While global shares pulled back in early trading from record highs on Wednesday, U.S. equity index futures are staging another comeback and point to a higher open on Wednesday following a volatile day of trading Tuesday which saw the S&P 500 have its worst reversal in two years. Whether yesterday sharp drop in the S&P was due to fears of a government shutdown, which now appears less likely as another short-term spending bill appears imminent, or due to fears over what Steve Bannon may tell Mueller, it is now largely forgotten, and the S&P was up by 9 points, rising 0.3% from the Tuesday close and retracing much of the day's selloff, once again approaching 2,800 in the cash index.

Having retreated at the start of European trading, following declines in a number of Asian markets, Europe's Stoxx 600 index erased its earlier drop and traded little changed, as U.S. futures pointed to stronger open - Dow Jones futures up 0.5% and the 26,000 is once again in sight, with European insurance and tech sectors leading the rebound, while media, banking and telecom sectors retreat. Also out of Europe, we got some final CPI prints:

• EU Inflation Final MM (Dec) 0.4% vs. Exp. 0.4% (Prev. 0.1%)
• EU Inflation, Final YY (Dec) 1.4% vs. Exp. 1.4% (Prev. 1.4%)

Asian equities stepped back from a record high as the region's resource shares were knocked by falling oil and commodity prices, however, Chinese shares bucked the trend, climbing to a fresh record in Hong Kong.Australia's ASX 200 (-0.5%) and Japan's Nikkei 225 (-0.3%) were negative as losses in miners continued to weigh on Australia, while risk appetite in Japan remained sapped by the recent JPY strength. Elsewhere, Hang Seng (-0.4%) pulled back from yesterday’s record close and the Shanghai Comp. (+0.6%) bucked the trend after another firm liquidity effort by the PBoC, although a slump in Shenzhen stocks provided some mainland jitters as the ChiNext board for small cap and tech firms fell to its lowest since July after blockchain-related stocks tumbled in the wake of the crypto-chaos.

(Click on image to enlarge)

Finally, 10yr JGBs were subdued as prices failed to benefit from a broad risk-averse tone, while today’s Rinban announcement was also uneventful in which the BoJ maintained its purchase amounts in the belly to short-end.

The dollar DXY index rebounded from close to a three-year low, bounding away from 90.00 level for third successive day while Treasury yields rose as investors braced for Congressional talks to avert a government shutdown Friday. The loonie weakened a second day before a BOC rate decision due later Wednesday, while EM currencies traded in the red.

The euro slipped from a fresh cycle high, yet held comfortably above $1.22 even as ECB officials urged caution over the common currency’s strength. Overnight, a chorus of ECB speakers warned on the euro's growing strength, with Constancio and Nowotny added to Villeroy’s comments yesterday, totaling three ECB speakers warning on EUR moves.  Specifically, Nowotny said Euro exchange rate must be observed, while Constancio said he is worried EUR moves don't reflect fundamentals; says changes to ECB's forward guidance won't be immediate.

Overall dollar weakness and growing optimism about the outlook of the European economy in 2018 has lent fresh legs to the euro’s rally after it gained more than 10 percent last year.

But the speed of the rise in the opening days of 2018 -- up more than 3 percent in the last two weeks -- has invited some comments from ECB officials this week, highlighting some growing concerns, according to analysts.

“The ECB is playing the good cop and the bad cop in terms of their comments over the euro but there is no doubt the currency’s rally has sowed the seeds of uncertainty in the ids of ECB policymakers,” said Viraj Patel, an FX strategist at ING in London.

The Canadian dollar traded at C$1.2452 per dollar off its three-month high of C$1.2355 hit on Jan 5. The Bank of Canada is seen as likely to raise its benchmark interest rate by 25 basis points to 1.25 percent later in the day, with analysts expecting three hikes this year.

Bitcoin extended its sharp tumble of the past 24 hours, skidding more than seven percent on Wednesday as investors were spooked by fears regulators might clamp down on the digital currency. The price of the world's biggest and best known cryptocurrency fell to as low as $10,567 on the Luxembourg-based Bitstamp exchange.

In US Treasuries, the belly and long end of UST curve resume flattening with UST futures close to overnight lows after a large Aussie bond syndication. The UST/Bund spread widened 2.5bps, while a large number of BTP futures blocks sees Italy underperform versus rest of Europe. Crude futures push lower after Brent fails to hold above $70/bbl again, metals steady and the Bitcoin selloff continues if so far supported by the key $10k level.

