Compare this to the start of 2014 when JGB’s were trading around 120bps inside Bunds. I had quite a few questions from clients yesterday that asked whether this made much sense. The answer is that economically it probably doesn't but that the net supply/demand story for Bunds (including QE) is very favourable at the moment. In the back of my mind is the article written in DB's Konzept magazine at the back end of last year suggesting that Germany could actually see a mini-boom ahead due to the artificially weak currency for them with real assets being positively impacted.

Staying on absurdly low yields, with nine countries in Europe now having negative two-year yields, it was perhaps only a matter of time before we saw corporate euro denominated yields follow suit. Yesterday Nestle’s EUR 2016 notes closed at -0.002% with Bloomberg suggesting that they may be among the first corporate bonds to trade with a negative yield. Maybe chocolate is the new Gold!!

Wrapping up the remainder of market moves yesterday, Treasuries yields climbed for a second successive day with the 10y benchmark yield 12.7bps higher at 1.792%. It’s been a volatile 2015 so far for Treasuries having rallied 53bps into the tights at the end of January (1.641%) and now bouncing some 15bps off those levels this month already. Yesterday we heard from the Fed’s Bullard and Kocherlakota – both continuing to offer contrasting views. Bullard (a hawkish non-voter) was noted in particular saying that the FOMC should remove their language around patience, specifically saying that ‘I would take it out to provide optionality for the following meeting after that’ as per a Reuters article. Perhaps of more interest however was Bullard playing down the reference to ‘international’ developments in the latest FOMC statement with another Reuters article suggesting that the reference was just an acknowledgement of discussion about the impact of global events rather than any potential delay to lift-off. On the other side of things, Kocherlakota yesterday reiterated his view of keeping rates unchanged in 2015, suggesting that the low yields in longer-dated Treasuries and Bunds suggests a lack of confidence in the FOMC and other Central Banks hitting their respective inflation targets.

Data took something of a back seat but in reality was a touch on the weaker side. The lesser followed ISM New York current business conditions index declined to 44.4 in January, from 70.8 in December and the lowest level since 2009. Factory orders meanwhile were also weaker, the -3.4% mom decline in December lower than the -2.4% expected. Auto sales meanwhile were generally as expected. Total vehicle sales amounted to 16.6m for January.

Turning our attention to the early trading in Asia this morning, bourses are following the US lead and trading higher as we type. The Nikkei (+1.97%), Hang-Seng (+0.87%), Shanghai Composite (+0.22%) and Kospi (+0.65%) are all firmer. Asian credit is also stronger with CDS spreads 2bps tighter. Cash earnings data for Japan was as expected with the +1.6% yoy print for December in line with consensus with the reading the tenth consecutive month of gains.

In terms of today’s calendar, focus this morning in Europe will be on the services and composite PMI prints for January with the final readings due for the Euro-area as well as regionally in Germany, France and first readings for Italy and Spain. We also have the preliminary readings for the UK due as well as retail sales for the Euro-area. Across the pond this afternoon, the ADP employment change print for January will be closely watched given the payrolls release due on Friday. Services and composite PMI’s are also due for the US as well as the ISM non-manufacturing reading. The Fed’s Mester is also due to speak.