• Asian equity markets traded mostly higher but with gains capped as the euphoria from the US-China Phase 1 trade deal signing dissipated
• The deal was caveated by China’s commitment to purchase agricultural goods “based on market conditions” and potential for China to exit the deal
• President Trump said he will visit China in the not too distant future to reciprocate for the Phase 1 signing. Work on Phase 2 will begin as soon as this one kicks in
• President Trump was reported to have previously threatened auto tariffs of 25% on European autos if Europe refused to initiate the dispute mechanism against Iran in the JCPOA deal
• Looking ahead, highlights include, German CPI (F), IEA Monthly Report, SARB and CBRT rate decisions, ECB Minutes, US Import & Export Prices, Retail Sales, Weekly Jobs, Philly Fed, Business Inventories, Fed’s Bowman, ECB’s Lagarde, BoE’s Haldane

ASIA-PAC

Asian equity markets traded mostly higher but with gains capped as the euphoria from the US-China Phase 1 trade deal signing, which had buoyed Wall St to record highs and the Emini S&P to an unprecedented 3300 level, began to wane amid some doubts concerning the implementation of the deal. Nonetheless, ASX 200 (+0.6%) outperformed as it forayed above 7000 for the first time ever led by notable strength in tech and financials, while Nikkei 225 (+0.1%) was indecisive and stalled ahead of 24k despite strong Machinery Orders which showed the first M/M expansion in 5 months, as well as its largest increase on record for the series. Elsewhere, Hang Seng (+0.1%) and Shanghai Comp. (-0.3%) failed to take advantage of another substantial PBoC liquidity injection and the eased tensions from the US-China trade deal, as there were lingering doubts regarding China’s caveat of purchasing agricultural goods “based on market conditions”, while the unilateral dispute settlement mechanism which allows US to reimpose tariffs for non-compliance and doesn’t permit China to retaliate but instead can quit the agreement, fuelled some concerns on whether the deal will hold. Finally, 10yr JGBs were marginally higher and briefly reclaimed the 152.00 level with prices supported as the momentum in stocks began to wane and with the BoJ also in the market for JPY 350bln of JGBs in the belly.

PBoC injected CNY 300bln through 14-day reverse repos. (Newswires)

PBoC set USD/CNY mid-point at 6.8807 vs. Exp. 6.8809 (Prev. 6.8845)

US President Trump said he will visit China in the not too distant future to reciprocate for the Phase 1 signing and that work on Phase 2 will begin as soon as this one kicks in. President Trump also stated they are leaving tariffs on so the US has more cards to negotiate for Phase 2, where he will agree to remove all tariffs if Phase 2 is completed and that he expects Phase 2 to be the last, while US Vice President Pence later suggested discussions on a Phase 2 have already begun. (Newswires)

USTR Lighthizer outlined the details of the Phase 1 deal in which he stated that in the 2020/21 period, on top of 2017 baseline figure, China is to purchase an additional USD 32bln of agricultural goods, USD 77.7bln of manufacturing, USD 52.4bln of energy and USD 37.9bln of services. Reports also noted the deal includes detailed provisions on patent protections and counterfeit products, as well as an enforcement process, while the dispute settlement mechanism of the deal is designed to be completed in 90 days and if US reimposes tariffs in an enforcement dispute, China cannot implement retaliatory tariffs but it can quit the agreement. Furthermore, Lighthizer reiterated the only way to get further tariff relief from the US is to make Phase 2 but noted it is not the US' intention to wait until after the US election for a Phase 2 agreement. (Newswires)

US Treasury Secretary Mnuchin said the USMCA and US-China trade deal will contribute 50-70bps to US GDP and that they have data on Chinese subsidies which they will address in Phase 2, while there were separate comments from NEC Director Larry Kudlow that Huawei cannot be a part of 5G in the US and that there will be some disputes that need to be resolved in the China trade deal. (Newswires/Fox Business)

