• European equities have kicked the session off with modest losses (Eurostoxx 50 -0.5%) as markets take a breather from yesterday’s “trade truce” inspired gains
• DXY pulling back further from 97.000 to register a fresh post-G20 low of 96.372
• Oil surged on source reports of a 1.3mln BPD minimum cut, before pairing gains after KSA Energy Minister watered down cut expectations
• Looking ahead, highlights include weekly API crude inventories, ECB’s de Guindos, BoE's Vlieghe, Fed’s Williams, and the Brexit deal debate begins at the House of Commons

ASIA

Asian stocks traded mostly negative as the relief rally fizzled out in the region with investors quick to book their recent profits. ASX 200 (-1.0%) and Nikkei 225 (-2.4%) were lower from the open in which a pullback in consumer and energy stocks led the downside in Australia and with Japanese sentiment dampened by a firmer currency. An indecisive tone was seen in the Hang Seng (+0.3%) and Shanghai Comp. (+0.4%) amid a lack of fresh drivers and as participants await the next developments of the US-China trade saga with China reportedly considering possibilities of lowering US auto tariffs. In addition, US Treasury Secretary Mnuchin was said to be hopeful for an agreement but warned tariffs will be implemented if a deal fails to materialize, while China reportedly censored a post by the US Embassy regarding the recent trade developments and tariff ceasefire which some have suggested could be a possible effort to avoid looking weak or that it gave in to US pressure. Finally, 10yr JGBs traded higher amid the risk averse tone and as they tracked the overnight gains in T-notes. This coincided with the US 10yr Treasury yield dropping below its 200DMA for the first time in around a year, while the US 2yr/10yr spread continued to narrow to its flattest in over a decade. Today also saw a 10yr auction from Japan, although there was a muted reaction as the auction bore mixed results.

PBoC skipped open market operations for a net neutral daily position. (Newswires)
PBoC set CNY mid-point at 6.8939 (Prev. 6.9431); strengthened fix by the most since June 2017.

RBA kept the Cash Rate at the record low 1.50% as expected and reiterated that low rates are supporting the economy. The RBA also repeated that progress on inflation and unemployment is expected to be gradual, while it expects GDP to average 3.5% over 2 years. Furthermore, the RBA stated household consumption is a continuing source of uncertainty but commented that terms of trade had been stronger than earlier anticipated. (Newswires)

Australian Current Account Balance SA Q3 -10.7B vs. Exp. -10.2B (Prev. -13.5B, Rev. -12.1B). (Newswires)
Australian Net Exports Contribution Q3 0.4% vs. Exp. 0.2% (Prev. 0.1%)

China are reportedly to step up patent-related violation punishments; according to the National Development and Reform Commission. (Newswires)

UK/EU

MPs are to vote today whether the UK government breached Parliament rules which could result to a suspension of Attorney General Cox or PM May’s de facto Deputy Liddington. (Newswires/Twitter/BBC/Times)

Top EU Court states that Britain can revoke Brexit Article 50 unilaterally. (Newswires)

BoE Governor Carney says GBP underlying price has not factored in a high chance of a disorderly Brexit. (Newswires)

UK BRC Retail Sales YY Nov -0.5% (Prev. 1.3%). (Newswires)

UK Markit/CIPS Cons PMI (Nov) 53.4 vs. Exp. 52.5 (Prev. 53.2)

Italy’s Deputy PMs Di Maio and Salvini are said to be open to a possible 2% deficit. However, Italian press noted that a budget deficit at 2% is not low enough for the EU. EU estimates that Italy needs to cut budgets by around EUR 12bln. Italian Deputy PM Salvini later said the 2% deficit is just a number and has defended the budget, as according to reports in LAZ (Corriere/Messaggero/Stampa)

Italy Junior Economic Minister says an agreement may not be found with the EU regarding the budget, and that the government has already taken into account this possibility adding that the government will do everything possible to avoid disciplinary procedure by the EU over the budget. (Newswires)

