Was that it for the "trade war optimism" euphoria?

While traders were delighted to buy the rumor and then buy the news of the China March 1 tariff extension, expecting an imminent trade deal between the US and China, sentiment soured on Tuesday as world shares took a breather on Tuesday after hitting a five-month high, with global markets dropping as the rush of optimism over U.S.-China trade talks turned to pessimism, leading to a sea of red in world markets with even the Chinese stock bubble pausing overnight as concerns about a breakout in hostilities between India and Pakistan spooked the region, while in FX the pound soared, hitting the highest against the Euro since 2017, as the May government gave signs it was willing to delay Brexit.

Europe's Stoxx 600 Index slumped and S&P 500 Index futures drpoped after President Trump raised the possibility of signing a new trade deal with Chinese counterpart Xi Jinping, but cautioned an agreement “might not happen at all.”

“It looks like they will be coming back quickly again,” Trump told reporters Monday, referring to the possibility of Chinese negotiators returning after a week of talks on trade. “We are going to have a signing summit, which is even better,” he said, adding: “We are getting very very close.” However, the president promptly tempered his enthusiasm, noting that a deal “might not happen at all.” As Bloomberg notes, with Trump set to hold another summit with North Korean leader Kim Jong-Un this week, a diplomatic effort in which China will play a critical role, the risk of a setback remains significant.

And so with the S&P once again failing to break decisively above 2,800, is it time to consider the dreaded (and technically non-existant) "quadruple top" formation, and the possibility that the next big target for the S&P will be the December lows.

Traders will now focus on Fed Chair Powell's semiannual testimony on monetary policy and the state of the economy over two days to House and Senate committees. With the Fed already fully dovish, there is little that Powell can say to "dove" up the case, and the risk is that he comes off sounding hawkish.

As DB's Jim reid asks, will Powell keep the recent dovish Fed momentum going when he delivers his semi-annual Humphrey Hawkins testimony before the Senate Banking Committee? In terms of what to look for, our US economists expect Powell to reiterate that “patience” remains the order of the day and in this regard, the January FOMC meeting minutes should be a good template for his prepared remarks. The minutes indicated “a patient posture would allow time for a clearer picture of the international trade policy situation and the state of the global economy to emerge and, in particular, could allow policymakers to reach a firmer judgment about the extent and persistence of the economic slowdown in Europe and China.” In short, expect the Chair to convey the message that the Fed is cautiously optimistic about the outlook but will be monitoring conditions and would be willing to adapt as the uncertainties realise.

Overnight, Fed Vice Chair Clarida said that the Fed pays a lot of attention to whether the curve is flattening because of a fall in inflation expectations and reiterated that going ahead the Fed is likely to be patient and data dependent.

Meanwhile, JPMorgan analysts urged investors to curb some of their enthusiasm. “It is notable that 1) no new deadline date (on U.S. China trade talks) has been set and 2) there weren’t any formal statements published from either side following the talks in Washington.”

Earlier in Asia, traders took JPM's advice as the MSCI Asia-Pacific index dipped 0.5% after the "trade hope" driven rally ran into profit-taking overnight, with the Shanghai Composite failing to keep earlier gains and closing 0.7% lower at 2941, while the Shenzhen Component index was down 0.5% as small-caps outperformed. Chinext index closed just barely higher after earlier climbing near 3% intraday. Still the euprhoria is clearly back with total trading volume hitting 1.04 trillion yuan, a new post-Nov 2015 high. since Nov 2015.

As discussed earlier, Indian markets were rattled by flaring border tensions between India and Pakistan, both of which have nuclear arms. The broader NSE stock index skidded, the rupee fell prompting the central bank to intervene and sell dollars, and bonds rose in a flight to safety. Elsewhere, Australian shares lost 0.9 percent, weighed by energy stocks as oil prices tumbled overnight, Japan’s Nikkei stumbled 0.4 percent and Chinese shares closed down after surging on the U.S. trade hopes on Monday.

Investors will also keep an eye on a two-day U.S.-North Korea summit this week where leaders of the two countries will try to reach an agreement on Pyongyang’s pledge to give up its nuclear weapon program.

In Company specific news, Tesla fell as much as 5.4% in post-market trading after regulators asked a judge to hold Elon Musk in contempt for violating last year’s SEC settlement. Caterpillar also slumped on a double downgrade from UBS to "sell", while Home Depot also dropped after reporting Q4 EPS of 2.09, below the 2.16 expected, while revenue of 26.5BN also came in short to the $26.57BN expected as comp stores missed; the company's solution: a USD 15bln share repurchase authorization.

In FX, it was all about sterling as pound bulls latched onto reports that May was considering delaying the March 29 deadline for Britain’s exit from the European Union, a day after the main Labour opposition party had shifted towards supporting a second referendum. The British currency surged 1% against the dollar after BOE Governor Mark Carney said officials are not seeing any liquidity strains in the market ahead of the U.K.’s Brexit departure date; sterling was already supported after the Labour party came out in favor of a second Brexit vote. As a result, the pound leaped to $1.32 while some poor company news shoved London’s FTSE down as much as 1 percent.

