Dollar continues to underperform major counterparts ahead of FOMC and expectations for a Dovish-Hike

WTI hits October 2017 lows as oversupply and growth concerns weigh on prices

Looking ahead, highlights include US building permits and housing starts, ECB’s Makuch

ASIA

Asian equities were lower across the board following the slump seen on Wall St. as investors readied for an expected Fed hike against the backdrop of slowing global growth. The S&P fell to the lowest in 14 months, while the Dow declined in excess of 500 points as shares in Amazon and Goldman Sachs led the declines. ASX 200 (-1.2%) was pressured by energy names amid the price action in the complex, while Nikkei 225 (-1.8%) underperformed due to a firmer currency on safe-haven demand as equities continued selling off. Elsewhere, Hang Seng (-1.0%) and Shanghai Comp. (-0.8%) extended on opening losses as Chinese President Xi Jinping gave his landmark speech at the Beijing Conference in which he provided little by way of details regarding trade developments with the US.

Chinese President Xi said China is to stick to supply side reforms, to promote trade convenience and a multilateral trading system. President Xi added that no-one is in a position to dictate what China should or shouldn't do and opposes nations forcing their ideas on others and that China may face unimaginable difficulties ahead, but will control major risks in the economy. (Newswires)

PBoC set CNY mid-point at 6.8854 (Prev. 6.8908)
PBoC injected CNY 140bln via 7-day reverse repos and CNY 40bln via 14-day reverse repos, net CNY 180bln in Open Market Operations

Japanese Finance Minister Aso said Japan are to reduce purchasing auto tax and extend housing loan tax exemptions. (Newswires)

Chinese State Planner says there will be policy easing but they will not walk the old path and fall back on massive stimulus. (Newswires)

UK/EU

UK government is said to have taken secret legal advice on extending Article 50 which it argues effectively rules out a second referendum. (The Telegraph)

UK cabinet will discuss whether the government should ramp up preparations for a no-deal Brexit when it meets later this morning (BBC)

UK Cabinet will, on Tuesday, order UK's six million businesses to start immediate preparations for a No Deal Brexit. (The Sun)

PM May will present 3 Brexit countdown options to the cabinet, The Times understands that senior Government figures would accept that cabinet is likely to back the option which would see no-deal preparations ramped up and centralised across Whitehall. (The Times)

The Times Sam Coates tweets that the DUP says PM May is apparently promising them the assurances they would require to back her deal. (Twitter)

Sky's Tamara Cohen tweets, Labour source latest on a no confidence vote in the government: “it’s a question of when, not if”, John Healey told Sky News this morning that the right moment could be if PM May's deal is voted down on Jan 14th. (Twitter)

EU reportedly remains unconvinced over the Italian budget, as such the EU Commission have reportedly stated it requires structural savings of between EUR2-3bln to approve the budget. (Corriere della sera/La Repubblica)

EU's Moscovici says he is working very hard to ensure that Italy does not face sanctions over the deficit goal breach. (Newswires)

Italian Treasury Official states that final outlook is still to be decided. This follows previous reports that Italy were said to have lowered their 2019 growth rate to 0.9-1.0%. (Newswires/Il Sole)

Italy's Di Maio says that Italy has done all it could do on the budget; according to Rai. (Rai)

US

Senate Democratic sources stated that the stopgap bill has been sent to the White House with no response and added that there has been no change in government funding negotiations. (Newswires)

Trade aid program is estimated at USD 7.3bln to soybean farmers and total commodity payments at USD 9.6bln; according to USDA. (Newswires)

EQUITIES

Major European Indices are now mixed after beginning firmly in the red at the start of the session. Underperformance is seen in the FTSE 100 (-0.5%) and the AEX (-0.8%) with both weighed on by index heavyweight Royal Dutch Shell (-1.8%) in the red as they are reportedly planning to purchase Endeavor Energy for USD 8bln. Sectors are similarly in the red with underperformance seen in energy names due to oversupply fears weighing on oil prices and the aforementioned Royal Dutch Shell story. Significant outperformance is seen in the European Auto’s & Parts sector, with auto names such as Daimler (+1.6%) and BMW (+1.0%) causing the DAX (+0.4%) to be the outperforming European index. Other notable equity movers include National Grid (-6.3%) who have stated that they are disappointed with OFGEM’s proposed financial package.

