US equity futures and world stocks continued their ramp higher on Tuesday following upbeat German and Chinese data showed the economic recovery was gaining traction, coupled with the usual optimism about coronavirus vaccines while the struggling dollar kept the hot streaks for the euro and some of the biggest emerging market currencies sizzling. The USDJPY slumped to 105.53 while the Chinese yuan rose above 6.80, the highest level since May 2019.

E-Mini futures for the S&P 500 put on 0.6%, also reversing early losses. Tesla, Apple and Nvidia all climbed in pre-market trading, while in Europe Hennes & Mauritz AB led a rally among fashion retailers after beating profit estimates. Ocado Group gained after the U.K. grocery delivery company reported a strong surge in sales. Sentiment was also boosted by hopes for a COVID-19 vaccine after British drugmaker AstraZeneca restarted its vaccine trial and the dollar extending recent losses, other currencies were also on the rise.

“It is better risk appetite and the softer dollar environment,” ING’s Chief EMEA FX and interest rate strategist, Petr Krpata, said, though the approaching U.S. election was likely to prevent too much of a run up, he added.

"Market volatility is returning after months of steady advances in risk assets,” BlackRock Investment Institute strategists led by Elga Bartsch said. "Valuations have risen, and we could see greater volatility as a result, especially as the U.S. election closes in."

Europe’s STOXX 600 was last up 0.5% having shaken off its slow start after a surprise jump too in Germany’s ZEW sentiment survey, which surged to 77.4 (up from 71.5), smashing expectations of 69.8, and the highest since June 2000.

“The September ZEW was a strong beat, with expectations reaching a 20-year high and current conditions also exceeding expectations,” Morgan Stanley economist Markus Guetschow said, although he did caution most other data was still gloomier.

Earlier in the session, the MSCI index of Asia-Pacific shares ex-Japan added 0.5%, for a fourth straight day of gains that propelled it up 3% for the year  with health care rising and consumer staples falling, after rising in the last session. Most markets in the region were up, with Thailand's SET gaining 0.8% and South Korea's Kospi Index rising 0.6%, while Jakarta Composite dropped 1.2%. The Topix declined 0.6%, with Hamee and Diamond Electric Holdings falling the most. The Shanghai Composite Index rose 0.5%, with Junzheng Energy and Ningbo Shanshan posting the biggest advances.

The offshore yuan climbed to the highest level in a year and stocks in Shanghai advanced on evidence that China is accelerating out of the virus slump. As noted last night, industrial production beat expectations, while retail sales rose for the first time this year in August.

The day’s eye-catching move was a 16-month high for the yuan as 5.6% jump in Chinese industrial output in August and the first pick-up in retail sales since the coronavirus outbreak gave it its best day since July. "Strong external demand, a further recovery from the pandemic and pent-up demand from the floods all contributed to the robust activity data in August," Ting Lu, chief China economist at Nomura, said in a note to clients. "We expect a further, albeit gradual, recovery of the services sector, a steady improvement in retail sales and elevated fixed-asset investment growth."

With the yuan leading the charge, MSCI’s EM FX index also climbed to a near 7-month high. The Australian dollar led an advance among Group-of-10 currencies against the greenback after the central bank’s latest minutes showed it didn’t plan to ease further anytime soon. The Bloomberg Dollar Spot Index gave up an earlier advance after China posted its first growth in retail sales since Covid-19 hit early in the year. The euro rose a fifth day against the greenback, up 0.2% at $1.1891 after the surprise jump too in Germany’s ZEW sentiment survey, while the pound advanced for a second day on improved global risk appetite. The yen nudged higher as Japanese Chief Cabinet Secretary Yoshihide Suga won a ruling party leadership vote, as expected, paving the way for Japan’s first change of leader in nearly eight years.

“He’s seen as someone who’s particularly stock market friendly. The fact that we’ve got political certainty for the next two years from someone who’s connected to the free market is going to be good news for Japan,” said Jim McCafferty, joint head of Asia Pacific equity research at Nomura.

