US index futures dropped and European shares edged lower as investors struggled to find fresh catalysts to extend their buying of stocks after the market has fully priced in an improved health outlook on vaccine optimism, while waiting for the latest ADP private payrolls report. Treasury yields modestly faded Tuesday surge which was sparked by renewed fiscal stimulus optimism, while the dollar rebounded from a 2.5 year low. At 7:30 a.m. ET, Dow E-minis fell 111 points, or 0.36% and S&P 500 E-minis dropped 11.25 points, or 0.31%. Nasdaq 100 E-minis declined 29.50 points, or 0.24%.

Among individual stocks, Salesforce.com dropped about 4.5% as it agreed to buy workplace messaging app Slack Technologies Inc in a $27.7 billion deal as it bets on an extended run for remote working. Moderna shares fell in the pre-market to as low as $135.52, down from earlier trading that saw prices as high as $151.47, after Merck said it had sold its direct holding in Moderna in the first half of the fourth quarter. Pfizer climbed after its Covid-19 shot was cleared for deployment in the U.K. as soon as next week while shares in BioNTech surged by more than 8% before trimming gains.

In the latest positive vaccine news, overnight Britain approved Pfizer and BioNTech's COVID-19 vaccine, jumping ahead of the United States and Europe to become the first country to formally endorse a shot it said should reach the most vulnerable people early next week. The two drug firms and competitor Moderna have also sought emergency use approval from European regulators this week, while U.S. health officials have announced plans to start vaccinating Americans as early as mid-December, once regulatory approvals are in place.

"Early vaccines will help bolster the reflation and normalcy trade, which has been the key macro theme in driving equity markets," said Neil MacKinnon, global macro strategist at VTB Capital. "Equity bulls will be hoping that the vaccine news is not an example of ‘buy the rumor, sell the fact’,” he added, saying there was a risk stock markets have already been "priced to perfection."

The MSCI index of global stocks inched up 0.4% to keep it near an all-time high set in the previous session. "General risk sentiment is unchanged - perhaps there’s a bit of consolidation today but that’s understandable given where we’ve come from since November," said Derek Halpenny, EMEA head of research for global markets at MUFG. The dollar lost more than 2.5% of its value in November.

Despite the positive vaccine news, European stocks failed to add to their recent surge. The Stoxx Europe 600 Index erased declines of as much as 0.5%, before dipping again, and trading down 0.3% last with automakers and travel shares leading declines while defensive sectors, such as real estate, utilities, healthcare gained.

Earlier in the session, Asian markets were mixed; shares in China recovered from early losses and rose 0.12%. China’s No. 2 smartphone maker Xiaomi Corp. dropped the most ever after disclosing a share sale. The offshore yuan erased gains after president-elect Joe Biden told the New York Times he won’t soon remove tariffs on Chinese goods. Tokyo stocks were little changed after setting a new 29-year high. Softbank Group shares fell 0.66% after Bloomberg News said the tech investor is winding down its options trades on companies including Amazon.com Inc and Facebook Inc.

As Bloomberg notes, after vaccine breakthroughs fueled record monthly gains for global stocks in November, markets appear to have priced in an improved health outlook, and investors are turning some of their attention to bonds. One of the year’s biggest spikes in Treasury yields on Tuesday has spurred speculation about the potential impact of rising rates on stocks and corporate debt.

"The question is how much is already priced in, and is the upside therefore limited?” Esty Dwek, head of global market strategy at Natixis Investment Managers Solutions, wrote in a report. “The outlook is one of improvement and leaving behind the chaos of the pandemic. Still, a number of risks remain."

Markets were also buoyed on Tuesday after top U.S. Senate Republican Mitch McConnell said that Congress should include new coronavirus stimulus in a $1.4 trillion spending bill aimed at heading off a government shutdown in the midst of the pandemic. Joe Biden told the New York Times his priority is getting a generous aid package through Congress even before he takes office in January.

