After several days of precipitous market drops, and following yesterday's dramatic Apple-led intraday rebound, the biggest since February, S&P futures and European stock markets are sharply higher even as Asian shares slipped, as investor sentiment was boosted by fresh prospects of a thaw in the trade war following overnight news that Chinese Vice Premier Liu He discussed a timetable for trade talks with Treasury Secretary Steven Mnuchin, coupled with a report this morning from Bloomberg that China is moving toward cutting its trade-war tariffs on imported U.S.-made cars, a step which had previously been brandished by President Donald Trump as a concession won during trade talks in Argentina.

The big news overnight was a report according to China's Mofcom which said Vice Premier Liu He spoke by phone with US Treasury Secretary Mnuchin and Trade Representative Lighthizer in which both sides exchanged views on implementing consensus reached by their leaders, while they also exchanged views on pushing forward timetable and roadmap for next stage of trade discussions. The news - taken as a positive sign for trade war de-escalation - sent S&P futures as much as 20 points higher, shrugging off losses in the Asian benchmark and a drop in Japanese equities...

... while Europe's Stoxx 600 was trading at session highs, up over 1.5% as a result of a late catch up with yesterday's S&P rebound, led by THE construction, basic resources, builders and telecom sectors even with today's rebound it was still heading for its worst year since 2008.

European automakers also surged following the Bloomberg report that China is said to be moving on the US auto tariffs reduction that US President Trump has previously tweeted on. The proposal has been submitted for review, however, the decision has not been finalized and still could change.

After crashing on Monday to a 21 month low as Theresa May postponed a key Brexit vote in parliament, the pound staged a rally, trimming some of Monday's tumble as the UK Prime Minister tried to convince EU leaders to renegotiate the current Brexit deal.

The broader risk-on sentiment weakened the dollar weakened while Treasuries and European sovereign bonds fell.

With the market having been gripped by a growing sense of panic, some - like Nomura's Charlie McElligott - have warned that the next move could be a furious rally higher as hedge funds scramble to recover some of their YTD losses in the last few days of 2018.

“Markets are highly volatile,” said hedge-fund pioneer Paul Tudor Jones at a conference in New York. “I can easily see a situation in 2019 where all the deleveraging that we’ve experienced in the last month and a half -- really, the last four or five months -- all that deleveraging gets reinvested back into the market.”

Meanwhile in India’s assets saw a choppy session, with stocks initially roiled by a surprise resignation of the central bank governor on Monday, before posting a recovery as traders mulled the implications for Prime Minister Narendra Modi of regional election results. Emerging-market currencies and shares edged higher. Oil climbed with most metals.

The dollar dropped versus most of its G-10 peers as concerns over a possible deterioration in U.S.-China trade talks persisted, while short-term positioning and U.K. wage data helped lift the pound from a 20-month low. The pound headed for its first gain in three days versus the dollar, having tumbled Monday to its lowest level since April 2017 after the U.K. Prime Minister opted to delay a key vote on her Brexit deal. The yen climbed against major global currencies as U.K. Prime Minister Theresa May’s Brexit vote deferral and weakness in equity markets deterred risk-taking

Brent (+0.9%) and WTI (+1.0%) prices rebounded, despite drifting lower at the start of the session following comments from Russian Energy Minister Novak that Russia plans to cut oil output by 50k-60k BPD in January which is significantly below the 228,000 BPD figure targeted as part of the latest OPEC deal. Novak adds that they will gradually reduce oil output. Separately, high-level internal reports are to cut output by 139k BPD following the OPEC deal. Looking ahead today sees the API weekly data release, which saw a crude stocks build of 5.6mln last week. Gold has strengthened on a softer dollar, although the yellow metal is still off of the 5-month high of USD 1250.55/oz reached in the previous session. Separately, exploration by Rio Tinto in Australia has yet to find any economically viable copper ore veins; the site had been touted as being potentially rich in copper.

Expected data include PPIs and small-business optimism index. American Eagle and Pivotal Software are among companies reporting earnings.