Investors now turn their attention to the Federal Reserve whose two-day policy meeting begins today to gauge the outlook for markets following a slide of about 2% in global stocks this month. The Fed is expected to maintain its dovish stance after earlier saying it will shift to a more relaxed approach on inflation. Central bank largesse is shoring up sentiment in the face of risks from the pandemic, the U.S. presidential election and the possibility of a no-deal Brexit.

In rates, treasuries were weaker as U.S. trading gets under way, led by long end ahead of $22b 20-year bond reopening at 1pm. U.S. yields lag steeper increase in several European markets, especially supply-driven move in U.K. gilts. Yields were higher by about 2bp at long end, 10-year by less than 1bp at 0.68%; WI 20-year yield is around 1.22% vs 1.185% stop in August new-issue auction. Last week’s 30-year reopening stopped through slightly, arresting a bear-steepening move in Treasuries and easing concern about appetite for record-size auctions; Tuesday’s 20-year reopening is $5b larger than last quarter’s taps, and the projected total issue size for the August 2040 bond is $69b vs $44 billion for the May 2040 according to Bloomberg.

In commodities, Brent crude climbed back to $40 a barrel and gold prices put on 0.4%, extending a sharp rise in the previous session. WTI and Brent futures have been on an upward trajectory in the latter part of the European morning as traders balance the supply and demand implication arising from developments in the Gulf of Mexico alongside a resurgence of the pandemic ahead of the JMMC meeting on Thursday. Most industrial metals were bolstered by the robust Chinese data; gold jumped on the back of the weaker dollar.

Looking at the day ahead, we’ll get the Empire State manufacturing survey for September, as well as industrial production, capacity utilisation and the import price index for August. FedEx is among companies reporting earnings.

Market Snapshot

• S&P 500 futures up 0.4% to 3,395.00
• STOXX Europe 600 up 0.2% to 369.30
• MXAP up 0.09% to 173.18
• MXAPJ up 0.5% to 569.87
• Nikkei down 0.4% to 23,454.89
• Topix down 0.6% to 1,640.84
• Hang Seng Index up 0.4% to 24,732.76
• Shanghai Composite up 0.5% to 3,295.68
• Sensex up 0.5% to 38,966.30
• Australia S&P/ASX 200 down 0.08% to 5,894.83
• Kospi up 0.7% to 2,443.58
• Brent Futures up 0.3% to $39.72/bbl
• Gold spot up 0.3% to $1,963.16
• U.S. Dollar Index down 0.1% to 92.92
• German 10Y yield rose 0.9 bps to -0.471%
• Euro up 0.2% to $1.1884
• Brent Futures up 0.3% to $39.72/bbl
• Italian 10Y yield fell 4.1 bps to 0.815%
• Spanish 10Y yield rose 1.7 bps to 0.3%

Top Overnight News from Bloomberg

• The Federal Reserve’s new approach to setting interest rates will probably be hard to divine from the economic projections it’s set to publish on Wednesday
• The head of macro strategies at Record Currency Management is shorting government bonds of Spain, France and Italy -- as well as the euro itself -- on the expectation that Turkey’s market ructions will soon be felt on the balance sheets of European banks
• Barclays Plc asked Pritpal Gill, head of foreign exchange trading in Asia Pacific, to leave after about 18 months with the British lender

A quick look at global markets courtesy of NewsSquawk:

Asian equity markets were somewhat mixed as the region only partially sustained the momentum from the firm handover from the US where the tech sector resumed its outperformance and sentiment was underpinned by vaccine and M&A developments. ASX 200 (-0.1%) was indecisive and only briefly benefitted from the announcement to ease regional Victoria coronavirus restrictions, with strength in tech and mining stocks offset by losses in energy and financials, while Nikkei 225 (-0.4%) underperformed as exporters suffered from the ill-effects of a firmer currency and with Sony shares pressured by reports it is to reduce its PS5 sales forecast by 4mln units due to chip supply issues. Hang Seng (+0.4%) and Shanghai Comp. (+0.5%) eventually gained following a CNY 600bln MLF announcement by the PBoC and better than expected Chinese data where Industrial Production and Retail Sales both topped forecasts. In addition, China announced to extend tariff exemptions for 1 year on imports of some US products which were due to expire tomorrow, although the support for stocks was limited as uncertainty regarding TikTok remained given the no-algorithm inclusion aspect of the deal and with the US to block imports of cotton, linen, hair products and computer parts made by specific entities in Xinjiang. Finally, 10yr JGBs were flat following similar rangebound trade in T-notes, while firmer demand at today’s enhanced liquidity auction for long-end JGBs only mildly supported as price action was once again hampered by resistance at the 152.00 level.

