• Asian equity markets traded positively; US equity futures saw mild gains overnight after Wall Street closed firmly in the green
• In FX, DXY pulled back, EUR/USD nursed some recent losses, USD/JPY hovered around 113.50 and CAD lagged
• Preliminary results from a small study showed a 40x reduction in neutralization capacity of the Pfizer vaccine against Omicron
• Early hospitalisation data from South Africa showed the new variant could result in less severe COVID
• Apple (AAPL) was forced to scale back its total output target for 2021 and reportedly told suppliers to accelerate iPhone production for November-January
• US President Biden warned Russian President Putin that gas exports via Nord Stream 2 will be targeted and more troops will be deployed if he orders an invasion of Ukraine
• Looking ahead, highlights include US JOLTS, BoC Policy Announcement, ECB's Lagarde & de Guindos, supply from Germany and the US

CORONAVIRUS UPDATE

US CDC Director Walensky said the 7-day average of cases is up 18.5% from the prior period and White House COVID adviser Zients said southern Africa travel restrictions will remain in place for a reasonable period of time. There were also comments from NIH's Dr Fauci that early cases of Omicron seem to show less hospitalizations and less need for oxygen, but they still need more data, while he added that it is still unclear how it impacts vaccine antibodies and expects to get more data next week. (Newswires)

US federal judge issued a nationwide temporary injunction against the US Federal Contractor COVID-19 vaccine mandate. (Newswires)

South Africa daily COVID hospital admissions have more than doubled. In relevant news, Africa Health Resource Institute said the Omicron variant does not escape the Pfizer (PFE) vaccine impact completely, while it stated the variant still targets the Ace-2 inhibitor but added the news is "generally good". Furthermore, its study on 12 people using blood plasma showed a 40x reduction in neutralization capacity of the Pfizer vaccine against the Omicron variant, although it noted that results are preliminary and subject to change and that vaccines are likely protect against severe diseases. (Newswires)

UK government is reportedly drawing up plans for a Christmas work from home order as PM Johnson considers measures to slow the spread of the Omicron variant. (Telegraph) UK officials are reportedly weighing plans for the introduction of vaccine passports to slow the spread of Omicron. Sources state that work on implementing plan B has been stepped up, and this would include work-from-home guidance, vaccine passports for nightclubs, alongside guidance on indoor and outdoor events. (Times)

Norwegian Prime Minister said they must install more restrictions to control the spread of COVID but must avoid a full lockdown of society. The PM added that there should be no more than 10 visitors in private homes, while bars and restaurants must stop serving alcohol from midnight every day and they will introduce new economic compensations for companies hit by COVID restrictions. (Newswires)

ASIA

Asian equity markets traded positively as the region took impetus from the global risk momentum following the tech-led rally in the US, where Apple shares rose to a record high and amid increased optimism that Omicron could be less dangerous than prior variants. This was after early hospitalisation data from South Africa showed the new variant could result in less severe COVID and NIH's Fauci also suggested that Omicron was 'almost certainly' not more severe than Delta, although there were some slight headwinds in late Wall Street trade after a small study pointed to reduced vaccine efficacy against the new variant. The ASX 200 (+1.3%) was underpinned in which tech led the broad gains across sectors as it found inspiration from the outperformance of big tech stateside, and with energy bolstered by the recent rebound in underlying oil prices. The Nikkei 225 (+1.4%) conformed to the upbeat mood although further advances were capped after USD/JPY eased off the prior day’s highs and following a wider-than-expected contraction to the economy with the final annualised Q3 GDP at -3.6% vs exp. -3.1%. The Hang Seng (+0.1%) and Shanghai Comp. (+0.9%) were less decisive and initially lagged behind their peers as sentiment was mired by default concerns due to the failure by Evergrande to pay bondholders in the lapsed 30-day grace period on two USD-denominated bond payments and with Kaisa Group in a trading halt after missing the deadline for USD 400mln in offshore debt which didn’t bode well for its affiliates. Furthermore, China Aoyuan Property Group received over USD 650mln in repayment demands and warned it may not be able to meet debt obligations, while a subdued Hong Kong debut for Weibo shares which declined around 6% from the offer price added to the glum mood for Hong Kong’s blue-chip tech stocks, as did reports that China is to tighten rules for tech companies seeking foreign funding. Finally, 10yr JGBs languished after spillover selling from T-notes and due to the heightened global risk appetite, but with downside stemmed by support at the key psychological 152.00 level and amid the presence of the BoJ in the market today for over JPY 1.0tln of JGBs.