Also on Tuesday Fed Chair Powell again cautioned lawmakers that the U.S. economy remains in a damaged and uncertain state during testimony at a Tuesday hearing before the Senate Banking Committee. Perhaps boosted by his comments, congressional efforts to pass additional coronavirus relief in the U.S. pushed ahead Tuesday as House Speaker Nancy Pelosi presented a fresh Democratic proposal and Senate Majority Leader Mitch McConnell floated a revision of his smaller plan to fellow Republicans.

In rates, Treasuries held small gains following Tuesday's rout although yields remained within a basis point of Tuesday’s closing levels. Yields were lower by about 1bp at long end with the curve slightly flatter; 10-year around 0.92% after touching 0.936% Tuesday, the cheapest in two weeks. Yields on euro zone government bonds edged up to their highest in three weeks at -0.51% before weakening to -0.525% at 1153 GMT.

In FX, The dollar edged off 2-1/2 year lows against the euro and a basket of major currencies hit earlier on Wednesday. The pound was under some pressure, with doubts remaining over whether Britain can agree a trade deal with the European Union. Sterling fell 0.6% to $1.3342. UK blue-chip stocks were up 0.2%.

In commodities, oil prices dropped after OPEC and its allies left markets in limbo by postponing a formal meeting to decide whether to lift output in January. Brent crude futures fell 0.44% to $47.21 per barrel, while U.S. crude was down 0.74% at $44.22 per barrel. Oil has raced up nearly 30% over the last month. Gold rose for a second day, while bitcoin traded just above $19,000.

As pandemic-led restrictions continue to pose a threat to the labor market recovery, investors will keep a close eye on November’s private payrolls data, which is due at 8:15 a.m. ET.  The U.S. House of Representatives is expected to pass legislation later on Wednesday that could prevent some Chinese companies from listing their shares on U.S. exchanges unless they adhere to U.S. auditing standards, congressional aides said.The bill would give Chinese companies like Alibaba , tech firm Pinduoduo Inc. and oil giant PetroChina Co Ltd. three years to comply with U.S. rules before being removed from U.S. markets.

Looking at today's calendar, we get the November ADP employment change at 8:15am ET and Fed Chair Powell appearance before House panel. ECB Board member Philip Lane is due to speak as part of the Thomson Reuters Global Investment Summit at 1400 GMT, ahead of a Dec. 10 ECB policy meeting which is expected to increase and extend the central bank’s Pandemic Emergency Purchase Programme.

Market Snapshot

• S&P 500 futures down 0.1% to 3,656.25
• STOXX Europe 600 down 0.05% to 391.72
• MXAP up 0.3% to 191.55
• MXAPJ up 0.3% to 631.40
• Nikkei up 0.05% to 26,800.98
• Topix up 0.3% to 1,773.97
• Hang Seng Index down 0.1% to 26,532.58
• Shanghai Composite down 0.07% to 3,449.38
• Sensex down 0.05% to 44,635.22
• Australia S&P/ASX 200 up 0.03% to 6,590.20
• Kospi up 1.6% to 2,675.90
• Brent futures down 0.1% to $47.36/bbl
• Gold spot up 0.5% to $1,824.21
• U.S. Dollar Index little changedat 91.36
• German 10Y yield rose 1.2 bps to -0.516%
• Euro down 0.1% to $1.2058
• Italian 10Y yield rose 4.8 bps to 0.563%
• Spanish 10Y yield unchanged at 0.12%

Top Overnight News from Bloomberg

• President Trump has discussed with advisers whether to grant pre-emptive pardons to his children, to his son-in-law and to his personal lawyer Rudolph W. Giuliani, and talked with Mr. Giuliani about pardoning him as recently as last week, according to two people briefed on the matter
• President-elect Joe Biden told the New York Times he’d leave the phase-one trade deal with China in place while he conducts a full review of U.S. policy toward its Asian rival in consultation with key allies
• One of the year’s biggest spikes in Treasury yields has investors mapping out the impact of rising rates on markets ranging from stocks to corporate bonds
• The U.K. became the first western country to approve a Covid-19 vaccine, with its regulator clearing Pfizer Inc. and BioNTech SE’s shot ahead of decisions in the U.S. and European Union
• European Central Bank policy maker Martins Kazaks said an expansion of the institution’s emergency bond-buying program by 500 billion euros ($603 billion) would be “reasonable” and he’s ready to support an extension until mid 2022
• German car and parts makers’ expectations have regressed during each of the last four months in the Ifo Institute’s monthly survey, sending the economic think tank’s index into negative territory in November