Top Asian News

• Chinese Consumers Join Industrial Recovery From Covid-19
• China Gives Markets Just Enough Support, Lets Yuan Strengthen
• Hong Kong to Reopen Pubs, Pools and Theme Parks From Friday
• Singapore Trader Rhodium Sued by Maybank for $3 Million Payment

Europe saw an uninspiring cash open following a mixed APAC handover, but thereafter upside momentum seeped into the markets (Euro Stoxx 50 +0.6%) – with little by way of fresh catalysts to shift the dials ahead of the FOMC policy decision tomorrow. Nonetheless, performance across bourses remain mixed but tilted to the upside, with the DAX (+0.2%) the laggard in the region whilst IBEX (+1.6%) leads the gains, propped up by solid gains in index heavyweight Inditex amid broader consumer discretionary outperformance, with the sector underpinned by H&M (+13%) after a well-received trading update. Sticking with sectors, material names are supported by the USD-induced gains in copper coupled with strong Chinese data and a slew of broker upgrades for the UK mining sectors; for the likes of Anglo American (+2.4%), Glenore (+2.8%), BHP (+2.5%), Rio Tinto (+2.82%), Fresnillo (+0.6%) and Polymetal (+0.8%). To the downside, Financials are weighed by the European banking sector consolidation, with Spanish banks pressured after Caixabank (+0.9%) is said to be mulling a EUR 4bln bid for Bankia (-0.9%) vs. current market cap EUR 4.2bln, whilst UBS (-1.5%) threatened to move its HQ to Frankfurt if officials were to forbid a merger with Credit Suisse (-2.0%). In terms of other individual movers, Fiat Chrysler (+7.1%) has benefitting from a revision of its planned merger with PSA (-0.9%) which includes dividend cut in order to keep cash inside the merged entity. This has also weighed on the likes of Faurecia (-6.5%) as PSA is the majority shareholder in the group, will in turn delay the planned spinoff of Faurecia until after the mergers’ closing. Finally, Carrefour (-2.5%) shares remain on the backfoot after Credit Agricole corporate and investment bank launched the disposal of around 3.1% of Carrefour share capital.

Top European News

• Panetta Says ECB Needs to Remain Vigilant on Inflation Outlook
• Trial Against Carlos Ghosn Begins as Kelly Faces Charges Alone
• U.K. Says ‘No Magic Solution’ for Struggling Covid Test System
• William Hill Soars to 22-Month High; Partner Signs ESPN Deal

In FX, in contrast to yesterday, news that COVID-19 restrictions have been eased in the state of Victoria allied to a relatively upbeat economic assessment in the RBA minutes have boosted Aud/Usd and Aud/Nzd from sub-0.7300 and circa 1.0860 respectively, while the ongoing appreciation of the Yuan (CNY and CNH both through key resistance at 6.8000 vs the US Dollar) following stronger than expected Chinese data (ip and retail sales) has also propelled the Aussie a bit further than the Kiwi as Nzd/Usd pivots 0.6700 before Q2 current account data.