FX

NZD - The Kiwi is back in the ascendency and leading widespread advances against an increasingly soggy Dollar ahead of the FOMC amidst growing expectations for a dovish hike, with Nzd/Usd extending gains above 0.6800 and through 0.6850 to circa 0.6880 in wake of an encouraging NZ business survey overnight. This bodes well for the Westpac consumer report for Q4 due later ahead of current account data for the previous quarter and following the latest GDT auction that could see prices rebound further given WMP futures indicating a 3% rise.

JPY - The next best G10 performer and beneficiary of safe-haven positioning amidst broad risk-aversion in global equities and especially oil that continues to price in a return to oversupply vs demand. Consequently, Usd/Jpy has pulled back further from recent highs to retest December lows not far above 112.00, but may encounter some technical bids around 112.40 (100 DMA) given decent option expiries in the same area (1 bn from 112.40 to 112.55).

GBP/AUD/EUR - All firmer vs the Greenback, as the DXY skirts nearest sub-97.000 chart support at 96.850, and the Buck’s defensive pre-Fed tone overshadows independent factors that may otherwise keep the Pound, Aussie Dollar and single currency suppressed. For Sterling, Brexit remains the obvious and main stumbling block, but Cable is sitting more comfortably above 1.2600 and testing the 10 DMA at 1.2640, while Aud/Usd is staging another attempt to breach 0.7200 even though the Aud/Nzd cross has recoiled sharply to sub-1.0500 levels on the aforementioned Kiwi outperformance. Eur/Usd has also established a firmer base above a big figure, at 1.1300, and eyeing strong chart resistance at the foot of a daily formation just before a cluster of other upside targets around 1.1400 where a decent 1 bn expiry runs off. However, more downbeat German macro news in the form of December’s Ifo survey has also dampened some of the Euro’s more bullish momentum.

CAD/CHF - The Loonie is struggling to bounce off 1.3400+ lows given the latest collapse in crude prices, which is also undermining the likes of the NOK despite March 2019 Norges Bank rate hike guidance from Governor Olsen, while the Franc continues to meet offers ahead of the 0.9900 mark and has eased back from peaks vs the Eur towards 1.1300 following more reports of convergence between Italy and the EU on the 2019 budget.

FIXED INCOME

The initial EU stock downturn and poor IFO data gave Bunds some additional steam to print fresh session highs at (163.55) but failed to test the contract peak of 163.64 with the benchmark now settling around the 163.50 level. Gilts have closed the gap on their German counterpart as upcoming commons Brexit debate continues to support 10-year futures, but pulled up short of chart resistance at 123.73 and hang around 123.65. Elsewhere, BTPs have gradually ticked up throughout the EU morning  to trade in close proximity to session highs of 125.64 as the distance between the EU and Italy on the budget has narrowed to ~EUR 2bln vs. prev. EUR 4bln, with Tria supposedly hopeful of an agreement by tonight.

Moving to the US, 10-year futures printed a new recovery pinnacle at 120-27 ahead of the 120-30 highs of Dec. 10th with yields falling to as low as 2.823% at one point and hitting its lowest point since August ahead of the upcoming Fed meeting and today’s housing data, where investors will look for confirmation of the poor NAHB survey results yesterday.

COMMODITIES 

Brent (-2.3%) and WTI (-2.7%) have continued to decline amidst concerns of an oversupplied market, with WTI dropping to October 2017 levels. The price decline follows reports from the US, the world’s largest oil producer, that their shale oil output is to top 8mln BPD by year end. There have also been comments from Russian Energy Minister Novak who states that December output is around Octobers levels which are slightly higher than in November; meaning that Russia’s output has increased not decreased following the OPEC+ deal where they pledged a cut of 228,000 BPD. Later today we have API Weekly Stocks which are expected to present a 3.25MMbbls draw, which may offer prices some respite from the current downward pressure. Elsewhere, Libya’s NOC has declared a force majeure on operations at the El Sharara oil field, stating that production will only restart after alternative security arrangements are implemented. For context, this follows the force majeure declared on the fields exports last week.

Gold has benefited from dollar weakness reaching week highs of USD 1249.83/oz ahead of this week’s FOMC meeting. While Palladium has fallen from the record high of USD 1269.5/oz reached in the previous session. Elsewhere Chinese steel and raw materials have fallen alongside the broader risk sentiment and after President Xi’s speech where no new specific reform measures were stated.

Russian Energy Minster Novak says he is to discuss the OPEC+ deal with Russian co.’s on Wednesday. (Newswires)

North Sea Buzzard oil field output is now said to be at a normal level; according to sources. (Newswires)