• European bourses are subdued this morning, in a continuation of APAC trade
• 291 cases of Coronavirus have now been confirmed by China (as of Jan 20th), according to State media
• US Treasury Secretary Mnuchin says, with the Phase One China deal in place the Phase Two deal would not necessarily lead to the removal of all tariffs; could be done sequentially along the way, WSJ
• UK labour market data was firmer than expected, though expectations for a January BoE remain around 60%
• BoJ kept rates and yield target unchanged, upgraded real GDP forecasts but cut core CPI
• Looking ahead, highlights include BoE’s Carney (Davos-WEF)

ASIA-PAC

Asian equity markets weakened across the board following a non-existent handover from their peers on Wall St, while further reports of coronavirus cases added to the subdued tone. ASX 200 (-0.2%) pulled back from record highs amid broad sector weakness and with BHP pressured after quarterly iron ore production fell short of analyst estimates, while Nikkei 225 (-0.9%) retreated below 24k as Japanese exporters suffered from safe-haven flows into the domestic currency. Elsewhere, Hang Seng (-2.8%) and Shanghai Comp. (-1.4%) also declined with the former reeling after Moody’s downgraded Hong Kong’s sovereign rating by 1 notch to Aa3, and amid heightened concerns surrounding the ongoing coronavirus outbreak which has spread to more Chinese cities with 224 cases confirmed so far resulting to 4 deaths. Finally, 10yr JGBs rose back above the 152.00 level as the risk averse tone spurred similar strength in T-notes, while prices largely ignored the BoJ policy announcement in which the central bank kept all policy settings unchanged as widely expected and reaffirmed its forward guidance but suggested that overseas risks somewhat eased.

PBoC injected CNY 100bln via 14-day reverse repos. (Newswires) PBoC set USD/CNY mid-point at 6.8606 vs. Exp. 6.8590 (Prev. 6.8664)

PBoC is reportedly gauging demand for Targeted Medium Term Lending Facility before Thursday maturity, according to sources. (Newswires)

291 cases of Coronavirus have now been confirmed by China (as of Jan 20th), according to State media; as well as a 4th death.The World Health Organization called an emergency meeting amid the spread to more cities. (Newswires)

China MOFCOM official said China welcomes competitive US products to enter its markets and hopes US will create conditions to facilitate its exports to China. MOFCOM added that said China will expand imports based on market conditions and in line with WTO rules, while it also stated the sides will work on implementing the trade and that the deal adheres to WTO rules. (Newswires)

BoJ kept monetary policy settings unchanged as expected with NIRP maintained at -0.1% and 10yr JGB yield target at around 0%, while it reaffirmed forward guidance that rates will remain at current or lower levels for as long as needed to guard against risk momentum for hitting price target may be lost. BoJ also stated the economy is sustaining momentum for reaching the 2% price target although momentum is lacking strength and that downside risks regarding overseas economies eased somewhat. Furthermore, the central bank raised Real GDP growth forecasts but lowered Core CPI forecasts in its Outlook Report. (Newswires) 

BoJ Governor Kuroda says that risks are skewed to the downside, mainly due to oversea factors, and externals risks are somewhat diminishing due to China-US Phase One deal, reiterates readiness to ease further if momentum towards price target is at risk. (Newswires)

US

US Treasury Secretary Mnuchin says, with the Phase One China deal in place the Phase Two deal would not necessarily lead to the removal of all tariffs; could be done sequentially along the way. (WSJ)

US President Trump says the US is in the midst of an economic boom, adds that the Fed raised rates too fast and lowered them too slowly, Phase Two talks with China will start "very shortly". (Newswires)

US Senate Majority Leader McConnell proposed impeachment trial rules with no guarantee witnesses will be called to testify and which would grant House Democrats and White House lawyers 24 hours each for opening arguments, according to the resolution. Furthermore, the White House would be able to propose an early motion to dismiss all charges against US President Trump, although US Senate Democrat Leader Schumer called trial proposals a cover up and national disgrace, while he will offer amendments. (Newswires)

