The dollar rebounded from a key support level, strengthening against all major peers, pushing S&P futures higher as European shares rose, led by basic resources and real estate, while Asian stocks fall. Gold fell from its highest level since November as demand for some haven assets ebbed while global bonds declined. Oil dipped, pressured by a stronger dollar.

The Bloomberg Dollar Spot Index rose the most in almost two weeks, jumping against the offshore Chinese yuan on an unexpected fall in Beijing's foreign exchange reserves below $3 trillion for the first time in six years, while a slumping euro benefited European stocks.“We think the dollar will go higher from here,” said Adam Cole, head of global foreign-exchange strategy in London at Royal Bank of Canada. “On balance Trump’s policies are dollar positive and that will win over the rhetoric.” The euro fell 0.8% to $1.0665, its biggest fall since Dec. 15 last year, while the dollar index was up over 0.7%, its biggest rise since Jan. 6.

European political jitters remained, and sent the spread between French and German 10-year bonds rose to 78 bps, the highest level since November 2012. It was 50 basis points only two weeks ago.

"The acceleration of the trend of wider spreads since the start of the year has been widespread and not just confined to France, where obviously the political tail risk is the greatest," said Kenneth Broux, head of corporate research, FX and rates at Societe Generale.

Even as the main European indices advanced, banks posted the biggest declines on lackluster earnings and falling bond yields. European financial markets struggled with growing economic and political concerns involving the French and German elections on Tuesday as the euro neared its biggest fall this year and bond yield spreads over Germany reaching the widest in several years.

"The political calendar is likely to make some investors sit uneasy on some positions, particularly as the prevailing opinion remains that none of the anti-European parties will have a significant chance of getting close to power," RBC Capital Markets strategists wrote in a note on Tuesday quoted by Reuters. "Whilst this is also our expectation, complacent markets will likely face at least one moment where the iron-clad view will be questioned."

Among the rising political din, the markets broadly ignored a 3.0% plunge in German industrial output (exp.+0.3%), the biggest drop in 8 years, and yet another indication that the favorable global macro impulse driven mostly by China's record credit injection in 2016 is fading fast.

European corporate earnings offered some cheer even though oil giant BP missed estimates, but failed to completely shrug off the unease fueled by the growing unpredictability of the French presidential election race. National Front Leader Marine Le Pen has vowed to fight globalization and take France out of the euro zone, while conservative candidate Francois Fillon on Monday vowed to fight on for the presidency despite a damaging scandal involving taxpayer-funded payments to his wife. Earlier on Tuesday, Emmanuel Macron, the independent centrist candidate and favorite to win the election, knocked down rumors he has a gay relationship outside his marriage since 2007.

Chipmaker AMS rose 16%, poised for its best-day ever after the company's fourth-quarter revenue came in at the top end of the chipmaker's expectations. BP was the biggest drag on the broader index, down 2.5%.

Elsewhere, MSCI's index of Asia-Pacific ex-Japan fell 0.3% while Japan's Nikkei closed down 0.35%, driven by a stronger Yen, although the USDJPY has since rebounded stronly. Chinese shares dropped 0.4%ahead of data that showed FX reserves fell for the seventh straight month in January and below $3 trillion for the first time in six years.  The dollar rose 0.5 percent against the offshore yuan its biggest rise in three weeks. Concerns remain over the speed at which China has depleted its cash resources to defend the currency. Reserves were almost $4 trillion in mid-2014.

U.S. stock futures pointed to a 0.3% higher open, undoing all over Monday's 0.2% drop.

Oil prices buckled under the dollar's gains, extending their decline following the biggest one-day loss since Jan. 18 on Monday as worries about rising oil supply out of the United States tussled with optimism about output curbs elsewhere. U.S. crude fell 0.5% to $52.72 a barrel, after falling 1.5% on Monday. Brent fell 0.6% to $55.40, after sliding 1.9% on Monday.

Bulletin Headline Summary from RanSquawk

• European stocks trade with little direction in a similar fashion to their Asian counterparts amid light new fundamental news
• Energy underperforms in line with oil prices while soft BP earnings sees them lag in the FTSE 100
• A light economic calendar remains the case today, with highlights including US API crude oil inventories, comments from ECB's Weidmann and earnings from Walt Disney

Market Snapshot

• S&P 500 futures up 0.3% to 2293
• Stoxx 600 up 0.4% to 363
• FTSE 100 up 0.6% to 7216
• DAX up 0.4% to 11557
• German 10Yr yield down 1bp to 0.36%
• Italian 10Yr yield down 3bps to 2.35%
• Spanish 10Yr yield down less than 1bp to 1.78%
• S&P GSCI Index up less than 0.1% to 396.9
• MSCI Asia Pacific down 0.3% to 142
• Nikkei 225 down 0.3% to 18911
• Hang Seng down less than 0.1% to 23332
• Shanghai Composite down 0.1% to 3153
• S&P/ASX 200 up 0.1% to 5622
• US 10-yr yield up less than 1bp to 2.42%
• Dollar Index up 0.77% to 100.68
• WTI Crude futures down 0.3% to $52.84
• Brent Futures down 0.3% to $55.53
• Gold spot down 0.5% to $1,229
• Silver spot down 0.8% to $17.60