A quick look at global markets courtesy of NewsSquawk

In Asia, stocks lacked firm direction as momentum faded from the record-setting performance on Wall St, where the S&P 500 and Nasdaq printed fresh all-time highs after a resumption of COVID-19 relief discussions and weak data spurred stimulus hopes, while US futures pulled back after-hours with DJIA futures retreating further away from 30k. ASX 200 (Unch.) was indecisive after underperformance in healthcare and tech was offset by gains in the mining sectors and with better than expected GDP data failing to spur risk appetite as although Q/Q growth topped estimates at 3.3% vs. Exp. 2.6%, the economy still contracted by 3.8% from the prior year. Nikkei 225 (+0.1%) traded rangebound and ignored a predominantly weaker currency, while KOSPI (+1.6%) outperformed amid strength in chipmakers and with shares in index heavyweight Samsung Electronics rallying to unprecedented levels. Hang Seng (-0.1%) and Shanghai Comp. (Unch) conformed to the humdrum mood after the PBoC drained CNY 110bln of liquidity and amid lingering concerns regarding US-China tensions, as well as the worsening COVID-19 situation in Hong Kong. Finally, 10yr JGBs fell below the key 152.00 level as they tracked the downturn in T-notes but with further losses stemmed by the uninspiring mood for regional stocks and with the BoJ present in the market for nearly JPY 1.1tln of JGBs in up to 5yr maturities.

Top Asian News

• Specter of Cashless Gambling Drives Junket Operators from Macau
• Thai Court Rejects Petition to Disqualify Premier Amid Protests
• Philippines Adds to Global Debt Binge With Another Bond Deal

European markets kicked the session off lower across the board but have since trimmed/nursed losses with the region now seeing a mixed picture (Euro Stoxx 50 -0.2%) following the uninspiring APAC handover. The main news of the morning has been UK's approval of the Pfizer/BioNTech COVID-19 vaccine, a move touted in UK press over the weekend, with the vaccine to be rolled out as soon as next week, with sources over the weekend suggesting the first jab to be administered on December 7th. On this front, it is worth keeping in mind the challenges posed by the logistics of supply and distribution, whereby "The companies have developed specially designed, temperature-controlled thermal shippers utilizing dry ice to maintain temperature conditions of -70°C±10°C. They can be used be as temporary storage units for 15 days by refilling with dry ice", according to the official PFE/BNTX release. Nonetheless, the news sparked little in the way of a sustained reaction across European and US equity futures, with US FDA and EU EMA reviews expected later this month. On that note, EU lawmakers called the UK approval "problematic" as it was too fast - something to keep an eye on to gauge the bloc's risk profile with regards to accelerated approvals. Sectors in Europe are mostly in the red having had had a downbeat open, but energy has recouped lost ground on account of price action in the complex whilst healthcare is supported. Elsewhere, Travel & Leisure was faring well at the open but the optimism has since waned. Overall, a clear risk profile cannot be derived from sectors. Looking at individual movers, G4S (+7%) top the charts following a revised offer from Gardaworld who upped the price to GBP 2.35 per G4S shares vs. the prior offer of GBP 1.90. G4S has until December 16th to digest the terms and respond. Meanwhile, Rolls-Royce (+1.0%) sees tailwinds after signing an aerospace engineering partnership with Indian giant Infosys. Finally, Tesco (-1.5%) shares are on the backfoot as the Co. is to repay the UK govt GBP 585mln of business rates relief received in the wake of the pandemic, whilst adding the latest estimates in October was that COVID would cost Co. GBP 725mln this year, well in excess of the rates relief received.

