PS:

Uh oh. The World Bank has just cut its growth forecasts.

In a new report, the World Bank has warned that dark clouds are gathering menacingly over the global economy.

It now expects global growth to slow to 2.9% this year, down from 3% in 2018, dipping again to 2.8% in 2020.

Significantly, it expects that both the US and China will slow over the next couple of years, as Beijing’s structural reforms kick in and Donald Trump’s tax cuts fade.

Bloomberg has the lowdown on what’s moving on Wall Street today, with the main indices up around 1% in late trading.

All major indexes were higher, led by the small-cap Russell 2000 Index for a second day.

The S&P 500 Index gained, as transportation companies, telephone stocks and technology hardware makers pushed the benchmark higher.

Financials were only major industry group to decline. Boeing Co. helped lift large-caps with a strong fourth-quarter delivery report. PG&E Corp. was the biggest decliner, dropping 10 % amid reports that the California utility giant is considering bankruptcy.

Brexit uncertainly is clouding over the UK economy, but today’s data suggests Germany, not Britain, is more likely to slide into recession in the months ahead.

Our economics editor, Larry Elliott, says:

News that German industrial production fell by 1.9% in November came as a nasty shock. The stock response to the contraction in the third quarter was that it was due to the tightening up of European vehicle emission standards which led to one-off problems for its carmakers that would quickly be overcome.

While the bounce-back has been delayed rather than cancelled, Europe’s biggest economy faces significant headwinds. The growth spurt generated by monetary stimulus from the European Central Bank has run its course.

Hopes of a trade war breakthrough are keeping shares higher in New York.

The Dow is currently up 0.8%, or 191 points, at 23,723. The broader S&P 500 index of US companies is 0.6% higher, on track for its third daily rise in a row.

Investors are speculating that markets could be heading higher, following the heavy losses at the back end of 2018.

Some are making comparisons with 2016, when early losses were followed by strong gains.

Jeffrey Schulze, investment strategist at ClearBridge Investments, has pointed out several similarities (via Marketwatch):

If you think what was plaguing the market at that time, you had a strong dollar that was choking off not only U.S. earnings but also the global economy. Oil was plunging…You had a Fed that was ending quantitative easing and they were projected to do four rate hikes in 2016. and then lastly you had very weak Chinese economic data.”

In other news, Brexit may mean millions of pound of lost revenue for telecoms giant BT.

Our Brussels bureau chief Dan Boffey explains:

BT is facing a post-Brexit battle to maintain access to a number of multimillion-pound EU contracts and avoid the premature termination of a £24m deal with the European parliament.

The BT Group has won a slew of contracts with the EU’s institutions in the last decade worth more than £150m.

But the potential for the EU to scrap “sensitive” contracts such as that struck with BT was raised during a recent meeting of EU officials and senior MEPs discussing Brexit preparations, according to leaked minutes obtained by the Guardian. The risk to the EU in honouring contracts and allowing the BT Group to provide telecommunications services, when the UK is no longer an EU member state, was said to require examination.

More here:

Trade Optimism Trumped Weak European Economic Sentiment today, says Fiona Cincotta of City Index.

She explains

Global markets bounced higher on Tuesday as optimism grows over a US – Sino trade deal. A strong Asian session spilled into Europe, although markets pared gains as Wall Street opened owing to increasing tech concerns.

US and China extending trade talks for another day has been interpreted as a positive sign by the markets. Whilst no reason was given for the extension, Trump’s tweet that the talks “were going very well” was sufficient to lift sentiment boosting appetite for riskier assets such as stocks, whilst safe haven gold declined.

With US and China working to resolve their issues, the Fed promising to remain flexible and the US economy firing on all cylinders it is easy to see why sentiment is on the up. Obviously, this is not the end of US – China trade tensions by a long shot, ad there will almost certainly be further bumps and twists along the way but for now the markets are happy with the slow steady progress which it perceives has been achieved.

Even the Dax rallied, gaining 0.5% despite this morning’s dismal factory data, she adds.

This comes hot on heels of downbeat German factory orders, which dropped by -4.3% in November. These are the latest signs that the eurozone economy is slowing, as trade tensions sap momentum for the powerhouse of Europe.

Britain’s FTSE 100 index of top shares has closed 50 points higher at 6861 points, a gain of 0.75% today.

Optimism that Beijing and Washington are making progress in their trade negotiations lured investors into buying shares, following the recent sell off.

Many traders are still anxious, though, as this chart shows:

Top US banker Jamie Dimon has added to the optimism on Wall Street, by suggesting that investors got carried away with recession fears in recent weeks.

CNBC has the details:

Markets from equities to high-yield bonds that have been flashing warning signs are probably an overreaction to slowing growth rather than a precursor of imminent recession, according to J.P. Morgan Chase CEO Jamie Dimon.

“I think markets are overreacting to short-term sentiment around a whole bunch of complex issues,” Dimon said in a Fox Business interview released Tuesday. He quickly added that the market moves were a “rational response” to slower growth and the U.S.-China trade dispute.

Reuters’ Jamie McGeever tweets:

US stocks are now trading at a three-week high, Bloomberg flags up.

European stock markets are all surging higher, after president Trump tweeted that the trade negotiations with China were going “very well”.