Top Global News

• KKR to Combine Prisma With Paamco to Create $34 Billion Firm: Employees to own 60% of Paamco Prisma while KKR holds 40%
• TEVA Loses CEO, Leaving Investors to Guess What’s Next: Board Chairman Peterburg will take over as interim CEO
• FXCM to Withdraw From U.S. After Probe, Sell Client Accounts: Gain Capital signs letter of intent to purchase U.S. accounts
• Philadelphia Fed’s Harker Says March Is on the Table for a Hike: Harker says it depends on how data shape up
• BP and Shell (RDS-A) Hit After OPEC Output Cuts Halt Oil-Trading Bonanza: Oil traders benefited in 2015, 2016 from storage deals
• Trump Administration to Argue U.S. Faces Grave Peril Without Ban: Appellate judges will hear case Tuesday in San Francisco
• Bayer-Monsanto Seen Squeezing Brazil’s Farmers, Minister Says: ‘Only a small number of suppliers for a very large world’

Asian stocks dropped, pressured by a weak close in the US where the main indices were kept in check amid a lack of fundamental news and drivers, which resulted in the S&P 500 snapping a 3-day win streak. 7 out of 11 sectors retreat in the MSCI Asia Pacific Index with energy, consumer discretionary underperforming and utilities, real estate outperforming. ASX 200 (+0.1%) was initially lower with weakness in financials and consumer discretionary after Macquarie affirmed flat guidance Y/Y and reports that Tabcorp's monopoly on in-venue betting was under threat by a potential Crown Resorts venture, although, the index then staged a late recovery into the close. Elsewhere, Nikkei 225 (-0.5%) suffered the brunt of a firmer JPY with mining and energy names weighed by declines seen in copper, iron ore and crude oil, while the Hang Seng (-0.1%) and Shanghai Comp (-0.4%) were dampened as participants digested the PBoC once again refraining from conducting open market operations due to high liquidity and reportedly urged banks to curb lending. Finally, 10yr JGBs traded marginally higher amid a risk averse tone in Japan, while mixed 10yr inflation-indexed auction results failed to spur any significant price action.

Top Asia News

• Top India Forecaster Sees Rate Pause in Break From Consensus: Would be helpful for economy, rupee “to stay pat": BNP’s Hau
• India Said to Sell $993 Million ITC Stake to State-Owned LIC: Stake said to be sold for about 275.85 rupees a share
• China’s Central Bank Halts Gold Buying for Third Straight Month: Country’s foreign exchange reserves at lowest since ‘11
• Rio Gifts India Diamond Mine to Madhya Pradesh Government: Project hampered by delay in getting environmental permits

European equities traded mostly higher today, initially opening lower, before moving into modest positive territory throughout the European morning. 15 out of 19 Stoxx 600 sectors rise with basic resources, real estate outperforming and oil & gas, banks underperforming. 77% of Stoxx 600 members gain, 21% decline. Earnings continue to draw headlines, with BP (-2.4%) the worst performer in the FTSE after their report, while BNP Paribas (-4.3%) weigh on the CAC in the wake of their release. As such energy and financials are the worst performing sectors, with upside seen in materials so far this morning. Elsewhere, FTSE100 outperforms as exporters benefit once again from GBP softness French yields rose this morning as the political situation in the country intensifies, OAT's trade higher by 0.65% slightly higher than the core regions this morning. Today supply is slightly heavier than average with the UK, ESM and the US all coming to market.

Top European News

• BNP Paribas Posts Net That Misses Estimates, Plans Cost Cuts: French consumer-banking earnings decline by 36% in quarter
• Statoil Vows to Keep Cutting Costs After Third Consecutive Loss: Company plans a further $1 billion of savings in 2017
• German Industrial Output Unexpectedly Falls Most in 8 Years: Output dropped 3% in December vs estimated 0.3% increase
• May Comfortably Sees Off First Attempts to Amend Brexit Bill: Commons lawmakers vote down series of opposition amendments
• Deutsche Boerse, LSE Submit Divestment Plans to Regulators: ormal remedy submitted to EC to ease antitrust concerns

