Following two days of violent, historic swings in the US stock market, S&P 500 futures climbed to session highs, up as much as 0.9% and back over 2,500 after swinging between gains and losses following the biggest upside reversal in the index since 2010 on Thursday and the single biggest point gain in the index on Wednesday as a result of a massive, 11th-hour pension fund rebalancing trade which has seen over $60 billion shifted out of bonds and into stocks into what has been a historically illiquid market.

The US rally followed a sharp rebound in European shares and a mixed Asian session as traders struggled to make some sense of the ridiculous, wild price swings in the final sessions of the year which prompted comparisons to watching the cult favorite Pulp Fiction. The dollar tumbled and gold climbed.

The active S&P 500 future contract gained as much 0.9 percent, after dropping as much as 0.7 percent earlier in the session. Contracts on the Nasdaq 100 and the Dow Jones Industrial Average rose 0.5 percent and 0.6 percent, respectively. The benchmark index for American equities erased a 2.8 percent tumble late Thursday afternoon, finishing the day with a 0.9 percent gain, following a historic point gain the day prior which in turn followed the biggest ever Christmas Eve drop the day prior.

European shares, which tumbled the day prior, extended gains on Friday, after a mixed session for Asian stocks as traders struggled to make sense of wild price swings in the final sessions of the year. All sectors were in positive territory, as cyclical equities led gains in Europe, with construction materials and technology the top performers in the Stoxx Europe 600 Index according to Bloomberg.

Volatility in Europe and in the United States has spiked to highs not seen since the sharp global correction in stock markets in February.

Top European News

• SNB Disregards Critics as Franc Keeps Negative Rates in Play
• DIA Trading Suspended by Spanish Regulator
• ECB Officials Request Carige Capital Increase at Meetings: Sole
• Baloise Buys 20% Stake in Aevis Victoria’s Infracore

Earlier in Asia, Japan and China - which had their final trading day of the year Friday - had opposing fates with the Nikkei closing down 0.3% due to yen strength, while the Shanghai Composite rose 0.4% but closed below the critical 2,500 level.

Top Asian News

• One of World’s Top LNG Users Buys Into Offshore Wind Farms
• Japan Shares Fall, Capping Worst Annual Performance Since 2011
• Philippines Increases Bills and Bonds Offers to 360b Pesos in 1Q
• India Is Said to Announce Universal Basic Income Program: AajTak

Even with the latest pension rebalancing rebound, the yearly picture for world stocks remains grim, with the MSCI world equity index, which tracks shares in 47 countries, losing close to 12% so far in 2018. Indeed, the last-minute rebound is doing little to mend the damage from the worst year for global stocks since 2008 and the gains in haven assets show investors are still looking for value in safer investments. Plenty of event risks loom in the coming quarter, from the U.K. vote on the Brexit deal to U.S.-China trade talks to the continuing showdown between President Donald Trump and Congress over the budget.

While stocks showed signs they might recoup more losses in the year’s final days, lingering doubts about the stability of the market sustained demand for safe-haven currencies, as the following strategist quotes demonstrate:

• “Markets are a bit more cautious on risk appetite, with the Japanese yen and the Swiss franc gaining,” said Lee Hardman, an FX strategist at MUFG. “The dollar continues to be soft across the board as volatile stock markets are reducing the relative safe haven appeal for U.S. assets.”
• “We’re heading into a period of higher volatility,” said Manpreet Gill, head of fixed income, currency and commodities strategy at Standard Chartered. “You need to have some dry powder on the side to take advantage of that. That’s where we particularly think that cash plays a bit of a role.”
• “Consensus is firmly set on a 2020 recession, but the question for investors is whether they are willing to stay away from equities for all of next year when the U.S. is still expected to grow, albeit at a slower pace than this year,” said Edward Park, investment director at Brooks Macdonald Asset Management. “The current market bounce may have been catalyzed by institutional portfolio re-balancing, however, valuation levels seem to be tempting investors to become incrementally more bullish.”
• "Where stocks head from here is anyone’s guess as uncertainty looks set to seep into the first quarter of 2019", said Ben Emons, managing director at Medley Global Advisors. "While a bounce is positive news, it’s coming with much more volatility - which normally falls when stocks rally", he told Bloomberg TV.

Sentiment was boosted by a sliding dollar as the Bloomberg Dollar Spot Index extended declines, falling to lowest level since Nov. 8, as the greenback slipped against all G-10 peers; meanwhile the Norwegian krone among top performers after rebounding from the lowest in a decade.