Chinese Vice Premier Liu He said China will purchase agricultural goods based on market conditions, as specified in the deal and that China will adhere to the deal out of mutual respect. Liu also stated that Phase 1 will not impact legal interests of third parties and that implementing Phase 1 is the highest priority, while he added US and China need to step up cooperation as it is the only right path. Furthermore, the Chinese Finance Ministry also released a statement on the Phase 1 deal in which it confirmed China agreed to buy at least USD 200bln of additional US goods and services over 2 years and stated that the sides acknowledged purchases will be made on commercial considerations and market prices. (Newswires)

UK/EU

UK RICS Housing Survey (Dec) -2 vs. Exp. -10.0 (Prev. -12.0, Rev. -11). RICS said agreed home sales turned positive last month which was the first time since May 2019, while it added the housing market is benefitting from increased political clarity post-election. (Newswires)

BoE’s Haldane has noted that the UK’s decade-long productivity crisis might be partially attributed to labour market laws that make it easy for bosses to hire and fire staff. (Times)

FX

DXY remained subdued after mixed data and the Phase 1 deal signing failed to spur bids, while the lacklustre tone was not helped by Congress in which the House voted to send the Articles of Impeachment against President Trump to the Senate. As such, the greenback’s major counterparts held on to recent gains in which EUR/USD found a base at the 1.1150 level and with GBP/USD building upon its advances to test 1.3050. Elsewhere USD/JPY and JPY-crosses were choppy with the former eyeing a reclaim of the 110.00 handle, while antipodeans mildly benefitted from another firmer PBoC reference rate setting with slight outperformance in NZD/USD after breaking through the prior day’s resistance of 0.6620 and with ASB suggesting the RBNZ can be patient on delivering its next rate cut this year.

COMMODITIES

Commodities were mixed in which WTI crude futures recouped losses to reclaim the USD 58.00/bbl level after yesterday’s relatively choppy session where prices were initially pressured after a mixed OPEC report where 2019 world oil demand growth forecast was lowered, but then recovered as Wall St posted record highs and with the latest EIA inventory report showing a larger than expected draw in headline crude inventories. Elsewhere, gold was lacklustre rangebound overnight amid an uneventful greenback, while copper was also subdued as trade doubts crept in despite the recent US-China Phase 1 signing.

GEOPOLITICS

US President Trump was reported to have previously threatened auto tariffs of 25% on European autos if Europe refused to initiate the dispute mechanism against Iran in the JCPOA deal. (Washington Post)

US 

The TPLEX settled firmer amid caution on the signing of the Phase 1 trade deal. Fixed income got off on the front foot throughout the European session in a bull-flattening manner. The march higher seemed to be led by Bunds and Gilts as they tested technical levels on the upside, with the latter supported by growing consensus for a BoE rate cut, which soon saw the TPLEX follow suit. The T-Note did pare some of its gains heading into the US cash equity open, where risk appetite picked up, although ultimately found itself back to highs once the dust settled from the Phase 1 deal. By settlement, the curve's bull flattening saw yields lower across the curve, with the 30-year yield falling 4bps, seeing the 2s30s narrow by approximately 2.5bps. US T-note futures (H0) settled 6+ ticks higher at 129-11.

Fed's Beige Book stated US activity continued to expand modestly in the last 6 weeks of 2019 and that expectations for near term outlook remained modestly favourable across the nation. Furthermore, consumer spending grew at a modest to moderate pace and some noted a pick up from previous, while holiday sales on balance were said to be solid although manufacturing activity was "essentially flat" and tariffs as well as trade uncertainty continued to weigh in many districts. (Newswires)

Fed's Kaplan (Voter, Neutral) said the Fed should have a structure in place so that it can have the smallest balance sheet possible, while he added it would be healthy to lay out a path where the Fed can reduce repo operations and curtail balance sheet growth. (Newswires)

Fed's Harker (Voter, Neutral) said rates are in a good place unless there is a significant change in inflation, while he added they don't need to lower rates right now citing risks of financial stability. (Newswires)

US House voted 228-193 to appoint managers and send Articles of Impeachment against President Trump to the Senate. In related news, US Senate Majority Leader McConnell said the impeachment trial will begin on Tuesday and the Senate will complete USMCA trade deal today. (Newswires)