• Asian stocks followed suit to the losses on Wall St where all major indices declined, led by tech and growth; Nasdaq -2.6%
• European futures are indicative of a softer open with the Mar'22 Eurostoxx 50 future lower by 0.5%
• An explosion in Turkey forced the shutdown of the Iraq-Turkey crude oil pipeline which is Iraq’s largest crude oil export line
• Conservative MPs are reportedly confident they have enough votes to trigger a confidence vote in PM Johnson
• The DXY remains above 95.50 with NZD the best performer in the G10 space following hawkish forecasts from ANZ
• Looking ahead, highlights include UK & Canadian CPI, IEA OMR, US Building Permits, Housing Starts, supply from Germany & the US. Earnings from Bank of America, MS, UnitedHealth

CORONAVIRUS UPDATE

UK health officials are preparing to begin charging for free COVID-19 tests at the end of June, while it was separately reported that PM Johnson is to announce the lifting of 'Plan B' COVID restrictions on Wednesday with the Cabinet to agree to end working from home and COVID restrictions as the PM faces a plot from rebel MPs. (Newswires/Daily Telegraph)

ASIA

Asian stocks followed suit to the losses on Wall St where all major indices declined led by tech and growth as US yields climbed to two-year highs and with financials also hit following earning releases in which Goldman Sachs and Charles Schwab both missed on their bottom lines. ASX 200 (-1.0%) traded lower in which tech mirrored the underperformance of the sector stateside as Nasdaq 100 futures dipped into correction territory after shedding 10% from its November peak and with BHP failing to benefit from an increase in its quarterly iron ore and petroleum output as the mining giant also reported a decline in coal production and warned of short-term disruptions from next month’s proposed easing of Western Australia border restrictions. However, the energy sector was buoyed by continued advances in oil prices due to the geopolitical risk premium and after an explosion in Turkey forced the shutdown of the Iraq-Turkey crude oil pipeline which is Iraq’s largest crude oil export line. Nikkei 225 (-3.1%) was heavily pressured by recent currency strength and with Japan set for tighter COVID-19 restrictions in key areas including Tokyo, while Toyota and Sony were the notable laggards after the automaker flagged a miss to its output targets due to chip shortages and with Sony impacted by news that rival Microsoft is to acquire video game publisher Activision. Hang Seng (-0.7%) and Shanghai Comp. (-0.7%) were choppy and initially fared better than their regional peers after the PBoC continued with its liquidity efforts and recently hinted of more easing, but with upside restricted amid reports of further scrutiny by the US on Chinese businesses including an examination into Alibaba's cloud unit to determine if it poses a risk to US national security. Finally, 10yr JGBs were kept afloat amid the broad risk aversion in Tokyo although gains in JGBs were gradual as T-note futures remained pressured by a further rise in yields and following slightly weaker demand at the enhanced liquidity auction for 2yr-20yr JGBs.

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 6.3624 vs exp. 6.3606 (prev. 6.3521)

Two US lawmakers are urging the federal government to ensure state governments are not procuring telecommunications equipment from Chinese companies deemed a security risk. (Axios)

China local governments released their economic development plans for this year in which most set targets of above 6%. (Securities Times)

UK/EU

A senior Conservative backbencher said they are confident of getting to 54 letters Wednesday to try and oust the PM, according to ITV's Paul Brand. (Twitter) This comes after over 20 Conservative MPs who were elected in 2019 met yesterday to discuss concerns over Johnson's premiership. (Times) If 54 letters are sent into the 1922 Committee, this will trigger a confidence vote against the PM. If the vote is unsuccessful, no new vote can be triggered for 12 months

US and UK are to announce the intent to launch formal talks on steel and aluminium tariffs with the announcement to be made on Wednesday as part of virtual meeting between US Commerce Secretary Raimondo and UK Trade Secretary Trevelyan, according to sources. (Newswires)

UK government is facing increasing pressure for the FCA to strengthen it policing of rules that restrict banks from charging higher borrowing costs than advertised. (FT)

Germany's Bundesbank reportedly warned German lenders of becoming too complacent about risks of borrower defaults and noted that credit risks have been underestimated amid surging house prices. (FT)

ECB's Villeroy said French inflation should fall progressively to less than 2% by year-end and suggested to have no doubt in their will to adapt monetary policy faster if inflation proves more persistent. (Newswires)

Former Italian PM Berlusconi is considering withdrawing from the race to become President ahead of the election on January 24th with Berlusconi reportedly set to fall short of the necessary number of votes for victory. (Newswires)

FX

In FX markets, the DXY held on to its gains on the back of the recent upside in US yields which rose to two-year highs amid resurging expectations the Fed could become more aggressive in its upcoming rate hike cycle, which participants will be eyeing signals for at next week’s FOMC meeting. The surge in US yields has been the main driver in the FX space so far this week and the risk aversion also provided a tailwind for the USD. EUR/USD was pressured and slipped firmly beneath the 1.1400 handle owing to the mighty dollar and overall subdued macro climate, while there were also comments from ECB’s Villeroy that French inflation should fall progressively to less than 2% by year-end and suggested to have no doubt in their will to adapt monetary policy faster if inflation proves more persistent. GBP/USD softened and briefly gave up the 1.3600 status with the currency not helped by overhang from the ongoing political uncertainty with a senior Tory backbencher said to be confident of getting to 54 no-confidence letters to try and oust PM Johnson. USD/JPY and JPY-crosses retreated after the downbeat mood spurred haven currency inflows and prompted a reversal of yesterday’s reaction to the dovish BoJ affirmation, while antipodeans were uneventful due to uninspired risk tone and following weaker Australian Westpac Consumer Sentiment data although NZD/USD was mildly supported amid hawkish forecasts by ANZ Bank for the RBNZ to lift the OCR to 3% by April 2023 which implies a hike at every meeting till then if the central bank were to move in 25bps increments.