• PBoC injected CNY 10bln via 7-day reverse repos with the rate at 2.20% for a net neutral daily position. (Newswires)
• PBoC set USD/CNY mid-point at 6.3677 vs exp. 6.3632 (prev. 6.3738)

China is to tighten rules for tech companies seeking foreign funding and is preparing a blacklist that is seen to tightly restrict main channel used by start ups to attract foreign capital and list abroad. (FT)

UK government reportedly mulls a ministerial boycott of Beijing Olympics but would permit a limited government attendance that would stop short of a full-on diplomatic boycott. It was also reported that Japan's government is considering restricting cabinet-level officials from attending the Beijing Olympics and Australian PM Morrison confirmed Australia will not send government officials to the Beijing Olympics. (Newswires/Telegraph)

Japan's government plans to prevent large firms that raise wages by less than 1% from receiving tax cuts on investments, while it will give a tax deduction of up to 30% on taxable income for companies which raise wages by 4%, and up to a 40% deduction on small firms that raise wages by 2.5%. (Newswires)

RBI kept Repurchase Rate at 4.00% and Reverse Repo Rate at 3.35% as expected, while it maintained its accommodative stance as voted by 5 out of the 6 MPC members. RBI Governor Das said the MPC was of the view that a sharp reduction in new COVID-19 infections is contributing to consumer confidence but noted that a recovery of aggregate demand hinges on private investment which is still lagging and that continued policy support is still warranted given slack in economy and ongoing catch up in activity. Furthermore, Das stated the MPC sees continued policy support required for a durable recovery and the recovery is not yet strong enough to be self sustaining and durable, while downside risks to outlook have risen due to emergence of Omicron variant. (Newswires)

• Japanese GDP Revised QQ (Q3) -0.9% vs. Exp. -0.8% (Prev. -0.8%)
• Japanese GDP Rev QQ Annualised (Q3) -3.6% vs. Exp. -3.1% (Prev. -3.0%)

UK/EU

Bank of France sees Q4 Q/Q growth "slightly below" the initial 0.75% guide from early November and its survey showed staffing difficulties worsened in services and supply problems worsened in the industrial sector. In relevant news, France is looking at extending the furlough past December 31st, according to Finance Minister Le Maire. (Newswires)

FX

In FX, the DXY was indecisive above the 96.00 level with mild outflows spurred by the positive risk tone, although price action lacked excitement as the US data schedule remains extremely light and with plenty of attention on Congress where progress was made on the debt ceiling and the House approved the measure to speed the debt limit increase, with the Senate also likely to conduct a vote on Thursday. EUR/USD continued on from yesterday’s intraday rebound and homed in on the 1.1300 status where it previously met resistance and with recent hawkish leaning central bank rhetoric. GBP/USD mildly benefitted from the slight softening of the greenback but with the pair relatively contained near its 50-hour MA of 1.3253. USD/JPY slightly eased from the prior day’s best levels but JPY-crosses remained underpinned by the positive risk tone, while antipodeans eked mild gains due to their high-beta statuses and as CNY reached its strongest level against USD since May 2018 following a firmer PBoC fix. Elsewhere, there was some mild pressure on INR after the RBI kept its rates unchanged as expected at Repurchase Rate at 4.00% and Reverse Repo Rate at 3.35%, given that there were some outside call for a hike in the latter and Governor Das also noted the MPC sees continued policy support required for a durable recovery and the recovery is not yet strong enough to be self sustaining and durable, while he added that downside risks to outlook have risen due to emergence of Omicron variant.

