• UK PM May leadership challenge submitted by 1922 committee, with results due at 21:00GMT/16:00EST
• US-China trade tensions marginally subside as Trump says telephone negotiations are underway
• Looking ahead, highlights include US CPI & Real Weekly Earnings, Brazilian Interest Rate Decision, US 10yr Auction

ASIA

Asian stocks traded higher across the board with sentiment underpinned as news flow spurred optimism regarding US-China trade relations, including reports that China submitted a proposal for review that would cut tariffs on imports of US autos to 15% from 40%. ASX 200 (+1.4%) and Nikkei 225 (+2.2%) gained from the open with energy and tech the front-runners in Australia, while the Japanese benchmark outperformed as it benefitted from USD/JPY’s slipstream and with the BoJ said to have purchased a record JPY 6tln of ETFs so far this year. Elsewhere, Hang Seng (+1.6%) and Shanghai Comp. (+0.3%) were positive on hopes of a potential tariff cut on US autos and encouraging comments from US President Trump, while news that Huawei’s CFO was released on bail and the recent better than expected lending data from China also added to the optimism. Finally, 10yr JGBs are subdued with demand dampened by the gains in stocks and amid spill-over weakness from T-notes.

PBoC skipped open market operations. (Newswires)
PBoC set CNY mid-point at 6.9064 (Prev. 6.8996)

US President Trump said China is purchasing a tremendous number of soybeans and that trade negotiations are already taking place via telephone. Furthermore, Trump said he would intervene in Huawei CFO case if it would serve national interests and trade talks with China, while he added release of Huawei CFO could be part of a broader trade deal with China. (Newswires)

Canadian judge granted bail to Huawei CFO subject to CAD 10mln guarantee including CAD 7.0mln in cash. The judge also said the CFO must surrender passports and must be subject to electronic monitoring, while the CFO is ordered to reappear in court on February 6th. (Newswires)

US President Trump administration is to condemn China over hacking and economic espionage, while there were separate reports the US State Department is mulling travel advisory for China to caution US citizens following the Huawei CFO arrest. (Washington Post/Newswires)

US House Representatives have introduced a bill that would ban the sale of US goods to Chinese telecom firms who are in violation of US export and sanctions laws, while there were separate reports that US President Trump administration is said to be mulling executive order to make it more difficult for Chinese companies to obtain critical telecom hardware. (Newswires/NYT)

UK/EU/US

Leadership challenge in May has been triggered; the 48 letters have been submitted; ballot will be held between 18.00GMT and 20.00GMT today. Results are to be announced at 21.00GMT. UK PM May said a new leader would have to extend or rescind Article 50, while adding she believes a deal with EU is attainable and within UK’s grasp after meeting with EU leaders yesterday. (Newswires)

Chairman of 1922 committee Brady says that if a leadership contest were to occur, they would want to finish the parliamentary stage before Christmas. (Newswires)

ITV's Peston tweeted that MP George Freeman appears to be saying that PM May is over, but that Tories have to find a way to replace her temporarily without a leadership election. Elsewhere, UK Shadow Brexit Minister Starmer said the opposition Labour party will call a no-confidence vote “before Christmas”. (Twitter)

European Council President Tusk noted he held a "long and frank discussion" with UK PM May ahead of EU summit and that it is clear EU27 wants to help but the question is how, while Austrian Chancellor Kurz told PM May on the phone that the Brexit deal can't be renegotiated. (Twitter/Newswires)

UK officials are reportedly warning EU members that a "no deal" Brexit raises the risk of financial disruption to banks. (Sky News)

US Treasury and USTR reportedly finalized a bilateral agreement with UK. (Newswires)

Italian PM Conte will present European Commission President Juncker a revised budget number; according to a sources at Conte's office. (Newswires)

Italian ruling coalition is not willing to reduce the 2019 deficit/GDP target to below 2.1%; according to La Repubblica. (La Repubblica)

Italian PM Conte and European Commission President Juncker's meeting is going ahead as it stands, according to Italian sources. (Newswires)

Italy's Deputy PM Salvini has denied reports (from La Repubblica) that he may pursue elections in March 2019. (Newswires)

Italian government has agreed on a new fiscal target proposal; according to an Official. (Newswires)

French Parliament to debate no confidence motion tomorrow; according to AFP. (AFP)

US President Trump said it would be foolish for the Fed to hike rates next week and that he is fighting some trade battles which needs accommodation. US President Trump also said he is not concerned about getting impeached as it is hard to impeach someone who hasn't done anything wrong, while he added that payments to women were not campaign contributions and that he relied on his former lawyer Cohen who was supposed to know what to do. (Newswires)

EQUITIES

European equities are higher across the board (Euro Stoxx 50 +1.3%) following the strong performance experienced in Asia overnight after sentiment was underpinned as news flow spurred optimism regarding a US-China trade deal. France’s CAC 40 (+1.6%) outperforms its peers on the back of shares in Kering (+2.0%) amid an upgrade at Deutsche Bank and Pernod Ricard (+3.6%) after upbeat comments from activist investor Elliott on the Co. Meanwhile, Spain’s IBEX 35 (+0.80%) marginally lags peers as the index is weighed on by shares in heavyweight Inditex (-4.0%) following disappointing earnings. Moving on, sectors are experiencing broad-based gains with marginal outperformance in utility names. In terms of notable movers, auto names are performing particularly well (Stoxx 600 Auto & Parts +1.5%) in a continuation of the positive momentum from potential Chinese tariffs cuts on US autos from 40% to 15%. Meanwhile, Dixons Carphone (-8.2%) shares fell in excess of 10% at one point after the company downgraded interim dividend guidance alongside expectations for higher net debt.