Earnings are expected from Bank of America, Goldman Sachs and Alcoa. Federal Reserve is set to release its Beige Book, and macro data includes industrial production and manufacturing production

Market Snapshot

• S&P 500 futures up 0.37% to 2,793.00
• STOXX Europe 600 unchanged to 398.29
• VIX
• MSCI Asia Pacific down 0.09% to 182.66
• MSCI Asia Pacific ex Japan down 0.02% to 594.11
• Nikkei down 0.4% to 23,868.34
• Topix down 0.2% to 1,890.82
• Hang Seng Index up 0.3% to 31,983.41
• Shanghai Composite up 0.2% to 3,444.67
• Sensex up 0.8% to 35,060.64
• Australia S&P/ASX 200 down 0.5% to 6,015.81
• Kospi down 0.3% to 2,515.43
• German 10Y yield fell 1.0 bps to 0.552%
• Euro down 0.2% to $1.2238
• Italian 10Y yield fell 3.1 bps to 1.703%
• Spanish 10Y yield fell 0.6 bps to 1.496%
• Brent Futures down 0.3% to $68.96/bbl
• Gold spot down 0.2% to $1,335.53
• U.S. Dollar Index up 0.3% to 90.63

Top Overnight News from Bloomberg

• U.S. House Freedom Caucus’s Meadows: House doesn’t appear to have enough votes to pass current stopgap funding measure without Democratic support
• Fed’s Kaplan (non-voter): base case is for 3 hikes this year; may need to be more aggressive to keep economy from overheating
• ECB’s Nowotny: EUR appreciation is not helping; ECB has no exchange rate goal so we must only watch it in terms of economic developments
• ECB’s Constancio: worried about sudden EUR moves that do not reflect fundamentals; changes to forward guidance will not be immediate
• Robert Bogucki, who is the former head of New York foreign- exchange trading at Barclays Plc’s investment bank was charged for his alleged role in defrauding a client with a front-running scheme, the U.S. Justice Department said
• Recent euro appreciation “is not helping,” ECB Governing Council member Ewald Nowotny tells reporters
• Dallas Fed President Kaplan said he expects three rate increases this year, according to interview with WSJ
• Euro zone Dec. F CPI unrevised y/y at 1.4%; Core CPI unrevised 0.9%

Asia’s major stock markets traded mostly negative following a weak performance in the US, where the main indices reversed from record levels on political concerns including the looming government shutdown deadline and reports that former Trump strategist Steve Bannon was subpoenaed by Special Counsel Mueller. Furthermore, some also suggested profit taking in overbought conditions after both the S&P 500 and DJIA notched historical feats at the open in which they briefly rose above the 2800 and 26000 levels respectively for the 1st time ever. ASX 200 (-0.5%) and Nikkei 225 (-0.3%) were negative as losses in miners continued to weigh on Australia, while risk appetite in Japan remained sapped by the recent JPY strength. Elsewhere, Hang Seng (-0.4%) pulled back from yesterday’s record close and the Shanghai Comp. (+0.6%) bucked the trend after another firm liquidity effort by the PBoC, although a slump in Shenzhen stocks provided some mainland jitters as the ChiNext board for small cap and tech firms fell to its lowest since July after blockchain-related stocks tumbled in the wake of the crypto-chaos. Finally, 10yr JGBs were subdued as prices failed to benefit from a broad risk-averse tone, while today’s Rinban announcement was alsouneventful in which the BoJ maintained its purchase amounts in the belly to short-end.

Top Asian News

• The Ex-Goldman Banker Who Quit to Take Over a Myanmar Empire
• India Cuts Planned Extra Borrowing to $3.1 Billion; Bonds Climb
• Philippines’ BPI to Raise up to 50B Pesos in Rights Offer
• BOJ Could Cut Stimulus Without Sparking Rate Surge, Moody’s Says
• India Is Said to Mull Selling HPCL at Not More Than 9% Premium
• Third HNA Unit Halted From Trading, Pending ’Major Matter’

European equity markets are lower, echoing the tone seen in Asia and the US, with Informa (-8.6%) shares propping up the FTSE 100 after reports that the company is in talks to merge with UBM, whose shares are up 12.5%. Burberry (-8.1%) shares are also lower after a disappointing trading update although tech shares outperform, lifted by ASML (+4.6%) after the chipmaker reported better than expected profit.

