• Asia-Pac equities traded mostly higher; US equity futures held onto mild gains
• In FX, DXY was subdued, EUR/USD and GBP/USD probed 1.1300 and 1.3550 respectively
• Fed's Bullard (hawk, voter) said the first rate hike could come in March and said the balance sheet run-off should start shortly after
• China may still ease policy in Q1 despite the hawkish Fed, according to reports citing China's Securities Journal
• Crypto markets saw hefty losses overnight with Bitcoin (BTC) falling below its recent flash-crash low
• Looking ahead, highlights include German Industrial Output, UK Construction PMI, EZ CPI (Flash), Economic Sentiment, US and Canadian Labour Market Reports, Fed's Barkin, Bostic & Daly

CORONAVIRUS UPDATE

Japan's government is reportedly seeking approval to declare COVID "quasi-emergency" in Okinawa, Hiroshima and Yamaguchi prefectures. (Newswires)

US Treasury issued final rules for USD 350bln in state and local COVID-19 aid funds and offering further spending flexibility; has expanded uses for aid funds to services such as child care, early childhood education and affordable housing development. (Newswires)

Pre-departure testing for travellers entering the UK has been scrapped as of 04:00GMT. New arrivals will no longer have to isolate until they get a negative PCR test. They will have to take a lateral flow test at the end of Day 2 in the UK. If that result is positive, they will require a further PCR test. (Sky News)

ASIA

Asia-Pac equities traded mostly higher but off best levels following a choppy Wall Street session – which saw the Russell 2000 close in the green whilst mild losses were seen across the Dow Jones, Nasdaq and S&P 500. US equity futures resumed trade with modest gains but the upside momentum faded, with the ES Mar'22 on either side of 4,700 in the run-up to the US jobs data. European equity futures traded flat with an upside bias for most of the overnight session. In APAC, the ASX 200 (+1.2%) was supported by its Financials, Energy, and Consumer Discretionary sectors. The Nikkei 225 (unch) was choppy but ultimately negative, with the index subdued by reports the Japanese government is seeking approval to declare COVID "quasi-emergencies" in three prefectures. The KOSPI (+1.0%) saw its Tech sector among the top performers after Samsung Electronic rose over 1.5% following its prelim earnings. The Hang Seng (+1.0%) and Shanghai Comp (+0.3%) held onto the mild gains seen at the cash open, although the property sector felt no reprieve as Shimao – thought to be one of the safer property firms – reportedly defaulted on a trust loan, thus triggering freefalls across its stock and bonds. In fixed income, US 10yr cash yield trimmed some of the prior session's gains.

• PBoC set USD/CNY mid-point at 6. 3742 vs exp. 6. 3720 (prev. 6.3728)
• PBoC injected CNY 10bln via 7-day reverse repo at maintained rates of 2.20% for a net daily drain of CNY 100bln (rev. CNY 100bln); for a weekly drain of CNY 660bln - the largest in two months. (Newswires)

Samsung Electronics (005930 KS) reported Q4 prelim Revenue KRW 76tln vs exp. KRW 75.6tln, Operating Profit KRW 13.8tln vs exp. KRW 15.2tln; Earnings reflected a one-time cost of special bonus payments. The operating profit was impacted by the one-time bonus. (Newswires)

CENTRAL BANKS

Fed's Bullard (hawk, voter) said the first rate hike could come in March and the Fed is now in a good position to address inflation with rate hikes and balance sheet runoff if needed. He was one of those who projected three hikes for 2022 in the December SEPs and said the balance sheet run-off should start shortly after the initial rate increase. He said it is better to get hikes going sooner rather than later, can slow the pace if inflation moderates, and the balance sheet could decline even below pre-pandemic levels given the existence of the standing Repo facility. He said a smaller balance sheet and higher policy rate means both ends of yield curve should rise in tandem. He is uncertain how much inflation control will depend on natural moderation vs Fed intervention, and expects inflation to moderate naturally to some degree, but not dramatically and still sees inflation above 3% at the end of the year. Bullard added the Fed can reduce the balance sheet in a "non-disruptive" way using a passive runoff. (Newswires)

