• Asia-Pac equity markets took their cues from last Friday’s gains on Wall Street; US equity futures traded with mild upside overnight
• In FX, the DXY eked mild gains, EUR/USD slipped back under 1.1300 and USD/JPY traded around 113.50
• UK raised its COVID alert level to 4 from 3 and accelerated its booster programme
• UK PM Johnson is reportedly no longer seeking the immediate axing of the ECJ from its role in enforcing the Northern Ireland protocol
• Iran’s top nuclear negotiator Bagheri said good progress was made in nuclear talks and can quickly pave the way for serious negotiations
• Looking ahead, highlights include German Wholesale Prices, OPEC Oil Market Report, BoE Financial Stability Report

CORONAVIRUS UPDATE

US CDC said Omicron caused mild illness in fully vaccinated individuals in the US and that among 43 cases of the Omicron variant with one follow up, there was one hospitalisation and 34 of the cases were fully vaccinated but no deaths were reported. There were also comments from US CDC Director Walensky that initial data suggested COVID-19 boosters help to bolster protection against Omicron. (Newswires)

NIH’s Dr. Fauci stated that three shots of the COVID-19 vaccine is optimal care although two doses of the Pfizer (PFE) and Moderna (MRNA) vaccines and one dose of the Johnson & Johnson (JNJ) vaccine remains the US government's official definition for fully vaccinated, while Fauci commented on Friday that the US is working to model the impact of lifting the travel ban. (Newswires)

UK raised its COVID alert level to 4 from 3 and PM Johnson warned that a tidal wave of Omicron is coming. He announced to acceleration to the booster programme in which all adults will now be offered a booster by the new year. There were prior reports on Friday that Britain’s top public health officials advised ministers that “stringent national measures” need to be imposed by 18th December to avoid hospitalisations surpassing last winter’s peak, according to documents leaked to the Guardian. (Newswires/The Guardian)

UK Health Security Agency said that boosters increase protection against mild disease to around 70-75% in a real world study of 581 people with the Omicron variant. It is also seeing evidence of immune evasion with the Omicron COVID-19 variant and noted that UK experiments show Omicron decrease lab neutralisation of 20-40x compared to the original virus and 10-20x compared to Delta. Furthermore, it is seeing a reduced vaccine effectiveness of both AstraZeneca (AZN LN) and Pfizer (PFE) vaccines against mild disease with Omicron. (Newswires)

South African President Ramaphosa tested positive for COVID-19 although his symptoms were mild, and he is in self-isolation with all responsibilities delegated to Deputy President Mabuza. (Newswires)

Israel added Britain, Denmark and Belgium to the “red list” of countries which are banned for travel due to concern regarding spread of the Omicron variant. (Newswires)

Australian PM Morrison confirmed they are to reopen their border to international students and skilled migrants from Wednesday, while the New South Wales state border with Queensland was also reopened after five months of closures due to COVID-19. Elsewhere, New Zealand PM Ardern said the COVID-19 alert level for Auckland is to be eased on December 30th and the next review of alert levels is planned for January 17th. (Newswires)

ASIA

Asia-Pac equity markets took their cues from last Friday’s gains on Wall Street where the S&P 500 notched a fresh record close and its best weekly performance since February, with markets now bracing for a risk-packed week including a busy schedule of central bank meetings. The ASX 200 (+0.4%) traded higher with risk appetite supported by the reopening of Australia’s borders to international students and skilled workers from Wednesday, while the government will also partially underwrite up to AUD 7bln in new loans for small businesses impacted by lockdowns. The Nikkei 225 (+0.8%) benefitted from the mild outflows from the JPY, with the index unphased by mixed Tankan and Machinery Orders data in which the Tankan Large Manufacturers Index and Outlook missed expectations but sentiment among Large Non-Manufacturers and Small Manufacturers improved for the sixth consecutive quarter. The Hang Seng (+0.5%) and Shanghai Comp. (+0.6%) conformed to the upbeat mood amid economists' expectations for China to add fiscal stimulus from early next year following last week’s conclusion to the Central Economic Work Conference, which noted that China's economy faces shrinking demand, supply shock, and weakening expectations but added that economic operations are to be kept within a reasonable range. Alibaba shares were among the biggest gainers in Hong Kong as it extended its rebound from YTD lows. Finally, 10yr JGBs were rangebound with March futures contained by resistance at the key 152.00 level and amid the positive mood across riskier assets, although JGBs were off the lows seen late last week where there were source reports that the BoJ is likely to scale back its pandemic relief programs in March with a potential announcement as early as this week’s meeting.

