• Asian equity markets were mostly lower with sentiment in the region downbeat after the tech-led declines in the US
• In FX, DXY dipped back under 96.00, EUR/USD eyed 1.1350 and USD/JPY briefly dipped below 113.50
• UK will reportedly drop key ECJ demand in an effort to de-escalate tensions with the EU
• UK Conservative Party lost the North Shropshire seat for the first time in history
• US Senate approved the Uyghur bill aimed at China which bans imports from Xinjiang
• Looking ahead, highlights include German Producer Prices & Ifo, UK Retail Sales, Quad Witching; CBR Policy Announcements
• Desk will be closing at 18:05GMT/13:05EST, following the Baker Hughes Rig Count

CORONAVIRUS UPDATE

US President Biden said Omicron has not spread as fast as it would have without steps his administration took, while he added they are looking at a winter of severe illness and death for the unvaccinated. Furthermore, he stated it is past time for people to get booster shots and warned that Omicron is here which will start spreading more rapidly. (Newswires)

US CDC panel work group said blood clot reporting rate following Johnson & Johnson’s (JNJ) COVID-19 vaccine is higher than previous estimates, while the advisory panel voted in favour of recommending that mRNA COVID-19 vaccines are preferred over the Johnson & Johnson (JNJ) vaccine for all those aged 18+ and the CDC later endorsed the ACIP recommendation regarding Moderna (MRNA) and Pfizer vaccines of the Johnson & Johnson vaccine. (Newswires)

Merck (MRK) and Ridgeback announce publication of Phase 3 study of oral antiviral COVID-19 treatment Molnupiravir in which early treatment with Molnupiravir reduced the risk of hospitalization or death in at-risk, unvaccinated adults with COVID-19. (Newswires)

EU Commission President von der Leyen said boosters are recommended six months after COVID-19 vaccination, while there were separate comments from French President Macron that they are not considering requiring PCR tests for EU travellers entering France and will look at hospital capacity, not just cases, when deciding about possible tightening restrictions. (Newswires)

Japanese PM Kishida is to speak with Pfizer (PFE) CEO as early as Friday to request a delivery of 120mln doses of its COVID vaccine by end-2022, while it was also reported that Japan is considering extending border restrictions past January. (Nikkei)

ASIA

Asian equity markets were mostly lower with sentiment in the region downbeat after the tech-led declines in the US and yesterday’s central bank frenzy. Overnight US equity futures held a downside bias. The ASX 200 (+0.1%) traded positively amid notable outperformance in the commodity-related sectors which was spearheaded by gold miners as the precious metal reclaimed with the USD 1800/oz level and with sentiment also helped by the announcement of a UK-Australia trade deal. The Nikkei 225 (-1.9%) was the biggest laggard as exporters suffered from detrimental currency inflows and following the BoJ announcement to scale back its pandemic relief measures in March. The Hang Seng (-1.1%) and Shanghai Comp. (-1.0%) were lacklustre after further restrictive measures by the US on Chinese companies including the passage of the Uyghur bill aimed at China which bans imports from Xinjiang unless the US government determines they were not produced with forced labour, while tech suffered after the US included several Chinese companies to its investment and trade restrictions lists. Finally, 10yr JGBs were flat despite the steepening seen in the US and underperformance of Japanese stocks, with demand subdued amid the BoJ decision to scale back pandemic relief measures.

• 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 6.3631 vs exp. 6.3619 (prev. 6.3637)

UK announces it signed a trade deal with Australia. (Newswires)

• New Zealand NBNZ Business Outlook (Dec) -23.2% (Prev. -16.4%)
• New Zealand NBNZ Own Activity (Dec) 11.8% (Prev. 15.0%)

CENTRAL BANKS

PBoC Deputy Governor Chen vowed to deepen the financial opening up in China and called for the development of a financial risk alert system, while it added that China should build all kinds of firewalls to guard against systemic financial risks. (Newswires)

BoJ kept its monetary policy settings unchanged with the rate at -0.10% and 10yr JGB yield target at 0% with YCC decision made by 8-1 vote as Kataoka dissented, while it extended a portion of its pandemic relief loan scheme targeting smaller firms beyond the March deadline by six months. BoJ said it decided to scale back pandemic relief funding upon reaching the March deadline and will taper corporate bond and commercial paper buying in which it will end the increased purchases of such assets in March and will gradually slow the pace of corporate bonds and commercial paper purchases to pre-pandemic levels after April, with the decision on pandemic relief funding made unanimously. BoJ said it will stop rewarding interest to financial institutions that tap funds against government-supported lending they make to smaller firms and maintained the JPY 20tln upper limit on outstanding holdings of corporate bonds and commercial paper purchases. Furthermore, the BoJ reiterated it is ready to take additional easing steps as needed with an eye on the pandemic and that Japan's economy has picked up as a trend although remained in a severe situation due to COVID-19 impact at home and abroad, while it expects the economy will likely recover as downward pressure from COVID-19 on services consumption and effects of supply-side constraints ease. (Newswires)

