• Indecisive and somewhat choppy trade amid a thin docket; Euro Stoxx 50 -0.1%, ES U/C, NQ -0.3%
• In FX, the DXY tested 96.00 to the upside with peers mixed but relatively contained while USTs/EGBs recovered from initial pressure
• US Senator Manchin reportedly no longer supports a USD 1.8trl Build Back Better counterproposal, via Washington Post
• US-Russia talks have begun and initial commentary seemingly downplays the prospect of a breakthrough
• ECB’s Schnabel stated that the green transition poses upside risks to medium-term inflation
• China reported its first community transition of the Omicron variant in Tianjin which is a gateway city to Beijing
• Looking ahead, highlights include Fed's Bostic

CORONAVIRUS UPDATE

A strain of COVID-19 that combines Delta and Omicron was discovered in Cyprus, according to University of Cyprus biological sciences professor and head of the Laboratory of Biotechnology and Molecular Virology Leondios Kostrikis. (Newswires)

Canada announced that unvaccinated foreign truck drivers that arrive at the border will be turned back to the US from January 15th and that truck drivers could face delays due to the vaccine mandate, but does not expect it to result in significant disruptions or shortages. (Newswires)

UK reported 141.5k new COVID-19 cases and 97 deaths on Sunday vs 146.4k new cases and 313 deaths on Saturday. It was also reported that London may have passed or be at the peak of the latest COVID wave, according to the city's public regional health director. In relevant news, Tory Covid Recovery Group chair Harper called for PM Johnson to end all COVID-19 restrictions in England later this month, while he said PM Johnson should announce an end to restrictions and never bring them back when most current rules expire on January 26th. (Newswires/Sky News/FT) Chancellor Sunak is among those in the cabinet calling for a reduction in the isolation period to five days; PM subsequently said they are looking into this. (Telegraph/Newswires)

France reported 296.1k new COVID-19 cases on Sunday which was around 7.5k cases less than the prior day, while Italy reported 155.7k cases on Sunday vs. 197.6k cases on Saturday. Furthermore, Italy is readying a EUR 2bln package to help COVID-hit firms, which is to be approved in the week ahead, according to Reuters sources. (Newswires)

A cluster of 20 Omicron cases was reported in Tianjin which is a gateway city to Beijing and it also reported China’s first community spread of the Omicron variant, while mass testing is underway in Tianjin and it required that residents do not leave the city unless necessary. In relevant news, Chinese health experts said that the Omicron variant tends to infect children more easily with more than half of the Tianjin cases in less than a month being middle and primary school students. (Newswires/Global Times)

• Tianjin, China has suspended tourism-related businesses due to COVID-19, via Global Times; suspension starts from Monday. (Global Times)

Japanese prefectures of Okinawa, Yamaguchi and Hiroshima entered a COVID-19 state of pre-emergency on Sunday which will remain effective until January 31st. (Inquirer.net)

ASIA

Asia-Pac markets traded mixed and US equity futures were initially pressured after last Friday's post-NFP weakness amid higher yields despite the miss on the headline jobs data, as a wider than expected decline in the Unemployment Rate provided evidence of the US moving towards full employment and boosted odds for a rate hike at the March meeting. This resulted in underperformance in consumer discretionary and tech with the latter also not helped by the worst start to the year for the Nasdaq 100 since 2000, while ongoing Omicron woes and the absence of Japanese participants due to Coming of Aged day further added to the uninspired mood. ASX 200 (-0.1%) was subdued as consumer discretionary and tech mirrored the underperformance of their US counterparts and with Australia suffering from the ongoing surge in COVID-19 cases, although loses for the index were cushioned by strength in the commodity-related sectors and better than expected Building Approvals data. KOSPI (-1.0%) continued its descent beneath the 3,000 level as it succumbed to the tech and consumer stock woes, with participants also cautious amid mixed expectations regarding the prospects of another rate hike by the BoK later this week. Hang Seng (+1.0%) and Shanghai Comp. (+0.4%) remained afloat with Hong Kong underpinned as some property concerns eased after Shimao placed all its property projects for sale and Kaisa agreed to the Shenzhen government's request to generate a plan by end-January to repay wealth management products to investors. Furthermore, China’s Guangdong provincial government held meetings with property enterprises which was said to likely pave the way for state-owned real estate enterprises to conduct M&A with troubled property firms, although not all developers joined in on the spoils as Modern Land reversed initial double-digit gains and slumped almost 40% on resumption from a two-month trading halt with the Co. in talks on a potential debt restructuring plan, while sentiment in the mainland was also contained after China reported its first community transition of the Omicron variant in Tianjin which is a gateway city to Beijing.