Top European News

• Juncker: Even if U.K. Leaves, We’d Facilitate Re- Accession
• Heathrow Plans Sloping Runway to Cut Costs by $3.4 Billion
• Melrose Makes Firm $10.2 Billion Offer to Acquire GKN

In FX, the ECB have continued to sound the alarm over the strengthening currency with Vice-President Constancio and Austrian Central Bank Governor Nowotny both echoing comments made yesterday by France’s Villeroy. Constancio said he is concerned about sudden movements that do not reflect fundamentals while Nowotny said the strengthening Euro is not helpful. The comments helped EUR/USD to session lows before finding support ahead of 1.2200 before today’s inflation data. Elsewhere, the USD has shown some signs of a recovery with USD/JPY approaching 111.00 and USD/CAD above 1.2450 ahead of the Bank of Canada decision

In commodities, WTI and Brent crude futures are both marginally lower in early European trade as markets look ahead to the weekly API inventory data (delayed to today following the MLK holiday). Gold and silver prices have generally tracked movements in the USD. Kuwait oil minister says compliance with production cuts stood at 125% in December; until now there is no plan or intention to exit the supply cut agreement. Niger Delta Avengers state that oil attacks are imminent.

Looking at the day ahead, there is the final revisions to the December inflation figures for the Euro area. The ECB’s Nowotny will speak at a conference in Vienna and BOE’s Saunders will also speak in London. In the US, the most significant release of note is the December IP print, while the January NAHB housing market index is also due. Late in the evening we’ll get the Fed’s Beige Book, while the Fed’s Evans and Mester are scheduled to speak shortly after. Bank of America and Goldman Sachs are due to report Q4 earnings.

US Event Calendar

• 7am: U.S. MBA Mortgage Applications, Jan. 12, no est., prior 8.3%
• 9:15am: U.S. Industrial Production MoM, Dec., est. 0.5%, prior 0.2%; Capacity Utilization, Dec., est. 77.4%, prior 77.1%
• 9:15am: U.S. Manufacturing (SIC) Production, Dec., est. 0.3%, prior 0.2%
• 10am: U.S. NAHB Housing Market Index, Jan., est. 72, prior 74
• 4pm: U.S. Total Net TIC Flows, Nov., no est., prior 151b; Net Long-term TIC Flows, Nov., no est., prior 23.2b

Central Banks

• 10am: Bank of Canada Rate Decision, Jan. 17, est. 1.25%, prior 1%
• 2pm: U.S. Federal Reserve Releases Beige Book
• 3pm: U.S. Fed’s Evans and Kaplan Speak on Economy and Monetary Policy
• 4:30pm: U.S. Fed’s Mester Discusses Monetary Policy Communication

DB's Jim Reid concludes the overnight wrap

Talking of US equities, the melt up in the short-term continued at the open yesterday with the main indices cracking through 2,800, 26,000 and 7,300 for the first time and up around 1% at the very early session highs, partlysupported by positive corporate results. However the rest of the day was spent reversing the moves and we closed -0.35%, -0.04% and -0.51% lower for the S&P 500, Dow and Nasdaq. The S&P’s intraday move of 1.41% was the largest seen since early December and the fifth highest change since December 2016. Within the S&P, losses were led by energy and materials stocks, in part as Brent crude oil retreated 1.58% yesterday, after rallying c40% from its recent lows in August. Further, GE’s shares also weakened -2.93% after announcing a $6.2bn charge related to its old portfolio of long term care insurance.

Elsewhere, the VIX jumped 14.76% higher to 11.66 – the fourth highest close since mid-September, while Bitcoin dropped c23% yesterday, weighed down by concerns of potential regulatory crackdowns. The crypto currency is partly recovering this morning, but is still down c41% since its recent high of $18,675 back in mid-December.

Turning to government bonds, core European 10y bond yields were 2-3bp lower (Gilts -2bp; Bunds -2.5bp), in part following a slightly dovish Reuters report where three unnamed sources noted the “ECB is unlikely to ditch a pledge to keep buying bonds at its meeting next week”. Although Reuters also noted that “any fundamental change to guidance was likely to come later, with the March meeting, when policymakers get updated forecasts….seen as a more likely option”. From where we were a week ago this is still more hawkish. Elsewhere, the UST 10y yields fell 1bp.

Staying on the topic of QE, the ECB’s Villeroy noted “we are predictable as to the direction of our policy and the sequencing, but we’re not pre-committed in terms of precise timing”, with the final outcome contingent on the progress on inflation. Further, he added “we did not say anything about what will happen after September, and our monetary policy is not driven by market expectations”. Elsewhere, he noted the recent change in the Euro is a “source of uncertainty which requires monitoring with regard to its possible downward effects on imported prices”.

Following on, the Bundesbank’s Weidmann noted the markets expectation that ECB interest rates won’t rise before the middle of 2019 “seems to be grosso modo in line with the current forward guidance of the government council”. On QE, he seems to have softened his stance a little, noting “if the positive development continues, it would be logical not to make substantial purchases beyond those already decided upon”.

