• Equities remain pressured in a continuation of the yield-inspired downside seen in APAC hours as the German 10yr yield nears 0.00%
• Overnight, the US yield briefly breached 1.85% but has since pulled back modestly though equities remain waylaid with NQ, -2.0%, continuing to underperform
• Oil remains elevated on supply-side factors while the DXY is firmer but yet to test 95.50 with peers modestly pressured
• BoJ maintained policy settings as expected and reaffirmed its dovish stance
• PBoC Vice Governor says the LPR will reflect changes in market rates, RRR can be used still, based on macro requirements
• Looking ahead, highlights include earnings from Goldman Sachs & ECB's Villeroy

US HOLIDAY WRAP

US stocks futures have done very little, with slight NDX underperformance, while Russell 2k is a mild outperformer. Treasury futures have sold off, but all the action was overnight, with cash 10s indicated to be at a new post-COVID yield high (>1.80%) if the levels hold when markets reopen Tuesday. Oil prices were firmer, with some added geopolitical risk premium amid terrorist attacks in UAE, albeit there was no reported impact on energy production, but several fuel tankers were hit. A flat DXY could have also prevented commodity weakness, as the index failed to extend its ground above 95.00. CAD strengthened amid the oil gains, although didn't seem to react too much to the Q4 BoC Business Outlook Survey which hit a record high indicator while firms continued to stress familiar themes of inflation concerns, labour shortages, and supply bottlenecks, although note the survey was conducted before the rapid spread of Omicron. China was busy as the PBoC made its first cut to the MLF since 2020, with the 10bps cut larger than some had forecasted considering the PBoC only reduced the 1-year Loan Prime Rate by 5bps in December; China also reported above-forecast activity data. Russian assets saw volatility after Handelsblatt reported the EU and US are moving away from excluding Russia from the SWIFT payments system but instead are preparing targeted economic penalties against Russian banks.

CORONAVIRUS UPDATE

Japan is to suspend vaccine and test program due to Omicron and is reportedly eyeing three-week quasi-state of emergencies for Tokyo and other areas. It was also reported that Tokyo is considering COVID restrictions on alcohol and opening hours, while Japanese Chief Cabinet Secretary Matsuno later confirmed that Tokyo and nine other areas requested COVID-19 measures. (Newswires/NHK)

• Tokyo reportedly plans to raise its COVID warning level by one notch, according to TV Asahi
• Japanese PM Kishida says Japan wants to impose quasi-emergency on some regions from Jan 21st to Feb 13th; follows reports of a record daily figure for Japan.

China announced it will not sell Beijing Winter Olympics tickets to the general public and instead will only have selected spectators amid the COVID-19 outbreak, while other reports also noted that Beijing reported another locally-transmitted Omicron case. (Newswires)

ASIA

Asia-Pac stocks traded mixed with early optimism in the region soured by a resumption of the surge in US yields as trade got underway from the US holiday. US equity futures resumed trade flat but thereafter experienced pressure with the NQ (-1.8%) the laggard as US yields surged, with the 10yr cash yield briefly topping 1.85%. European equity futures were also softer overnight but to a lesser extent. In APAC, the ASX 200 (-0.1%) was initially kept afloat by strength in tech and the mining sectors with the latter unfazed by Rio Tinto’s weaker quarterly iron production and shipment numbers as the mining heavyweight’s FY22 guidance was relatively in line with forecasts, although the gains were later faded amid losses in the top-weighted financials sector and a rise in US yields to their highest in two years. The Nikkei 225 (-0.3%) benefitted early on from the recent JPY weakness and after the BoJ policy announcement in which it maintained policy settings as expected and reaffirmed its dovish stance. The central bank reiterated that it will take more action without hesitation if needed and that it expects rates to remain at current or lower levels, which was at a contrast to a prior source report that suggested debate among policymakers on how soon a rate increase can be signalled, although the Japanese benchmark later slipped into the red as the spotlight turned to the higher US yields. The Hang Seng (-0.4%) and Shanghai Comp. (+0.8%) were mixed with outperformance in the mainland following the PBoC’s liquidity efforts and with many anticipating further policy action from China. This helped the mainland shrug off the early indecision brought on by ongoing developer headwinds and virus concerns that have prompted China’s decision to refrain from selling Beijing Winter Olympics tickets to the general public amid the COVID-19 outbreak. Finally, 10yr JGBs were initially kept afloat with mild support heading into the BoJ policy announcement where the central bank maintained it policy settings and reiterated its intentions to sustain powerful monetary easing, although JGBs then retreated in tandem with the pressure in T-note futures as US yields resumed their advances to the highest levels since January 2020 which saw yields in the belly up by around 10bps and the 10yr yield briefly rose above 1.85%.