PBoC injected CNY 10bln via 7-day reverse repos with the rate at 2.20% for a CNY 10bln net injection. (Newswires) PBoC set USD/CNY mid-point at 6.3653 vs exp. 6.3628 (prev. 6.3742)

US Democratic Senators Brown and Republican Senator Portman called for the passage of the China competition legislation. (Newswires)

Senior Chinese officials reportedly do not expect bilateral relations with US President Biden’s administration to improve in 2022, while they will not initiate discussions to remove tariffs and pledge to no longer instruct Chinese companies to buy large amounts of US goods, according to SGH Macro Advisers. Furthermore, it was noted that a China National Security Meeting of the CPCC in late December which Chinese President Xi presided over, outlined five priorities in which the fifth priority was placing the stability of Sino-US relations in a very important position and an official suggested that importance of US in China’s relations were greatly lowered citing its fifth ranking. However, SGH Macro Advisers stated it doubts the US is number 5 on China’s priority list but noted it reflects China has no expectations for an improvement of bilateral relations with US. (SGH Macro Advisers)

• Chinese Commerce Ministry announces that it will impose anti-dumping tariffs on certain glycol ethers imported from the US on January 11th.

China may conduct monetary easing measures in the first quarter as the economy needs more support while the US Fed accelerates its tightening steps, according to experts. (China Economic Net)

China’s Guangdong province government reportedly held meetings with property enterprises, likely paving the way for state-owned real estate enterprises to conduct M&A with troubled property firms, while reports later noted that China will make it easier for state-backed property developers to buy up distressed assets of property companies. (Newswires)

Huawei is taking measures such as issuing debts and a management overhaul amid lingering challenges including the US' crackdown and the ongoing pandemic, although analysts noted the measures are not proof that the Chinese company is in serious financial trouble or faces other problems, as its business has generally stabilised despite external hits. (Global Times)

US

US Senator Manchin reportedly no longer supports a USD 1.8trl Build Back Better counterproposal (which was put forward by himself before Christmas) following a breakdown in negotiations between himself and the White House. (Washington Post)

Fed's Barkin (2021, 2024 voter) says March rate rise in conceivable, supports the December shift towards a more hawkish stance; supply chain pressures may persist into next year; upward inflation pressures may abate late this year. (WSJ)

UK/EU

UK Foreign Secretary Truss is 'willing' to override the Northern Ireland part of the Brexit agreement and stated she will not accept a deal which involves goods from Britain being checked as they enter Northern Ireland. (BBC)

UK Chancellor Sunak is facing increasing pressure to levy a windfall tax on UK offshore oil and gas operators with some Tory MPs, as well as Labour and Liberal Democrats wanting Sunak to levy a tax on North Sea operator profits to alleviate surging domestic energy bills. (FT)

UK Housing Secretary Gove will issue a warning to unsafe property developers as he seeks to pressure them to spend on replacing dangerous cladding, while developers are pushing back on government plans to resolve the cladding crisis which could result in them footing the bill of as much as GBP 4bln. (Sky News/FT)

ECB’s Schnabel said the green transition poses upside risks to medium-term inflation and suggested that rising energy prices could require the ECB to act on policy but added there has not been signs so far of broader second round effects of a higher inflation. (Newswires)

EU Sentix Index (Jan) 14.9 vs. Exp. 12.0 (Prev. 13.5)