• Australian Westpac Consumer Sentiment Index (Jan) 102.2 (Prev. 104.3)
• Australian Consumer Sentiment M/M (Jan) -2.0% (Prev. -1.0%)

COMMODITIES

Oil extended on its rally which saw Brent crude and WTI crude futures test the USD 89/bbl and USD 87/bbl, respectively, despite the risk averse mood and firmer greenback, as prices remained underpinned by the geopolitical risk premium amid NATO-Russian tensions concerning Ukraine and recent attack in the UAE by Yemeni Houthis. The upside for crude was also fuelled after an explosion in Turkey forced the shutdown of the Kirkuk-Ceyhan pipeline which is Iraq's largest crude oil export line, while the latest energy rally has garnered attention from the US with the White House stating that they still have tools to address price increases and will engage OPEC as appropriate. Gold was rangebound with the precious metal contained by the firmer greenback and rising yields, while copper benefitted alongside early strength in Dalian iron prices as Chinese commodities trade got underway but then faded some of the gains amid the risk aversion.

White House spokesperson said they still have tools on the table to address increases in oil prices and will engage OPEC as appropriate, while it was also reported that the DoE approved a fifth exchange of 400k bbls of crude oil for release to Atlantic Trading and Marketing from the SPR. (Newswires)

US total shale regions oil production for February is seen up 105k BPD at 8.54mln BPD (prev. 91k BPD rise in Jan), according to EIA. (Newswires)

Turkish state pipeline operator Botas announced it cut oil flow at the Kirkuk-Ceyhan oil pipeline due to an explosion with the cause of the explosion unknown. (Newswires)

GEOPOLITICAL

US official said Secretary of State Blinken will urge Russia to take immediate steps to de-escalate the Ukraine situation at his meeting with Russia's Foreign Minister Lavrov in Geneva on Friday. It was added that they have seen the opposite of de-escalation from Russia including during and after this month's diplomatic talks in which Russian escalation included moving forces into Belarus over the weekend. Furthermore, the US official said Russia could launch an attack on Ukraine at any point, possibly between January and February, while the US is committed to peace but is preparing for possible conflict and will continue to increase support for Kyiv if Russia continues to press ahead in Ukraine. (Newswires)

US is mulling sanctions for at least four pro-Russian separatists in Ukraine which could be announced as soon as Thursday, while there were also comments from the White House Press Secretary that stopping Nord Stream 2 pipeline is a credible piece they hold over Russia and said no option is off the table when asked about Russia being removed from the SWIFT system. (Newswires)

US State Department official said there can be no doubt about Belarus' role as an increasingly destabilizing actor in the region and that Russian deployment of troops in Belarus raises concerns that they could be used to attack Ukraine, while the US questions how much control Belarus leader Lukashenko still maintains. (Newswires)

Senior E3 source said negotiations are still moving too slowly regarding Iran talks and time is running out with key nuclear and sanctions lifting issues still unresolved, while the source added that they need to move to the end game or they may not be able to reach a deal within a timeframe that delivers the necessary non-proliferation benefits. (WSJ)

US

Treasuries made new yield highs amid the return of US participants; belly leads weakness as Fed hawkishness remains the key theme. At settlement, 2s +7.6bps at 1.043%, 3s +9.1bps at 1.355%, 5s +10.5bps at 1.651%, 7s +10.9bps at 1.825%, 10s +10.0bps at 1.872%, 20s +8.4bps at 2.259%, 30s +7.3bps at 2.188%. 5yr TIPS +14.5bps at -1.183%, 10yr TIPS +14.4bps at -0.623%, 30yr TIPS +11.4bps at -0.056%. T-Notes hit interim lows of 127-15 at the time, with cash 10s finding interim highs at 1.855%, before paring back into the European session. But, a sustained bid off the lows failed to carry into the NY session and better selling emerged not long after to new lows. IFR wrote, "the belly led the move lower on MBS-related selling with the Fed’s cancelation of the 4- to 7-year buy-back operation today (postponed until tomorrow) added to the intermediate selloff". With little tier 1 data this week and the FOMC blackout, the price action in Treasuries is becoming a bit of a story itself, with the market continuing to price in a hawkish policy outlook, further exhibited by the continued move higher in real yields, which drove the day's move higher across the rates space; the 30yr TIPS yield is approaching positive territory for the first time in a year. Otherwise, participants have their eyes on Wednesday's 20yr auction after the average results seen at last week's 10yr and 30yr offerings. T-note (H2) futures settled 26 ticks lower at 127-12.

Emirates is to suspend flights to several destinations in the US from Wednesday as a result of plans to deploy 5G mobile network services, while major foreign airlines in India and Japan also cancelled some US flights amid 5G wireless deployment plan set to start on Wednesday. Furthermore, Korean Air (003490 KS) said that Boeing (BA) 777 and 747-8 planes are affected by the 5G rollout in US and it has switched to other models on routes to US airports of concern to avoid cancellations and Cathay Pacific (293 HK) also said it is deploying different aircraft when flying to the US due to 5G issue and it sees no impact to passenger flights (Newswires/Twitter)

Apple (AAPL) sent a letter criticising antitrust bills to lawmakers and tells Senate that big tech bills will harm iPhone users privacy and opposes measures that would allow sideloading of apps, while it was also reported that Apple retook the number one spot in the global smartphone market in Q4 '21 with 22% amid to strong demand for the iPhone 13 which comes as global smartphone shipments grapple with supply chain concerns, via TechCrunch citing Canalys. (Newswires/TechCrunch)