FX

GBP

Not just the most volatile major, but displaying considerable resilience (or complacency?) in the face of perhaps the biggest Brexit hurdle in the form of a challenge to UK PM May’s leadership, not to mention all the political uncertainty if she fails to survive. However, Cable has recovered well from new ytd lows circa 1.2478 and almost reached 1.2550 before waning again as a number of high profile Cabinet members voiced public support for the current Conservative head in the run up to tonight’s confidence vote. A hefty 1 bn option expiry at the 1.2500 strike may be exerting a gravitational pull, while Eur/Gbp is pivoting 0.9950, as the single currency continues to weather its own storm via Italian and French budget excesses.

NZD/SEK

In contrast to Sterling’s stellar performance, the Kiwi and Swedish Krona have slipped to the bottom of the G10 ranks, as Nzd/Usd reverses from 0.6900 to within a few pips of 0.6850, regardless of RBNZ Orr’s assertion that the currency has been ‘remarkably’ obedient, and Eur/Sek rebounds sharply from sub-10.3000 to just over 10.3700 at one stage in wake of softer than forecast Swedish inflation data. Note, the Riksbank’s preferred CPIF measure was especially benign and well below the Bank’s own estimate, undermining December hike expectations to around evens.

EUR/AUD/CAD/CHF/JPY

All narrowly mixed vs a generally firmer Greenback (DXY just off a fresh 97.500 recent peak) and the ongoing revival in broad risk sentiment amidst heightened hopes of a tangible improvement in US-China trade relations. Eur/Usd has survived another, deeper test of 1.1300 support where a massive 2.4 bn expiries reside and are perhaps helping to keep the headline pair cushioned against Italian/French deficit issues ahead of Thursday’s ECB policy meeting. Meanwhile, the Aud and Loonie are feeding off the aforementioned improved risk appetite, with the former holding above 0.7200 and latter rebounding a bit further from 1.3400+ lows with the added incentive of rebounding crude prices. The Franc is meandering in a tight range between 0.9950-20 and encircling 1.1250 vs the Eur awaiting the final 2018 SNB Quarterly review tomorrow, while Usd/Jpy is equally restrained within 113.50-30 trading parameters with the topside said to be laden with Japanese offers.

EM

In contrast to the Sek, firmer than expected SA CPI has underpinned the Zar around 14.3100 vs the Dollar, but the Rand may also be drawing momentum from option-related flows alongside bullish technical impulses as 1 bn expiries roll off at the 14.5000 strike today

FIXED INCOME

Gilts are still off worst levels but have printed a new low to trade around the 124.00 handle as more MP’s come out in support of the PM, including key ministers such as Gove, Mourdant and Williamson and the running total of those in support >70 ahead of the no confidence vote results at 9pm.  Meanwhile, Bunds have seen similar price action with the German 10-year settling just below 163.40 after failing to test Monday’s 162.59 high, with German participants keeping a close eye on no-confidence developments and Italian and French counterparts. On that note, BTPs extend their outperformance vs. their EU counterparts (fresh high at 124.37) amidst suggestions the EU will take a softer approach given France’s budget position alongside now refuted suggestions of an early election and PM Conte set to present revised budget numbers to Juncker.  OATs are recovering some composure and almost touched 151.00 after yesterday’s heavy losses and underperformance with the French 10-year trading with gains of over 10 ticks.

Elsewhere, US Treasuries see little action ahead of issuance later in the day in the form of a 10 year auction with US 2s/10s building a solid base above 10bps, with the US also releasing CPI figures.

COMMODITIES 

US API Weekly Crude Stocks (7 Dec) -10.18mln vs. Exp. -3.0mln (Prev. +5.36mln). (Newswires)

WTI (+1.8%) and Brent (+1.7%) trade with firm gains amid the improvement in the risk sentiment as US-Sino trade discussion seem to be on track, with US President Trump expressing optimism via Twitter yesterday. Furthermore, prices may be underpinned in light of last night’s API crude inventories which showed a much wider-than-expected draw of 10.18mln barrels vs. the expected draw of 3.0mln barrels. Traders will be eyeing this afternoon’s weekly DoE inventory release for a fresh catalyst (alongside production numbers) in which crude inventories are expected to decrease by 3.0mln barrels.

In terms of metals, spot gold (+0.1%) remains steady as the dollar index remains within a tight range while copper traded sideways near weekly highs in light of the improvement in risk sentiment. Elsewhere, Shanghai steel snapped a three-day losing streak amid talks of production cuts at the top steelmaking city, Tangshan.