In a carbon copy of yesterday's early session, global stocks and US equity futures rallied amid renewed optimism of a thawing in U.S.-China trade relations after President Trump said he would intervene in Huawei case to get a trade deal with China and was ready to meet with Xi for a second time. The question now is whether the early rally will once again fizzle as it did 24 hours ago.

The pound strengthened as traders took the news that Theresa May will face a vote of confidence from the Conservative Party she leads in stride, with sterling gaining as several ministers rushed to back her and she vowed to contest the vote “with everything I’ve got", prompting analysts to conclude she may prevail.

Global markets were solidly in the green, with Asian and European shares enjoying big gains after Trump said talks were taking place with Beijing by phone and he would not raise tariffs on Chinese imports until he was sure about a deal. Trump also said he would intervene in the Justice Department’s case against a top executive at China’s Huawei Technologies if it would serve national security interests or help close a trade deal, after a Canadian court on Tuesday granted bail to the executive in a move that could help placate Chinese officials angered by her arrest.

S&P futures were 0.7% higher in a rerun of Tuesday's morning session, buoyed by more Trump rhetoric after the president told Reuters that it would be a mistake if the Federal Reserve raises interest rates when it meets next week, as it is expected to do, continuing his criticism of the U.S. central bank. “I think that would be foolish, but what can I say?” Trump told Reuters in an interview. Trump said he needed the flexibility of lower interest rates to support the broader U.S. economy as he fights a growing trade battle against China, and potentially other countries. “You have to understand, we’re fighting some trade battles and we’re winning. But I need accommodation too,” he said.

In Asia, Japan’s Nikkei led the way in Asia with a jump of 2.2% while Shanghai blue chips rose a more modest 0.3%. London, Frankfurt, and Paris then gained between 0.4 and 0.8 percent to push Europe higher.

“We are seeing risk sentiment stabilizing a bit,” said Societe Generale strategist Alvin Tan. “Firstly we had news that China was considering reducing tariffs on US car, then the Huawei CFO was released on bail and then Trump said could he intervene in the case if it helped secure a trade deal.”

Of course, having been repeatedly disappointed before, analysts were still being careful to not get too optimistic about the prospects of a trade agreement. ING said the Huawei case made it increasingly obvious that the China-US trade war is about the exchange of technology, and there were also reports the United States would release evidence this week detailing Chinese hacking and economic espionage.

“Even if this (auto) step is taken it just removes what was a retaliatory measure to begin with,” noted ANZ economist David Plank. “Whatever the case, market price action is somewhat of a chop-fest, right now, as it swings around on each new headline."

On Tuesday, markets had also been jolted when Trump threatened to shut down the government over funding for a wall he has promised to build on the southern border with Mexico; look for more drama out of the White House.

Meanwhile, the Brexit drama may be approaching an endgame of sorts when as noted above, the pound fell to 20-month lows overnight after lawmakers in May’s Conservative party gathered enough support to trigger a no-confidence vote in her leadership. But it stabilized as some investors bet that May would win Wednesday’s vote and in the process isolate opponents in her party who want a clean, sudden break from the EU. Nevertheless, uncertainty over the secret ballot capped gains, keeping the pound only just above $1.25, having shed 1.9 percent in the previous two sessions to a trough of $1.2483.

The vote of no-confidence will be held between 18.00GMT and 20.00GMT tonight, with results are to be announced at 21.00GMT. UK PM May said a new leader would have to extend or rescind Article 50, while adding she believes a deal with EU is attainable and within UK’s grasp after meeting with EU leaders yesterday. Chairman of the 1922 committee Brady says that if a leadership contest were to occur, they would want to finish the parliamentary stage before Christmas. Meanwhile, ITV's Peston tweeted that MP George Freeman appears to be saying that PM May is over, but that Tories have to find a way to replace her temporarily without a leadership election. Elsewhere, UK Shadow Brexit Minister Starmer said the opposition Labour party will call a no-confidence vote “before Christmas”.

“The market is concerned that May could be replaced by a Brexit-supporter, increasing the chance of a no-deal scenario,” said Rodrigo Catril, a senior FX strategist at NAB.

The dollar weakened versus most of its G-10 peers, as the yen slipped as demand for havens waned on signs the U.S.-China trade dispute may be easing. The recent slide in U.S. yields means that the prospect for “broad-based” yen appreciation appears to be increasing every day, Morgan Stanley strategists wrote in a note. The Aussie rose a second day as the offshore yuan climbed with Asian and European equities and U.S. stock futures.

Investors are also looking ahead to the U.S CPI later on Wednesday where an expected slowdown in headline inflation would only reinforce speculation of fewer rate hikes from the Federal Reserve.

