• Asia-Pac equities traded mostly in the red and US equity futures were subdued
• FX, fixed income, crude and precious metals were more contained overnight
• Fed's Kashkari (2023 voter) expect the Fed balance sheet to come down, but not to pre-pandemic levels
• North Korea fired a projectile which landed outside of Japan's Exclusive Economic Zone (EEZ)
• China Huarong Asset Management slumped over 50% after a nine-month trade halt was lifted
• Looking ahead, highlights include EZ & US Composite/Services PMI (Final), US ADP, FOMC minutes, supply from Germany and Spain

CORONAVIRUS UPDATE

Macy's (M) has cut hours at all of its stores as COVID cases surge and retailers face new staffing difficulties, according to CNBC. (CNBC)

UK official Vallance said there is no evidence Omicron has peaked in London yet. (Newswires) UK COVID testing rules will be relaxed in a bid to shorten isolation period and alleviate staffing shortages, according to reports. (Telegraph) UK travel industry groups have called for all remaining Covid restrictions on travellers to be removed. (BBC)

French President Macron said no "drastic" new COVID-19 measures are to be expected at the Wednesday meeting, according to Le Parisien. Macron added the COVID debt bill will be paid back through economic activity and not taxes. (Newswires)

US CDC said individuals should isolate for five days. At the end of 5-day isolation, if an antigen test shows negative then isolation can end, if positive then isolation should be carried out until day 10. (Newswires)

Japan's Okinawa saw a daily doubling of COVID-19 cases and officials are said to be considering emergency steps. (Newswires)

IMF is to delay the release of the World Economic Outlook (WOO) to Jan 25th to include the latest COVID developments. (Newswires)

ASIA

Asia-Pac equities traded mostly in the red following the mixed handover from Wall Street, where the US majors maintained a cyclical bias and the NDX bore the brunt of another sizeable Treasury curve bear-steepener. Overnight, US equity futures resumed trade with mild losses and have since been subdued, with participants now gearing up for the FOMC minutes (full Newsquawk preview available in the Research Suite) ahead of Friday’s US jobs report and several scheduled Fed speakers. In APAC, the ASX 200 (-0.3%) was pressured by its tech sector, although the upside in financials cushioned some losses. The Nikkei 225 (+0.1%) was kept afloat by the recent JPY weakness, whilst Sony Group rose some 4% after its chairman announced EV ambitions. The KOSPI (-1.7%) was dealt a blow as North Korea fired a projectile that appeared to be a ballistic missile, but this landed outside of Japan’s Exclusive Economic Zone (EEZ). The Hang Seng (-1.4%) saw its losses accelerate with the Hang Seng Tech Index tumbling over 4% as the sector tackled headwinds from Wall Street alongside domestic crackdowns. China Huarong Asset Management slumped over 50% as it resumed trade following a nine-month halt after its financial failure. The Shanghai Comp. (-1.3%) conformed to the mostly negative tone after again seeing a hefty liquidity drain by the PBoC. In the debt complex, the US T-note futures held a mild upside bias since the resumption of trade, and the US curve was somewhat steady. Participants also highlighted large short-covering heading into yesterday’s US close ahead of the FOMC minutes.

A unit of China Evergrande (3333 HK) will hold meetings with bondholders between Jan 7-10th, according to a filing; reports suggest Evergrande unit proposes delaying Yuan bond repayment. (Newswires)

China's market regulator imposed fines on several transactions involving Bilibili (9626 HK), Alibaba (9988 HK) and some units of Tencent (700 HK); the market regulator says Cos failed to report some deals. Tencent has been fined CNY 4.5mln, Alibaba CNY 1mln, and Bilibili CNY 500k. (Newswires)

China's market regulator has issued draft rules on mobile apps; providers must not take part in activities that threaten national security. (Newswires)

Sony Group (6758 JT) chairman said the Co. is to establish an EV company this Spring. (Newswires)

• Australian ANZ Job Advertisements M/M (Dec): -5.5% (Prev. 7.4%, Rev. 9.9%)

CENTRAL BANKS

Fed's Kashkari (2023 voter) said the strategy the Fed used to normalise the balance sheet last time worked quite well, he does not expect the balance sheet to come down to pre-pandemic levels but he does still expect it to come down. He said "what is now stimulus is going to become a fiscal drag", meaning demand boost is going to be temporary, and it is very unclear to him how long it is going to take for supply chains to normalise. He is more confident that demand is going to normalise, and one risk is that high inflation could lead to higher inflation expectations. Kashkari does not see any reason why the economy would not revert back to a low inflation regime as the pandemic subsides. He said there is a reallocation of workers from jobs that are particularly challenging to those that may have better wages or better quality of life. (Newswires)