In currencies, the JPY looks to be driving trade at present, and this has contributed to the USD/JPY move higher to 112.50 to spike through 111.75 initial support. Stronger levels seen below 111.50, and we have since recovered through 112.50 after hitting a 111.60 low. Elsewhere though, the USD has made good ground against the EUR, GBP and CAD as well as managing to pull the AUD and NZD back down to more familiar levels — the NZD after pushing to new cycle highs just shy of 0.7375. This has been facilitated by the loss of 120.00 in EUR/JPY, 140.00 in GBP/JPY and more modest JPY gains against the commodity currencies. EUR/USD has dropped down 1.0655 so far, and political tensions will be cited as a key driver, but this has not stopped EUR/GBP pushing back above 0.8600 again, resulting in a Cable move below notable support ahead of 1.2400. Brexit jitters allied with a significant fall in the BRC like for like sales over Jan have contributed to the latest round of losses here, but as the triggering of Article 50 nears, (GBP) longs are becoming nervous. The RBA overnight gave a balanced account of domestic and global prospects/risks whilst maintaining the cash rate at 1.50%, but despite a somewhat delayed move higher, failed to generate momentum for a fresh test on 0.7700. In contrast, the rise in NZ inflation expectations saw the recent 0.7350 highs stretched out by another 24-25 ticks, but this has since been reversed and we have since lost the 0.7300 handle. USD/CAD is now testing 1.3200 on the upside, dragged higher by the broader 'USD' move.

In commodities, there has been little of note in the commodities market over the last 24 hours, though Gold has dropped from the best levels in three months. Losses in USD/JPY highlight the risk skew to the moves in the yellow metal, but we have seen some resistance here through the USD1230.00 level. WTI has edged back under USD53.00, but limited emphasis on price action as long as we stay inside the USD50-55 range. Base metals trading sideways, but Copper has edged further away from USD2.70, but to a modest degree. Palladium the under-performer on the day so far, but little to note behind it as yet.

Looking at today’s calendar, this morning we kicked off in Germany where the December industrial production data was released and caused a mini shock when it showed a 3% plunge, the biggest in 8 years, on expectations of a modest rise. In the US the early release is the December trade balance reading, followed then by the latest JOLTS job openings print. Later we’ll get consumer credit for the month of December. Away from the data we are due to hear from the BoE’s Forbes this afternoon as well as the ECB’s Weidmann. The BoJ is also due to release minutes from the January meeting. Earnings wise there are 28 S&P 500 companies due to report including General Motors (GM) and Walt Disney (DIS).

US Event Calendar

• 8:30am: Trade Balance, Dec., est. -$45.0b (prior -$45.2b)
• 8:55am: Redbook weekly sales
• 10am: JOLTS Job Openings, Dec., est. 5.580m (prior 5.522m)
• 3pm: Consumer Credit, Dec., est. $20.0b (prior $24.532b)
• 4:30pm: API weekly oil inventories

US Government Docket

• Senate votes on nomination of Betsy DeVos for Education sec.
• House votes on measures to block Interior Dept and Education Dept regulations
• 10am: Andy Puzder, nominee for Labor sec., testifies before Senate Health, Education, Labor and Pensions Cmte
• 10am: House Armed Services Cmte holds full cmte hearing on the state of the military
• 10am: Senate Foreign Relations Cmte hearing on ‘‘The Plan to Defeat ISIS’’
• 10am: House Homeland Security Cmte hears from Homeland Security Sec. John Kelly on U.S. borders and the path to security
• 10:10am: Sen. Kirsten Gillibrand, D-N.Y., and Rep. Rosa DeLauro, D-Conn., hold press call to introduce ‘‘Family and Medical Insurance Leave Act”
• 2:30pm: House Democrats hold news conference on Obamacare

DB's Jim Reid concludes the overnight wrap

I've been away for a long weekend and since I've last worked on the EMR before the break I have 35 new President Trump tweets to review. Indeed markets have started the week on the back foot with politics again the overriding theme for much of the past 24 hours. Indeed while various Trump developments continue to create headlines it was Europe’s turn to take the spotlight yesterday. Much of that can be attributed to France where Francois Fillon confirmed his intention to continue running for presidency despite pressure from his own party to step aside in the face of the scandal over his family’s employment. In a press conference yesterday Fillon continued to make the case for his continued candidacy while also expressing regret for the allegations put forward.

Together with Le Pen’s rally cry over the weekend, these developments put pressure on French assets from the get go yesterday. This was most notable in bonds where 10y OAT yields finished the day 5.9bps higher at 1.136% - compared to a 4.3bps rally for Bunds and 5.7bps rally for Treasuries - and to the highest since September 2015. It’s the spread over Bunds that we’ve been watching closely though and yesterday saw that 10y spread hit 77bps and the widest now since November 2012. That spread was as low as 45bps just four weeks ago and just 21bps in November last year. In fact it wasn’t just OATs which had a difficult day yesterday. Similar maturity yields in Italy (+10.7bps), Spain (+10.4bps) and Portugal (+7.5bps) all surged higher with the BTP-Bund spread also hitting a fresh three-year high at 200bps with looming banking sector concerns and potential elections also a focus for the market.

