• European bourses and US futures are firmer following yesterday's US rebound, ES +0.3%, but off best pre-Powell's testimony
• Fed Chair Powell’s prepared remarks noted the economy has rapidly strengthened despite the ongoing pandemic
• Fed's Bostic (2024 voter) sees three 2022 hikes, risks of a fourth on the possibility of higher inflation
• DXY remains sub-96.00 and continues to drift with peers ex-JPY modestly firmer while debt is choppy but ultimately near unchanged levels
• Russian Kremlin says that so far it does not see a reason for optimism following discussions with the US in Geneva
• Looking ahead, highlights include Fed's George, Powell, Bullard, supply from the US

CORONAVIRUS UPDATE

US COVID-19 hospitalizations reached a record high on Monday in which it surpassed 132k, according to a Reuters tally. In relevant news, the US CDC is mulling recommending better masks for Omicron and is likely to say those who can consistently wear N95 masks and KN95 masks should do so, while it was also reported that the US CDC told Americans to avoid travel to Canada citing the COVID-19 statement. (Newswires/Washington Post)

China's Tianjin imposed a partial lockdown and the Henan province capital of Zhenzhou tightened restrictions and shut down places. It was also reported that Hong Kong plans to ban transit passengers from 150 places for a month from January 15th except those travelling to the Beijing Olympics. Furthermore, Hong Kong will halt in-person kindergarten and primary school classes, while Chief Executive Carrie Lam said they will start vaccinating children aged 5-11 with the Sinovac (SVAC) vaccine and will launch a new anti-epidemic relief fund in which the government has at least HKD 4.0bln for new economic relief measures. (Newswires)

Tokyo daily COVID cases 962 (vs yesterday's 871). (Newswires)

Mexican President AMLO tested positive for COVID-19. (Newswires)

ASIA

Asian equities were subdued following on from the mostly negative lead from Wall St where stocks declined at the open, but then finished off their lows and the Nasdaq fully recovered from a near-3% drop as yields wavered. ASX 200 (-0.8%) was pressured with the index dragged lower by underperformance in the top-weighted financials and consumer staples sectors amid expectations that the ongoing Omicron wave is to slow the economic recovery, with better-than-expected Retail Sales data doing little to lift sentiment. Nikkei 225 (-0.9%) underperformed on return from the holiday closure amid confirmation that border restrictions will be extended until end-February and after some prefectures recently entered into COVID-19 pre-emergency status, while KOSPI (+0.1%) was also cautious following a second suspected ballistic missile launch by North Korea in less than a week. Hang Seng (Unch.) and Shanghai Comp. (-0.7%) were choppy with price action rangebound amid a neutral PBoC liquidity operation and after China’s Cabinet reiterated to refrain from flood-like stimulus but will expand financial consumption. Furthermore, COVID-19 concerns persisted with Tianjin imposing a partial lockdown and Hong Kong suspending in-person kindergarten and primary school lessons, although Hong Kong Chief Executive Carrie Lam also announced to launch a new anti-epidemic relief fund. Finally, 10yr JGBs were initially flat as the risk averse mood in Tokyo stocks and presence of the BoJ in the market for over JPY 1tln of JGBs failed to spur demand, while prices were later pressured on return from the lunch break in a retreat beneath the 151.00 level.

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 6.3684 vs exp. 6.3698 (prev. 6.3653)

South Korea January 1st-10th Trade Balance at provisional deficit of USD 4.95bln, Exports rose 24.4% Y/Y and Imports rose 57.1% Y/Y. (Newswires)

US

Fed Chair Powell said the economy is growing at its fastest pace for many years and the labour market is strong in prepared remarks for reappointment hearing. Powell added that the economy has rapidly strengthened despite ongoing pandemic, giving rise to elevated inflation, and he is strongly committed to reaching maximum employment and price stability. Furthermore, he said the Fed will use tools to support the economy and a strong labour market, while he added the economy will be different after the pandemic and Fed must adapt to the changes. (Newswires)

Fed's Bostic (2024 voter) says the balance sheet should decline faster than in the last tightening cycle, perhaps by USD 100bln/month with no phase in. Sees three 2022 hikes, risks of a fourth on the possibility of higher inflation. March would be reasonable for a first rate increase, balance sheet runoff to commence soon after - runoff should be geared to end in a "couple" of years. Wages and other labour dynamics are consistent with maximum employment. (Newswires)

Fed Vice Chair Clarida is to resign on January 14th ahead of the expiry of his term which ends on January 31st. (Newswires)

House Minority Leader Kevin McCarthy is reportedly considering instituting new limits or an outright ban on lawmakers holding and trading stocks and equities if Republicans take the majority in November, according to Punchbowl. (Punchbowl)

China's Commerce Ministry says it will continue imposing anti-dumping and anti-subsidy tariffs on Dried distillers grains with solubles (DDGS) imported from the US throughout the investigation period. (Newswires)

UK/EU

Economists believe the impact of Omicron on the UK economy will be modest with dips in December and January but a rebound thereafter as restrictions are lifted. (FT)