US Agriculture Secretary Perdue stated there is no need for additional farm aid following the US-China trade deal. (Newswires)

UK/EU

US President Trump spoke with French President Macron in which they agreed to pursue talks on digital tax until year-end and that it is important to complete successful negotiations regarding the digital services tax, according to White House spokesman. (Newswires)

Subsequently, French Finance Minister Le Maire says talks with the US regarding Digital Tax remain difficult, the goal remains for minimum taxation. France has made an offer to suspend down-payments on digital services tax for 2020 fiscal year as the nation looks to resolve its ongoing dispute with the US, according to sources (Newswires)

UK government lost three votes in the House of Lords regarding Brexit legislation as Peers in the upper chamber supported calls for EU nationals to be given a physical document as proof they have the right to live in the UK post-Brexit, although reports added that ministers will seek to reverse the moves when the bill returns to the Commons. (BBC)

Reports suggest the EU wants any agreement with the UK to include potential fines if the UK violates any pact. (Newswires)

UK Employment Change 208k vs. Exp. 110k (Prev. 24k)

-        Average Week Earnings 3M YY (Nov) 3.2% vs. Exp. 3.1% (Prev. 3.2%)

-        Average Earnings (Ex-Bonus) (Nov) 3.4% vs. Exp. 3.4% (Prev. 3.5%)

-        Claimant Count Unemployment Change (Dec) 14.9k vs. Exp. 22.6k (Prev. 28.8k, Rev. 14.9k)

-        ILO Unemployment Rate (Nov) 3.8% vs. Exp. 3.8% (Prev. 3.8%)

German ZEW Economic Sentiment (Jan) 26.7 vs. Exp. 15.0 (Prev. 10.7)

-        Current Conditions (Jan) -9.5 vs. Exp. -13.5 (Prev. -19.9)

-        Strong increase in the Economic Sentiment is predominantly due to recent settlement of the US-China trade dispute; which gives hope that the negative effect on Germany will be less pronounced than before; although, growth is expected to remain below average

GEOPOLITICS

3 rockets fell inside Baghdad’s Green Zone in Iraq, although no casualties were reported according to police. (Newswires)

EQUITIES

European equities post losses across the board [Eurostoxx 50 -0.8%] following on from a similar APAC lead, with subdued sentiment also attributed to the ramifications of the spreading coronavirus, with Taiwan now the latest country to report its first case. UK’s FTSE 100 (-1.2%) lags its peers amid unfavourable currency effects induced by the UK Labour Market Report. Meanwhile, the SMI’s losses are somewhat cushioned by earnings from Lonza (+4.0%) – providing some support to the Swiss healthcare names which in total accounts for 37.5% of the index. Sectors are all in the red with defensives lower to a lesser extent when compared to cyclicals. Consumer discretionary names are hit on the back of dampening demand expectations on the back of the China virus outbreak, with LVMH (-2.7%), Kering (-3.7%), Swatch (-2.5%) and Richemont (-3.4%) among the worst hit. In terms of other individual movers, UBS (-5.0%) shares fell despite topping net expectations and announcing a share buyback alongside a sale of its stake in UBS Fondcenter – amid lower 2022 CET1– forecast at 12-15%, down from 2021’s 17%. On the flip side, Hugo Boss (+5.6%) shares rose to the top of the Stoxx 600 after earnings topped forecasts, with the company noting that FY19 targets were achieved.