Mexican Central Bank Interest Rate (Dec) 5.50% vs. Exp. 5.25% (Prev. 5.0%) in 4-1 vote split as Esquivel (Dove) opted to hike rates by 25bps, while the central bank sees end-2021 inflation at 7.1% and noted the balance of risks for inflation has deteriorated and remains biased to the upside. Furthermore, it noted that headline and core inflation expectations for 2021 and 2022 increased again, as well as medium term expectations, but longer-term expectations have remained stable at levels above the target. (Newswires)

UK/EU

Liberal Democrats was confirmed to have won the North Shropshire by-election with a 5925-vote majority (Lib Dem 17,957 vs Tory 12,032). (Newswires)

UK Chancellor Sunak will be holding talks today with business heads regarding a new support package for the hospitality sector. (Times)

UK will reportedly drop its demand that the ECJ has no legal role in the Northern Ireland protocol in an effort to de-escalate tensions with the EU. UK Brexit Minister Frost will speak to his European counterpart today. (FT/Times)

• UK GfK Consumer Confidence* (Dec) -15 (Prev. -14.0)

FX

In FX, the DXY languished and failed to sustain a brief recovery of the 96.00 status following the losses from yesterday’s central bank frenzy and which was not helped by falling yields and mixed data releases. In addition, the recent comments by President Biden suggested he has conceded that the Build Back Better bill will miss the Christmas deadline. EUR/USD was steady above the 1.1300 level after the prior day’s ECB announcement. GBP/USD rallied following the surprise hike by the BoE although then faded much of the gains before finding support at 1.3300. Nonetheless, focus then turned to the North Shropshire by-election where the Lib Dems handed PM Johnson a devastating defeat as the Tories lost the seat for the first time in history and which is likely to stoke further discontent towards UK PM Johnson from within the party. USD/JPY and JPY-crosses were lacklustre amid the broad risk aversion and after the BoJ scaled back pandemic relief measures, while antipodeans were also subdued by their high-beta statuses and as NZD/USD digested a deterioration in Business Survey data.

COMMODITIES

WTI crude futures were pressured and declined towards USD 71.50/bbl after a false breakout above the USD 72/bbl level - with price action subdued by the broad risk aversion and spread of the Omicron strain. There were notable bullish comments from Goldman Sachs that the new variant hasn't had much of an impact on oil demand and it anticipates demand to be strong in 2022 due to increased capex and infrastructure construction, while it also anticipates average oil demand to reach record highs for the next two years, although this had little effect on price action. Gold extended on this week's post-FOMC gains to reclaim the USD 1800/oz level amid the lacklustre greenback and copper prices shrugged off the negative mood with price action sideways around the USD 4.30/lb level.

Goldman Sachs said Omicron hasn't had much of an impact on mobility and oil demand, while it sees strong oil demand in 2022 from rising capex and infrastructure construction. Furthermore, it stated that average oil demand is to hit record highs in 2022 and 2023. (Newswires)

GEOPOLITICAL

US Senate approved the Uyghur bill aimed at China which bans imports from Xinjiang unless US government determines they were not produced with forced labour, sending it to President Biden for signing. (Newswires) US Secretary of State Blinken said they are holding to account Chinese tech entities that actively support surveillance and tracking of religious minorities in China, predominantly Muslim Uyghurs in Xinjiang. (Twitter). SGH Macro sources (dated 16th Dec) say Chinese Premier Li stated any US firms that boycott Xinjiang products will not be permitted to do business in China. (SGH Macro)

US added Chinese technology companies to investment restrictions list for ties to Chinese Military which were DJI Technologies, Xiamen Meiya, Leon Tech, Netposa Tech, Dawning Information Industry, Megvii, Cloudwalk Tech and YiTu Tech added to the list. In relevant news, President Biden's administration is reportedly still undecided on imposing broader restrictions on sales of US technology to Chinese chipmaker SMIC (981 HK). (Newswires)

