·       US Defense Secretary Esper said the US does not have plans to pull out of Iraq, whilst a Pentagon spokeswoman said there is no change in US policy on its troops' presence in the country

·       Trump administration has begun drafting sanctions against Iraq, according to sources - but plan to wait on the decision to impose penalties

·       China-US Phase One trade deal is on track and could be signed in the near future, sources told the Global Times

·       Asian equities traded higher across the board; Nikkei 225 reversed most of yesterday’s losses

·       In FX, DXY remained within a tight range, USD/JPY tested 108.50 to the upside, USD/CNY briefly dipped below 6.9500

·       Looking ahead, highlights include Swiss CPI, EZ CPI (Flash) & Retail Sales, US ISM-Non-Manufacturing, Factory Orders & International Trade, Canadian Trade Balance. Fed Discount Minutes, supply from UK and US

GEOPOLITICS

US Defense Secretary Esper said the US does not have plans to pull out of Iraq. This follows reports that US Army told Iraq it is preparing to "move out", according to AFP citing an official letter. The Pentagon could not immediately confirm the authenticity of the letter, but AFP later confirmed the legitimacy. (AFP/Newswires) US Chief of Staff later stated the letter circulating regarding US troops pulling out of Iraq was an unsigned draft and should not have been published.  Further reports noted that the US-led coalition is to scale back its operations in Baghdad after an order from Iraq's parliament. (Sky News) However, Pentagon spokeswoman said there is no change in US policy on its troops' presence in Iraq. (Newswires)

US Defence Secretary Esper, when asked whether US will strike Iranian cultural sites, said US will follow the laws of armed conflicts. (Newswires) US Chief of Staff noted that according to intel he has seen, IRGC Commander Soleimani was coordinating and preparing simultaneous combat actions against US forces in the region, according to Al-Jazeera. (Al-Jazeera)

US has reportedly barred Iran's Foreign Minister Zarif from entering the US this week to address the UN Security Council about the assassination of General Soleimani, according to diplomatic sources. (Foreign Policy) This was later confirmed by a US official who stated that the US has denied Iranian Foreign Minister Zarif a visa to travel to US for the UN Security Council meeting. (Newswires)

Trump administration has begun drafting sanctions against Iraq, according to sources cited by Washington Post. Sources stressed that no decision has been made on whether to implement penalties. One of the officials said the plan was to wait “at least a little while” on the decision in order to see whether Iraqi officials follow through on their threat to push U.S. troops out of the Iraq. (Washington Post)

Senior IRGC Commander Soleimani's body has arrive at his hometown for burial, according to IRNA. (Newswires) Commander of the Iranian Revolutionary Guard said Iran's response will be strong and humiliating to those who assassinated IRGC Commander Soleimani and "we will avenge the enemy", and added that there is no safe place for Americans in the region, reported via Al-Jazeera. (Twitter)

Iranian Parliament has passed a draft bill labelling US military as a terror organisation, via ELINT News. (Twitter)

US military has deployed troops to the Kenya airfield to increase security following the deadly attack by militants of Al Shabaab. Also, US military's Africa command announced it does not believe the attack was linked to Iran. (Newswires)

Pentagon is planning to begin deployment of six B-52 bombers to the British territory of Diego Garcia in the Indian Ocean on Monday, CNN reports citing a US official. CNN added the deployment does not signal that operations have been ordered, and that the Pentagon has traditionally deployed long-range bombers and other aircraft as a sign of US force presence and capability. (CNN/Newswires)

US Democratic leaders are considering holding votes on two provisions that they had dropped from a compromise defense authorization bill last month amid opposition from the White House and Senate Republicans, according to Al-Monitor. Anti-war activist groups are lobbying Democrats to revive legislation defunding offensive military action against Iran and to repeal the 2002 military authorization that allowed President George. W. Bush to invade Iraq. (Al-Monitor) This would come alongside the anti-war bill that is expected to be voted on later this week which would limit US President Trump's military capability in the Middle East 

ASIA-PAC

Asian equities posted gains across the board following a less pronounced but positive handover from Wall Street in which in the major bourses experienced a modest recovery from the prior session’s losses. ASX 200 (+1.4%) was propped up by its largest-weighed financials as yields recouped from recent downside. Nikkei 225 (+1.3%) retraced some of the prior session’s hefty losses whilst welcoming recent favourable currency moves. Elsewhere, Hang Seng (+0.7%) and Shanghai Comp (+0.4%) conformed to the overall risk appetite - and with the former supported by gains in large-cap financial stocks.