GEOPOLITICAL

US President Biden administration is weighing up offering Russia cuts to US troops in Eastern Europe and with cuts matched by Russia in the stated area, according to NBC News. There were later reports that a US official confirmed the Biden administration is open to discuss reciprocal limits on military exercises in the eastern European region as part of talks with Russia on Ukraine but clarified that US in not willing to talk about the number of US troops deployed in NATO. (Newswires/NBC News)

Russian Deputy Foreign Minister Ryabkov said preliminary discussions in Geneva on Sunday were “complex and businesslike” after he met with US Deputy Secretary of State Sherman ahead of Monday’s talks, while Ryabkov also stated that it is entirely possible that diplomacy with US could end abruptly after a single meeting on Monday and that Russia will not make any concessions whatsoever under pressure. Furthermore, reports noted that Sherman stressed the US commitment to the principles of sovereignty, territorial integrity and freedom of sovereign nations to choose their own alliances. (Newswires/RIA)

US Secretary of State Blinken said he does not expect a breakthrough from US-Russia talks this week and that it is very hard to see progress happening when ‘Russia has a gun to the head of Ukraine’, while he commented that the US is seeking clarification from Kazakhstan officials in why they needed to ask for help from Russian-led troops and that the shoot to kill order in Kazakhstan is wrong which should be rescinded. Blinken also said regarding US-Russia talks that there are two paths ahead including a path of dialogue and diplomacy, while the other path is confrontation and massive consequences for Russia with the decision ultimately up to President Putin. (Newswires/ABC/CNN/The Hill)

US National Security Adviser Sullivan sought advice from Russia hawks ahead of this week's talks and a group of Russia experts urged for the US to send more arms to Ukrainians. (Axios)

NATO Secretary-General Stoltenberg urged Russia to co-operate with the west and warned Russia to abandon its hostile foreign policy or face a military alliance ready for conflict in Europe. There were separate comments from French European Affairs Minister Beaune said that Europe must not be absent from the negotiating table regarding Ukraine and that they need to understand what is happening in Kazakhstan including what Russia is doing. Furthermore, it was also reported that Kazakhstan authorities announced that 164 people were killed and almost 6,000 were detained after days of deadly unrest, while they warned that they will continue operations against “terrorists” with the help of Russian-led forces. (Newswires/FT)

• NATO Secretary General says the body is helping Ukraine to move closer to NATO membership; will not resolve all issues with Russia this week but could agree on a way forward.

US National Security Advisor Sullivan stated Iran imposed sanctions on 52 Americans and said the US will protect and defend citizens, while other reports also noted that the US warned Iran of severe consequences if it attacks any Americans including the 52 people that Tehran imposed sanctions on. (Newswires/Twitter)

EQUITIES

European equities (Euro Stoxx 50 Unch; Stoxx 600 -0.1%) have erased the mild opening gains of around 0.4% as the pick-up from Friday’s losses lost steam early doors. There wasn’t much in the way of a catalyst after the cash open for the price action with not much in the way of fresh developments for the region over the weekend. The handover from the APC region was a mixed one (Japan away from markets) with the ASX (-0.1%) a touch softer amid losses on consumer discretionary and tech names, whilst Chinese bourses (Shanghai Comp. +0.4%, Hang Seng +1.1%) shrugged off COVID angst with property stocks in Hong Kong boosted after Shimao placed all its property projects for sale and Kaisa agreed to the Shenzhen government's request to generate a plan by end-January to repay wealth management products to investors. Stateside, US futures are mixed (ES Unch, NQ -0.1%, RTY +0.2%) after last week’s losses of 2.5%, 5.7% and 4.1% for the S&P 500 Nasdaq and Russell 2000 respectively. In a note published today, HSBC has raised its S&P 500 target to 4,900 from 4,650 (vs 4,677 close on Friday). The focus in the US remains on the pace of Fed tightening, on which, Goldman Sachs now anticipates a total of four hikes this year beginning in March and for the balance runoff to start in July. Elsewhere, JPMorgan recommends overweighting stocks which are positively correlated to upside in bond yields; banks, autos, mining, energy and insurance. Back to Europe, sectors are painting a relatively mixed picture, with Travel & Leisure names best in class thus far amid support from airline names, whilst Oil & Gas and Banking names are also seen higher with the latter supported by the ongoing favourable yield environment. To the downside, Real Estate names lag with softness observed in UK homebuilders (Persimmon -3.8%, Berkeley -2.8%, Barratt Developments -3.2%) as companies attempt to push back on government plans to resolve the cladding crisis which could result in them footing the bill of as much as GBP 4bln. In terms of stock specifics, Credit Suisse (+1.6%) sits at the top of the SMI following reports in Inside Paradeplatz suggesting rumours of a potential sale or merger of the Co. with UniCredit and BNP Paribas mentioned in the article. To the downside, Atos (-17%) is the standout laggard in the Stoxx 600 after issuing a further profit warning and announcing that it will present a new re-organisation to the board of directors.

HSBC raises S&P 500 target to 4,900 from 4,650 (vs 4,677 close on Friday). (Newswires)

FX

DXY - The DXY has lost some steam after an early resurrection from Friday’s NFP-induced fall under 96.000 (to a 95.710 low), with overnight and early European gains a function of a rise in US yields and a decline in the EUR. US cash yields continue the grind higher with the 10yr eclipsing Friday’s 1.8010% peak, in part spurred (or at least influenced) by Goldman Sachs now expecting four Fed hikes this year alongside faster quantitative tightening, citing above-target inflation. This comes ahead of the CPI metrics on Wednesday - which is expected to see the headline Y/Y at 7.0% and the Core Y/Y at 5.4%; but before that, Fed Chair Powell and 2022-voters (and hawks) George and Bullard are slated for tomorrow ahead of the Fed blackout commencing on the 15th Jan. Back to this week’s inflation metrics and using last week’s PMIs (Markit and ISM) as proxies, the releases are consistent with a rise in CPI and a cooling in PPI in December. Markit noted “Input shortages, transportation delays and upticks in labor costs drove the rate of private sector input price inflation to a fresh series high in December”, whilst ISM suggested “Vendors are trying not to pass on expenses, but their margins are such that they will need to raise prices…Prices continue to be driven up, with shipping costs the largest driver due to inflated pressures on capacity and fuel costs.” From a technical standpoint, the index remains above its 50 DMA (95.838), with the 21 DMA (96.171) the closest point of resistance ahead of Friday’s 96.299 pinnacle, if 96.00 sees a convincing upside break. Ahead, the State-side calendar is light, with 2024-voter Bostic’s speech seemingly postponed.

EUR, GBP - EUR has been offered this morning and stands as the current G10 laggard as GBP/EUR threatens an upside breach of 1.2000 (a 23-month peak), with traders noting potential stops above for GBP/EUR and below the corresponding 0.8333 mark in EUR/GBP. The weekend also saw commentary from ECB-regular Schnabel, who suggested that rising energy prices could require the ECB to act on policy but added there have not been signs so far of broader second-round effects of higher inflation. Eyes remain on the German 10yr cash yield eyeing positive territory. Nonetheless, the ECB policy divergence with the Fed and BoE keeps the single currency subdued against major peers. From a technical standpoint, EUR/USD is back under its 50 DMA (1.1345) with the 21 DMA (1.1308) the next support ahead of 1.1300. Sterling is in turn supported, with GBP/USD testing 1.3600 to the upside at the time of writing – with clean air seen until 1.3650.

AUD, NZD, CAD, JPY - The high-beta FX are the current top performers with the Loonie leading the gains as crude prices remain firm. USD/CAD has dipped under its 100 DMA, (1.2625) for the first time since November last year. The AUD is the next best gainer with copper firm and the AUD/NZD cross topped 1.0600 once again. NZD/USD meanwhile tested but failed to breach resistance at its 21 DMA (0.6787). Conversely to the high-betas, the havens are among the straddlers with USD/JPY off its overnight highs (with Japan also observing a market holiday) and stuck within a 115.55-85 range with upside capped by the recent downside across stocks.