COMMODITIES

Crude futures consolidated overnight after settling higher by over USD 2/bbl apiece yesterday, buoyed by the overall market optimism and shrinking chances of a smooth Iranian nuclear deal. Brent Feb traded on either side of the USD 75/bbl mark, and WTI Jan just under USD 72/bbl after the weekly Private Inventories printed a larger-than-expected draw, albeit the internals were less bullish. Elsewhere spot gold was supported by the overnight pullback in the Dollar and met resistance at the 100 DMA around USD 1,790/oz, with nearby upside levels including the 200 DMA (1,792/oz) and the 50 DMA (1,794/oz). Copper prices meanwhile consolidated within a tight range, with LME copper holding onto a USD 9,500/t handle. Dalian iron ore extended on gains in a continuation of the upside seen in recent trade.

US Private Inventory (bbls): Crude -3.1mln (exp. -1.7mln), Gasoline +3.7mln (exp. +1.8mln), Distillates +1.2mln (exp. +1.6mln), Cushing +2.4mln. (Newswires)

Iraqi Oil Minister said Iraq policy in OPEC is based on reservations about the unjustified increase in production, while there were separate comments from the Kazakhstan Deputy Energy Minister that their country is keen to raise production and is committed to the OPEC+ agreement. (Newswires)

EIA STEO cut 2021 world oil demand growth forecast by 10k BPD to 5.10mln BPD and raised 2022 forecast by 200k BPD to 3.55mln BPD. Furthermore, it sees US crude output to fall 100k BPD to 11.18mln BPD in 2021 (prev. 150k BPD fall last month) and to rise 670k BPD to 11.85mln BPD in 2022 (prev. 770k BPD rise), while it expects US petroleum consumption to rise 1.58mln BPD to 19.77mln BPD in 2021 (prev. rise of 1.40mln) and to rise 700k BPD to 20.47mln BPD in 2022 (prev. rise of 690k BPD). (Newswires)

US EPA proposed to set biofuel blending mandates at 17.13bln gallons in 2021 (prev. 20.09bln), 18.52bln in 2021 and 20.77bln in 2022, while it is considering making electric vehicles eligible for renewable fuel credits when it unveils the 2023 biofuel blending mandates in 2022. (Newswires)

GEOPOLITICAL

White House Press Secretary Psaki said President Biden voiced deep concerns to Russian President Putin over Russia's actions in Ukraine and said the US would respond with strong economic and other measures in the event of a military escalation. Furthermore, the leaders tasked their teams to follow-up and President Biden reiterated support for Ukraine's sovereignty and territorial integrity, while they discussed US-Russia dialogue on strategic stability, ransomware and regional issues such as Iran. (Newswires)

US National Security Adviser Sullivan said the US does not believe Putin has made a decision regarding whether to invade Ukraine and that the US is prepared to do things now that weren't done in 2014 if Russia did invade, while he added that Biden made no concessions on how NATO decides membership. There were also comments from US State Department official Nuland that there are "intensive consultations" with the new German government over the response to Russia if it invades Ukraine and believes Germany is ready to take significant action and officials also told Congress they have an understanding with Germany to shut Nord Stream if Russia invades Ukraine. (Newswires)

Russian Kremlin aide Ushakov said Putin and Biden suggested a normalisation of US-Russian relations, although there were no breakthroughs in talks and its hard to predict sudden breakthroughs for now. Furthermore, Ushakov said it is too early to draw conclusions and resolving problems in US-Russian ties is not the work of one month and perhaps not one year either, while when he was asked if Putin gave Biden assurance Russia would not attack Ukraine, Ushakov responded that was not what discussions were about. There were also separate comments from the Ukraine Presidential Office the the Biden-Putin call did not bring sensations. (Newswires)

Russia's Kremlin said talks between US President Biden and Russian President Putin were open and business-like, while Putin told Biden he wanted reliable and legally binding guarantees that rule out NATO's eastwards expansion. Putin also told Biden about Ukraine's alleged destructive attitude towards East Ukraine settlement and said it was wrong to put all responsibility on Russia's shoulders for the current tensions. Furthermore, Russia wanted guarantees that offensive strike systems would not be deployed in countries close to Russia and complained about NATO's dangerous attempts to develop Ukrainian territory with NATO said to building military infrastructure near Russia's border, while the two sides agreed to continue contacts and it was also reported that Russia's Kremlin said Putin told Biden it was important to implement deals on the Iranian nuclear programme as it had been originally agreed. (Newswires)

