LIVE MARKETS-US fiscal stimulus: by year end or something for 2021?

* STOXX 600 declines 0.2%

* S&P 500 futures flat

* PMIs show EZ activity shrank sharply in Nov

* Hopes grow for swift Brexit deal

* EZ inflation expectations on the rise Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com

US FISCAL STIMULUS: BY YEAR END OR SOMETHING FOR 2021? (1335 GMT)

Now that the vaccine breakthroughs look to have been fully absorbed into prices and the rotation trade has run its course for now, what else could drive markets higher before this exceptional 2020 ends?

Central bank surprises are a good answer and we may know about that quite soon (The ECB meets on Dec. 10 and the Fed on Dec. 15-16). Another valid response is a deal in Washington over a fiscal aid package and the good news here is that the chances of a compromise before year end have increased.

The renewed hopes came as a bipartisan group of lawmakers proposed on Tuesday a $908 billion COVID relief bill which was then backed by Democratic House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer. The proposal has helped lift US Treasury yields this week (see chart) but as of yesterday there was still no agreement in Congress. leaders appear to have yielded on their insistence on a multi-trillion dollar fiscal stimulus package, raising the odds that a deal can be reached before the end of the year," says Jan Hatzius and his team at Goldman Sachs (NYSE:GS).

Several sticking points remain, however, and Goldman cautions that the issue could slip into the new year.

In more detail they say: "Whatever agreement is reached is likely to be attached to omnibus spending legislation that congressional leaders look to pass before year end. The hope has been that this would pass by December 11, but it is possible that Congress will pass one more short-term extension, to December 18 for example".

And then add: "If congressional leaders do not reach an agreement on a broad package (i.e., $500bn to $900bn) by the time that longer-term spending bill is complete, we expect that congressional leaders would instead extend some expiring programs (e.g., unemployment insurance) to early 2021 and take up the issue then".

Meantime UniCredit also agrees the chances of a deal in 2020 have increased. Their base case however remains that a deal is more likely in January/February under the new administration.

"Time is running out to pass a bill before Congress breaks, the USD 908bn bipartisan proposal has yet to be written into a draft legal text and is likely to come up against resistance from Senate Republicans who prefer a smaller package," they say.

(Danilo Masoni)

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A BULL CHARGE? IN THE EMERGING MARKETS (1245 GMT)

While valuations on European and U.S. stocks are somewhat baffling investors after a strong rally triggered by positive news on vaccines, if you watch outside developed countries you can see some real bullish sentiment.

According to an emerging market (EM) strategy report by Citi, panelists heard by the investment bank are very bullish on EM forex, with highest conviction on Mexican Peso and China Yuan, as well as on EM high yield credit.

Sentiment is very positive on China in terms of economic performance and asset price performance, with inflows in China bond market which are expected to continue to be significant.

Generali (MI:GASI) Investments underlines in its Markets Perspectives report that a weakening U.S. dollar, on lower political uncertainty after Joe Biden victory and effective vaccines, favours exposure to EM.

Generali Investments turns positive on EM sovereign bonds underlining that LATAM can extensively benefit from a Biden victory and a vaccine. It favours Peru and Chile, while it sees a risk for Mexico and Colombia of becoming ‘fallen angels'.

There are risks of course. The main one is probably related to the roll-out of the vaccine, which will be less smooth and rapid than in developed markets. (see the chart below)

Besides that, the Italian investment house also slightly extends a pro-risk tilt with “a sizeable overweight in credit and more prudently in equities.”

Credit spreads have recently accelerated their convergence to pre-Covid levels and current market conditions will continue supporting high yields, while investment grade are still interesting for the carry versus sovereign, it says.

(Stefano Rebaudo)

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THE BIG INFLATION UNKNOWN (1159 GMT)

Inflation expectations are definitely picking up!

After yesterday's spike in U.S. breakeven inflation rates, the market gauge for the euro zone also jumped to its highest levels since February this morning.

That's an encouraging sign for betting on the great rotation to value's legs.

"Without a strong pick up in inflation and bond yields, it is premature to fully rotate from growth stocks to unloved 'value' companies such as banks", warns Luca Paolini at Pictet Asset Management.

That being said, inflation is probably the biggest unknown going forward as economic models stubbornly failed to predict its course since after the financial crisis.

Inflation trends have proven a tad more complex to track than money supply versus GDP growth or the good old Philipps curve on the unemployment impact.

Massive stimulus through innovative QEs and even negative rates have so far failed to prop up inflation back to their pre-crisis levels, as the ECB can easily testify.

But many investors are now ready to bet that 'this time it's different' and that inflation is ready for a comeback.

"Whilst inflation was the dog that didn't bark after the great financial crisis, it may be about to bite", argues

Neil Wilson at Markets.com.

For him, the main difference with the GFC is the coordinated fiscal stimulus implemented and the fact that "the growth in M2 money is being mainlined into the economy's veins" rather than absorbed by banks like after the subprime crisis.

Taking the opposite view, HSBC analysts warn that markets may have got ahead of themselves.

"Expensive Euro breakeven valuations are at odds with the challenging fundamental outlook and hence underprice the risk of 'Japanification'", they wrote in a note today.