Australian Building Approvals (Nov) 3.6% vs Exp. 0.0% (Prev. -12.9%, Rev. -13.6%)

FX Expiries, NY Cut:

• EUR/USD: 1.1275-80 (1.2BLN), 1.1300 (394M), 1.1350 (552M), 1.1390 (340M)
• USD/JPY: 114.00 (1.2BLN), 116.00 (600M) 116.50 (1.2BLN)
• AUD/JPY: 80.98-81.00 (1.25BLN)

FIXED

Bunds and USTs began the European morning with a very slight negative bias for the benchmarks which, for instance, saw the German 10yr yield match Friday’s -0.029% peak; note, APAC action was affected by the absence of Japanese participants for Coming of Age day. As the session has progressed core debt has undertaken a reversal from the above lead and is now mixed but with a modest positive bias beginning to emerge, a recovery which has occurred without catalyst or driver and is therefore not worth reading into too much, Particularly as yields remain in proximity to key levels and as Monday’s docket is minimal when compared to the substantial amount of Fed speak, among other drivers, due later on with Powell, US CPI and Brainard the highlights on Tuesday, Wednesday and Thursday respectively. Technically, there isn’t much of note aside from psychological figures in the near term. For what it is worth, technicians’ flag 168.32/34 and 170.93 as respective Bund support and resistance marks. Today’s light docket does feature a known hawk in Fed’s Bostic, albeit, a non-voter until 2024; nonetheless, it will be interesting to get his views on the rate lift-off as pre-December he had one 2022 hike forecast and since then the Fed’s median has moved to three for the period and the likes of Goldman Sachs expect four. Unscheduled commentary from another non-voting hawk in Barkin via the WSJ this morning echoed the hawkish December outlook and, on the economy, remarked that it is an “interim full employment”. Reminder, the blackout period starts on Saturday before the January Fed.

European Financial Stability Facility (EFSF) opens books to sell 8yr and 31yr EUR bonds via syndicate. (Newswires)

COMMODITIES

WTI and Brent front-month futures have trimmed earlier gains after seeing overnight support with the inflation narrative underpinning prices at the time, although supply woes arising from Kazakhstan (1.6mln BPD) could be abating as production at its largest oilfield comes back online and the President claims the domestic unrest is now under control. In terms of some themes to be aware of: China’s COVID situation will be eyed heading into the Lunar New Year – which is marked as the largest human migration – with COVID restrictions likely to dampen the demand side of the equations. On the geopolitical front, noises out of the Iranian nuclear talks have been more sanguine but progress remains to be seen. Meanwhile, the Russian-Ukraine spat is picking up traction with punch verbal rhetoric from both sides and talks set to take place later in the week. WTI Feb has falling back under USD 79.50/bbl (vs low USD 78.36/bbl) while Brent Mar briefly topped USD 82/bbl (vs low USD 81.20/bbl). In terms of metals, spot gold remains sub-1,800/oz but topped its 100 DMA (1,792/oz) and 21 DMA (1,799/oz) with technical re-eyeing the 200 DMA (1,800/oz) and 50 DMA (1,804/oz) from a technical standpoint ahead of Wednesday’s US CPI. LME copper has been constrained to a tight range above USD 9,500/t amid the overall indecisive mood. Coal meanwhile eyes the potential resumption of Indonesian coal exports, which was paused last week amid domestic power worries. Elsewhere, Vale announced that it has partially suspended trains at the Vitoria-Minas railway amid rain in the Minas Gerais state, but maintained guidance for 2022 iron ore productions of 320-335mln tonnes.

Qatar cut oil price differentials vs Dubai/Oman for February with Marine crude OSP at a premium of USD 1.35/bbl vs Dubai/Oman average (prev. premium of USD 3.05/bbl) and with Land crude at a premium of USD 2.00/bbl vs Dubai/Oman (prev. premium of USD 3.80/bbl). (Newswires)

Production at Kazakhstan’s largest oilfield Tengiz is gradually being restored after reductions due to disruptions from protests in the country. (Newswires)

Indonesia could allow coal exports by the end of today or tomorrow, according to CNBC. (CNBC)

Vale announces that it has partially suspended trains at the Vitoria-Minas railway amid rain in the Minas Gerais state. (Newswires)