• Dollar is trading cautiously ahead of FOMC with comparative outperformance seen in G10 counterparts.
• EU & Asian equities begin the week cautiously, amidst comments that the US are raising concerns over China with the WTO
• Looking ahead the highlight is NY Fed Manufacturing

ASIA

Asian equity markets began the week somewhat cautiously following the downbeat lead from Wall St. in which the three major bourses closed lower by around 2% each. The Dow plunged almost 500 points to its lowest level since early May, led lower by shares in Apple and Johnson & Johnson, while the S&P and Nasdaq were dragged down by tech names as the sector lagged. ASX 200 (+1.0%) was buoyed by material and mining names after MOFCOM confirmed the suspension of retaliatory tariffs on US vehicles and auto parts, while Nikkei 225 (+0.7%) initially outperformed on currency effect as the export-heavy index benefitted from the weaker JPY. Elsewhere, Hang Seng (Unch) and Shanghai Comp. (+0.1%) traded choppy and swung between gains and losses in which the indices initially dipped in the red as industrial names were again pressured in a continuation from the weak IP data last week, housing names then provided the bourses with some support amid an improvement in house prices data. Finally, 10yr JGB yields touched over 5-month lows as fears of slower global growth boosted demand for the debt.

Chinese China House Prices YY Nov 9.3% (Prev. 8.6%)

PBoC set CNY mid-point at 6.8908 (Prev. 6.8750) (Newswires)
PBoC injected CNY 160bln via 7-day reverse repos

PBoC said it will guide reasonable growth of credit and social financing and are to further improve monetary policy transmission channels. (Newswires)

PBoC Adviser Songchen said China should defend the USD/CNY at the 7.00 level. (Newswires)

BoJ Tankan inflation survey shows Japanese firms expect inflation to rise 0.9% a year from now (vs. Prev. 0.8%)

TRADE

US states that they are raising serious concerns at the WTO with the "fundamental challenge posed by China's state-led, mercantilist approach to the economy and trade", according to the US Trade Ambassador. Adding that China's approach is invoking serious harm on the US and other members of the WTO, their workers and companies, which is incompatible with the WTO. (Newswires)

Chinese Trade Envoy tells WTO that US measures on steel and aluminium "allows protectionism" to exist under the suggestion of "national security. Calling on the US to work on WTO reform and ‘equal-grounds’ consultation. (Newswires)

UK/EU

PM May’s Deputy David Lidington and Number 10 Chief of Staff Gavin Barwell dismissed reports from The Times that the two senior ministers were preparing for a second referendum behind PM May's back. (Newswires)

PM May is being urged to allow Tory MPs a free vote in a series of ballots over different options regarding Brexit's next steps, including a second referendum. PM May will meet her Cabinet on Tuesday to outline options. (The Guardian)

UK Attorney General Cox has reportedly told Cabinet Ministers that PM May must be “removed” after Brexit (March 29th), so others can renegotiate her deal; according The Telegraph citing sources. (The Telegraph) Senior Tories who had showed loyalty to PM May as she faced a no-confidence vote were secretly organising leadership bids to replace her. (The Times) UK PM May is set to be put under more pressure on Tuesday to step up preparations for leaving the EU without a deal, with 11 Cabinet ministers understood to be in favour of a "managed" no-deal. (Telegraph)

A row has reportedly erupted in Labour Leader Corbyn's top team over the timing to push a vote of no confidence in PM May's government. Labour sources declined to rule out tabling a no-confidence motion this week, but the party is said to be more likely to strike after the meaningful vote in January. (The Independent) Labour activists have launched a fresh campaign for a second referendum, pressuring Labour Leader Corbyn to drop his resistance to a new public vote. (BBC)

The European Commission, on Wednesday, will publish its contingency action plans for a no-deal Brexit, covering up to 13 areas that threatens chaos. (The Times)

UK Business Secretary Clark says that parliament should be invited to say what it would agree with on a Brexit deal at some point. (Newswires)

Daily Mirror Political Editor Pippa Crerar tweets, Pressure mounting on Theresa May to hold an indicative vote on all Brexit options. But No 10 insider tells me: “The idea that this solves anything or is a path to anywhere is wishful thinking.”. (Twitter)

UK PM May Spokesperson says we will not be holding a second Brexit referendum and there are no plans to hold an indicative vote in Parliament on Brexit options. (Newswires)

EU Commission states that dialogue continues with Rome over Italy's revised budget. (Newswires)

Italian government has the resources to afford a 2.04% deficit/GDP target; according to ANSA. The newspaper also reported that Italy's Cabinet Undersecretary Giorgetti said if the current government fails, Italy should go to early elections. (ANSA)

Italy's Deputy PMs Di Maio, Salvini and PM Conte are in "total agreement" on 2019 budget figures to propose to Brussels; according to a League spokeswoman. (Newswires)

Italy's Undersecretary says the Government is optimistic the EU will not open disciplinary action over the budget. (Newswires)

French PM Phillip said France’s 2019 budget deficit is likely to stand at around 3.2%. (Les Echos)
 

US

US President Trump is reportedly mulling the prospect of preventing a partial government shutdown and delaying the border wall fight until January; according to Politico citing two sources familiar with the negotiations. (Politico)

US President Trump announced Mick Mulvaney (Director of the Office of Management and Budget) as acting White House Chief of Staff following the departure of General John Kelly. (Twitter)

US Interior Secretary Zinke is to step down at the end of the year amid an ongoing ethics probe, US President Trump is to announce his replacement this week. (Newswires)