Iranian Foreign Ministry said US sanctions on Iranian entities won't create leverage and are "anything but seriousness & goodwill". In relevant news, French Foreign Minister Le Drian said things in the Iran nuclear deal talks are not encouraging so far and the impression is that Tehran wants to make the talks long-lasting. (Newswires/Twitter)

US

Treasuries saw further bear-flattening in thin trade amid the 3yr auction and corporate supply, while the risk appetite weighed on rates as Omicron fears subside. Volumes were below average. At settlement, 2s +5.2bps at 0.687%, 3s +4.9bps at 0.958%, 5s +4.3bps at 1.257%, 7s +4.1bps at 1.428%, 10s +4.6bps at 1.480%, 20s +3.3bps at 1.877%, 30s +4.1bps at 1.799%. 5yr TIPS -0.4bps at -1.604%, 10yr TIPS +0.9bps at -1.036%, 30yr TIPS +2.7bps at -0.487%. 5yr BEI +8.1bps at 2.861%, 10yr BEI +5.9bps at 2.489%, 30yr BEI +2.9bps at 2.303%. The curve came out of the APAC session already in a mild bear-flattener ahead of the Treasury supply and the Fed's long-end buyback. The moves gained traction as stocks bolted firmer into the NY session, with all citing Omicron fears being overdone and some suspicions of a "Santa Rally". The move gained more traction as Merck (MRK) announced a five-part debt issuance from the 5yr sector out to the 40yr, weighing on the whole curve, seeing T-Notes make new session lows just beneath Friday's (NFP) 130-13+ low ahead of the NYSE opening bell as the market made room for the big issue. A tech and growth stock led bolt higher at the stock open coincided with T-Notes being lifted for a few ticks, with hedging for the Merck deal out the way, before better selling emerged to take the contracts back to session lows of 130-12 ahead of the 3yr auction. Enough concession was made to avoid a tail at the reopening, which managed to stop the rout lower for the curve. However, with thin and catalyst-lite markets expected until Friday's CPI, the 10yr and 30yr offerings on Wednesday and Thursday could see the long-end vulnerable to bouts of concession with no more long-end Fed buybacks. T-note (H2) futures settle 10+ ticks lower at 130-10+.

White House hopes to have further Fed nominees to announce this month. (Newswires)

US House voted (222-212) to approve measure to speed the debt limit increase. The House had earlier released details to increase the debt ceiling in a fast-track process that would be approved by a simple majority, which would be allowed just this one time. Furthermore, US Senate Minority Leader McConnell briefed his team on the raising of the debt limit by USD 2tln lasting through to the 2022 midterm elections. (Newswires/CNN/CNBC)

US Senate Majority Leader Schumer stated that it looks like Republicans will help on the debt limit process and there were also comments from a US Senate aid that the debt limit could be raised as soon as this week. (Newswires)

US Senate Minority Leader McConnell said the plan on debt limit is in the best interest of the US and that debt ceiling measures meet Republicans' aims, while McConnell said the Senate will vote on legislation regarding the debt limit measure on Thursday. This follows earlier reports that Senate Republicans were hopping on board with Senate Minority Leader McConnell’s plan to allow Democrats to raise the debt ceiling with Senators Capito, Blunt, Thune and Wicker all warm on the idea which will need 10 Republicans to set the process up. (Newswires)

US Treasury Department Senior officials expressed reservations about the new minimum tax on large corporations proposed as part of President Biden’s Build Back Better agenda, according to sources cited by WaPo. Furthermore, officials in the department’s Office of Tax Policy felt the new 15% minimum tax could lead to unintended consequences and prove difficult to implement. (Washington Post)

Apple (AAPL) was forced to scale back total output target for 2021 and will make only 83mln-85mln units in the iPhone 13 range by year-end vs ambitious goal of 95mln units, according to Nikkei. iPhone and iPad assembly was halted for several days due to supply chain constraints and restrictions on the use of power in China, multiple sources told Nikkei. Apple reportedly told suppliers to quicken iPhone output from November to January. (Nikkei)