3rd January 2020

·       Asian equities failed to track the Wall Street rally as sentiment took a hit from geopolitical developments

·       Oil prices surged as US air strikes killed Senior Iranian Revolutionary Guard Corp Commander Soleimani; IRGC official vowed revenge against the US

·       North Korea's official newspaper warned of "immediate and powerful" strikes against threats, according to Yonhap

·       In FX, DXY held onto a bulk of its recent gains, JPY gained on safe-haven flows whilst high-beta FX pairs were pressured, EUR/USD traded sideways

·       Looking ahead, highlights include UK Construction PMI, German CPI (Prelim), US ISM Manufacturing, EIA Weekly Report, FOMC Minutes (December), Fed’s Mester, Brainard, Evans, Barkin, Daly, Kaplan and BoC’s Wilkins

GEOPOLITICS

Senior Iranian Revolutionary Guard Corp Commander Soleimani and Iraqi Militia Commander Muhandis have been assassinated in the air strike on the convoy close to the Baghdad International Airport, according to Iraqi State TV, with the Iraqi Militia spokesman noting that US and Israel were behind the attack. The US Pentagon has since confirmed that the death of the Senior IRGC Commander and noted the attack was aimed at deterring future Iranian attack plans. (Newswires) Initially, there were reports of unknown air activity over Baghdad with explosions heard near the Baghdad International Airport, via airspace observer INTELSky and Al-Jazeera. Iraqi security sources then noted that explosions in the vicinity of Baghdad International Airport were caused by three rockets, however local police sources noted four rockets hitting the Iraqi Military base near the airport with US helicopters spotted in the airspace according to reports. INTELSky reported that PMU Relations Director alongside a delegation of the Iranian Revolutionary Guards were reportedly assassinated in the air strike.

Iranian Revolutionary Guard Corp officer said Iran will take revenge on the US for the death of the Senior IRGC Official Soleimani. Iranian Supreme Leader Khamenei said harsh revenge awaits those who assassinated Senior IRGC Commander Soleimani and added that the killing will double motivation for resistance against the US and Israel. (Newswires) Iranian Foreign Minister Zarif tweeted "The US' act of international terrorism, targeting & assassinating General Soleimani is extremely dangerous & a foolish escalation", and added that US will bear responsibility for all consequences. (Twitter) Iran's top security body is to meet to discuss the "criminal attack" against Senior IRGC Commander Soleimani, according to a spokesperson quoted by FARS. (Newswires)

US Senator Graham warned that "If Iranian aggression continues and I worked at an Iranian oil refinery, I would think about a new career.” US Defence Department sources note that patriot batteries are active in Bahrain for alert posture, according to Newsweek's LaPorta. (Twitter)

North Korea's official newspaper warned of "immediate and powerful" strikes against threats. (Yonhap)

US President Trump told Turkish President Erdogan that foreign interference in Libya is complicating the situation. (Newswires) 

ASIA-PAC

Asian equities failed to benefit from the rally seen by global peers in which the major bourses on Wall Street headed into the close in fresh record territory. Tech-giant Apple briefly surpassed the USD 300/shr milestone for the first time, whilst chip names were bolstered by AMD’s +7% surge after a 45% price target boost by analysts at Instinet. In overnight trade, US equity futures alongside regional bourses saw downside which coincided with reports of North Korea's official newspaper warning of "immediate and powerful" strikes against threats and with sentiment dampened by concerns in the Middle East. Japanese markets remained closed amid an extended New Year holiday, whilst ASX 200 (+0.7%) was bolstered in early trade with all sectors initially in the green and with the heavily weighted financial sector leading the gains. Similarly, South Korea’s KOSPI (-0.2%) also saw early upside with heavyweight chipmaker SK Hynix advancing over 3% as semiconductor names piggy-backed on Wall Street’s stellar chip performance – similar gains were seen in TSMC shares at the Taiwan open. Hang Seng (-0.3%) was originally kept afloat by energy giants benefitting from the sudden rise in oil prices before the index conformed to the overall risk appetite, whilst Shanghai Comp (-0.2%) traded somewhat lacklustre following a net weekly liquidity drain of CNY 550bln by the PBoC.