• PBoC injected CNY 100bln via 7-day reverse repos with the rate at 2.10% for a CNY 90bln net injection. (Newswires)
• PBoC set USD/CNY mid-point at 6.3521 vs exp. 6.3522 (prev. 6.3599)

China NDRC official said the challenges facing China's economy are not small and trade also faces large uncertainties, while sporadic COVID-19 outbreaks directly weigh on consumption and investment growth is constrained. Furthermore, the official stated that small firms face increasing difficulties and market confidence fluctuates but noted China still has relatively large room for macro policies and more policy tools in reserve. (Newswires)

PBoC Vice Governor says the Loan Prime Rates (LPR) will reflect changes in market rates; will actively cope with policy adjustments from developed countries, the room for further RRR reductions decreases, though there is still capacity. RRR can be used still, based on macro requirements. (Newswires)

BoJ kept monetary policy settings unchanged, as expected, in which it held rates at -0.10% and the 10yr JGB yield target at 0% with the YCC decision made by 8-1 vote as Kataoka dissented. BoJ stated that it expects rates to remain at current or lower levels and that it will take more action without hesitation if needed, while it noted that risks to the price outlook are roughly balanced and risks to economic activity are skewed to the downside but stated that Japan's economic pick-up is becoming clearer and the economy is likely to recover. Furthermore, it decided to extend loan disbursements under its fund-provision scheme by one year to stimulate bank lending, while it lowered its FY21 Real GDP forecast to 2.8% from 3.4% but raised FY22 estimates for Real GDP to 3.8% from 2.9% and for Core CPI to 1.1% from 0.9%. (Newswires)

• Governor Kuroda said not considering at all rate hikes or tweaks to the current policy easing.

Japan keeps the overall economic assessment unchanged, adding COVID to downside risks given Omicron. Lifts view on production, given a rebound in autos and related sectors. (Newswires)

UK/EU

UK PM Johnson's former top aide Cummings claims the PM lied to Parliament as he was warned about holding a drinks party in the No 10 garden during lockdown. (Twitter/BBC)

Eurogroup President Donohoe said higher inflation levels will persist longer than previously anticipated but believes inflation will ease this year and stated that efforts to support the economy during the pandemic were adequate. (Newswires)

UK ILO Unemployment Rate (Nov) 4.1% vs. Exp. 4.2% (Prev. 4.2%); Claimant Count Unemployment Change (Dec) -43.3k (Prev. -49.8k)

• Average Week Earnings 3M YY (Nov) 4.2% vs. Exp. 4.2% (Prev. 4.9%); Ex-Bonus (Nov) 3.8% vs. Exp. 3.8% (Prev. 4.3%)

German ZEW Economic Sentiment (Jan) 51.7 vs. Exp. 32.0 (Prev. 29.9); Current Conditions (Jan) -10.2 vs. Exp. -8.5 (Prev. -7.4)

• Economic outlook has improved considerably since the start of 2022, positive economic expectations include consumer-related and export-orientated sectors, which comprise a large part of the domestic economy
• EU ZEW Survey Expectations (Jan) 49.4 (Prev. 26.8)

GEOPOLITICAL

Yemen's Houthis said five ballistic missiles and numerous drones were used in the attack on Abu Dhabi and Dubai airports, as well as an oil refinery and other sensitive targets in UAE. Furthermore, the Houthi military warned of further attacks on more important sites in the UAE and said that a Saudi-led coalition strike on Yemen's Sanaa killed 12 people including women and children, while there were also comments from the UAE Foreign Ministry that they reserve the right to respond to the Houthi "terrorist" attack in Abu Dhabi. (Newswires)

UK Minister of Defence Wallace invited his Russian counterpart to visit London in the next few weeks and said the UK is supplying Ukraine with light, anti-armour defensive weapon systems for self-defence given Russia's latest behaviour. (Newswires)