Top European News

• U.K. Debates Carbon Cut as High as 69% to Show Climate Ambition
• The U.K. Has Approved a Vaccine. Here’s What Happens Next
• Covid-19 Testing for Most of a Nation Backfires on Slovak Leader

In FX, the Pound was riding high alongside fellow majors against downtrodden Dollar before an update on Brexit trade talks from chief EU negotiator Barnier pulled the rug from Cable and pushed Eur/Gbp back above 0.9000. In short, far from entering the final phase towards a deal, the 2 sides remain apart on the 3 main sticking points and an agreement is still in the balance. Moreover, his briefing to envoys also conceded that is uncertain whether the gaps can be bridged as EU officials are said to be getting increasingly nervous about the prospect of reaching an accord, albeit with one source in Brussels suggesting that a deal can still be done in December, next month or (presumably) later in 2021. Cable is now a full point down from best levels circa 1.3440 and the cross is hovering near the top of a 0.9045-0.8965 range.

• DXY - For all intents and purposes, the Buck appears to have stopped the rot by virtue of the aforementioned relapse in Sterling, as other G10 currencies suffered contagion, like the Euro to lift the index from 91.103 to 91.426. However, the Greenback remains fragile overall ahead of ADP, the 2nd part of Fed chair Powell’s Congressional testimonies and 2 speeches from Williams before the latest Beige Book prepared for next month’s FOMC.
• AUD/NZD/CAD - Mixed GDP data and the ongoing rift with China may be keeping the Aussie capped into 0.7400 vs its US counterpart, but Aud/Nzd has bounced from recent lows nearer the 1.0400 mark as the Kiwi stalls in the high 0.7300 zone against its US peer following remarks from RBNZ Governor Orr flagging risks to the economic recovery and outlook, while reiterating that the LSAP, FLP and OCR can all be adjusted to meet the Bank’s mandate. Meanwhile, some stability in crude prices is keeping the Loonie afloat between 1.2915-50 parameters awaiting OPEC+ tomorrow.
• JPY/CHF/EUR - Little respite for the underperforming Yen irrespective of fading risk sentiment and bear-steepening in US Treasuries abating somewhat, as Usd/Jpy pivots 104.50 in a moderately firmer 104.23-72 band. Elsewhere, the Franc is straddling 0.9000 against the Dollar, but thankfully for the SNB unable to keep pace with the Euro following its outsized gains yesterday given more deflationary than expected Swiss CPI. Indeed, Eur/Chf is elevated within a 1.0852-71 band even though Eur/Usd has run in to resistance just shy of 1.2100, albeit partly in sympathy with the Pound as noted above. Note also, aside from the obvious psychological factors surrounding the next round number, a prior high from September 2017 (1.2092) may be hampering the single currency in addition to a key Fib retracement level only a few pips above (1.2103 represents a 76.4% correction of the move from 1.2555 to 1.0638 - mid-February 2018 peak to this year’s low).

• SCANDI/EM/PM - The Sek and Nok seem more in thrall with Eur excesses than the general risk tone or somewhat confusing Norwegian current account developments as the surplus widened in Q3, but only after a huge downward revision to the prior quarter. Conversely, EMs are trading mixed with the Zar underperforming regardless of Xau extending its recovery rally beyond another chart hurdle in the form of the 10 DMA (after breaching the 200 DMA on Tuesday).

In commodities, WTI and Brent front month futures have recouped earlier losses which were seen in wake of OPEC indecision coupled with a surprise build of 4.1mln bbl (vs. Exp. -2.4mln bbls) in private inventories last night. The recovery in futures commenced in APAC hours but gained traction following the UK vaccine approval announcement, albeit in the context of yesterday's sell-off, the recovery is somewhat tame. In terms of where we stand on OPEC, ministers are to meet again today in an attempt to hash out differences over the producers' next move - with three options reportedly on the table. 1) An extension of current cuts by three months (Saudi's preference), 2) output to be raised from January but by a smaller volume than the 2mln BPD under the DoC (Russia's preference), and 3) hiking output under the original plan. Furthermore, the compliance mechanism seems to be an issue with the UAE, whereby sources noted that kingdom is willing to back the 7.7mln BPD extension but contingent on assurances of improved compliance. Note UAE also reportedly called for an extension of 7.2mln BPD cuts. WTI Jan trades on either side of USD 44.50/bbl (vs. low 43.92/bbl) and Brent Feb on either side of USD 47.50/bbl (vs. low ~ 46.85/bbl). Elsewhere, precious metals have been bolstered post-vaccine approval amid reflationary play and despite the firmer Buck. Spot gold also surpassed the 10DMA (~ 1820/oz) flagged by technicians ahead of USD 1850/oz psychological mark and the 21 DMA at USD 1859/oz. Spot silver meanwhile continues to make headway above USD 24/oz. Elsewhere, Dalian iron ore futures gained as much as 3.5% amid rosy steel demand prospects, whilst LME copper is subdued amid the firmer Buck and mixed equity picture.

US Event Calendar

• 7am: MBA Mortgage Applications, prior 3.9%
• 8:15am: ADP Employment Change, est. 430,000, prior 365,000
• 2pm: U.S. Federal Reserve Releases Beige Book

Central Banks

• 10am: Powell Appears Before House Finance Panel
• 1pm: Fed’s Williams Holds Press Briefing
• 2pm: U.S. Federal Reserve Releases Beige Book

DB's Jim Reid concludes the overnight wrap

Risk assets got December off to a very strong start yesterday, as both the S&P 500 (+1.13%) and the NASDAQ composite (+1.28%) shrugged off the rising number of pandemic cases to reach fresh all-time highs. 21 of the 24 S&P 500 industry groups rose yesterday, and there was not a clear driver of the rally which was led by a mix of growth and cyclical names. Tech hardware (+2.65%), Media (+2.27%), Autos (+1.96%) and Banks (+1.95%) all led the way, Energy (+0.44%) had been doing well early in the session before oil prices reversed on further OPEC+ meeting worries. The overall equity strength was seen in Europe too, where the STOXX 600 (+0.65%), the DAX (+0.69%) and the FTSE 100 (+1.89%) had all moved higher by the close.

With equities reaching all-time highs, there was a major selloff in sovereign bond markets as investors rotated out of safer assets, and yields on 10yr US Treasuries were up +8.7bps to 0.926% by the close. The moves offered support for those of us saying the Covid crisis is more likely to lead to inflation than deflation in the coming years (although maybe not in 2021), since US 10-year breakevens rose to 1.82% yesterday, their highest closing level since May 2019. European sovereigns witnessed a similar selloff, and yields on 10yr bunds (+4.3bps), OATs (+3.7bps) and gilts (+4.2bps) all moving higher yesterday. Nevertheless, Greek bonds continued their relative outperformance however, with the spread of their 10yr yields over bunds falling to a post-sovereign debt crisis low yesterday of 1.185%.

Overnight the New York Times has reported that President-elect Joe Biden won’t immediately remove the phase 1 tariffs on China and will conduct a full review of the existing trade deal with China. Biden further said that when dealing with China it is all about “leverage,” and “in my view, we don’t have it yet.” This news is weighing on Asian bourses as most of them have erased part of their early gains. Currently, the Nikkei (+0.04%) and Shanghai Comp (+0.02%) are flattish while the Kospi (+1.47%) is up and the Hang Seng (-0.20%) is down. Futures on the S&P 500 are down -0.26% and European equivalents are pointing to a weaker open.

Fed Chair Powell spoke yesterday before the Senate Banking Committee and again tried to urge lawmakers that while economic indicators are improving, the outlook for the economy continues to see risks. The Fed chair noted that the “recent news on the vaccine front is very positive for the medium term,” but added that “significant challenges and uncertainties remain, including timing, production and distribution, and efficacy across different groups.” Powell also both congratulated the CARES act for helping to support the economy while also stressing the fact that more fiscal stimulus may be needed, especially in a winter that is sure to see more small business closures if case counts do not get under control quickly. Treasury Secretary Mnuchin shared the Fed Chair’s desire to get more fiscal stimulus and urged Congress to “pass something quickly”.