The French CAC is leading the charge, up almost 2%.

Hu Xijin, editor of China’s Global Times, tweets:

Trump’s trade war optimism is pushing the stock markets up.

The FTSE 100 is now up 70 points, or 1%, at 6880, and Wall Street is expected to open higher too.

JP Morgan has now voiced its alarm over Germany’s economy.

J.P.Morgan economist Greg Fuzesi fears that the economy may not have grown in the last quarter, following its small contraction over the summer.

Fuzesi told clients:

The very bad run is continuing and it is now possible that German gross domestic product (GDP) stagnated in the fourth quarter of 2018,”

“Of course, the German industrial production data are very noisy, but even with a big rebound in December, it is no longer possible to rule out even a small GDP contraction in the fourth quarter of 2018.”

Germany’s once fast-pumping economic engine is misfiring, says Mihir Kapadia, CEO and founder of Sun Global Investments.

Kapadia blames the ongoing trade war between the US and China, which has hurt economic demand:

Industrial output from Europe’s largest economy has been slowing down each consecutive month, since September 2018, with the drop accounting to 4.7% on an annualised basis. The shortfall in the output underscores the impact on the global economy - wounded and reserved under hostile trade rhetoric. The German economy is expected to be strained in the last quarter of 2018 as the weakness from Industrial output has also matched with a slump in German factory orders, down by 4.3% year-on-year in November.

This is in line with global trends, as global risk factors have led to a cautious undertone in the markets. Unless a more welcoming approach is led, especially from the US, the cracks will only widen further globally.

The UK economy isn’t looking too hot either.

Economist Sam Tombs of Pantheon has flagged up that business morale has hit a five-year low, which probably signals a slowdown.

David Madden, analyst at CMC Markets UK, spies optimism over the US-China trade talks:

Traders are hopeful that some sort of progress can be made, and the fact China sent, Liu He - a top tier trade negotiator, the market is viewing this as a sign that Beijing means business. The FTSE 100 is enjoying a broad based rally, as financial, mining, and consumer stocks are all higher this morning.

However, the German factory slowdown is weighing on the euro, he adds:

EUR/USD is the red after Germany revealed poor industrial output figures. The November report showed a 1.9% decline, while economists were expecting a 0.3% rise, and the October report was revised lower to -0.8%, from -0.5%.

This is a poor update from the largest economy in Europe, and it doesn’t bode well for the region.

Kit Juckes of Societe Generale says today’s German industrial output figures are “terrible”.

This morning’s main piece of new economic news was a 1.9% [month-on-month] fall in November industrial production, accompanied by a downward revision to October that leaves Q4 GDP growth looking close to zero.

European stock markets are pushing higher this morning, despite the growing fears that Germany could be sliding into recession.

All the main indices are in positive territory, although Frankfurt’s DAX (+0.2%) is lagging behind.

Shares are getting a currency boost, with both the pound and the euro down around 0.3% against the US dollar.

Connor Campbell of SpreadEx says:

A troublesome German industrial production figure, one that suggests the country could be slipping into a technical recession, was the most overt challenge to sentiment after the bell. However, it only ended up impacting the euro, sending the single currency down 0.4% against the dollar and 0.3% against the pound.

Celebrating this euro pull-back instead of lingering on Germany’s economic woes, the DAX added half a percent, once again climbing back towards the 10800 it failed to burst past at the start of the week. The CAC was even more chipper, rising 0.8% to tickle 4750. As for the FTSE, a 0.6% helped push the UK index above 6850.

The main driver of this optimism appears to be the ongoing trade talks between the US and China in Beijing. Not that there is anything too substantial to justify such positivity, but rather a lack of mood-dampening comments has green-lit an early European rebound

Back to Germany.... and Chris Williamson of data firm Markit also fears weak growth in the final three months of 2018 (following a 0.2% contraction in July-September).

Back in the UK, house prices have unexpectedly jumped in December - at least according to the Halifax bank.

Halifax reports that prices spiked by 2.2% in December, up from a 1.2% drop in November.

This lifted the annual rate of house price growth to 1.3% in the three months to December, up from just 0.3% in November.

That’s stronger than expected, and completely at odds with rival data from Nationwide. It reported last week that house prices fell by 0.7% between November and December, with annual growth of only 0.5%.

Both surveys are based on transactions at Halifax and Nationwide, so are susceptible to volatility.

Here’s Bloomberg economist Jamie Murray:

Teis Knuthsen of Kirk Kapital is also worried by the sharp slump in German factory output:

Bloomberg says the decline in German industrial output underlines “the subdued pace of expansion in Europe’s largest economy during the final quarter of 2018”.

It adds:

• Consumer goods output declined 4.1 percent, while energy was down 3.1 percent.
• The Economy Ministry said the slump was exacerbated by calendar effects as workers took extra time off around public holidays close to the weekend.
• Germany’s automakers continued to struggle to adjust to new emissions-test procedures, the ministry said.

Several financial analysts fear that November’s 4.7% tumble in German industrial output could signal a technical recession (two quarters of negative growth).

Here’s Jan von Gerich, chief analyst at Denmark’s Nordea bank.

Economist Fred Ducrozet of Swiss bank Pictet is also concerned:

Here’s financial blogger Jeroen Blokland: