10th January 2020

·       Rockets reportedly landed near the Balad military base north of Baghdad, which houses US troops, according to Iraqi police

·       US government officials are now confident the Ukrainian Boeing 737-800 was shot down by an Iranian missile, citing satellite data

·       US President Trump said he might want to wait till after the election to complete Phase Two China trade deal; China Global Times tweeted that November is too far away

·       Asian equities traded cautiously, ASX 200 outperformed, Mainland China lagged

·       DXY traded in a tight range, AUD was supported by strong retail sales, energy futures and spot gold were uneventful

·       Looking ahead, highlights include US & Canadian Jobs Report, Chinese M2 Supply & New Yuan Loans and BoE’s Tenreyro

GEOPOLITICS

Rockets have reportedly landed in the vicinity Balad airbase, north of Baghdad, according to reports. Iraqi police forces said the rockets hit near the Balad military base which houses US troops. US official said the military is assessing potential defensive adjustments after Iran showed it was willing to attack in Iraq. (Newswires)

Israeli Air Force jets reportedly carried out air strikes in Al-Bukamal, situated in eastern Syria near the border with Iraq, via IntelSky - further reports note that the airstrikes targeted weapons shipments, via ELINT News. There were reports of casualties following the Israeli air strike, according to INTELSky citing Al-Maydeen news anchor. There were further reports of unidentified planes bombing the city of Al-Bukamal on the Syrian-Iraqi border, according to Al-Jazeera citing local sources – although it is unclear from the reports if this is a separate attack. (Twitter)

US House has approved the non-binding war power resolution which limits US President Trump's military capability in Iran. The measure would require Trump to cease military actions against Iran unless authorized by Congress or in response to an imminent threat. The passage in the House sends the measure to the Republican-controlled Senate. (Newswires) US Senator Graham notes that the US House passage of the anti-war resolution will not stop US President Trump from doing what he said he would do if Iran continues to engage in hostilities against the U.S. or our allies. (Twitter)

US government officials are now confident the Ukrainian airliner - Boeing (BA) 737-800 - was shot down by an Iranian missile, citing satellite data. US President Trump said he has suspicions regarding the Boeing (BA) jet crash in Iran noting "somebody could have made a mistake. Iranian aviation regulator chief said it is "impossible" that a missile hit the Ukrainian plane (BA), according to ISNA. (Newswires) Iran govt spokesperson said reports that missile hit the Ukrainian plane is psychological warfare against Tehran. (Newswires) US National Transportation Safety Board has accepted Iran's invitation to take part in the investigation of the Boeing 737-800 crash, according to an Iranian official. (Newswires)

US President Trump said the US was ready to retaliate to the Iranian strike on Iraqi bases but decided not to upon hearing that no personnel were injured - Ohio rally. (YouTube) US President Trump's new National Security team was less cohesive and less inclined that its predecessors to push back against the President's wishes and are also less likely to consult with other administrations, according to sources cited by WSJ. (WSJ)

Libya's Hafta has rejected ceasefire request from Turkey and Russia, according to AFP. (AFP)

ASIA-PAC

Asia-Pac equities traded cautiously as the region failed to fully materialise on the positive lead from Wall Street - which saw the tech-giant Apple soar in excess of 2% to a record high, after Chinese government data showed an 18% rise in iPhones sales in December. ASX 200 (+0.8%) was propped up by healthy gains in its financial sector with the “Big Four” Aussie banks all firmly in positive territory. Nikkei 225 (+0.3%) was buoyed by its auto sector alongside other large-cap stocks post-earnings, albeit Fast Retailing shares slumped to the foot of the index after the Co. cut its FY outlook following dismal quarterly results. Elsewhere, Hang Seng (+0.3%) and Shanghai Comp (-0.3%) were mixed with the former swinging between gains and losses whilst the latter lost momentum and gave up its mild opening gains before trading with little conviction. 

US President Trump said he thinks the US-China Phase One deal will be signed on January 15th or shortly after. President Trump said he might want to wait till after the election to complete Phase Two China trade deal, but also said the US will begin Phase Two talks straight away. (Newswires) China Global Times tweeted that a Phase Two trade deal after November is too far away and added that China's willingness to start Phase Two negotiations depends on the implementation of the Phase One deal; citing an expert close to the Chinese Government. Furthermore, China is not in a rush to begin Phase Two talks if US President Trump criticises the country during his election campaign, according to Global Times citing the expert close to the Chinese government. (Twitter)

PBoC set USD/CNY mid-point at 6.9351 vs. Exp. 6.9344 (Prev. 69467) - firmest CNY fix since August 2019. (Newswires) PBOC skipped open market operations for a daily net neutral position but a weekly drain of CNY 50bln.