• 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 6.3669 vs exp. 6.3606 (prev. 6.3702)

BoJ noted that the Tankan survey showed large non-manufacturers index and small manufacturers index improved for a sixth consecutive quarter, while a BoJ official said most firms that replied in the December Tankan likely did not take into account the impact of Omicron and it was also noted that firms' inflation expectations for one year ahead is at 1.1% which is the highest since September 2015. (Newswires)

Japanese Tankan Large Manufacturing Index (Q4) 18 vs. Exp. 19 (Prev. 18)

• Japanese Tankan Large Manufacturing Outlook (Q4) 13 vs. Exp. 19 (Prev. 14)
• Japanese Tankan Large Non-Manufacturing Index (Q4) 9 vs. Exp. 6 (Prev. 2)
• Japanese Tankan Large Non-Manufacturing Outlook (Q4) 8 vs. Exp. 10 (Prev. 3)
• Japanese Tankan Large All Industry Capex (Q4) 9.3% vs. Exp. 9.8% (Prev. 10.1%)
• Japanese Machinery Orders MM (Oct) 3.8% vs. Exp. 2.1% (Prev. 0.0%)
• Japanese Machinery Orders YY (Oct) 2.9% vs. Exp. 4.0% (Prev. 12.5%)

UK/EU

UK PM Johnson is reportedly no longer seeking the immediate axing of the European Court of Justice from its role in enforcing the Northern Ireland protocol, according to a senior British official. (FT)

France, UK and the EU have dropped talk of a trade war and appeared to settle a dispute over post-Brexit fishing licenses, but French fisherman threaten to go ahead with pre-Christmas blockades. (Guardian)

UK Brexit Minister Frost said we have made further limited progress with the EU on medicines but have not reached an agreement, while a UK government spokesperson said they have made some progress on the Northern Ireland Protocol. (Newswires)

ECB’s de Guindos tested positive for COVID. He has not been in close contact with President Lagarde over the past week. (Newswires)

Fitch affirmed the BoE at AA-; Outlook Stable. (Newswires)

Greece's Central Bank plans an appeal for its bonds to remain eligible for new ECB purchase after March, when PEPP is expected to end. (FT)

• UK Rightmove House Prices (Dec) MM (-0.7% (Prev. -0.6%)

FX

In FX, the DXY eked mild gains and held on to the 96.00 status ahead of a slew of central bank activity with the FOMC, BoE, ECB and BoJ headlining a busy week of more than a dozen monetary policy meetings globally. EUR/USD was lacklustre and slipped back beneath the 1.1300 handle, as well as its nearby 100-hour and 200-hour moving averages with the price action in the single currency largely influenced by the recovery in the greenback. GBP/USD was marginally softer after the UK raised its COVID-19 alert level to 4 over the weekend which is the second-highest possible and was due to the rapid spread of the Omicron variant, although PM Johnson refrained from imposing further restrictions and announced to speed up the vaccine booster rollout with all adults to be offered a booster by year-end. USD/JPY nursed some of its recent declines to trade around 113.50 and antipodeans were uneventful as price action was contained by a slightly firmer greenback, but with downside also cushioned amid gains in commodities and the constructive risk tone.

S&P affirmed Turkey, Outlook Revised to Negative. (Newswires)

COMMODITIES

Crude futures were underpinned amid the constructive mood in which WTI Jan rose above the USD 72.50/bbl to extend on Friday's risk-fuelled gains. The focus for the complex now turns to the OPEC Monthly Report due for release later today. Gold was kept afloat but with upside limited by the mild gains in the USD and amid a lack of haven demand. Copper prices benefitted from the positive risk appetite and increased expectations for fiscal support from China early next year.

Baker Hughes US Rig Count (w/e Dec 10th): Oil +4 at 471, Nat Gas +3 at 105, Total +7 at 576. (Newswires)

Iraq’s Oil Minister said he expects OPEC to maintain its current policy of gradual monthly increases of 400k bpd at the next meeting. (Newswires)

Saudi Arabia approved a draft budget for 2022 of SAR 955bln, while its oil revenues for 2021 is seen to increase 35% Y/Y to SAR 558bln. (Newswires)

Iran set January Iranian light crude price to Asia at Oman/Dubai + USD 3.10/bbl, while it was separately reported that Iran’s draft budget projects 1.2mln bpd in oil exports with a selling price projected at USD 60/bbl. (Newswires)

GEOPOLITICAL

Iran’s top nuclear negotiator Bagheri said good progress was made in nuclear talks and can quickly pave the way for serious negotiations, while he added that their path during the negotiation was successful but also noted that Iran received no proposal or initiative from western parties to 2015 deal. (Newswires)

G7 Foreign Ministers reiterated that Iran must stop its nuclear escalation and reiterated a unified position on Russia’s aggression towards Ukraine, while the final statement called for Russia to de-escalate and pursue diplomatic channels, as well as noted that further military aggression against Ukraine would have massive consequences and severe costs. The G7 also expressed concern about China’s coercive economic policies and reaffirmed the statement calling for the Belarus regime to urgently alter its course. (Newswires)