Meanwhile, in France, the spread between government bond yields and those in Germany were about the highest since the 2017 election. France’s Prime Minister Edouard Philippe confirmed that President Emmanuel Macron’s efforts to meet protester demands will have an impact on the country’s deficit, with the situation causing a new headache for the EU in its talks over the Italian budget.

Elsewhere, oil jumped on the easing trade war rhetoric and after the API oil report signaled a far greater than expected, 10 million draw in crude inventories. Treasuries edged lower after Trump warned the Federal Reserve against hiking interest rates this month. India’s bonds rallied after an ally of Prime Minister Narendra Modi was named as the new central bank chief. In terms of metals, spot gold (+0.1%) remains steady as the dollar index remains within a tight range while copper traded sideways near weekly highs in light of the improvement in risk sentiment. Elsewhere, Shanghai steel snapped a three-day losing streak amid talks of production cuts at the top steelmaking city, Tangshan.

Expected data include mortgage applications and inflation. Nordson is reporting earnings

Market Snapshot

• S&P 500 futures up 0.8% to 2,662.00
• STOXX Europe 600 up 0.9% to 347.15
• MXAP up 1.5% to 150.16
• MXAPJ up 1.3% to 483.90
• Nikkei up 2.2% to 21,602.75
• Topix up 2% to 1,606.61
• Hang Seng Index up 1.6% to 26,186.71
• Shanghai Composite up 0.3% to 2,602.15
• Sensex up 1.8% to 35,769.11
• Australia S&P/ASX 200 up 1.4% to 5,653.50
• Kospi up 1.4% to 2,082.57
• German 10Y yield rose 0.9 bps to 0.241%
• Euro up 0.1% to $1.1329
• Italian 10Y yield rose 1.6 bps to 2.756%
• Spanish 10Y yield fell 1.3 bps to 1.424%
• Brent futures up 1.7% to $61.22/bbl
• Gold spot up 0.1% to $1,244.11
• U.S. Dollar Index unchanged at 97.38

Top Overnight News

• Theresa May is fighting for her job as British prime minister after being told she will face a vote of no confidence in her leadership, throwing the U.K. into fresh turmoil and Brexit into disarray
• Progress toward easing the steep tariffs China imposed on U.S. vehicle imports this year lifted carmaker stocks across the globe. President Trump says he’s willing to meet China’s leader Xi again as he hailed the country for resuming soybean purchases
• President Trump said he would intervene in the case of Huawei CFO Meng if it would help win a trade deal with China
• The European Commission took a step toward meeting the financial industry’s demands for a so-called equivalence decision that would help prevent a derivatives-market rupture in a no-deal Brexit
• President Trump tells Reuters it would be a mistake if the Fed increases interest rates when it meets next week, with the flexibility of lower rates needed to support the U.S. economy amid the trade war with China
• Trump staged a confrontation Tuesday with the two top congressional Democrats before television cameras in the Oval Office as the dispute over funding for his border wall turned publicly acrimonious
• As Italian Prime Minister Giuseppe Conte prepares to present his budget in Brussels on Wednesday, one of the main powers behind Italy’s government, League leader Matteo Salvini, may be looking beyond the crisis a failed spending plan could trigger and toward new elections early next year, la Repubblica reported; Salvini said the report on early elections was fake news, according to newswire Ansa
• France’s government will face a no-confidence vote in parliament Thursday, according to AFP
• Sovereign bonds and stocks rallied in India on optimism of a more dovish monetary policy after the government named former bureaucrat Shaktikanta Das as the central bank chief. The rupee weakened amid investor concerns about central bank independence.

Asian stocks traded higher across the board with sentiment underpinned as news flow spurred optimism regarding US-China trade relations, including reports that China submitted a proposal for review that would cut tariffs on imports of US autos to 15% from 40%. ASX 200 (+1.4%) and Nikkei 225 (+2.2%) gained from the open with energy and tech the front-runners in Australia, while the Japanese benchmark outperformed as it benefitted from USD/JPY’s slipstream and with the BoJ said to have purchased a record JPY 6tln of ETFs so far this year. Elsewhere, Hang Seng (+1.6%) and Shanghai Comp. (+0.3%) were positive on hopes of a potential tariff cut on US autos and encouraging comments from US President Trump, while news that Huawei’s CFO was released on bail and the recent better than expected lending data from China also added to the optimism. Finally, 10yr JGBs are subdued with demand dampened by the gains in stocks and amid spill-over weakness from T-notes.