Chinese Embassy in Washington spokesperson said US sanctions on Chinese entities related to Xinjiang are totally groundless, adds US actions violate rules of free trade and threatens security of global supply chain. (Newswires)

Remaining parties to Iran nuclear deal plan to meet on Friday at 14:00 local time (13:00GMT/08:00EST) to adjourn nuclear talks, according to diplomats. (Newswires)

US hopes to launch arms control talks with China soon although it gave no timeline, while it said that China is expanding its nuclear arsenal and fleet of nuclear-powered submarines, according to a State Department official. (Newswires)

US is pushing the EU to ready sanctions on Russia if it invades Ukraine which would target energy and banks but EU allies are more cautious in embracing sanctions and cutting Russia from SWIFT is seen as problematic, according to sources. (Newswires)

EU Commission President von der Leyen said the EU would impose sanctions with massive effect if Russia were to move against Ukraine, while it was also reported that EU is to work with allies on potential Russian sanctions related to Ukraine. (Newswires/FT)

US

The Treasury curve steepened on Thursday in what appears to be year-end related now with key Central Bank risk out the way. At Settlement, Nominals: 2s -6.6bps at 0.621%, 3s -9.0bps at 0.907%, 5s -8.8bps at 1.170%, 7s -7.5bps at 1.339%, 10s -4.3bps at 1.419%, 20s -0.2bps at 1.892%, 30s +0.6bps at 1.859%. TIPS: 5yr TIPS -14.5bps at -1.547%, 10yr TIPS -8.7bps at -1.026%, 30yr TIPS -1.4bps at -0.367%. Breakevens: 5yr BEI -4.7bps at 2.726%, 10yr BEI -3.1bps at 2.416%, 30yr BEI -3.7bps at 2.244%. Spreads: 3m10s -3.5bps at 137.1bps, 3m30s +0.0bps at 181.0bps, 2s5s -2.8bps at 57.6bps, 2s10s +0.5bps at 79.1bps, 2s30s +4.3bps at 119.4bps, 5s10s +3.6bps at 21.1bps, 5s30s +7.4bps at 61.4bps, 10s30s +3.8bps at 39.9bps. With the Fed out the way Wednesday evening, eyes turned to the BoE and ECB on Thursday. The BoE hiked by 15bps which was always seen as a risk given the c. 50/50 market pricing going into the event. Treasuries tracked gilts lower, particularly the belly with all eyes moving to the ECB. The ECB gave a mixed bag and can be spun either hawkish or dovish. The ECB provided a strong upgrade to inflation forecast while also conducting lower PEPP buys next quarter but it did extend the reinvestment horizon to 2024 and left the optionality for it to be reinstated if needed. The Asset Purchase Programme is to be raised to USD 40bln from March for Q2 (as PEPP ends), before cooling to USD 30bln in Q3, and then USD 20bln from October for however long is necessary. With lows in Treasuries seen after the BoE, dip-buyers emerged with strong steepening flows on decent volume as opposed to earlier in the week. With key central bank risk now out the way and holiday’s approaching, as well as year-end, desks have suggested pension fund rebalancing may start to take place. JPMorgan strategists estimate “the potential pending rebalancing flow at around USD 210bn out of equities to bonds from multi-asset investors such as balanced mutual funds, US defined benefit pension funds, the Norwegian oil fund and the GPIF”. Note, the bond buying on Thursday was matched with pronounced selling in equities, particularly large cap tech names and growth stocks, which would match this view. T-notes (H2) futures settled 20 ticks higher at 131-03.

US President Biden signed the debt ceiling increase bill into law. There were also comments from President Biden that he had a productive call with Senate Majority Leader Schumer and House Speaker Pelosi. President Biden added that work will continue next week on Build Back Better bill and that they will advance this work together in days and weeks ahead, while he also noted that Senator Manchin reiterated support for Build Back Better funding at the level announced in September. (Newswires)

US Senate Majority Leader Schumer reportedly decided to delay the consideration of Biden's economic agenda until next year, according to sources. In relevant news, it was also reported that the Senate Parliamentarian rejected the Democrat's immigration proposal in the Build Back Better bill. (Twitter/WSJ)

US Consumer Financial Protection Bureau to demand buy-now-pay-later firms provide details about product offerings and use of consumer data, according to sources. Furthermore, CFBP orders are aimed at informing the agency's potential rulemaking and enforcement actions. (Newswires)

Apple (AAPL) is reportedly planning to build a new office to bring wireless chips in-house which may replace parts from Broadcom (AVGO) and Skyworks (SWKS). (Newswires)