In fixed income, US Treasurys were slightly higher with yields dipping to 2.7556%, with the yield curve flattening with 10-year rate down almost 2bps.

Elsewhere, European bonds trade mixed, with short end of bund curve underperforming. Italian yields rose as investors made space for the last auction of the year. A strong auction of zero-coupon bonds on Thursday led to a mini-rally in Italian government debt as investors saw this is a good omen for today’s up to 5 billion euro bond sale, which caps one of the largest borrowing programs. The Treasury is hoping the auction will decisively show that Italy has turned a corner after months of volatile trading on the back of fractious talks between Rome and Brussels over its spending plans.

Finally, Japan’s 10-year yield turns negative for first time since 2017.

Oil bounced with commodities and emerging-market equities. Oil prices rebounded and took back some of the ground lost this week, but remained close to their lowest levels in more than a year as rising U.S. inventories and concern over global economic growth kept markets under pressure. Brent crude oil was up $1.10, or 2.1 percent, at $53.26 a barrel, having earlier risen more than 3 percent. It had dropped 4.2 percent on Thursday.

Spot gold, which has benefited this week from the global market turmoil, was just slightly higher at $1,276.33 an ounce following an ascent to a six-month high of $1,279.06 on Wednesday.

Aside from any further developments on the American political front - where departures of senior officials and tensions at the White House over the Federal Reserve have unsettled investors, upcoming manufacturing PMIs from China and the U.S. may be a focus in the coming week. Among key events next quarter are the Brexit-deal vote in the U.K., a U.S.-China trade-talks deadline and the annual gathering of China’s legislature.

Market Snapshot

• S&P 500 futures up 0.8% to 2,515.50
• STOXX Europe 600 up 1.4% to 334.23
• MXAP up 0.4% to 146.06
• MXAPJ up 0.8% to 475.47
• Nikkei down 0.3% to 20,014.77
• Topix down 0.5% to 1,494.09
• Hang Seng Index up 0.1% to 25,504.20
• Shanghai Composite up 0.4% to 2,493.90
• Sensex up 0.8% to 36,093.34
• Australia S&P/ASX 200 up 1% to 5,654.32
• Kospi up 0.6% to 2,041.04
• German 10Y yield rose 0.3 bps to 0.234%
• Euro up 0.2% to $1.1450
• Italian 10Y yield fell 8.2 bps to 2.389%
• Spanish 10Y yield rose 1.6 bps to 1.402%
• Brent futures up 2.1% to $53.23/bbl
• Gold spot little changed at $1,276.90
• U.S. Dollar Index little changed at 96.44

Top Overnight News

• The S&P 500 erased a 2.8 percent drop in an afternoon rebound, finishing the day with a 0.9 percent gain. It’s the first time since May 2010 that the index has posted such a huge upward reversal, data compiled by Bloomberg show
• The partial U.S. government shutdown will probably continue into 2019 after House Republicans said Thursday they didn’t plan any votes this week and President Donald Trump said most federal employees losing pay because of the closure are Democrats
• The Trump administration granted the first exclusions from tariffs imposed on China for intellectual property violations, according to a Federal Register notice scheduled for Dec. 28 publication
• Unease has strengthened within the Bank of Japan’s policy board over the outlook for prices as cheaper oil and mobile phone charges threaten to drive inflation toward zero and possibly back into negative territory
• Japan’s factory output dropped again in November, marking the sixth contraction in eight months. The data and risks to the outlook suggest limited strength in any rebound in coming months as businesses navigate the U.S.-China trade war, Brexit and slowing global growth
• China’s economy slowed for a seventh straight month in December, as the trade war, subdued domestic demand and decelerating factory inflation combined to undercut growth. That’s the signal from a Bloomberg Economics gauge aggregating the earliest-available indicators on business conditions and market sentiment
• Prime Minister Giuseppe Conte played down the risk of Italy’s huge level of debt as he reaffirmed confidence in his coalition government’s controversial economic policies.
• China will speed up approvals for securities firms and fund-company joint ventures in which foreign investors have majority stakes, a senior official said, another sign that policymakers are pressing ahead with efforts to open up the country’s financial system.
• Japan’s 10-year bond yield fell below zero for the first time since Sept. 2017, as slide in global equities fueled a rally in government debt around the world.

US Event Calendar

• 9:45am: Chicago Purchasing Manager, est. 60.3, prior 66.4
• 10am: Pending Home Sales MoM, est. 1.0%, prior -2.6%
• 10am: Pending Home Sales NSA YoY, prior -4.6%