EU's Moscovici says talks with Italy on the 2019 budget are intense; adding that Italy is trying to solve the problem, who later said that the EU commission are not disputing pension reform in Italy. (Newswires)

Riksbank's Jansson states that it is too early to suggest whether rates can be lifted in December or February. (Newswires)

White House Economic Advisor Kudlow commented that the 90-day US-China truce will begin January 1st, although the White House later corrected this and stated that the truce began on December 1st. (Newswires)

Fed Chair Powell (Neutral) said he sees long term challenges in otherwise strong economy and added that the Fed has made great progress towards mission goals. (Newswires)

Fed's Kaplan (Non-Voter, Dove) said he is focused on not being pre-determined about the future path of rates, while he added he is paying attention to slowdown in global growth and expects US growth to slow next year. Furthermore, Kaplan said it is very possible that the US economy will look very different by mid-2019 and that he wants to be patient and watch things unfold. (Newswires)

GEOPOLITICAL

US aircraft carrier is reportedly heading to the Persian Gulf as a show of forces following an Iranian ballistic missile test over the prior weekend. (Newswires)

China is ramping up navy patrols in Taiwan Strait as a response to US warships sailing through the region. (SCMP)

EQUITIES

European equities have kicked the session off with modest losses (Eurostoxx 50 -0.5%) as markets take a breather from yesterday’s “trade truce” inspired gains. The CAC 40 (-0.6%) was initially showing some marginal underpeformance relative to its peers in what has been a difficult start to the week for French equities amid domestic protests over the weekend, albeit tensions might show some signs of abating following reports that the French PM is to halt the proposed fuel tax hike. Elsewhere, sectors are relatively mixed thus far with mild outperformance seen in energy names (in-fitting with price action in the complex). Consumer discretionary stocks are a clear underperformer with Volkswagen (-2.2%), Porsche (-2.0%) and BMW (-1.9%) all lower after German car registrations fell 10% Y/Y.

Postal names are softer in Europe following a disappointing update from BPost (-20.4%) which has sent their shares to the foot of the Stoxx 600, dragging Post NL (-5.3%) and Deutsche Post (-1.7%) lower in sympathy. In terms of individual movers and shakers have predominantly been the result of broker moves with Rightmove (+1.8%), JC Decaux (-3.3%), BAE Systems (-4.9%) and Continental (-4.0%) all gaining traction as a result of rating action.

FX

JPY, GBP – Major G10 outperformers with cable breaching yesterday’s high of 1.2825 (vs. intraday lows of 1.2720), absorbing offers around 1.2800-1.2820 on the way to a peak of 1.2839. The Pound may have derived support from another UK PMI beat (construction) having already gained impetus after the ECJ’s senior advisor stated that the UK can revoke Article 50 unilaterally (under certain conditions). The single currency vs. the pound holding just above 0.8900 vs. lows of 0.8890 with stops reported at 0.8950 (though some distance away). To the downside, 0.8861 is reported to be a support level. Elsewhere, the JPY is taking advantage of the ongoing buck decline and a marked downturn in risk sentiment after initial US-China truce euphoria, with USD/JPY taking out the Tenken line at 113.34, a Fib level at 113.17 and the 55DMA at 113.05 to hit a low of 112.75 (ahead of the psychological 112.50 and the 100-DMA at 112.25)

DXY – On the backfoot again with the index retreating further from 97.000 to trip stops at 96.400 and register a fresh post-G20 low of 96.372. This against the backdrop of broad Dollar losses vs. its major counterpart and a sharp retreat in US Treasury yields with the long-end of the curve outperforming.

EUR – Also benefitting from the Greenback’s misfortunes and hopes that Italy vs. EU fiscal friction may be resolved amidst latest reports that PM Conte will deliver another revised 2019 budget draft with deficit circa 2.0%. EUR/USD back above 1.1400 (with 1.234bln option expiries between 1.1400-05) but just stopped short of a key Fib at 1.1424.