FX

GBP/JPY/EUR/CHF - The Pound has regained some poise thanks to the latest UK jobs and earnings report that beat consensus almost across the board and came with a healthy revision to the previous claimant count in contrast to the recent run of sub-forecast/BoE rate cut supportive macro releases. Cable has reclaimed 1.3000+ status after flirting with 1.2955 early January lows only yesterday and Eur/Gbp is eyeing 0.8500 from 0.8550+ at one stage on Monday, even though the Euro has also gleaned some traction via an encouraging German/Eurozone ZEW survey to retest 1.1100 and offers above vs the Dollar. Meanwhile, the Yen is back in favour and over 110.00 after another dead rubber BoJ policy meeting as the YUAN pares more gains amidst the spread of China’s coronavirus that has claimed more lives and reached Australia, with safe-haven demand also returning to the Franc within a 0.9668-89 range.

AUD/CAD/NZD/NOK - All weaker against their US counterpart, and especially the Aussie given closer links to China and the reported case of the potentially fatal illness in Brisbane noted above. Aud/Usd has retreated further towards sub-0.6850 troughs not seen since mid-December (0.6849 and 0.6838) and is only just holding above the 100 DMA (0.6844) ahead of Thursday’s labour data that forms one of the last major inputs for the RBA next month. Similarly, the Loonie and Kiwi are trading defensively into Canadian manufacturing sales and the NZ GDT auction, with the latter also wary about Q4 CPI in 2 days time and its implications for the RBNZ in February. Usd/Cad is meandering between 1.3044-77, as Nzd/Usd straddles 0.6600 and Aud/Nzd slips back below 1.0400. Elsewhere, the Norwegian Crown is underperforming against the backdrop of receding oil prices and pre-Norges Bank caution in wake of a marked downturn in industrial sentiment, with Eur/Nok up above 9.9400 at the peak and through decent 9.9300 option expiry interest (680 mn).

USD - The DXY has drifted back down from MLK day peaks largely due to the aforementioned recoveries in G10 currency peers, like Sterling and the Euro on positive fundamentals and the Yen and Franc due to risk-off positioning/hedging. The index is pivoting 97.500 after peering above key chart levels yesterday, but not sustaining bullish momentum.

EM - Although the Greenback has conceded ground to several major rivals, risk aversion is keeping regional currencies suppressed, with the Rand extending declines towards it 200 DMA (14.6000) before clawing back amidst more SAA flight cancellations to cut costs, while the Lira fell below 5.9300 after remarks from Turkey’s Economy Minister expressing a desire for a more competitive Try.

Notable FX Expiries, NY Cut:

-        EUR/USD: 1.1100 (370M), 1.1125 (230M), 1.1140-50 (1.5BLN), 1.1185 (658M)

-        EUR/GBP: 0.8560 (595M)

FIXED INCOME

It’s been relatively measured, but no less compelling and persistent in better turnover after the long US holiday weekend, as bonds continue to retreat from early highs. To recap, UK jobs and wages were broadly better than anticipated and got the debt reversal going before the ZEW survey compounded the about turn and saw sellers step up to the plate with more conviction. Bunds have now been down to 171.55, Gilts to 133.04 and 10 year T-notes as low as 129-035 vs 171.98, 133.57 and 129-15+ at the other extremes. Note, however US Treasuries remain above parity and the curve is still flatter.

COMMODITIES

Commodities are lower on the day, with the energy market dampened more-so on sentiment – with the outbreak of the coronavirus playing a part. Brent Mar’20 futures reside just under USD 64.50/bbl, having taken out its 50 DMA at ~USD 64.50/bbl ahead of the 200 DMA at USD 64/bbl. Meanwhile, WTI front-month futures dipped below the USD 58/bbl mark with eyes on its 200 DMA at USD 57.60/bbl and 100 DMA at USD 57.25/bbl. Elsewhere, spot gold gravitates back to 1550/oz as a firmer USD weighs on the precious metal. Finally, base metals declined amid the aforementioned negative sentiment – with copper prices diving from around USD 2.8350/lb to sub-2.80/lb levels.

IEA’s Chief Birol says that the Libya disruption is not a major challenge for the oil market; is concerned regarding the stability of supply arising from Iraq. (Newswires)