Market Snapshot

• S&P 500 futures up 0.7% to 2,662.00
• MXAP down 0.3% to 147.99
• MXAPJ up 0.1% to 477.40
• Nikkei down 0.3% to 21,148.02
• Topix down 0.9% to 1,575.31
• Hang Seng Index up 0.07% to 25,771.67
• Shanghai Composite up 0.4% to 2,594.09
• Sensex up 0.2% to 35,044.71
• Australia S&P/ASX 200 up 0.4% to 5,575.88
• Kospi down 0.04% to 2,052.97
• STOXX Europe 600 up 1.4% to 343.77
• German 10Y yield rose 2.6 bps to 0.272%
• Euro up 0.2% to $1.1383
• Italian 10Y yield fell 2.6 bps to 2.74%
• Spanish 10Y yield rose 1.7 bps to 1.46%
• Brent futures up 0.5% to $60.45/bbl
• Gold spot up 0.3% to $1,248.54
• U.S. Dollar Index down 0.3% to 96.97

Top Overnight News from Bloomberg

• Top Chinese and American trade officials spoke by phone, signaling that dialog between the two nations on trade issues is at least continuing despite a diplomatic row over the arrest of a senior Chinese businesswoman
• Faced with a Brexit vote she can’t win, Theresa May appears to be gambling that running down the clock to a no-deal departure might change the arithmetic in Parliament
• The European Union won’t allow U.K. Prime Minister Theresa May to reopen negotiations over the Brexit divorce deal -- but it could offer some of the reassurances she says she wants, officials said.
• In India, Urjit Patel’s shock exit as governor of the central bank roiled financial markets already nervous about early election results showing Prime Minister Narendra Modi’s ruling party losing support in key states.
• OPEC’s surprise output reduction has wrong-footed short-sellers. Hedge funds increased wagers against rising Brent crude prices for a 10th straight week in the period that ended last Tuesday and cut bullish bets on West Texas Intermediate oil to the lowest in almost six years
• Allies of Republican Representative Mark Meadows are pressing for him to be Donald Trump’s new chief of staff as the White House weighed other serious contenders, including U.S. Trade Representative Robert Lighthizer, for the vital leadership post
• Jerome Powell is ramping up Federal Reserve communication to build public trust and help insulate it from political attack
• Indian assets swung as investors weighed Modi’s performance in the polls in states which are key to his reelection bid in 2019

Asian equity markets were mixed as sentiment in the region only found mild solace from the tech-led recovery on Wall St. ASX 200 (+0.4%) was firmer at the open in which outperformance in the tech sector helped the index pick itself up from around 2-year lows although this later stalled amid weakness in energy and financials, while Nikkei 225 (-0.3%) swung between gains and losses due to a lack of fresh drivers and an indecisive currency. Shanghai Comp. (+0.4) and Hang Seng (unch.) were also choppy on trade uncertainty amid lingering concerns the Huawei situation could spill-over to US-China trade talks, although there were reports that Vice Premier Liu spoke with US Treasury Secretary Mnuchin and US Trade Representative Lighthizer in which they exchanged views on pushing forward the timetable and road map for the next stages of trade discussions. Meanwhile, India markets were initially pressured following the shock resignation by RBI Governor Patel which many viewed to be in protest for government meddling, while the state assembly elections added to the woes for the government with the ruling BJP party on track to lose some states to the main opposition ahead of next year’s general election. Finally, 10yr JGBs were uneventful amid the indecisive risk tone and with participants following mixed results at the 30yr JGB auction.

Top Asian News

• Macau Casino Stocks Jump as Analysts Flag December Revenue Hopes
• Tencent Music Guides Pricing Around Midpoint in $1.2 Billion IPO
• HNA Is Said to Tap Credit Suisse to Revive Sale of Pactera Unit
• Goldman Sachs Buys Minority Stake in Turkey’s Hurriyet Emlak
• India Rupee, Stocks, Bonds Drop as RBI Chief’s Exit Roils Market

Major European Indices are in the green [Euro Stoxx 50 +1.6%], with some outperformance seen in the SMI (+1.6%) bolstered by strong performance in index heavyweight Novartis (+1.6%) after the FDA approved Pear Therapeutics mobile application, which their Sandoz unit will be rolling out in the US. The SMI is also bolstered by LafargeHolcim (+3.6%), which is benefitting from outperformance in the materials sector seen today on the back of US and Chinese representatives planning the next steps in trade discussions. FTSE 100 (+1.3%) is lagging its peers, amidst currency effects from ongoing Brexit developments. Other notable equity movers are WPP (+6.5%) after an update to guidance, and Ashtead Group (+4.2%) after they announced full year expected results to be ahead of expectations.