"As we move through 2021, the scale of economic scarring will emerge. When reality bites, breakevens may be exposed".

One thing that blurs and complicates the picture even further is the Fed's new policy which means it "will only hike interest rates once inflation has actually reached its 2% target rather than before that as it has done in the past", writes Thu Lan Nguyen at Commerzbank (DE:CBKG).

"That means rising U.S. inflation expectations are unlikely to result in a proportionate rise in US rate expectations for some time", she adds.

Good luck with juggling with that!

Some reading:

Is U.S. inflation coming back? Jump in market measure sparks debate Ponthus)

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PHARMA STOCKS? NOT SUCH A BARGAIN (1037 GMT)

Pharma stocks have been in the spotlight for weeks after the first news of an effective vaccine, on November 9, as well as during the whole coronavirus crisis.

But where are we now in terms of valuation and outlook?

According to UBS, the industry seems cheap but its 2021 growth is expected to be way below the average.

Let's see in details.

The sector trades at a double-digit discount to the market one year forward PE ratio, UBS says in a research note.

But “EU pharma doesn't seem that exciting” with an 8% Eps growth expected in 2021, compared with an average 2021 EPS growth seen above 30% for the broader market, it adds.

“And at the margin there is some downside risk to this growth – in aggregate we are slightly below consensus for 2021.”

UBS does not think the sector will re-rate en bloc simply because it is too cheap and looks for investment cases that offer a clear pathway to share price appreciation.

UBS top picks are Novartis NOVN.S , Bayer BAYGn.DE and Lundbeck LUN.CO , while it downgrades GlaxoSmithKline GSK.L to neutral from buy.

(Stefano Rebaudo)

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INDECISION AT THE OPEN (0820 GMT)

Where to go from here?

Markets still don't seem to have the answer to that one and the STOXX 600 is broadly flat, losing a meagre 0.03% ten minutes after the open.

Vaccine, stimulus and Brexit hopes are not triggering any particular moves today.

Sentiment looks to be slightly negative though with cyclicals such as banks, oil and gas and insurers leading losers with these sectors down 1%, 0.8% and 0.7% respectively.

The consensual tech sector is making the most gains, but with a timid 0.4% rise.

Among big movers, airline SAS SAS.ST is down 7% after its trading update. Orange Belgium OBEL.BR is up 35% after its mothership Orange ORAN.PA announced a 22 euro-per-share bid for the shares it does not already own.

The biggest gainer on the STOXX is Rolls Royce RR.L , up 4% after a report it is considering a possible re-entry into the narrow-body jetliner market.

(Julien Ponthus)

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REFLATION! (0755 GMT)

Will the U.S. hiring slowdown displayed in Wednesday's ADP (NASDAQ:ADP) data and the lacklustre Beige Book activity index pressure Congress into agreeing additional fiscal stimulus? That's what markets seem to expect.

That, alongside progress on coronavirus vaccines and evidence of a Chinese growth bounceback are spurring an epic reflation trade -- world stocks at new all-time highs and the S&P 500 posting another record close. The mood is calmer on European and U.S. equity futures but the commodity complex is helping -- record high iron ore futures are lifting miners' shares such as Rio Tinto (LON:RIO) and BHP.

Reflation bets are in full swing on bond markets too -- two-year/10-year Treasury yield curve have climbed to the steepest since Feb. 2018 and inflation-adjusted yields too have steadily risen. And with the dollar index at 2-1/2 year lows, commodity- and growth-driven Aussie dollar, Norwegian crown and emerging currencies are benefiting.

It all puts extra focus on what the U.S. Fed and the ECB might do about all this. Expectations are building the Fed will move to tamp down longer-dated yield and while the ECB has already as good as promised to expand bond buying, could it do more, given the euro has hit the highest since April 2018.

And more M&A -- French telco Orange plans a bid for shares in Orange Belgium OBEL.BR , in an offer worth around 620 million euros. It has offered a 35.6% premium to the Dec. 2 closing price. Italy's Creval holds a board meeting as it tries to extract a higher offer price from suitor Credit Agricole (PA:CAGR).

Key events that should provide more direction to markets:

-Final November services and composite PMIs

-Weekly U.S. jobless claims

-Meeting of OPEC+ on next year's oil output policy; expected to roll over output cuts until end-March

-ECB Board member Andrea Enria speaks at the FT online Banking Summit 2020

-Airline SAS is seen falling 7% after reporting big Q4 losses. Travel firm Tui meanwhile secured a third state bailout

(Sujata Rao)

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MORNING CALL: NO TREND JUST YET (0636 GMT)

There's been no dramatic change of mood between yesterday's close, when the STOXX 600 ended its session just a tad in the red and this morning's flattish futures.

Asian shares were also mixed overnight, although slightly on the positive side, with a choppy session on Wall Street.

In what has been a 'risk-on' signal recently, the dollar is trading around 2-1/2 year lows amid growing optimism on the imminent roll out of the coronavirus vaccine.

Oil prices tell another story though as producers, including Saudi Arabia and Russia, locked horns over the need to extend record production cuts set in place in the first wave of the COVID-19 pandemic.

(Julien Ponthus)

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