• GBP - Encouraging UK labour market metrics and some LHS interest in the Eur/Gbp cross appear to be propping up the Pound rather than safe enough passage of the IMB through parliament last night, as Cable bounces from the low 1.2800 zone to retest 1.2900 and Sterling takes another look at bids/support protecting 0.9200 vs against the Euro. However, the 200 WMA at 1.2933 still poses a technical hurdle if 1.2900 is breached again and market contacts suggest a breach of 0.9200 may be shallow given ongoing no deal Brexit risk.
• CHF/EUR - Also firmer vs the Greenback, with the Franc holding near the top of a 0.9090-55 range and undeterred by more deflationary Swiss import and produce prices, while the Euro trades closer to 1.1900 than 1.1850 amidst decent option expiry interest (1 bn between 1.1900-10, 1 bn at 1.1885 and 2.4 bn at 1.1850) and underpinned by ZEW readings beating consensus comfortably.
• CAD/JPY/USD - The Loonie and Yen are narrowly mixed against the Buck, as Usd/Cad straddles 1.3150 in advance of Canadian manufacturing sales and Usd/Jpy hovers below 106.00 before several US data points and Japanese trade ahead of the Fed. Meanwhile, the DXY is tethered to 93.000 awaiting impetus in the run up to the FOMC or via fresh guidance and SEP forecasts in the newly adopted flexible AIT era.
• SCANDI/EM - Moderately firmer oil prices and risk sentiment overall appear to have nudged the Norwegian and Swedish Crowns off Monday’s lows instead of data in the form of a wider trade deficit and fractionally softer than anticipated SA unemployment rate respectively. Moreover, improvements in the latest Norges Bank regional survey and the Riksbank rolling out Usd swap agreements until the end of Q1 next year may be keeping Eur/Nok and Eur/Sek capped at 10.7000 and 10.4000. Conversely, Turkey’s Lira is struggling to rebound after slipping briefly and marginally beneath 7.5000 as EU’s Borell warns that the country’s future relationship with the bloc is on the line. Elsewhere, the Rand will be eyeing SA business confidence for more pre-SARB pointers.

In commodities, WTI and Brent front month futures have been on an upward trajectory in the latter part of the European morning as traders balance the supply and demand implication arising from developments in the Gulf of Mexico alongside a resurgence of the pandemic ahead of the JMMC meeting on Thursday. In terms of the breakdown, the supply side sees disruptions from the myriad of hurricanes and tropical storms developing in the Atlantic, with Hurricane Sally the most pertinent as it is poised for landfall in the Gulf later today – with BSEE yesterday estimating that that approximately 21.39% of the current oil production and ~25.28% of the natural gas production in the Gulf of Mexico has been shut-in, with today’s update due at 1900BST. Sticking with supply side, sources yesterday suggested the OPEC+ meeting is unlikely to advocate deeper oil output cuts, with Saudi to reportedly not looking to lift oil prices, in-fitting with recent source reports via the FT. Moving to demand, the IEA cut its 2020 global oil demand growth forecast by 200k BPD, citing resurgence of COVID-19 cases, local lockdown measures, remote working and weak aviation for the downgrade. The agency also expects the recovery in oil demand to decelerate markedly in H2 this year. The report aligned itself with both the OPEC and EIA STEO, with OPEC and IEA also highlighting the renewed weakness in the Indian markets dragging on demand. Nonetheless, WTI resides around USD 38/bbl (vs. low 37.06/bbl) while its Brent counterpart regains a footing above 40.00 (vs. low 39.39/bbl). Elsewhere, spot gold and silver derive support from the softer USD to eke mild gains around USD 1960/oz and above USD 27/oz respectively. In terms of base metals, LME copper is supported and Shanghai copper was underpinned by the strong Chinese industrial production data and the recent gains in the stock markets, whilst Dalian iron ore futures came under pressure from lower Chinese steel margins.

US Event Calendar

• 8:30am: Empire Manufacturing, est. 6.8, prior 3.7
• 8:30am: Import Price Index MoM, est. 0.5%, prior 0.7%; YoY, est. -2.1%, prior -3.3%
• 8:30am: Export Price Index MoM, est. 0.4%, prior 0.8%; Index YoY, est. -3.2%, prior -4.4%
• 9:15am: Industrial Production MoM, est. 1.0%, prior 3.0%; Capacity Utilization, est. 71.35%, prior 70.6%

DB's Jim Reid concludes the overnight wrap

I’ll be publishing my monthly chart book later today so please keep an eye out for that. We released a single off this new album yesterday and previewed our “Print money not babies” chart which basically reinforces our long standing view that money printing is going to increase for years to come unless in part we can magic up more people in the generations behind us. See the CoTD here and a reminder that if you want it straight to your mailbox daily please email Jim-Reid.ThematicResearch@db.com. Also a reminder that we published our annual long-term study last week. This year’s is entitled “The Age of Disorder” (link here).