PBoC set USD/CNY reference rate at 6.9681 vs. Exp. 6.9683 (Prev. 6.9614) (Newswires) PBoC drained a net CNY 550bln for the week vs. a drain of CNY 30bln in the prior week

PBoC policy easing is on track despite higher inflation, sources state. China is to set annual inflation target at 3% for 2020, unchanged from last year, policy insiders expect consumer inflation to ease in H2 2020, according to sources. (Newswires)

UK/EU

Spain's Catalan separatist ERC party has come to an agreement with the socialist party PSOE ahead of the Sanchez-led cabinet votes on January 5th and 7th; ERC will abstain in the vote, which gives Sanchez the numbers to form a Socialist-led coalition, according to a senior party official. (Newswires)

FX 

DXY was choppy but ultimately held onto a bulk of its recent gains despite later pulling back and briefly dipping below the 96.75 mark - with little by way of immediate or sudden overnight price action ahead of the FOMC Minutes release later today. EUR/USD and GBP/USD traded mostly sideways under the 1.1175 and 1.3150 levels respectively with the latter finding some support around its 21 DMA just below 1.3120, before eventually breaching the level to the downside. Meanwhile, a similar non-committal tone was originally seen in USD/JPY and JPY-crosses although a pullback in the DXY initially prompted the pair to give up the 108.50 level - with reports potential North Korean strikes against threats and US’ assassinations of the senior IRGC Commander then underpinning the safe-haven currency amid woes of further escalation in tensions in the regions. USD/JPY continued to decline before finding a base at 108.00. Elsewhere, the antipodeans traded softer and in tandem with the overall risk sentiment across the market with AUD/USD breaching mild support at 0.6975 whilst its Kiwi counterpart gave up the 0.6700 handle having fluctuated on either side of the round figure in early trade.

Brazilian Economy Ministry said the trade surplus is likely to continue to decrease in 2020 due to stronger demand in Brazil supporting imports. (Newswires)

COMMODITIES

WTI and Brent price action took the spotlight in APAC trade as the front-month futures surged in excess of 4% at one point, bolstered by reports that targeted air strikes conducted by the US killed a key senior IRGC official – in turn spurring worries of escalating tensions in the oil-rich region due to expectations of an Iranian retaliation. Analyst have been noting that the security in the Persian Gulf and the Strait of Hormuz could be at risk, whilst Defence US Defence Department sources noted that patriot batteries are active in Bahrain for alert posture, potentially in anticipation of Iran’s next move. Over the course of an hour and a half, Brent Mar’20 futures rose from around USD 66.20/bbl to a high of USD 69.15/bbl before waning off highs, but the contract remained north of its 100WMA at USD 67.75/bbl. Meanwhile, spot gold was originally unfazed by the developments in the Middle East, but upside in the yellow metal coincided with reports via North Korean press warning of immediate strikes to threats, alluding to a potential increase in US-NK tensions. Finally, copper prices conformed to the risk tone as gave up the USD 2.8/lb handle.

Phillips 66 noted that its 203k BPD Ponca City, Oklahoma refinery experienced a fired in its process unit, fire is under control and said there has been no impact on personnel and no off-site impact, flaring may increase temporarily. (Newswires)

US 

* US T-NOTE FUTURES (H0) SETTLED 6+ TICKS HIGHER AT 128-20. The Treasury curve has bull-flattened led by gains in the long-end of the curve, which saw 2s30s narrowing by around 5bps. Desks remind us that volume was thin, and the complex will likely get back into full swing next week when participants return. Analysts suggested that the richening was inspired by the new year rally in EGBs (the ECB today re-started purchasing assets under its PSPP after the break into the end of 2019). Accordingly, US 10-year yields fell back beneath 1.90%, having cheapened to around 1.94%; a few analysts have previously suggested that 1.95%-2.00% levels could be a prime 'dip' to be bought, a play that appears to have yielded gains thus far. Meanwhile, the US Treasury will sell USD 28bln in 3-year notes, USD 24bln in 10-year notes re-opening, and USD 16bln in 30-year bonds re-opening; all sizes were unchanged.