Top Asian News

• Tencent Music Sets $1.1 Billion IPO at Bottom as Markets Gyrate
• China Said to Near Megamerger of ChemChina, Sinochem Group
• Citi Hires HSBC Veteran to Head Thai Corporate, Investment Bank
• Hitachi to Buy ABB’s Power-Grid Unit for $7 Billion, Nikkei Says
• Vietnam Is Coming Out on Top in the U.S.-China Trade War

European equities are higher across the board (Euro Stoxx 50 +1.3%) following the strong performance experienced in Asia overnight after sentiment was underpinned as news flow spurred optimism regarding a US-China trade deal. France’s CAC 40 (+1.6%) outperforms its peers on the back of shares in Kering (+2.0%) amid an upgrade at Deutsche Bank and Pernod Ricard (+3.6%) after upbeat comments from activist investor Elliott on the Co. Meanwhile, Spain’s IBEX 35 (+0.80%) marginally lags peers as the index is weighed on by shares in heavyweight Inditex (-4.0%) following disappointing earnings. Moving on, sectors are experiencing broad-based gains with marginal outperformance in utility names. In terms of notable movers, auto names are performing particularly well (Stoxx 600 Auto & Parts +1.5%) in a continuation of the positive momentum from potential Chinese tariffs cuts on US autos from 40% to 15%. Meanwhile, Dixons Carphone (-8.2%) shares fell in excess of 10% at one point after the company downgraded interim dividend guidance alongside expectations for higher net debt.

Top European News

• Italy’s Salvini May Seek New Election as Budget Fuels Crisis
• Inditex Resists Discount Pressure, Making Sales Target Harder
• Sainsbury, Asda Seek More Time to Handle Regulator’s Review
• Siemens, Alstom to Sell Signaling, Trains for Rail Merger
• ThyssenKrupp Supervisory Board Said to Favor Merz as Chair

In FX, GBP is not just the most volatile major, but displaying considerable resilience (or complacency?) in the face of perhaps the biggest Brexit hurdle in the form of a challenge to UK PM May’s leadership, not to mention all the political uncertainty if she fails to survive. However, Cable has recovered well from new ytd lows circa 1.2478 and almost reached 1.2550 before waning again as a number of high profile Cabinet members voiced public support for the current Conservative head in the run-up to tonight’s confidence vote. A hefty 1 bn option expiry at the 1.2500 strike may be exerting a gravitational pull, while Eur/Gbp is pivoting 0.9950, as the single currency continues to weather its own storm via Italian and French budget excesses.

• EUR/AUD/CAD/CHF/JPY:All narrowly mixed vs a generally firmer Greenback (DXY just off a fresh 97.500 recent peak) and the ongoing revival in broad risk sentiment amidst heightened hopes of a tangible improvement in US-China trade relations. Eur/Usd has survived another, deeper test of 1.1300 support where a massive 2.4 bn expiries reside and are perhaps helping to keep the headline pair cushioned against Italian/French deficit issues ahead of Thursday’s ECB policy meeting. Meanwhile, the Aud and Loonie are feeding off the aforementioned improved risk appetite, with the former holding above 0.7200 and latter rebounding a bit further from 1.3400+ lows with the added incentive of rebounding crude prices. The Franc is meandering in a tight range between 0.9950-20 and encircling 1.1250 vs the Eur awaiting the final 2018 SNB Quarterly review tomorrow, while Usd/Jpy is equally restrained within 113.50-30 trading parameters with the topside said to be laden with Japanese offers.
• EM: In contrast to the Sek, firmer than expected SA CPI has underpinned the Zar around 14.3100 vs the Dollar, but the Rand may also be drawing momentum from option-related flows alongside bullish technical impulses as 1 bn expiries roll off at the 14.5000 strike today

In commodities, WTI (+1.8%) and Brent (+1.7%) trade with firm gains amid the improvement in the risk sentiment as US-Sino trade discussion seem to be on track, with US President Trump expressing optimism via Twitter yesterday. Furthermore, prices may be underpinned in light of last night’s API crude inventories which showed a much wider-than-expected draw of 10.18mln barrels vs. the expected draw of 3.0mln barrels. Traders will be eyeing this afternoon’s weekly DoE inventory release for a fresh catalyst (alongside production numbers) in which crude inventories are expected to decrease by 3.0mln barrels. In terms of metals, spot gold (+0.1%) remains steady as the dollar index remains within a tight range while copper traded sideways near weekly highs in light of the improvement in risk sentiment. Elsewhere, Shanghai steel snapped a three-day losing streak amid talks of production cuts at the top steelmaking city, Tangshan.

US Event Calendar

• 7am: MBA Mortgage Applications, prior 2.0%
• 8:30am: US CPI MoM, est. 0.0%, prior 0.3%; Ex Food and Energy MoM, est. 0.2%, prior 0.2%
• 8:30am: US CPI YoY, est. 2.2%, prior 2.5%; CPI Ex Food and Energy YoY, est. 2.2%, prior 2.1%
• 8:30am: Real Avg Weekly Earnings YoY, prior 0.88%; Real Avg Hourly Earning YoY, prior 0.7%
• 2pm: Monthly Budget Statement, est. $199.0b deficit, prior $100.5b deficit