Senate Banking Committee said Fed Governor Brainard's nomination hearing for Fed Vice Chair will be on Thursday January 13th. (Newswires)

PBOC will likely step up cash injections through open market operations into the banking system from the second half of the month to meet rising demand for cash, according to China's Securities Journal. (Newswires)

EUROPE

UK PM Johnson, when asked about energy bills, said the UK is not ruling out further measures and Chancellor Sunak is mindful of the increase in energy prices. He said the government will do what it can to help but cutting VAT on fuel bills is a bit of a blunt instrument. (Newswires)

FX

Overnight FX action was more contained, the DXY remained within a tight range not far off yesterday’s 96.462 high following Fed dove Kashkari’s hawkish vibes yesterday. EUR/USD gave up 1.1300-status heading into Tuesday’s European close, but inched back towards the level in late APAC trade as EUR/GBP eyed 0.8350 to the upside. GBP/USD drifted back under 1.3550 after the pair found resistance at its 100 DMA in the prior session – which today stands at 1.3556. USD/JPY dipped under 116.00 shortly after the Chinese cash open as equities extended on losses at the time and thereafter stabilised around the level. Antipodeans were uneventful but AUD/USD met some resistance near its 50 DMA (0.7242) whilst NZD/USD found support at 0.6800.

COMMODITIES

WTI and Brent front-month futures were caged in tight ranges on either side of USD 77/bbl and USD 80/bbl respectively following a smooth OPEC+ meeting. Prices were also stable after the mixed weekly Private Inventory release, which saw a larger-than-expected draw in headline crude whilst the internals printed larger-than-expected builds. Overnight newsflow for the complex was quiet, thus prices took the cue from the sentiment, with some downticks seen shortly after the Chinese cash open as the mood across equities turned sour. Elsewhere, spot gold traded sideways but saw resistance around 1,815/oz ahead of upcoming risk events. LME copper was supported after Chilean Copper Commission (Cochilco) said Chile’s copper output fell in November amid production declines from the Codelco and Escondida mines.

Barclays maintains its 2022 Brent forecast at USD 80/bbl. (Newswires)

White House spokesperson said they have seen progress in recent weeks on oil supply meeting demand. (Newswires)

US Private Inventories (bbls): Crude -6.43mln (exp. -3.3mln), Cushing +2.27mln, Gasoline +7.06mln (exp. +1.8mln), Distillate +4.34mln (exp. +1.5mln). (Newswires)

GEOPOLITICS

North Korea fired what appeared to be a ballistic missile towards the East Sea. The projectile landed outside of Japan's Exclusive Economic Zone (EEZ). (Newswires/Yonhap/NHK)

US State Department said talks with Iran have shown modest progress and hope to build on that this week; sanctions relief and Iran's return to compliance are at the heart of the talks. (Newswires)

US State Department does not expect sanctions to be at the centre of US-Russia security talks; won't include discussions on NATO and Europe. (Newswires)

Air raid sirens sounded in Baghdad, Iraq, amid reports of strikes toward a US base. (Sputnik)

US

The APAC session Tuesday had seen two-way trade in average volumes with T-Notes failing to break into the red, but neither did they manage to claw back Monday's losses. Ahead of further participants returning Tuesday for the new year, there had been some hesitancy on whether Monday's govvie slide lower would see some reversion, although the NY handover confirmed the trend with fresh sales across the curve taking bonds cheaper on the session ahead of another busy slate of IG dollar supply (over 14 issuers Tuesday). What's more, some had attributed the fresh bear-steepening to an article in the WSJ ("Fed Weighs Proposal for Eventual Reduction in Bond Holdings") that drew attention to the potential for a quicker balance sheet runoff at the Fed than had been previously expected. There was no new information in the WSJ piece that wasn't already available, but given it's the FOMC minutes Wednesday (preview here) and other catalysts had been light, it gained more traction than it might have normally received. It's noteworthy that TIPS were sold harder than nominals, a sector that can be more sensitive to Fed action. Meanwhile, T-Notes hit session lows of 129-04 in the US pre-market, with cash 10s finding support above 1.67%. There was some reprieve on the Dec ISM Mfg. miss, with a notable decline in the Price Paid component alleviating some inflation woes, but nothing worth more than a few ticks in the T-Note, with cash 10s back making fresh yield highs at 1.68% later in the session. Those moves were seemingly driven by the long-end with a 2.5k Ultra Bond block sale seeing the 30yr cash yield rise to 2.10%, the highest since late October. T-note (H2) futures settled 5 ticks lower at 129-09

Moderate Democratic Senator Manchin said he has had no conversations about Build Back Better since his statement a few weeks ago. (Newswires)