This morning in Asia, markets have followed the US lead and are trading modestly lower. The Nikkei (-0.27%), Kospi (-0.40%) and Hang Seng (-0.37%) are all lower, with the latter weighed down by energy and discretionary consumer stocks. Turning to other markets performance from yesterday, European bourses were mixed but little changed with the Stoxx (+0.13%) and DAX (+0.35%) up modestly, while the FTSE fell 0.17% weighed down by energy and mining stocks. In contrast to the VIX, the Vstoxx was up only 2.5% to 11.35.

However the US only dipped into negative territory after Europe went home. Turning to currencies, the Euro initially weakened on news of a setback to Germany’s coalition talks but strengthened c0.6% post Weidmann’s comments to close broadly flat, along with Sterling. In commodities, precious metals softened slightly (Gold -0.12%; Silver -0.93%) while other base metals were broadly lower (Zinc -0.1%; Copper -1.3%; Aluminium -1.64%).

Away from markets, our team in China have published a summary of the 16th dbAccess China Conference which featured 27 speakers presenting their views on China's economy from different perspectives. Some of the key takeaways include: i) China's economic growth will slow in 2018 as policymakers shift focus to growth quality, ii) but GDP will likely be revised up in 2019 as a result of the economic census. This could provide room for lower growth in the next few years while maintaining the goal to double GDP by 2020, iii) monetary policy will remain tight and fiscal policy will tighten. Local governments will face tight constraints on its financing platforms and PPP projects, iv) realestate market will cool down and smaller real estate developers will face tight financing pressures and v) supply-side reform will continue its momentum in 2018, while SOE reform may gradually gain speed. For more details, please refer to their report.

In Germany, there was a setback to its efforts to form the next coalition government. Yesterday, the Berlin branch of the SPD voted against (21-8) the preliminary accord between Ms Merkel’s bloc and the SPD. As a reminder, votes at the SPD’s regional branches are non-binding and the larger branch of North Rhine-Westphalia which accounts for c25% of the votes remains undecided.

Nonetheless, it does partly illustrate the division within the party ahead of the crucial vote this Sunday where c600 SPD delegates will be attending. Elsewhere, the caucus chief of Ms Merkel’s CDU party Volker Kauder noted formal coalition talks between the two sides after SPD’s approval can be done fairly quickly, he said “there doesn’t have to be so much to be negotiated that we can’t achieve in two weeks”.

In the US, efforts to avoid a partial government shutdown from this Friday are still evolving, with Republican leaders weighing a move to extend the deadline until 16 February with the proposed measure not expected to include the DACA program. The main points of contention include lifting automatic budget caps on government spending, resolving the status of deferred action protections for undocumented immigrants who arrived in the US as children (the DACA program), and funding of the Children’s Health Insurance Program (CHIP).

Further, there is also the issue of securing enough votes in the Senate where the Republican may need 9 votes from the Democrats to pass a spending bill. Finally onto Brexit, the BOE’s deputy governor Sam Woods noted that the inclusion of UK based financial services firms in free trade deals with the EU post Brexit “is entirely technically feasible”, with a potential agreement “within a three year period from now”. Elsewhere, the EU side may still be hoping for a reversal of Brexit, with the EU Council President Tusk noting “if the UK government sticks to its decision to leave, Brexit will become a reality…unless there is a change of heart among our British friends” and “….our hearts are still open (to Britain)”, while the EC Chief Juncker said “our door still remains open”.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the January empire manufacturing index was below expectations at 17.7 (vs. 19), with the decline mainly due to an increase in inventories. Notably, the prior reading was upwardly revised by 1.6 and the sixmonth- ahead indices for general business conditions, capex and employment all strengthened this month.

In the UK, the December headline CPI was in line at 0.4% mom, but the core CPI was lower than expected at 2.5% yoy (vs. 2.6%) - the first monthly decline since June. Elsewhere, both the December core PPI and RPI was abovemarket expectations, at 2.5% yoy (vs. 2.3%) and 4.1% yoy (vs. 3.9%) respectively. In Germany and Italy, the final readings for the December inflation were both unrevised at 1.6% yoy and 1% yoy respectively.

Looking at the day ahead, there is the final revisions to the December inflation figures for the Euro area. The ECB’s Nowotny will speak at a conference in Vienna and BOE’s Saunders will also speak in London. In the US, the most significant release of note is the December IP print, while the January NAHB housing market index is also due. Late in the evening we’ll get the Fed’s Beige Book, while the Fed’s Evans and Mester are scheduled to speak shortly after. Bank of America and Goldman Sachs are due to report Q4 earnings.