The dollar was steady while U.S. Treasuries edged higher "as the rush of optimism over U.S.-China trade talks from earlier in the week faded" while the yen strengthened against most major peers while antipodean and Scandinavian currencies dropped as stocks traded in the red.

Oil markets were steadied after a blast from U.S. President Donald Trump at OPEC for “too high” prices had triggered the biggest tumble of the year. Brent (+0.3%) and WTI (+0.1%) prices were slightly firmer trading towards the top of the day’s very narrow USD 1/bbl range, after a largely unchanged overnight session. In terms of recent news flow Saudi Aramco expect oil demand to increase substantially, with this predominantly driven by transport. Adding that in order to meet future demand growth long term investment is required. Elsewhere, BP’s CEO has stated that oil prices within the range of USD 50-70/bbl works for both consumers and producers. Separately, the UAE are to host a meeting between the state oil firm and those involved in Libya’s conflict in order to resolves the El Sharara oil filed situation; with the 300k BPD field remaining closed. Gold was little changed with the yellow metal hovering towards the middle of its daily range, mimicking the dollar which is largely uneventful ahead of today’s testimony by Fed Chair Powell to the Senate Banking Committee at 15:00GMT.

Today's calendar sees economic data including housing starts and consumer confidence. Scheduled earnings include Home Depot, EOG Resources, Worldpay.

Market Snapshot

S&P 500 futures down 0.4% to 2,785.50

STOXX Europe 600 down 0.5% to 370.36

MXAP down 0.4% to 160.16

MXAPJ down 0.5% to 526.61

Nikkei down 0.4% to 21,449.39

Topix down 0.2% to 1,617.20

Hang Seng Index down 0.7% to 28,772.06

Shanghai Composite down 0.7% to 2,941.52

Sensex down 0.6% to 35,995.18

Australia S&P/ASX 200 down 0.9% to 6,128.39

Kospi down 0.3% to 2,226.60

German 10Y yield fell 0.5 bps to 0.103%

Euro unchanged at $1.1358

Brent Futures up 0.06% to $64.80/bbl

Italian 10Y yield fell 7.3 bps to 2.414%

Spanish 10Y yield fell 2.8 bps to 1.135%

Brent Futures up 0.06% to $64.80/bbl

Gold spot down 0.2% to $1,325.24

U.S. Dollar Index down 0.03% to 96.39

Top Overnight News

May is considering a plan to delay Brexit and stop the U.K. leaving the European Union with no deal next month, according to people familiar with the situation. U.K. opposition Labour Party Leader Jeremy Corbyn has bowed to pressure from his members of parliament and agreed to support a new Brexit referendum

Federal Reserve Chairman Jerome Powell will probably gloss over an emerging division among policy makers about what it will take for them to resume raising interest rates when he speaks to lawmakers on Tuesday. Fed Vice Chair Clarida notes that yield curve is getting flatter

Donald Trump’s second summit with Kim Jong Un gives the two leaders the chance to once again share the spotlight and demonstrate their mutual affection -- but not even the White House expects a breakthrough leading to Pyongyang’s surrender of its nuclear arsenal

It’s becoming a familiar choice for OPEC: risk the pain of an oil-price slump, or provoke the wrath of President Donald Trump

Bank of Japan Governor Haruhiko Kuroda says the impact of a planned sales-tax hike will depend on employment conditions and consumer sentiment at the time it’s implemented

Indian fighter jets destroyed a major terrorist camp in Pakistan, the ANI news agency said, as tensions between the nuclear-armed rivals rose following an attack in Kashmir earlier this month

The strength of direct bids at this year’s auctions of coupon- bearing U.S. debt should give the Treasury confidence in the support of a significant group of buyers. These latest auctions show demand holding up despite significant compression in front- end yields

Spain is making its second visit to the primary market in about a month after being among a host of countries to draw record order books from euro bond sales this year. The nation is offering 5 billion euros ($5.7 billion) of July 2035 notes at a guidance price of about 85 basis points above benchmark rates, according to a person familiar with the matter

Poland’s ruling populists, faced with sagging opinion-poll ratings and a growing challenge from a freshly united opposition, are about to fire off a set of new stimulus measures

Asian stocks traded mostly lower following an uninspiring lead from Wall Street where the major US indices gave up a bulk of their gains amidst a turn-around in risk sentiment. ASX 200 (-1.0%) extended losses from the open, with all sectors in the red and underperformance in IT, material and oil names amid price action in the energy and base metals complexes. Nikkei 225 (-0.4%) failed to hold onto opening gains as safe-haven flows into the JPY pressured the Japanese benchmark. Elsewhere, Shanghai Comp. (-0.7%) swung wildly between gains and losses following the prior day’s 5% trade-induced rally, whilst Hang Seng (-0.7%) failed to nurse losses as the index was pressured by heavyweight oil names alongside shares in Apple supplier ACC Technologies, which tumbled over 12% following a profit warning. Finally, US equity futures ebbed further from the prior day’s best levels, E-Mini futures (-0.4%) lost more ground below the 2800 level whilst DJIA futures (-0.4%) dipped below 26,000 with some attributing the downside to month-end rebalancing.