China-US Phase One trade deal is on track and could be signed in the near future, sources told the Global Times. (Twitter)

China Vice Agricultural Minister said China will not increase annual grain import quotas to accommodate higher US farm purchases. This refutes rumours that China may raise or scrap its corn import quota following a phase one trade deal with the US (Newswires/Global Times)

PBoC set USD/CNY reference rate at 6.9690 vs. Exp. 6.9697 (Prev. 6.9718) (Newswires) PBoC skipped open market operations for a net neutral daily position

Indian Government is likely to cut 2019/20 expenditures by INR 1.5-2.0tln whilst increasing borrowing by INR 300-500bln, according to sources. (Newswires)

UK/EU

No-deal Brexit plans were stood down “with immediate effect” just before Christmas, according to letter seen by Sky News, as UK PM Johnson’s deal is expected to be approved by MPs, but officials worry about cliff edge in December, according to Sky News' Cohen. (Twitter/Sky News)

UK Chancellor Javid has set March 11th as the date for the first budget since the general election. (BBC)

FX DXY held onto a bulk of the prior day’s losses but remained within a tight 96.68-62 parameter overnight. EUR/USD was contained just under the 1.1200 mark but managed to stay north of its 50 WMA at 1.1174. Meanwhile, GBP/USD drifted higher throughout the session and probed 1.3175 with the pair unreactive to reports that emergency preparations for a no-deal Brexit have been stood down as UK PM Johnson’s deal is almost certain to make its passage through parliament. That said, officials remain concerned regarding a cliff-edge Brexit, according to Sky News’ Cohen. Elsewhere, USD/JPY and JPY-crosses clenched onto recent gains as the overall risk tone kept the pairs afloat, and as the former attempted another test of 108.50 to the upside. Antipodeans traded choppy, albeit within narrow ranges. AUD/USD tested 0.6925 to the downside on multiple occasions but lingered above the figure, whilst its Kiwi counterpart gleaned some support from the AUD/NZD cross losing ground below the psychological 1.0400 level. Finally, CNY saw strength ahead of sources reports that the US-China Phase One deal remains on track - which prompted USD/CNY to test 6.9500 to the downside before briefly dipping below the psychological figure. Note: DXY strengthened to fresh session highs as European participants entered the market and as such, weakness was experienced in G10 pairs in which EUR/USD fell to around 1.1180, GBP/USD tested 1.3150 to the downside and AUD/USD eyed 0.6900 to the downside.

COMMODITIES

WTI and Brent futures continued to bleed in overnight trade. Brent front-month contracts dipped below the USD 68/bbl and WTI briefly traded below USD 62.50/bbl vs. recent highs of around USD 70.70/bbl and USD 64.70/bbl respectively. Downside in the complex also coincided with source reports via Washington Post which noted that the Trump administration has begun drafting sanctions against Iraq, but that the plan was to wait and see if Iraq follows through with their threat first rather than immediate penalties. Participants will be on the lookout for any potential Iranian retaliations after IRGC Commander Soleimani’s burial later today, as cautioned by several analysts. Elsewhere, spot gold continued to unwind some of its recent gains, although a sharp move lower of just under USD 10/bbl was seen with little by way of fresh fundamental catalysts to explain the move. Traders cite the downside to stops tripped at prior support around USD 1560/oz. Finally, copper prices were bolstered by the overall risk-sentiment but stopped short of resistance at USD 2.79/lb.

OPEC+ said it will respond to any oil emergency from the crisis in Iran, however spare capacity is tight, according to Platts Oil. (Platts)

US 

* US T-NOTE FUTURES (H20) SETTLES 4+ TICKS LOWER AT 129-08. The Treasury complex saw some profit-taking after gains seen at the start of the year, and amid a lack of fresh developments on the US/Iran front; the shape of the curve was little changed, while nominal yields inched up slightly. Analysts chewed the fat over the Iran situation, and there seems to be a consensus that from the oil market's perspective, the status quo is manageable (although much of that will depend on the next moves from stakeholders). Decent services PMI data out of major markets on Monday also helped, and the upward revision to the US Markit services PMI raises hopes of a decent ISM services print on Tuesday. Additionally, the corporate supply slate is heavy, with expectations of around USD 30bln of corporate dollar supply on tap for this week, while some have suggested that it might be as high as USD 40bln.