In equity markets it was the FTSE MIB (-2.21%) which drove losses in Europe with the banks in particular sharply lower. The Stoxx 600 edged down -0.68% while France’s CAC index finished the day -0.98% for its second worst-day of the year so far. The Euro also finished down -0.31% versus the Greenback. European credit markets weren’t immune to the risk off moves either with the iTraxx Main index ending the day some +3.5bps wider – the biggest move wider since September – while senior and sub financials sold off +5.0bps and +10.0bps respectively. The risk-off moves across the pond weren’t quite as exaggerated although the S&P 500 did still finish the day -0.21% and the Dow -0.09%.

There wasn’t much to drive markets in the US yesterday although one thing which caught our eye was the latest findings from the Fed’s Senior Loan Officer Survey. Regarding loans to large and mid-sized businesses, the survey revealed that banks net tightened standards by 1.4%, while standards were left unchanged for small firms. Although modest over the past couple of quarters, it is still worth noting that this is now the sixth quarter in succession that standards have tightened for large and medium sized firms. This usually only happens in recessions. Banks also reported that demand for C&I loans from large and middle-market firms, as well as small firms, was little changed. The most notable tightening in standards though was in consumer loans. During the quarter, banks reported an 8.3% net tightening in credit standards for credit cards and 11.6% net tightening for auto loans.

Refreshing our screens now, the broadly risk-off tone has continued in markets in Asia this morning, although this has been fairly modest for the most part. The Nikkei (-0.22%), Hang Seng (-0.16%), Shanghai Comp (-0.31%), Kospi (-0.12%) and ASX (-0.10%) are all in the red, while US equity index futures are little changed. Bonds are notably stronger with 10y yields in the antipodeans 7-8bps lower and yields in Hong Kong (-3.9bps), Singapore (-4.2bps) and China (-1.0bps) also lower. 10y JGB’s are unchanged at 0.092%. Meanwhile the US Dollar index has firmed another +0.22% this morning after the Fed’s Harker reiterated Williams’ comments from last week by saying that “March is on the table” for a possible Fed rate hike. Harker pointed towards the strong jobs numbers last week as well as “continued good news around GDP and GDP growth and continued signs that the labour market is strengthening”. Elsewhere this morning the Aussie Dollar is a touch firmer after the RBA left rates on hold as expected, with the broad policy stance remaining fairly neutral.

Coming back to politics briefly. France has rightly dominated much of the political focus in Europe lately but it was interesting to see the latest polls in Germany yesterday. An INSA poll for the Bild newspaper (of 2,042 people covering 3-6 February) revealed that support for the Social Democrats party has jumped ahead of Chancellor Merkel’s CDU party for the first time since 2010 according to Bloomberg. The poll put the Social Democrats at 31% versus 30% for CDU and 12% for the populist Alternative for Germany (AfD). The pollster highlighted that support for the Social Democrats was just 21% two weeks ago. The rising support for the Social Democrats comes following the appointment of Martin Schulz as the party’s leader so we’ll need to see if this support is maintained in the weeks and months ahead, rather than it being a temporary bounce. It’s worth keeping an eye on in any case.

Staying in Europe, yesterday we heard from ECB President Draghi. The overall tone felt mildly dovish with Draghi saying that “support from our monetary policy measures is still needed if inflation rates are to converge towards our objective with sufficient confidence and in a sustained manner” and that “underlying inflation pressures remain very subdued and are expected to pick up only gradually as we go on”. Draghi also defended the role of the Euro, calling it “irreversible” while also hitting back at the Trump administration comments about Germany being a currency manipulator. Draghi also highlighted that any relaxation of financial regulation “is very worrisome”.

Staying with the ECB, yesterday we got the latest CSPP holdings data. As of the 3rd of February, total holdings were reported at €60.98bn which implies net purchases settled last week of €2.17bn at an average daily run rate of €433m, ahead of the €365m average since the program started. Also released was the latest primary/secondary split. As of the end of January, 14.1% of purchases had been made in the primary market compared to 85.9% in the secondary. In January alone, there was a higher weight towards primary at 17.4% perhaps reflecting the strong start to the year for new corporate issuance.

Looking at today’s calendar, this morning we’re kicking off in Germany where the December industrial production data will be released. Thereafter we’ll get trade data in France followed by the latest house price data in the UK. This afternoon in the US the early release is the December trade balance reading, followed then by the latest JOLTS job openings print. Later on this evening we’ll get consumer credit for the month of December. Away from the data we are due to hear from the BoE’s Forbes this afternoon as well as the ECB’s Weidmann. The BoJ is also due to release minutes from the January meeting. Earnings wise there are 28 S&P 500 companies due to report including General Motors and Walt Disney. BP is among those reporting in Europe.