North Korea said that it tested tactical guided missiles on Monday and it was separately reported that North Korea was said to be using Russian satellite navigation, system for its missile tests. (KCNA/SCMP)

Russian Deputy Defense Minister is to move forces to Belarus for drills by February 9th; additionally, Belarus' defence ministry says Belarus-Russian drills are to be held until February 20th. Subsequently, Russia and Belarus do not rule out a situation in which their full military capacity is needed, according to Ifax. (Newswires)

Russia's Kremlin says that President Putin will brief Chinese President Xi on talks between Russia and NATO when he travels to Beijing in February. (Newswires)

EQUITIES

Major European bourses are firmly in negative territory (Euro Stoxx 50 -1.5%; Stoxx 600 -1.2%) as sentiment was hit amid surging bond yields as US cash bonds resumed trade overnight. APAC saw somewhat of a mixed closed with Shanghai benefitting from the prospect of further policy loosening after commentary from the PBoC, who also intimated that the divergence with some Western central banks is manageable. US equity futures have extended their APAC losses as volumes pick up and yields remain at high – with the NQ (-2.0%) the hardest hit. On that note, Deutsche Bank's January survey showed 49% of respondents believe US tech stocks are in a bubble, 39% disagree, 12% do not know, whilst the BofA January survey suggested investors cut net overweight positions in the Tech sector to their lowest since December 2008. Back in Europe, EUR-bourses see relatively broad-based losses and overlooked a sizeable rise in the German ZEW Economic Sentiment (51.7 vs exp. 32.0) – which indicated the economic outlook has improved considerably since the start of 2022. Meanwhile, the UK’s FTSE 100 (-0.9%) initially saw some losses cushioned by oil majors – which remains the outperforming sector despite trimming earlier gains. Broader European sectors are in the red across the board with some defensives towards the top of the bunch, while the other side of the spectrum sees Tech and Travel & Leisure as the marked laggards, with the former under heavy pressure from rising yields, with the German 10yr cash yields eyeing positive territory. The latter meanwhile is weighed on more by its Leisure subsector as sector-heavyweight Evolution Gaming (-4.8%) sits towards the foot of the Stoxx 600. The auto sector is also under pressure following lacklustre EU27 car registrations, whilst Toyota also cut its output forecast amid the chip shortage and as its auto plant in Tianjin remains suspended following the regional COVID outbreak. In terms of individual movers, Hugo Boss (-0.3%) conforms to the regional losses despite seeing an initial spike higher at the open following encouraging earnings.

US airline CEOs expressed alarm in a letter to the White House regarding the impending 5G service that will begin on Wednesday in which they suggested that it will result in major flight disruptions and said that immediate intervention is needed, while it was also reported that key congressional Democrats support airlines' request to delay some 5G service set for Wednesday amid concern that the new technology near airports could interfere with critical airplane equipment such as radio altimeters. (Newswires)

US is reportedly examining Alibaba's (BABA) cloud unit, to determine if it poses a risk to US national security, according to Reuters sources. (Newswires)

FX

DXY - Some respite for the Greenback after its marked reversal from early 2022 peaks (index at 96.422 on January 4th), and the latest ratchet higher in US Treasury yields is providing impetus even though other global bonds are tracking the moves amidst more upside in oil prices that is stoking inflation pressures and prompting further reflation trades. The DXY is trying to form a firmer base above 95.000 within a 95.126-95.454 range in the face of heightened risk aversion that is boosting demand for safer havens and crimping commodity related gains for currencies within and beyond the basket. Ahead, only NY Fed manufacturing and the NAHB housing market index on a relatively quiet agenda after the long MLK holiday weekend.

JPY - The Yen has recovered pretty well from overnight lows posted against the Dollar following a still dovishly positioned BoJ and subsequent comments from Governor Kuroda underlining that policy stance with little inclination to change tack anytime soon, irrespective of source reports claiming the contrary. Indeed, Usd/Jpy is back down around 114.60 having popped above 115.00 and a Fib retracement level at 114.92 that could be pivotal on a closing basis from a technical perspective rather than pure risk-off/on dynamics.