NOK,CHF  – Upbeat Norwegian regional network report with the backdrop of rising oil prices has benefitted the Crown with EUR/NOK falling below 9.6500 ahead of a Fib level at 9.6345. Conversely, Swiss CPI was softer than expected tempering the Franc’s safe-haven allure with USD/CHF pivoting 0.9950 and EUR/CHF at the upper end of a 1.1330-1.1345 range.

AUD, NZD – Antipodeans are overall on the front foot , AUD and NZD up around 0.5% vs. the buck. The RBA kept interest rates at 1.5% as expected, while the statement noted that Australia’s terms of trade have been stronger than expected. AUD/USD stopped just shy of 0.7400 (vs. low of 0.7350) while Kiwi tested above 0.6950 vs. buck (vs. low of 0.6925) ahead of the latest NZ GDT auction.

EM –Turkish Lira remains pressured by the ongoing recovery in oil prices (large net importer). USD/TRY trading around 5.30 with concerns that the Central Bank may prematurely loosen policy (aided by the slowdown in CPI) also weighing on investors’ minds. However, the ZAR is the clear EM outperformer amid the latest SA GDP figures showing the country has recovered out of recession, while a rally gold (major producer) is also providing the Rand with impetus. Finally, CNY undergoes another day of strengthening in a continuation from the G20 momentum. USD/CNY trading comfortably below 6.8500 after the PBoC set the strongest Yuan fix since June last year.

FIXED INCOME

Bunds continue to consolidate since the gap higher on the open and failure to break the 162 handle as the post G-20 risk appetite subsides further. The German 10 year benchmark hovers around the 161.80 area and did not really reactive to the increase in EZ PPI after yields declined to 5 month lows of 0.279%. This came as the Italian 10 year future dipped to test the 125.10 level ahead of PM Conte’s latest 2019 budget presentation to see whether the revised draft finally meets EU approval.

Meanwhile, the retreat in Gilts from 122.31, post the ECJ’s opinion piece on the unilateral right to reverse Brexit, has seen the UK 10-year bond break below yesterday’s close of 122.97 to 122.76, with further pressure from an upbeat construction PMI (hot on the heels of Monday's manufacturing beat) and pre-2024 auction concession, which was relatively well received, but did not stop the rot.

Elsewhere, US yields are seeing significant curve flattening after yesterday's inversion at the short end (3s-5s), as 10-year yields retreat through the 3.0% level to ~2.95% ahead of this week’s key events in the form of supply (on the short end), and NFP squeezed into a shortened trading week.

COMMODITIES 

Brent (+2.2%) and WTI (+2.2%) have continued to rise on expectations for a cut at the upcoming OPEC+ meeting, with any cut likely to take into account the reduction to Canadian output which is also supporting oil prices.

Prices came off highs after Saudi Energy Minister Al-Falih stated that it is premature to suggest that OPEC+ will reduce output at the meeting this week, in turn hinting division amongst OPEC members. Initial source reports suggest that OPEC+ are working towards a minimum output cut of 1.3mln BPD from the October levels. However, Russia’s position of a maximum output cut of 150k BPD is the main obstacle to this, as OPEC want a minimum cut of 250-350k BPD. With sources suggest that OPEC may delay cuts if Russia does not agree to a substantial output cut.

Looking ahead we have API data later in the day, with expectations being that crude stocks fell by 2.25mln/bbl for the week; if expectations prove accurate this will be the first crude oil draw since mid-September. Additionally, the weekly EIA release has been pushed back to Thursday at 16:00 GMT, due to the national day of mourning for Former President George H.W. Bush.

Gold hit a session high of USD 1238.83, reaching its highest value since the end of October, as the dollar continues to weaken on a decline in US yields following the positive G20 trade outcomes. Steel futures have hit a 7-month low as prices are pressured by the oversupplied market, this comes after the positive sentiment seen in base metals on Monday from US-China trade developments. Separately, palladium (+1.0%) hit a record high of USD 1221.95 earlier in the session.