Top European News

• Amsterdam Brothels to Get a Review by City’s First Female Mayor
• Danske to Sell Swedish Pension Assets to Polaris, Acathia
• Vivendi Urges Telecom Italia to Hold Shareholders Meeting
• Future of ‘Macronomics’ Tested by Violence on French Streets
• Casino Debt Swaps Rise to Record as French Protests Add Pressure

In FX, the GBP is ahead of the pack in terms of broad G10 currency advances vs the Greenback as the DXY ducks back under the 97.000 level. Cable has bounced further from yesterday’s new 2018 low circa 1.2507, through the pre-official cancellation of the Brexit vote base around a big figure higher and just shy of 1.2640, mainly on short covering and consolidation, but also with the aid of strong UK average earnings. Meanwhile, Eur/Gbp has retreated towards 0.9000 having cleared 0.9050 and topped out not too far from 0.9100.

• EUR/CHF/SEK/NOK - The next best majors, with the single currency maintaining its recovery momentum off 1.1350 lows vs the Usd, but capped ahead of 1.1400 and perhaps conscious of hefty option interest between 1.1390 and the bog figure (2 bn). The Franc remains relatively firm within a 0.9905-0.9865 range and above 1.1250 vs the Eur, while the Scandi crowns have clawed back recent losses amidst an improvement in risk sentiment, and with the Sek awaiting Swedish inflation data on Wednesday after significantly stronger than forecast Norwegian CPI metrics yesterday. Eur/Nok is around 9.7000 and Eur/Sek back below 10.3000.
• JPY - Also trying to pare losses vs the Dollar after extending its downturn from 112.25 to 113.35 and extremely close to a Fib level, but unable to rebound through 113.00 where heavy supply is touted and a 1.5 bn option expiry resides.
• AUD/CAD/NZD - Mixed fortunes once again as the Aud reclaims 0.7200+ status vs its US counterpart, albeit just, on more promising vibes regarding US-China trade, which have also nudged the Aud/Nzd cross back up towards 1.0500, as the Kiwi losses sight of 0.6900 vs the Usd. Meanwhile, the Loonie is back on the 1.3400 handle and regaining some composure alongside crude prices.
• EM - The Try continues to underperform on bearish technical rather than fresh fundamental impulses but did glean support from another upbeat snapshot of Turkey’s current account to trade back near 5.3500 vs the Dollar from 5.4000+ at one stage.

In commodities, Brent (+0.9%) and WTI (+1.0%) prices have strengthened, despite drifting lower at the start of the session following comments from Russian Energy Minister Novak that Russia plans to cut oil output by 50k-60k BPD in January; which is significantly below the 228,000 BPD figure targeted as part of the latest OPEC deal. Novak adds that they will gradually reduce oil output. Separately, high-level internal reports are to cut output by 139k BPD following the OPEC deal. Looking ahead today sees the API weekly data release, which saw a crude stocks build of 5.6mln last week. Gold has strengthened on a softer dollar, although the yellow metal is still off of the 5-month high of USD 1250.55/oz reached in the previous session. Separately, exploration by Rio Tinto in Australia has yet to find any economically viable copper ore veins; the site had been touted as being potentially rich in copper.

US Event Calendar

• 8:30am: PPI Final Demand MoM, est. 0.0%, prior 0.6%; PPI Ex Food and Energy MoM, est. 0.1%, prior 0.5%
• 8:30am: PPI Final Demand YoY, est. 2.5%, prior 2.9%; PPI Ex Food and Energy YoY, est. 2.5%, prior 2.6%