UK BRC Retail Sales YY (Dec) 0.6% (Prev. 1.8%), Total Retail Sales rose 2.1% (Prev. 5.0%)

Barclaycard UK December Consumer Spending rose 12.2% compared to December 2019. (Newswires)

ECB's Lagarde says we understand that increasing prices are a concern for many people; but, people can trust that our commitment to price stability is unwavering, which is critical for the firm anchoring of inflation expectations and confidence in the EUR. (ECB)

• ECB's Nagel (replacing Weidmann at the Bundesbank) says risks are skewed to higher inflation than expected, surge is not entirely due to temporary factors. Outlook for prices is extraordinarily uncertain. (Newswires)

European Parliament President David Sassoli has died, according to a spokesman. (AFP News Agency)

GEOPOLITICAL

North Korea fired what could be a ballistic missile which landed in the East Sea outside of Japan’s exclusive economic zone. Furthermore, it was later reported that North Korea's missile travelled more than 700km to an altitude of 60km and at Mach 10 speed, according to Yonhap. South Korea's National Security Council expressed strong regret over North Korea's missile test, while Japanese PM Kishida said North Korea's repeated launches are very regrettable and there were also comments from Japanese Chief Cabinet Secretary Matsuno that North Korea's actions threaten the status quo in the region and that Japan is very disappointed. (Newswires/Yonhap)

Russian Kremlin says that so far it does not see a reason for optimism following discussions with the US in Geneva; too early to draw any conclusions from the first round of discussions and there are still several rounds ahead. Will not be satisfied with a dragging out of talks. (Newswires)

• US has agreed to respond in writing to security proposals from Russia next week, according to a RIA source.

Ukrainian President Zelensky says he is prepared to take the necessary decisions to end the war in the east of the nation at a new four-way summit. (Newswires)

The Senate is set to vote this week on a bill which would impose fresh sanctions on the Nord Stream 2 pipeline. (Newswires)

Kazakhstan President Tokayev said the CSTO mission in the country was completed and a withdrawal will begin in two days. (Sputnik)

Turkish Foreign Minister to visit China on Wednesday, according to a MiddleEastEye journalist. (MiddleEastEye)

Taiwan has halted training drills for Lockheed Martin's (LMT) F-16s following the earlier incident where a jet went missing. (Newswires)

EQUITIES

European equities (Stoxx 600 +1.0%) are attempting to claw back some of yesterday’s losses and catch up with the late rally seen on Wall St. yesterday. Fresh fundamental/macro drivers for the region are lacking, however, from a technical standpoint, the Stoxx 600 (currently 484) still has some ground to cover before it reaches yesterday’s opening level of 487.58 and last week’s record high (4th Jan) at 495.46. The handover from the APAC region was a downbeat one as Japanese participants returned to the fray (Nikkei 225 -0.9%), with the ASX 200 (-0.8%) hampered by losses in financial and consumer discretionary names, whilst Chinese bourses (Hang Seng flat, Shanghai Comp. -0.7%) were subdued by ongoing COVID angst and further reiterations from China’s cabinet that it will avoid flood-like stimulus. Stateside, US futures have picked up throughout the European session with gains of a similar magnitude across the majors (ES +0.4%, NQ +0.4%, RTY +0.4%). Focus for the US will fall on Fed Chair Powell’s renomination hearing at the Senate Banking Committee which will see the policymaker grilled on how he is going to attempt to combat the current inflationary pressures in the US economy. In terms of desk views, analysts at BNP Paribas suggest that European equities could stage a rally over the coming months amid bearish positioning and attractive valuations. BNP forecasts the Eurostoxx 50 gaining 10% to 4,700 by the end of June before drifting lower to 4,500 by the end of the year. Preferred sectors include miners, oil & gas, banks, autos and healthcare. Sectors in Europe are mostly firmer with tech top of the pile in the wake of the rally staged after the European close in the Nasdaq. Retail names are also on a firmer footing with Kering (+3.4%) top of the CAC after RBC named the Co. among its preferred stocks in the region and cited it as a “more likely candidate for M&A”. RBC also listed Adidas (+4.1%), Puma (+2.3%), Richemont (+2.1%) and LVMH (+1.5%) as “outperform rated stocks” under its “Key Stock Ideas for 2022”. The travel & leisure sector has been lifted by performance in Flutter Entertainment (+4.1%) and Evolution Gaming (+4.9%) after both companies were upgraded at Citi. Performance in banking names has been subdued by losses in Deutsche Bank (-1.5%) and Commerzbank (-3.3%) after Cerberus sold around 21mln and 25.3mln of shares in both companies respectively.

FX

DXY - The Dollar has lost more of Monday’s recovery momentum as US Treasuries rebound from their fresh lows, risk appetite improves and some technical or psychological levels push the Buck back down towards recent lows. Using the index as a proxy, 96.000 is now capping the upside and support is seen at yesterday’s low (96.754) ahead of last Friday’s base (95.710) and the prior weekly trough (96.653) as the DXY drifts within a 95.947-765 band awaiting tomorrow’s CPI data that could well be pivotal, if not Fed commentary later today via George and chair Powell at this renomination testimony. Note, however, a prepared text for the latter has already been released so it will be the Q&A section of the Senate Banking Committee hearing that will likely be more informative/insightful.