It was “Merger Monday” in markets yesterday which must mean its “Takeover Tuesday” today? What will Wednesday welcome? Anyway, this M&A theme helped kick US equity markets off on a strong footing ahead of tomorrow’s Federal Reserve decision, as the S&P (+1.27%) and the NASDAQ (+1.87%) both saw major gains. The NASDAQ particularly benefited from the large M&A deals in Tech and Biotech, the two biggest components of the index. Although tech stocks led the advance, every sector in the S&P and 90% of all stocks in the index moved higher on the day. Meanwhile the VIX volatility index fell -1.0pts to 25.85, a lower mark than when the S&P hit record highs back on 2 Sept.

Oracle (+4.32%) had a good day after press reports (per Bloomberg) said that the company had reached a preliminary agreement in its bid for TikTok’s US operations, while Immunomedics was the top performer in the NASDAQ, seeing a massive +97.99%% advance after Gilead Sciences agreed to acquire the company for $21bn. Softbank remained in the tech headlines after agreeing to sell its chip division Arm Ltd. to Nvidia for $40bn. Nvidia, the seventh biggest company in the NASDAQ, rose +5.82% on the news. As has generally been the case this year however, European equities lagged behind, with the STOXX 600 up just +0.15% in spite of the tech outperformance there as well.

There were M&A headlines in Europe as well in the form of the perennial UBS / Credit Suisse merger story. The story emanated from an Inside Paradeplatz story, a Swiss Finance blog, claiming that the Chairmen of both banks are working on it together and had discussed the idea with the Swiss Finance Minister Maurer. Shares of Credit Suisse (+4.33%) and UBS (+2.47%) rose more than the Euro banking sector (+0.96%) – of which they are not eligible of course – on the reports.

On the coronavirus, there was mixed news on the vaccine front. AstraZeneca have restarted their trials in the U.K. (as we discussed yesterday), after an 8 day delay due to a subject falling ill, though the U.S. trial could remain on hold through midweek pending its independent probe. Separately, Pfizer CEO Bourla saw his weekend comments that it’s “likely” that the U.S. could deploy a vaccine before year-end expanded upon. He added that Pfizer and Germany partner, BioNTech, have a 60% chance of having an idea on the efficacy by the end of October.

Any positive vaccine news will be welcome as restrictions are once again being enacted as caseloads rise. France had over 6000 new cases on Monday, with Marseille and Bordeaux limiting public gatherings for individuals to 10 people or fewer, while the limit for large outdoor gatherings such as sporting events and concerts have been lowered to 1000 from 5000 people. Both regions are outlawing standing outdoor bars and will be shutting down bars and restaurants that are not strictly observing and enforcing distancing guidelines. Weekly cases in France are now up to 58,400 compared to a high of 41,000 back in April. Here in the UK the new guidelines restricting gatherings to no more than 6 people in both indoor and outdoor settings went into place yesterday as weekly cases are now over 21,000 for the first time since mid-May. Meanwhile Israel’s cabinet have voted to enact a second national lockdown starting at the end of this week as the country is currently seeing 25,000 new cases a week, compared to 12,000 weekly cases at the start of September. Cases in the US continue to fall as the major hotspots see cases coming back under control, however the weekly cases (243,800) have still not fallen under the highs of the first wave (217,700). Though as we have noted in the past the second wave saw fewer hospitalisations than the first, see the aforementioned upcoming chartbook for more on this.

Overnight we have seen China’s August economic data with retail sales (at +0.5% yoy vs. unchanged expected) and industrial production (at +5.6% yoy vs. +5.1% yoy expected) both beating expectations and thereby underscoring a rebound in economic activity due to fiscal stimulus and strong exports. Meanwhile the surveyed jobless rate came in line with expectations at 5.6% and YtD fixed asset ex rural were a touch better than expectations at -0.3% yoy. The Hang Seng (+0.57%) and Shanghai Comp (+0.28%) are advancing this morning on the back of these data beats. Other bourses in the region are trading a bit more mixed with the Nikkei (-0.56%) and Asx (-0.17%) both down while the Kospi (+0.64%) is up. In FX, all G-10 currencies are up against the greenback with the euro advancing +0.20% to 1.1890 and the onshore Chinese yuan up +0.35% to 6.7868, the highest level since May 2019. Other EM currencies are also trading up. Futures on the S&P 500 are up +0.17% this morning.

