• Asian equity markets eventually traded mostly higher but with price action relatively choppy
• Major US indices (S&P 500 -1%, Nasdaq -1.2%) failed to sustain the early reprieve despite yields easing from pandemic highs
• European futures are indicative of a firmer open with the Eurostoxx 50 future higher by 0.3%
• PBoC reduced the 1-year Loan Prime Rate by 10bps and cut the 5-year LPR by 5bps
• DXY resides around the 95.50 mark, AUD outperforms post-jobs data
• Looking ahead, highlights include German PPI, Norges Bank & CBRT rate decisions, EZ CPI (final), ECB Minutes, US IJC, Philadelphia Fed, Existing Home Sales, supply from Spain and France. Earnings from American Airlines and Netflix

CORONAVIRUS UPDATE

WHO committee recommended to not require proof of vaccination against COVID-19 for international travel. (Newswires)

Tokyo confirmed it raised virus alert level to its highest and healthcare alert to the second highest level, while it was also reported that Osaka prefecture in and nearby areas are to seek a quasi emergency. (Newswires/Nikkei)

ASIA

Asian equity markets eventually traded mostly higher but with price action choppy following the flimsy performance in the US where the major indices failed to sustain the early reprieve despite yields easing from pandemic highs. ASX 200 (+0.1%) lacked firm direction as underperformance in financials and tech was offset by strength in miners and after better-than-expected jobs data, while Nikkei 225 (+1.2%) swung between gains and losses due to currency fluctuations and as participants digested encouraging trade data in which the JPY-value of Japanese exports and imports rose to a record high. Hang Seng (+2.5%) and Shanghai Comp. (+0.2%) were kept afloat after further policy easing by the PBoC which reduced the 1-year Loan Prime Rate by 10bps and cut the 5-year LPR by 5bps for the first reduction to the mortgage reference rate since April 2020. This provided a tailwind for Chinese property stocks which were also boosted by reports that China is drafting rules to make it easier for property developers to use pre-sale funds in escrow accounts and even helped China Aoyuan Property recover from the majority of its opening slump that was triggered by its announcement that it will not make payments on remaining notes due this month. Finally, 10yr JGBs rangebound amid the indecisive mood in Japan and lacklustre trade in T-note futures, but with downside also limited with the BoJ present in the market for over JPY 1.3tln of JGBs in 1yr-10yr maturities.

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 6.3485 vs exp. 6.3482 (prev. 6.3624); strongest fix since May 2018.

US President Biden responded that it is uncertain when asked about lifting sanctions on imports from China and suggested that they are not there yet regarding declaring that China is meeting its purchase commitments. (Newswires)

China Q4 Beige Book noted that if China maintains zero COVID policy, services could face extreme pressure on both the supply and demand side with businesses shut and customers confined at home even due to just a single case in their area. (Newswires)

China’s Tencent (700 HK) and TikTok are to be added to the US tech platform antitrust bill. (Politico)

• PBoC 1-Year Loan Prime Rate 3.70% (Prev. 3.80%)
• PBoC 5-Year Loan Prime Rate 4.60% (Prev. 4.65%)
• Japanese Trade Balance Total Yen (Dec) -582.4B vs. Exp. -784.1B (Prev. -955.6B)
• Japanese Exports YY (Dec) 17.5% vs. Exp. 16.0% (Prev. 20.5%)
• Japanese Imports YY (Dec) 41.1% vs. Exp. 42.8% (Prev. 43.8%)

UK/EU

More Tory MPs are reportedly considering switching to Labour following the defection of Bury North MP Christian Wakeford, according to iNews citing party sources. (iNews)

EU and US officials are looking into February 7th to hold a joint Energy Council in Washington, EU’s Borrell and Simson would likely meet with US’ Blinken and Granholm. (Politico)

FX

In FX markets, the DXY continued to fade some its recent gains as yields eased off COVID-era highs but with downside limited by support around the 95.50 level and after the fragile risk appetite stateside, while there was little in terms of fresh macro drivers as markets await next week’s Fed meeting and US data also remained light. EUR/USD mildly benefitted at the buck’s expense but with price action rangebound in the absence of any major catalysts from the bloc. GBP/USD was kept afloat after the recent firm CPI data which rose at its fastest pace in three decades and with comments from BoE Governor Bailey who suggested some aspects of current inflation should be transitory such as energy and supply chains but noted concern about second round effects on wages. On the political front, UK PM Johnson remained defiant and vowed to fight any attempt to oust him, while reports noted further Conservative MPs were considering switching to the opposition after an MP defected to the Labour Party yesterday. USD/JPY mirrored the choppy risk mood with early declines reversed after support held at 114.00 and antipodeans were mixed with outperformance in AUD/USD due to the strong jobs data which was conducted prior to the Omicron surge. In addition, Westpac brought forward its RBA rate hike forecast as it now sees increases of 15bps in August and 25bps in October this year vs prev. call for a hike in February 2023 and Goldman Sachs expects the RBA to end QE in February and hike the Cash Rate in March citing recent unemployment data, further adding to the tailwinds for AUD/NZD which rose to a six-month high.