This came just ahead of reports that House Speaker Pelosi and Senate Majority Leader McConnell had new proposals for fresh stimulus. Pelosi’s plan has been sent to Secretary Mnuchin and the Republican leadership, while Senator McConnell is circulating his plan among Republicans to gauge support. President-elect Biden has called on Congress to get a “robust package” passed in the lame duck session, though indicated that this would be just the start. Neither plan had been released but you may recall that McConnell previously supported a $500 billion package, while President Trump indicated he is willing to back a bigger bill. Any legislation would have to get past a Democratic-controlled House, where Pelosi has called for a $2.4 trillion plan.

Risk appetite was further supported yesterday by some very strong readings in the global manufacturing PMIs, where all of the major economies reported decent numbers. In the Euro Area, the final PMI was revised up from the flash reading to 53.8 (vs. flash 53.6), the UK saw a revision up to 55.6 (vs. flash 55.2), and the US remained in line with the flash number at 56.7. Furthermore, as we mentioned in yesterday’s edition, China’s PMI was above expectations as well at 54.9. So all of the world’s major economies have their manufacturing PMIs in the 50s, which is in expansionary territory, and that’s even with the increase in restrictions that have come into place with Covid case numbers on the rise.

Speaking of Covid, UK MPs voted by 291-78 yesterday in favour of the new tiered system of restrictions for England. And the 78 voting against the measures included 55 from Prime Minister Johnson’s own Conservative Party, which reflects the fact that there’s increasing disquiet against further prolonged restrictions. Nevertheless, Johnson also told the House of Commons that if the Pfizer/BioNTech vaccine was approved, then it could start to be administered before Christmas, which raises the prospect that life could return closer to normal early next year.

Staying with vaccines, Pfizer/BioNTech have said that they have sought regulatory clearance for their Covid-19 vaccine in the EU with BioNTech adding that it could start shipping the first doses “within hours” after approval. Meanwhile, CNN has reported overnight that the US will see the first shipments of this vaccine delivered by December 15 while Moderna’s vaccine will arrive a week later.

In New York City, older residents and those with underlying health conditions were advised to remain at home and not have people over. This came as city hospitalisations rose by 242 yesterday, the largest one day rise since April. In better news, Dr Fauci said that US residents without co-existing conditions or elevated risks will get access to vaccines by April. He went on to say that, if Americans embrace vaccination to a high enough degree, herd immunity could be reached over the summer. The comments came in an online news conference with Colorado governor Polis. Overnight, Bloomberg has reported that the US CDC new guidance will cut quarantine time for individuals exposed to the coronavirus by as much as half. Across the other side of world, the Nikkei reported that Japan won’t require visitors to get vaccinated before arriving for next year’s Summer Olympics.

On Brexit, with just over 4 weeks to go until the end of the transition period, the chief political commentator of Times Radio reported yesterday that the trade talks had finally entered the so-called tunnel, which are intensified negotiations in the late-stage of talks. He said that “Neither side formally confirming tunnel status yet. No10 never recognise the term, but also not denying it.” There is some chatter that a deal as early as later this week could be on the cards. I say early but in reality this is very late in the day but the early refers to how soon that is to now! On the flip side there were also reports suggesting negotiators were bemused by reports that talks had entered a so called tunnel so no-one knows where we are apart from the two sides who are probably confused themselves! The EU’s chief negotiator is set to brief diplomats from the bloc’s 27 member states today on the progress of the negotiations. So expect more headlines and perhaps some more clarity on the state of negotiations.

Elsewhere in Europe, data yesterday showed the flash estimate of CPI inflation in the Euro Area remained at -0.3% for the 3rd month running in November, a tenth below expectations. However as in the US, inflation expectations have been on the up over the last week, with five-year forward five-year inflation swaps for the Euro Area now at a 3-month high of 1.23%. And on top of this, the dollar’s slide meant that the euro closed above $1.20 for the first time since April 2018. See here for why DB think the Euro rise continues.

To the day ahead now, and we’ll hear from Fed Chair Powell and Treasury Secretary Mnuchin again as they appear before the House Financial Services Committee. Otherwise, there’ll also be remarks from the Fed’s Williams and the BoE’s Haskel, and the Federal Reserve will be releasing its Beige Book. Elsewhere, data highlights include the Euro Area unemployment rate and German retail sales for October, while from the US we’ll get the ADP’s November report of private payrolls.