While we’re on Asia, in Japan just after we went to print yesterday the ruling Liberal Democratic Party’s leadership election was won by chief cabinet secretary Yoshihide Suga, in line with expectations. Suga won more than 70% of the available votes, and is now almost certain to replace Shinzo Abe as Prime Minister in a parliamentary vote tomorrow, with the new cabinet also expected to be announced the same day. Meanwhile overnight reports (per the Nikkei newspaper and Nippon TV) are suggesting that incumbent Finance Minister Taro Aso will keep his post in new cabinet. Aso has served as finance minister since the start of the Abe government in late 2012 and keeping him on would reinforce Suga’s message that he intends to keep the main policies of the outgoing Abe administration. Elsewhere, Aso has said overnight that the incoming government should consider calling an early election given plans to hold the postponed summer Olympics next year.

Staying on politics, Brexit got further attention yesterday, as the House of Commons began debating the Internal Market Bill, which passed its second reading vote by 340-263. However, that included 20 Conservative MPs who rebelled/abstained, including former Chancellor of the Exchequer Sajid Javid, who said “It is not clear to me why it is necessary for the UK to break international law”. For those who haven’t been following this as closely as us in the UK, the controversy behind this bill is that elements of it would allow the government to override parts of the Brexit Withdrawal Agreement reached with the EU, and hence break the UK’s international treaty obligations. The EU have given the UK until the end of the month to withdraw the relevant measures, but the UK government have shown no sign of backing down thus far, in spite of the fact that every former UK Prime Minister has now offered at least some criticism of the measures, albeit of varying degrees. Having passed its second reading, the bill now goes into committee stage from today and carries in into next week, during which amendments can be made by MPs. An important one there to look out for will be that from Tory MP Bob Neill, which would add the requirement that the House of Commons approve any measures before the government could decide to override the Northern Ireland Protocol in the Withdrawal Agreement.

On yesterday’s meeting between the EU and China over a trade deal, Xinhua has reported overnight that President Xi Jinping agreed that both sides need to “accelerate” the negotiations for the deal but shrugged off Europe’s “lecturing” over human rights issues and doubled down on the stance that any criticism of China’s policies in Xinjiang and Hong Kong is meddling in China’s internal affairs. Meanwhile, the EC Chief Ursula von der Leyen said of the meeting that “China has to convince us that it is worth having an investment agreement,” and the EU summit chair Michel told reporters that Xi Jinping appeared to be willing to allow visits by diplomats into the far western province of Xinjiang, however, details of this need to be worked out.

Turning back to yesterday and core sovereign bonds fell on both sides of the Atlantic, with gilts seeing the largest move as 10yr yields rose +1.2bps. Otherwise, yields on 10yr Treasuries (+0.7bps) and bunds (+0.1bps) all moved just slightly lower. Safe havens elsewhere advanced, with gold (+0.84%) recording its strongest performance in 2 weeks, and platinum (+2.88%) seeing its best day in a month. Oil lost ground however, as Brent crude (-0.55%) closed at its lowest level in 3 months.

There wasn’t a great deal of data yesterday, though we did get Euro Area industrial production for July, which saw a +4.1% increase (vs. +4.2% expected). That still leaves IP down -7.7% year-on-year however, compared to the -2.2% yoy decline in February, so there’s still some way to go before reaching pre-Covid levels again. Otherwise, the Bank of France’s industry sentiment indicator rose to 106 in August, its highest level since May 2017.

To the day ahead now, and today’s data highlights include the UK labour market statistics, the German ZEW survey for September, and Canadian manufacturing sales for July. Meanwhile from the US, we’ll get the Empire State manufacturing survey for September, as well as industrial production, capacity utilisation and the import price index for August. Otherwise, the ECB’s Panetta will be speaking.