UK/EU

UK House of Commons voted 330 to 231 in favour of the Brexit bill, as expected. The bill will now go to the House of Lords next week. (Newswires)

UK employers in December increased their number of new permanent staff for the first time in a year, reflecting a rise in optimism after UK’s general election; according to a survey by Recruitment & Employment Confederation. (Newswires)

UK business optimism improved by the largest margin in at least 11 years following the UK general election in December, according to a survey by Deloitte. (Newswires)

FX

In FX, DXY was contained within a tight parameter just under 97.50 and remained on standby for the key US labour market figures released later today (full preview available on the Newsquawk Research Suite). EUR/USD traded sideways and held onto the 1.1100 handle which sees around EUR 750mln of option expiries ahead today’s NY cut. Meanwhile, Cable experienced moderate strength as EUR/GBP gave up the 0.8500 handle to the downside. Elsewhere, USD/JPY held onto recent gains and fluctuated on either side of 109.50 throughout the session, ahead of its 100 WMA at 109.60 and 200 WMA at 109.70.  Antipodeans were choppy, the AUD felt some upside impetus upon the release of above-forecast Aussie retail sales, which prompted AUD/USD to briefly top its 50 DMA around 0.6860. The move was fleeting at the time but ultimately offered the AUD an underlying bid. NZD/USD traded sideways for a bulk of the session and retained its 0.6600+ status.

Australian Retail Sales MM (Nov) 0.9% vs. Exp. 0.4% (Prev. 0.0%, Rev. 0.1%) (Newswires)

COMMODITIES

Energy futures traded lacklustre overnight amid a lack of material catalysts and as participants largely focus US-Iranian relations ahead of US payroll figures. Brent futures held onto the USD 65/bbl handle throughout the session after rebounding from its 50 WMA (USD 64.54/bbl) in the prior session, and with technicians eyeing Mar’20 contract’s 200 and 50 DMAs which reside at USD 64.22/bbl and 64.12/bbl respectively, with the two moving averages poised to converge. Elsewhere, spot gold posted modest losses and dipped below the USD 1550/oz mark before the yellow metal tested mild support around USD 1546/oz. Meanwhile, copper was little changed as the red metal balanced the prospect of a delayed US-China Phase Two deal with exchange inventories near nine-month lows.

CENTRAL BANKS

Fed's Kashkari (Voter, Dove) said he is not concerned about low rates causing corporations to take on too much debt, but is more concerned with banks holding the debt, wants to ensure they have enough capital. Kashkari added that business investment is low due to tariff uncertainty, where an improvement in trade tensions could support gains in optimism; doesn't see a recession in the next few years (Newswires)

Fed's Kaplan (Voter, Neutral) said the 1.5%-1.75% FFR range is the "roughly appropriate" setting; sees between 2% to 2.25% growth in 2020, outlook has "firmed" in recent weeks, if anything. Kaplan expects unemployment to fall further and inflation rising to the 2% goal. (Newswires)

Fed's Bullard (Non-Voter, Dove) said he is content where rates are currently, and Fed should assess the lagged effects of the recent rate moves. Bullard added that there is reasonable chance of a soft landing in the US in 2020 due to the fast growth of 2018 and 2019's risks; businesses are remaining profitable despite trade uncertainty. If tensions in the Middle East pushes up oil prices the US will be more resilient in the face of any energy shock. Bullard favours a standing repo facility as a long-term solution; wants to keep the balance sheet as small as possible and feels a standing repo facility would help achieve that if banks feel they can source reserves from the Fed as needed (Newswires/WSJ)

Fed's Evans (Non-Voter, Dovish) expects that there could be no rate changes in 2020 and said if something happened that caused the economy to slow, that would call for a monetary response; inflation is anchored, maybe too low, doesn't see inflation leading to monetary tightening. Evans added that the US economy is in a very good place; expects employment growth to decelerate over time; sees inflation reaching 1.9% this year (in-line with Fed median dot plot), with current rates supporting inflation (Newswires)

Fed Discount Rate Minutes noted that all 12 regional banks voted to keep the rate steady; describe economic conditions as "positive" and were "optimistic about the prospect for economic growth". Several observe weakness in the manufacturing sector. Labour markets remain strong, with attracting new workers a challenge. On wage growth, the minutes note current and expected wage pressures. (Newswires)

BoC Governor Poloz said it seems potential downside risks of the trade dispute have eased as the US and China approach a deal; remains to be seen if trade policy improvements feed through to economy recovery and investment. Poloz cited strikes and bad weather as contributing factors to the weak data; inflation has been very close to the 2% target and economy has been close to capacity for nearly two years. (Newswires)

US 

* US T-NOTE FUTURES (H0) SETTLED 4 TICKS HIGHER AT 128-28+. The Treasury curve bull-flattened on Thursday. The session started off with a horizontal/downward bias, though a solid 30-year auction brought out the buyers. The auction itself stopped through the screens by a hefty 1.7bps, with analysts noting positive internals, where cover rose to a two-year high of 2.53x; dealer take-down was below recent averages, direct takedown was in line with recent averages, while the indirect bid was slightly above. Following the calming of geopolitical risk on Wednesday, which at the very least removes any immediate threat of military escalation between the US/Iran, and along with decent ISM services data and an ADP jobs report that surprised to the upside on Wednesday, the conditions appear to be in place to allow Treasury shorts to resume, desk noted. Some desks also suggest that rate unlocking in the corporate space has also added to the upward bias in yields.

Amazon (AMZN) is said to be in talks to sell streaming TV ads outside of Fire TV and potentially to Apple TV (AAPL) and Xbox (MSFT), according to sources cited by WSJ. (WSJ)