CAD/EUR/GBP/CHF - All softer vs their US rival to varying degrees, as the Loonie continues to derive a degree of traction/underlying support from WTI extending to Usd 85.74/brl at one stage and now awaiting Canadian CPI for further direction hot on the heels of yesterday’s broadly upbeat BoC business outlook survey. Usd/Cad is flattish between 1.2486-1.2534 parameters, while the Euro has lost grip of the 1.1400 handle, Sterling is back below 1.3650 and the Franc is straddling 0.9150 in wake of a rather mixed German ZEW survey, solid UK jobs data on balance and a slowdown in Swiss producer/import prices.

AUD/NZD - The Aussie and Kiwi have both faded above round numbers that have acted as support and resistance of late, at 0.7200 and 0.6800 respectively, but the former is holding up a tad better given a modest bounce in the Aud/Nzd cross in the low 1.0600 zone after a deterioration in NZIER confidence and decline in cap u. Moreover, Aud/Usd may glean impetus from decent option expiry interest between 0.7190-0.7200 (1.065 bn).

SCANDI/EM - Not much protection for the Nok from Brent’s exertions that lifted the crude benchmark through Usd 88/brl at best, as the downturn in sentiment weighs heavily and also also keeps the Sek depressed amidst more Riksbank remarks reiterating that rising inflation is mainly due to energy prices and is not expected to persist too long. Conversely, the Cnh and Cny are still outperforming or staying on an even keel amidst supportive physical and verbal PBoC factors via midpoint fixes, a liquidity injection and raft of commentary - see posts on the Headline Feed from 7.09GMT-8.04GMT for details.

Notable FX Expiries, NY Cut:

• AUD/USD: 0.7160-65 (320M), 0.7190-00 (1.065BN)

Turkish President Erdogan says they are to lower rates depending on conditions; exchange rates and interest rate to fall gradually. (Newswires)

Britain has released plans for the regulation of crypto assets; proposes to remove refence to blockchain from the definition of crypto assets; Decentralised Finance (DeFi) may be in scope of regulation, but will need to look on a case-by-case basis. (Newswires)

FIXED

Bonds remain at the mercy of sellers, but Bunds seem to have been given a stay of execution as they stage another recovery rally from just a single tick above a major downside chart level that chimes with a flat 10 year German yield. Similarly, Gilts have pared some declines from a deeper 122.77 Liffe low (-26 ticks on the day) and US Treasuries are hovering off worst levels awaiting the return of cash markets from Monday’s MLK Day break to see whether bears pounce on the latest rout or decide that levels are now too extreme before attention turns to Empire State and NAHB surveys. For the record, Germany’s Bobl auction was somewhat tepid, but the DMO received decent demand for its 2029 offering.

COMMODITIES

WTI and Brent front month futures have pulled back from overnight highs but remain at elevated levels with WTI Feb around USD 85/bbl (83.50-85.74 range) and Brent March north of USD 87/bbl (86.44-88.13 range). Several factors are in play for the complex from both sides of the equations. Geopolitical risk premium continues to be woven into prices as tensions remain at highs between NATO/Ukraine and Russia, adding to that the middle eastern developments between the UAE/Saudi and Houthis. Further on the supply side, the under-production from several OPEC members continues to underpin prices. On the demand side, the reopening of economies in the West provides the complex with bullish omens, albeit the East remains cautious – with China adhering to its zero-COVID policy and Tokyo reportedly planning to raise its COVID warning level by one notch, according to TV Asahi. Meanwhile, Goldman Sachs upped its forecast and expected oil hitting USD 100/bbl in H2 2021 amid a lower-than-expected hit to demand from Omicron. The bank sees USD 90/bbl in Q1 2022 and USD 95/bbl averaging in Q2 this year. Elsewhere, spot gold is under pressure from the rising Buck and yield, with the yellow metal in close proximity to its 21 DMA (1,809), 50 DMA (1,806) and 200 DMA (1,803). LME copper has succumbed to the risk aversion and currently trades around session lows but north of USD 9,500/t.

UAE’s ADNOC stated that it activated necessary business continuity plans to ensure reliable and uninterrupted supply of products to local and international customers following the incident at Mussafah Fuel Depot in Abu Dhabi. (Newswires)

Indonesia has allowed 48 coal ships to depart, according to Reuters citing a trade ministry official. (Newswires)

LME has stepped up monitoring of the nickel market due to supply tightness. (Newswires)