GEOPOLITICAL

Reported via SCMP that Canada’s Ambassador to China McCallum has met with the second detained Canadian Kovrig. (SCMP)

North Korea Foreign Ministry condemned US administration for stepping up sanctions and pressure to drop nuclear programme; adding that if US doesn't ease, disarming could be completely off the table. (Newswires)

EQUITIES

Major European indices are in the red [Euro Stoxx 50 -0.3%], with losses generally broad-based although there is some underperformance in the SMI (-0.6%) with heavyweight UBS (-0.4%) in the red having lost ground against rivals after USD 3.1bln was removed from their ETF business in November; alongside Swatch (-3.0%) and Richemont (-0.9%) who were both downgraded at Morgan Stanley. Similarly, sectors are in the red with some underperformance seen in Consumer Discretionary alongside the European Retail Sector, the latter dropping to its lowest level since July 2016. This follows Asos (-40.0%) plummeting after cutting their full year outlook, which has pulled other retail names down in sympathy.

In addition, ABB (+0.8%) are up after the Co has reached a deal with Hitachi regarding their power grids division valued at USD 11bln. SSE (-2.0%) are lower as they have been unable to come to an agreement with Innogy (-1.0%) on revised commercial terms.

FX

DXY - A 97.199-463 range for the index almost says it all in terms of the lacklustre start in currency markets to the final full week of the year. However, the Dollar is treading cautiously into the FOMC amidst an approximate 75% probability for a 4th 25 bp hike, with the focus firmly on updated policy guidance and fresh dot plots to see whether the consensus has shifted towards a pause in tightening or a shallower rate profile from 2019 out.

NZD/AUD - The Kiwi is just about keeping its head above 0.6800 vs its US counterpart and in front of the G10 pack, but largely by default and relative weakness in the Aud after the Australian Treasury downgraded its 2018/9 growth forecast to 2.75% from 3% overnight. Indeed, Aud/Usd remains capped ahead of 0.7200 where a decent 1.1 bn option expiry resides, while the Aud/Nzd cross is back under 1.0550.

EUR - The single currency has reclaimed 1.1300+ status vs the Greenback, but may also be hampered by expiry interest between 1.1320-35 as 1.1 bn runs off at the NY cut, or technical resistance at the 30 DMA circa 1.1353 if the headline pair manages to clear option-related offers/hedges convincingly. No discernible reaction to final Eurozone inflation data even though the EU-harmonised measure was unexpectedly trimmed to 1.9% y/y from 2%.   

CHF/GBP - Also firmer vs the Usd, but mainly due to the Buck’s pull-back from last Friday’s highs (97.716, a marginal new 2018 peak as well) rather than anything Franc or Pound positive. Usd/Chf is testing 0.9950 and Cable is back on the 1.2600 handle, albeit both marginally softer vs the Eur around 1.1290 and 0.8985 amidst ongoing EU treaty and Brexit uncertainty.

JPY/CAD - Both relatively flat vs the US Dollar and rangebound (113.25-50 and 1.3375-90 respectively), with the former awaiting the last BoJ meeting of the year ahead of the Fed and the latter only deriving modest momentum from firmer crude prices.

EM - The Mxn is benefiting from the broad Usd downturn and some bullish Peso sentiment following the Mexican budget projections to retest resistance ahead of 20.0000, but the Try is bucking the general trend in wake of considerably weaker than expected Turkish ip data, as the Lira struggles to hold above 5.4000.

FIXED INCOME

Core EU bonds have recovered some ground after touching session lows (163.04 and 123.37) with Bunds deriving some support from another retreat in BTPs (trading near lows at 125.20), that has pushed German benchmark futures back above par to print new highs at 163.29. This has been helped along by the negative revision to EZ CPI with Bund techs looking to the 163.64 contract high on the upside as resistance. Meanwhile Gilts have been further depressed by the accounting changes at the ONS which “effectively wipes out the Brexit buffer” after the Brexit-driven downturn, that has pushed the benchmark to trade in close proximity to lows of the day.

Elsewhere, US Treasuries have seen some bull steepening with 2s/10s and 10-year futures are uneventful ahead of an action-packed central bank week, that kicks off with the Chinese Central Economic Work Conference from Tuesday ahead of the FOMC on Wednesday, with BoJ, BoE and more thereafter, alongside US housing data tomorrow.

COMMODITIES 

Brent (+1.0%) and WTI (+1.0%) have shown a modest upside in prices with this more a by-product of currency effects as the dollar drifts lower. This morning there have been reports that Russia’s oil output has been at a record high of 11.42mln BPD in December, with prices unreactive to this news. Additionally, the UAE Energy Minister has said that he expects everyone to cut oil supply following the OPEC agreement, and separately reports state that China’s Shenghong has begun building a 330k BPD refinery in Jiangsu.

Gold has traded within a tight USD 4/oz range, but has recently begun to firm slightly as the DXY has remained largely unchanged ahead of this week’s FOMC meeting. Elsewhere, steel and iron ore prices have begun to rise due to winter production cuts, as Chinese authorities are trying to reduce air pollution levels. Separately, Vedanta may restart its 400ktpa Indian copper smelter following it’s forced closure by the government due to pollution.

UAE Energy Minister says he expects "everyone" to cut oil supply as per the OPEC agreement. (Newswires)

Kuwait Oil Ministers resignation is said to have been accepted, according to sources. (Newswires)