GBP/CHF/EUR/AUD/CAD/NZD - It has turned into a relatively tight race to reap the most from the Greenback’s retreat and top the G10 ranks as Sterling tests major trendline resistance seen around 1.3610-15 to post highs not seen since late 2021, while Eur/Gbp continues to hammer on the door aligning with 1.2000 in Euros per Pound, but looks thwarted indirectly by activity designed at curbing Franc strength via various Eur crosses. Indeed, the Franc is back above 0.9250, but well off best levels against the Euro as the pair pivots 1.0500 where 1.44 bn or so option expiries roll off. Eur/Usd is eyeing 1.1350 again, partly as a result, while the Aussie is approaching 0.7200 with impetus from much stronger than expected final retail sales and internals within a narrower than forecast trade surplus, the Loonie is latching on to a firm bounce in WTI either side of 1.2650 and the Kiwi is hovering above 0.6750 with tailwinds from Aud/Nzd easing back towards 1.0600.

JPY - The Yen looks somewhat caught between stalls following Japan’s long holiday weekend as the risk backdrop is negative for the safe-haven currency, but yields are more supportive along with the technical landscape assuming Usd/Jpy remains below a Fib retracement level at 115.45. From a fundamental perspective, the domestic COVID situation has worsened and data looms in the guise of current accounts and trade balances.

SCANDI/EM - Brent’s revival to circa Usd 82/brl or just above at best is keeping the Nok underpinned after yesterday’s strong Norwegian inflation readings, while the Zar is elevated alongside Gold that is holding comfortably on the Usd 1800/oz handle and over the 200 DMA. Conversely, the Rub appears to be cautious amidst reports from the Russian side that grounds for optimism from talks with the US are few and far between, while the Try has hardly been helped a slightly wider than consensus Turkish current account deficit or the higher price of crude oil.

Australian Retail Sales MM Final (Nov) 7.3% vs. Exp. 3.9% (Prev. 4.9%)

• Australian Trade Balance (AUD)(Nov) 9.42B vs. Exp. 10.6B (Prev. 11.2B)
• Australian Exports MM (Nov) 2% (Prev. -3%)
• Australian Imports MM (Nov) 6% (Prev. -3%)

Notable FX Expiries, NY Cut:

• EUR/USD: 1.1275 (1.23BN), 1.1295-05 (465M), 1.1325-30 (860M), 1.1340-45 (472M), 1.1500 (730M)
• EUR/CHF: 1.0500 (1.436BN)

FIXED

Debt futures have put down some stronger roots to offer more hope of a meaningful revival, but Bunds fell just one tick shy of Monday’s 170.21 Eurex high before waning again and really need to breach 170.23 to turn green shoots into something more substantial. Similarly, Gilts got as far as 123.21 (+30 ticks vs -6 ticks), though couldn’t sustain momentum irrespective of a solid 2026 DMO tap, albeit with greater concession, in contrast to a lacklustre German index-linked sale, and the 10 year T-note topped out at 128-14 with the yield holding above 1.75% pre-NFIB, weekly mortgage apps, Fed speakers and discount rate meeting minutes.

COMMODITIES

Crude prices mounted a recovery in APAC hours that has continued into and exacerbated during the European session taking WTI modestly past yesterday’s peak of USD 79.45/bbl and Brent to almost match its equivalent at USD 82.30/bbl. Fundamentals remain focused on USD/inflation implications, Fed Chair Powell – among other speakers – will be eyed closely for further insight into this; elsewhere, we remain attentive to supply updates and geopolitics. On the supply side, following yesterday’s reports that Libya’s El Sharara has resumed production at 998k BPD the El Feel field (90k BPD) is also reported to be back in action. However, since then the NOC has suspended exports from the Es Sider port, due to bad weather and a lack of storage; typically, loading 300k BPD of crude. While the duration and knock on impact of this suspension is unclear, it is worth noting the NOC says domestic oil output stands at 896k BPD – a figure that is below the resumed output of the El Sharara field. Separately, Reuters sources report that Saudi Aramco has informed multiple APAC purchasers that it will be supplying the entirety of its contractual volumes in February, following Aramco cutting February OSPs to the region to a three-month low in recent sessions. On geopolitics, the morning's press rounds from the Russian Foreign Ministry have not been particularly constructive after the first day of discussions, but nonetheless they to acknowledge that there are many more rounds to go – since then, sources via Ria indicate that the US has agreed to respond in writing to security proposals from Russia next week. Turning to metals, spot gold and silver are contained with the yellow metal continuing to pivot the USD 1800/oz mark and therefore remains in reach of the 21-, 50 & 200-DMAs. Base metals are more inspiring though LME copper lies in familiar parameters and directionally is in-tune with the broader risk tone.

Libya's El Feel oilfield resumes production, according to Mellitah Oil and Gas Company. Subsequently, NOC has suspended exports from the Es Sider port, due to bad weather and a lack of storage - NOC says total domestic oil output is 896k BPD. (Newswires)