• Australian Employment (Dec) 64.8k vs. Exp. 43.3k (Prev. 366.1k)
• Australian Unemployment Rate (Dec) 4.2% vs. Exp. 4.5% (Prev. 4.6%)

COMMODITIES

Commodities were rangebound with WTI crude relatively unchanged just below USD 86/bbl after the choppy risk appetite and mixed private sector inventory data which showed a surprise marginal build in headline crude stockpiles but draws for distillate and Cushing. Furthermore, there were recently somewhat bullish forecasts from the IEA which raised global demand estimates by 200k BPD for 2021 and 2022 due to softer COVID restrictions, although the resumption of flow in the Iraq-Turkey pipeline limited the prior day's gains. Gold traded sideways and held to yesterday's gains after it benefitted from a softer greenback, while copper bounced off support near USD 4.50/lb and was helped as risk appetite eventually improved.

US Private Energy Inventory Data (bbls): Crude +1.4mln (exp. -0.9mln), Cushing -1.5mln, Gasoline +3.5mln (exp. +2.6mln), Distillate -1.2mln (exp. -0.9mln). (Newswires)

GEOPOLITICAL

US President Biden said he thinks Russian President Putin does not want a full-blown war but thinks Putin will test the West. Furthermore, Biden added that Putin has never seen sanctions like the ones he has promised, while he added that Ukraine joining NATO in the new term is not likely. (Newswires)

US senior administration official said no option has been taken off the table in terms of sanctions on Russia and the US is prepared to look at sanctions on the largest financial institutions in Russia if there is a Ukraine invasion. Furthermore, the official stated that any move by Russian military to acquire land in Ukraine will merit a severe economic response and the White House also warned that if any Russian military move across the Ukrainian border, it will be met with a swift, severe and united response from US and its allies, while it added that any Russian aggression short of military action will be met with a decisive, reciprocal and united response. (Newswires)

Chinese military said a US warship entered waters near the Paracel Islands without permission, while Chinese forces followed the US ship and warned it to leave. Furthermore, China's military demanded that the US immediately stop such provocations or it will bear serious consequences of unforeseen events. (Newswires)

North Korea's Politburo meeting on Wednesday which was presided over by leader Kim, called for reconsidering trust building measures due to US hostile policy and ordered to examine a restart of all temporarily suspended activities. (Newswires)

US

Treasuries saw bull-flattening on Wednesday amid a flurry of profitable short-covering and a solid 20yr auction. Futures volumes in line with 5- and 10-day averages, but stronger than 20-day. At settlement, 2s -1.5bps at 1.025%, 3s -3.2bps at 1.320%, 5s -3.6bps at 1.613%, 7s -3.7bps at 1.783%, 10s -3.7bps at 1.831%, 20s -5.2bps at 2.203%, 30s -4.3bps at 2.143%. T-Notes saw fresh lows of 127-02 (cash 10s eclipsed 1.90%) on the back of weakness out of the Gilt complex after the hot UK inflation print, but failed to reach the pivotal 127-00 figure where a large number of puts are open. There was also a lot of attention on German Bund yields crossing into positive territory. Treasuries then gradually recovered into the NY handover, before building more momentum into the NYSE open. A strong Housing Starts & Building Permits print, alongside hot Canadian inflation, saw some fleeting weakness in Treasuries before better bidding resumed. IFR noted the drop in yields for 5s and 10s beneath 1.636% and 1.85% triggered algo buy programmes, which was working against dealer 20yr auction prepping. The solid 20yr offering saw a further lift to session highs of 127-23+ for T-Notes, with cash 10s making lows of 1.82%; on the curve, unsurprisingly, the 20yr saw the most strength, reducing its inversion somewhat against the 30yr. Participants now look to next week's 2s, 5s, and 7s auction with the Treasury announcement due Thursday. T-note (H2) futures settle 9+ ticks higher at 127-21+.

US President Biden said the Fed has the critical job of making sure elevated prices do not become entrenched and that it is appropriate for Fed to recalibrate support for the economy, while he called on Congress to confirm Fed nominees without delay. (Newswires)

US Senate Democrats failed to overcome the GOP blocking of the voting rights bill and failed to get enough votes to change the filibuster rule to advance voting rights bill after opposition from Senators Manchin and Sinema. (Newswires)

US and Britain agreed to launch talks on the steel and aluminium tariff dispute in which the talks will address global excess steel and aluminium capacity that is driven largely by China, according to a statement. (Newswires)