Russia’s Kremlin said President Putin told US President Biden that he would like to meet him in-person during their call last week but added that it is too early to say when they can meet and that Putin had no particular grounds for joy after talking to Biden. Putin also told Biden that Russian troops pose no threat to anyone and that Russia is being demonised for moving troops around its own territory, while the Kremlin added there are very serious conceptual differences between Russia and US regarding Russia’s “red lines”. (RIA/Tass)

US State Department senior official said the G7 is absolutely united in concerns over Russia’s build up at the Ukraine border, as well as the consequences and costs should Russia decide to invade. Furthermore, the official said there is more and more convergence between G7, other countries and US on plan to impose costs on Russia if they invade. The official also noted that there was tremendous convergence among G7 regarding discussions about China and the region, while European countries agreed that it is still possible to conclude a deal with Iran but the time is shrinking. (Newswires)

UK Foreign Secretary Truss said that this is the last chance for Iran to come to the negotiation table with a serious resolution and that Iran needs to agree on JCPOA terms, while Truss noted that they will not allow Iran to acquire a nuclear weapon and that there is still time for Iran to agree a deal. Truss also commented that G7 has sent a powerful signal to adversaries and allies in which the G7 has shown a united voice on Russia and have been clear there would be massive consequences for any incursion. Furthermore, Truss said Britain is considering all options how to respond if Russia invades Ukraine and that that they want Russia to stop its aggression on Ukraine, while she added the G7 is clear that they are concerned about China’s economic policies and they must make sure technology is shaped by the free world. (Newswires)

US Secretary of State Blinken said it is hard to see gas flowing through the Nord Stream 2 pipeline if Russia renews aggression towards Ukraine. There were also comments from German Foreign Minister Baerbock that Nord Stream 2 cannot be certified under current conditions as it does not fulfil European energy rules, while she added questions remain regarding security and that talks are a best measure to avoid further escalation. (Newswires)

Ukraine President Zelenskiy said he does not exclude the possibility of direct discussions with the President of the Federation in Donbass and that this route is supported by Europe and the US, while he also does not exclude a Donbass referendum. (Interfax)

US

Treasuries saw bull-steepening after an in line CPI report reduced the likelihood of runaway inflation and aggressive policy tightening. At settlement, 2s -2.4bps at 0.662%, 3s -1.4bps at 0.989%, 5s -0.3bps at 1.253%, 7s +0.0bps at 1.422%, 10s +0.0bps at 1.487%, 20s +0.6bps at 1.915%, 30s +1.6bps at 1.883%. 5yr TIPS +6.4bps at -1.535% 10yr TIPS +3.5bps at -1.001% 30yr TIPS +4.2bps at -0.381%. 5yr BEI -1.3bps at 2.794% 10yr BEI -1.7bps at 2.457% 30yr BEI -1.5bps at 2.281%. Ahead of CPI, Treasuries had initially seen gradual bear-flattening which caught some momentum in the European morning, in what appeared not much more than mean reversion and positioning. T-Notes hit session lows of 130-02 (cash 10s yield high of 1.52%) in the European morning and hovered above slightly into the US CPI report. The more-or-less in line with expected prints (+0.8% M/M, Core +0.5% M/M) saw a bid across the whole Treasury curve, particularly as many had expected a hotter report after warnings from Biden and other officials on Thursday that the report would not reflect some of the recent price declines in energy and commodities. The strength was led by the front-end of the curve as aggressive rate hike pricing saw some reversion. In T-Notes, highs were made for the day at 130-23 around the European close, with cash 10s finding lows of 1.453%. That also came straight after the Fed's 7-10yr buyback, which saw the lowest offer-to-cover ratio since September, sustaining the support in otherwise thin trading conditions. Furthermore, with no 20yr bond auction next week there was even less selling pressure out the curve due to a lack of Dealer hedging flows, while otherwise, participants now are positioning into the FOMC and SEPs next Wednesday, as well as the new, tapered month-ahead purchase schedule due on Monday. T-note (H2) settles half-a-tick higher at 130-13.

US President Biden repeated that the inflation data does not include recent energy price reductions and urges the passage of his spending plan to lower health costs. President Biden also said he thinks inflation is at a peak and that they will see inflation change sooner and quicker than thought, while he added inflation is due to supply chain concerns and suggested that gasoline and oil prices will come down in the next two months. Furthermore, President Biden said he will be talking to Democrat Senator Manchin on the Build Back Better bill at the beginning of this week. (Newswires)

Some Senate Democrats are bracing for President Biden's Build Back Better package to get punted into next year, despite Democratic leaders insisting the bill will pass before year-end. (Axios)

More than 100 are expected to have been killed in Kentucky from record tornadoes over the weekend where dozens remained unaccounted for. The Kentucky Governor requested a major disaster declaration and stated that the state will have over 1,000 homes gone when the final count is made, while he stated that he is still hopeful of finding more survivors. There were also comments from US President Biden that this was likely to be one of the largest tornado outbreaks in US history and that the US government will do everything it can to possibly help, while it was later reported that President Biden declared a major disaster in Kentucky which paves the way for additional federal resources. (Newswires)