Fed's Daly (dove, 2024 voter) said it is "very appropriate" to taper QE to be out of it by the end of March, and normalizing the balance sheet would come after raising rates, whilst balance sheet reduction to come after "neutralizing" the Fed Funds rate. She said the US labour market looks very strong but millions of jobs short of pre-COVID levels, people not working are being constrained by the virus. She said we shouldn't accept the current labour market as what the Fed wants to see in the future, but are closing in on achieving goals in the short run. She said inflation has been higher than she is comfortable with for a long time. She said if the Fed acts too aggressively to offset high inflation, they will not do much to solve supply chain problems. Daly said the Fed will need to raise interest rates to keep the economy in balance and even with a couple of interest rate hikes, policy will still be accommodative. (Newswires)

China may still ease policy in the first quarter of this year despite the hawkish Fed rhetoric, according to reports citing China's Securities Journal. (Newswires)

FX

In FX, DXY held a softer bias but remained above 96.00 as participants look ahead to Friday’s US labour market report alongside scheduled commentary from Fed’s Daly, Barkin and Bostic. EUR/USD tested 1.1300 to the upside whilst GBP/USD briefly gained a footing above 1.3550 on the softening Dollar at the time, with both pairs probing the respective psychological levels since. USD/JPY managed to remain under 116.00 during the latter half of the APAC session following commentary from Japanese Finance Minister Suzuki suggesting that he is closely watching FX impact on the economy amid the recent JPY deterioration. Antipodeans posted modest gains overnight after last night's underperformance. USD/CNH drifted lower after meeting resistance around 6.4000, whilst reports citing China's Securities Journal suggested China may still ease policy in the first quarter of this year despite the hawkish Fed rhetoric.

Japanese Finance Minister Suzuki said FX stability is important and they are closely monitoring market moves and closely watching FX impact on the economy. (Newswires)

COMMODITIES

WTI and Brent front month futures were firmer above USD 80/bbl and USD 82.50/bbl throughout most of the session, underpinned by the mostly positive APAC risk tone alongside the domestic unrest in Kazakhstan stoking some supply woes, albeit the nation's President suggested order has generally been restored. Spot gold traded sideways under 1,800/oz after meeting resistance at its 100 DMA (1,792.50/oz), with several DMAs seen to the upside between USD 1,798-1,805/oz. LME copper was on a softer footing and traded on either side of USD 9,500/t.

Morgan Stanley noted that on current trends, the oil market could see simultaneously low inventories, low spare capacity and low investment levels in H2 '22. (Newswires)

A Texas judge ruled against lawsuit by 23 states to revive the Keystone XL pipeline. (Newswires)

GEOPOLITICS

US and Japanese joint statement expressed serious concerns over human rights in Xinjiang and Hong Kong alongside efforts by China to undermine rules-based order. The statement highlighted commitment to deepening cooperation between Japan, US and South Korea. (Newswires)

Kazakh President says order has generally been restored; will continue with counterterrorist actions. (Newswires)

A Russian submarine collided with a Royal Navy warship on patrol in the North Atlantic. A UK defence source said it was unlikely the collision was deliberate. (BBC)

Foreign Ministers within NATO will today discuss a common approach to the Russian military build-up in and around Ukraine. (Politico)

US

US players hit the bid on their arrival yesterday, taking T-Notes to session lows of 128-14 and cash 10s cheapening above 1.75%, with eyes on the cycle peak of 1.78% from Q1 2021. But the selling could not be sustained and prices pared heading into the NYSE open. There was little reaction to both the rise in Jobless Claims and the slump in ISM Services. Later comments from both Fed's Daly and Bullard were not market moving, but did see the pair sustain their hawkish messaging with Bullard going as far as to suggest a hike in March is possible and that he was one of those who sees three hikes this year. T-Notes trundled sideways within a few ticks of 128-18 into the settlement. Participants now look to Friday's NFP with eyes also on next week's 3s, 10s, and 30s auctions. Note that with QT perceived to be on the horizon, any poor demand receptions at auctions could create more concern in the market due to the diminished liquidity outlook.

CRYPTO

Bitcoin (BTC) fell below its recent flat crash low and dipped under USD 42,000 to hit levels last seen in September last year.

GameStop (GME) is launching a division to develop a marketplace for nonfungible tokens (NFTs) and establish crypto partnerships as plans to turn a profit, WSJ sources state. (WSJ) Shares spiked over 20% after-market.