Top Asian News

India’s Fledgling 2019 Dollar Bond Deals Tested After Air Strike

Chinese Stocks Simmer Down as Officials Warn of Rise in Leverage

Major European equities are in the red [Euro Stoxx 50 -0.3%], taking the lead from a downbeat Asia session as risk sentiment began to fade. The FTSE 100 (-1.3%) is underperforming its peers weighed on by the currency effects of a strong pound, alongside poor performance in IAG (-4.6%) following the MSCI stating that it plans to delete the stock from MSCI Global Standard Indexes as of March 1st. Additionally impacted by Fresnillo (-7.6%) as the Co. state that they expect 2019 to be a challenging year. Sectors are mixed, with some underperformance in IT names, after Apple supplier ACC Technologies issued a profit warning. Towards the bottom of the Stoxx 600 are Babcock (-4.8%) after the Co. issued guidance regarding restructuring costs ahead of Brexit. At the other end of the Stoxx 600 are BASF (+3.9%) who are firmly in the green following their earnings, which included a beat on Q4 EPS.

Top European News

BASF CEO Looks Beyond Market Gloom to Profit Growth in 2019

Swedbank Estonia Unit Actively Sought Wealthy Russian Clients

Persimmon Rises as Billion-Pound Profit Marks Homebuilder First

Aixtron Sinks; Analysts Flag Disappointing 2019 Ebit Outlook

In FX, Sterling is the standout G10 outperformer ahead of the latest Brexit update from UK PM May amidst heightened speculation that she will bow to Cabinet pressure and pull a no deal scenario off the table and perhaps entertain an extension to the March 29 deadline if Parliament rejects the WA next month or next week. Buyers seem to be front running U-turns on the former if not both, with Cable breaching resistance around 1.3100, then circa 1.3150 (near the 50 WMA) and subsequently tripping stops at 1.3160 on its way to 1.3238 at best, so far and posting a new high for the year (Prior was 1.3217). Meanwhile, Eur/Gbp has retreated sharply to below 0.86, and also filling sell orders that were reportedly sitting between 0.8625-20 on the way. BoE testimony to the TSC on February’s QIR is now underway, but Brexit remains paramount and the PM is due to speak from 12.30GMT.

AUD/CAD/NZD – The major laggards on a mixture of tempered US-China related risk appetite and softer/stable crude prices after President Trump’s latest bearish interjection. Aud/Usd has duly retreated from Monday’s peaks having faded ahead of loftier highs reached last week and is back below 0.7150 where previous resistance at the 50 DMA (0.7134) may now provide some technical support. However, the Loonie has not been able to hold above 1.3200 vs its US rival and the Kiwi is hovering closer to the base of a 0.6872-88 range with hefty option expiry interest likely to cap the upside ahead of the NY cut (1.8 bn at the 0.6900 strike).

JPY/CHF/EUR – All on a firmer footing vs the Greenback that is drifting lower with the index down to fresh, albeit marginal lows (DXY just shy of 96.300). Usd/Jpy has eased back from 111.00+ to a 110.76 low and the Franc has pared losses from parity+ again, while the single currency appears more intent on taking out chart hurdles that have been protecting a more pronounced approach towards 1.1400, like the 30 DMA at 1.1363. If broken, 1.1393 represents daily resistance and 1.1402 is a 50% Fib, while decent expiries lie from 1.1390-1.1400 (1.6 bn).

In commodities, Brent (+0.3%) and WTI (+0.1%) prices are slightly firmer trading towards the top of the day’s very narrow USD 1/bbl range, after a largely unchanged overnight session. In terms of recent news flow Saudi Aramco expect oil demand to increase substantially, with this predominantly driven by transport. Adding that in order to meet future demand growth long term investment is required. Elsewhere, BP’s CEO has stated that oil prices within the range of USD 50-70/bbl works for both consumers and producers. Separately, the UAE are to host a meeting between the state oil firm and those involved in Libya’s conflict in order to resolves the El Sharara oil filed situation; with the 300k BPD field remaining closed.

Gold (U/C) is little changed with the yellow metal hovering towards the middle of its daily range, mimicking the dollar which is largely uneventful ahead of today’s testimony by Fed Chair Powell to the Senate Banking Committee at 15:00GMT. Elsewhere, spot Palladium rose above USD 1550/oz, with the metal hitting a new high of USD 1554.50/oz; following strike threat by South African mineworkers added to supply concerns.

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