A look at the day ahead in U.S. and global markets from Mike

Dolan

Wall Street stocks are grinding out new records as U.S. growth

continues to outperform, interest rate cut optimism has been

rekindled at the margins and investors raise eyebrows at

overseas turbulence in French politics and Chinese trade.

U.S. equity indexes seem to be basking in a

post-election, year-end glow that's seen volatility gauges

subside to their lowest levels since July - with the VIX

'fear index' now some six points below its historical averages.

Although U.S. manufacturing remains in the doldrums, the

latest survey from ISM showed the contraction moderating - in

marked contrast to equivalent European surveys released earlier.

As the factory gloom lifts, overall growth estimates are

back on the rise - with the Atlanta Federal Reserve's 'GDPNow'

model putting the annualised expansion in the current quarter at

almost 3.2% - faster than the 2.8% recorded for Q3.

And even though Treasury yields perked up a bit on Tuesday,

long-dated borrowing costs have plunged by more than 25 basis

points over the past fortnight, perhaps in part as a backwash

from rising overseas growth worries due to fears of a looming

global trade war.

Through the noise, Fed comments overnight seemed to

encourage hopes for another rate cut this month, nudging futures

pricing up to show almost a 75% chance of another move.

"As of today, I am leaning toward continuing the work we

have started in returning monetary policy to a more neutral

setting," Fed Governor Christopher Waller said. "Cutting again

will only mean that we aren't pressing on the brake pedal quite

as hard."

Fed Chair Jerome Powell is set to add his voice to the

debate with public remarks in New York on Wednesday, just as the

week's big labor market updates stream in, starting with today's

October job openings report.

ATTENTION ON FRANCE

But market attention in Europe was squarely on France, as it

looks likely the standing government there could fall this week

as it faces a 'no-confidence' vote as soon as Wednesday due to

the ongoing parliamentary impasse over the annual budget.

French government bonds are underperforming, with the

10-year yield spread over German equivalents on

Monday touching the widest since the height of the euro crisis

12 years ago.

But while the debt is underperforming surging German bunds

and other euro peers, French government borrowing rates have

actually been tumbling nonetheless - with 10-year nominal yields

down almost 25bps over the past month and off almost half a

percentage from midyear peaks.

That defuses the sense of crisis on the financial side at

least, even if wider spreads are irksome to the relative funding

costs of French banks.

French stocks and the euro caught a break on

Tuesday, both bouncing back a touch, and the French/German debt

spread compressed a bit too.

Even if the French government does fall due to far right and

far left votes against it this week, a basic holding budget can

still be pushed through this month, while another election can't

be held until the middle of next year.

Part of the reason for sinking borrowing costs overall is

that political stalemate in Paris - together with expected

German elections early next year - just adds to regional growth

worries, already heightened by trade war worries, auto sector

troubles and geopolitical tensions.

And all of that just heaps pressure on the European Central

Bank to keep cutting rates further, possibly even raising the

size of those cuts this month.

ECB board member Piero Cipollone said on Tuesday that U.S.

President-elect Donald Trump's planned tariffs would both lower

euro zone economic growth and inflation.

Those tariff worries are all the greater in China, already

hit by another round of chip sector investment curbs by the

outgoing Joe Biden administration this week.

With expectations of another round of monetary easing from

the Chinese central bank mounting and Chinese 10-year debt

yields below 2% for the first time, the offshore yuan is

tumbling against the dollar and hit its weakest level of the

year on Tuesday.

China's main stock indexes initially fell as

chipmakers wobbled on the latest U.S. clampdown, but then

rallied at the close. The focus is also shifting to Chinese

retaliation.

On Tuesday, China said it will ban exports to the U.S. of

items related to gallium, germanium, antimony and superhard

materials that have potential military applications.

U.S. stock futures were steady to higher ahead of the bell,

retaining the bulk of the latest push to new records.

Key developments that should provide more direction to U.S.

markets later on Tuesday:

* US October JOLTS job openings data, Brazil Q3 GDP, Mexico

October jobless

* Federal Reserve Board Governor Adriana Kugler and Chicago Fed

President Austan Goolsbee speak

* Allied foreign ministers meet at NATO headquarters in Brussels

* US corporate earnings: Salesforce

(Editing by Bernadette Baum)