• Early EU sentiment undermined by disappointing Chinese data, EZ PMIs and negative Brexit rumblings
• Some respite as China looks set to temporarily lift retaliatory tariffs on US cars
• Looking ahead highlights include, US Retail Sales, Flash PMIs, Industrial Production and Baker Hughes rig count

ASIA

Asian equity markets were negative across the board as sentiment in the region soured following the lacklustre lead from Wall St and as region digested disappointing data from China. ASX 200 (-1.1%) and Nikkei 225 (-2.0%) both declined from the open with Australia led lower by tech, telecoms and the largest weighted financials sector, while the Japanese benchmark was subdued amid a firmer JPY and mixed Tankan data despite the headline Large Manufacturers Index and Large All Industry Capex topping estimates. Elsewhere, Hang Seng (-1.6%) and Shanghai Comp. (-1.5%) were also pressured after Chinese Industrial Production and Retail Sales data both fell short of estimates, with underperformance seen in Hong Kong as this year’s run of lacklustre stock market debuts continued in the domestic exchange. Finally, 10yr JGBs were higher as they tracked gains in T-notes and with prices underpinned by safe-haven demand which saw 10yr JGBs print the highest since November 2016.

PBoC skipped repo operations but announced a CNY 286bln 1yr Medium-term Lending Facility. (Newswires)
PBoC set CNY mid-point at 6.8750 (Prev. 6.8769)

Chinese Industrial Output (Nov) Y/Y 5.4% vs. Exp. 5.9% (Prev. 5.9%). (Newswires)
Chinese Retail Sales (Nov) Y/Y 8.1% vs. Exp. 8.8% (Prev. 8.6%)

China National Bureau of Statistics said main economic targets are expected to be reached, but added global economy faces more uncertainties, while it also noted that China's weaker industrial production and retail sales shows downward pressure on the economy is increasing. (Newswires)

Japanese Tankan Large Manufacturing Index (Q4) 19.0 vs. Exp. 17.0 (Prev. 19.0). (Newswires)
Japanese Tankan Large Manufacturing Outlook (Q4) 15 vs. Exp. 16.0 (Prev. 19.0)
Japanese Tankan Large All Industry Capex (Q4) 14.3% vs. Exp. 12.7% (Prev. 13.4%)

TRADE

China are to lift retaliatory tariffs on US cars for 3-months effective Jan 1st. Chinese Finance Ministry said they will suspend 25% tariffs on 114 US vehicle and car part items and 5% tariffs on 67 auto items  (Newswires)

UK/EU

EU reportedly strengthened the wording on Brexit backstop in summit document and reiterated it doesn't seek to use Brexit backstop, while it noted a firm determination to reach a subsequent agreement. EU Leaders said the trade deal to avoid using backstop should be in place by December 2020 or soon after and that they wish to have as close as possible partnership with the UK in the future, while they underlined that the backstop is intended as an insurance policy. Furthermore, there were comments from EU Council President Tusk that leaders stand by the withdrawal agreement and that it is not to be renegotiated. (Newswires)

Certain Conservative MPs are said to attempt persuading PM May to step down next Spring. (The Sun)

UK PM May's Deputy Lidington says EU leaders gave a very clear commitment to negotiate trade deal quickly, adding that the PM will spend the next few days and weeks to talk further to EU counterparts and seek reassurances needed by lawmakers. Has also confirmed that the two main options are now either a second referendum or a no-deal Brexit. (Newswires)

RTE's Connelly tweets "The Taoiseach Leo Varadkar has said he was "very satisfied" with the EU's position on the Irish backstop at last night's summit meeting." (Twitter)

EU and Italy aim to conclude budget talks by Sunday and are said to be EUR 4.5bln apart on the budget. (La Repubblica) Meanwhile, La Stampa reported that Italy and EU could be EUR 4bln apart. (La Stampa)

Italian Deputy Di Maio says may have to cut 1.5% 2019 growth forecasts, which were due to end. Adding that the 2018 slowdown is linked to weaker exports; according to sources. (Newswires)

French Markit Manufacturing Flash PMI (Dec) 49.7 vs. Exp. 50.7 (Prev. 50.8)

French Markit Services Flash PMI (Dec) 49.6 vs. Exp. 54.8 (Prev. 55.1)

French Markit Comp Flash PMI (Dec) 49.3 vs. Exp. 54.0 (Prev. 54.2)

German Markit Manufacturing Flash PMI (Dec) 51.5 vs. Exp. 52.0 (Prev. 51.8)

German Markit Services Flash PMI (Dec) 52.5 vs. Exp. 53.4 (Prev. 53.3)

German Markit Comp Flash PMI (Dec) 52.2 vs. Exp. 52.5 (Prev. 52.3)

EU Markit Manufacturing Flash PMI (Dec) 51.4 vs. Exp. 51.9 (Prev. 51.8)

EU Markit Services Flash PMI (Dec) 51.4 vs. Exp. 53.5 (Prev. 53.4)

EU Markit Comp Flash PMI (Dec) 51.3 vs. Exp. 52.8 (Prev. 52.7)

ECB's Nowotny says in my view the ECB has achieved its inflation target, says the negative deposit rate should be removes as soon as possible. (Newswires)

ECB's Vasiliauskas says that the balance of risks for growth is more likely to change into a negative direction in 2019. (Newswires)

Swedish Parliament votes against giving Social Democratic Leader Caretaker PM Stefan Lofven's mandate to form a new government. (Newswires)

CENTRAL BANKS

Russian Federation Central bank key rate Dec 7.75% vs. Exp. 7.5% (Prev. 7.5%)

- CBR say that they will consider the further necessity of rate hike, taking into account inflation and economic dynamics

- Balance of risks remains skewed toward pro-inflationary risks, especially over a short-term horizon

- Inflation is expected at close to 4%, which falls in line with the bank's targets

US

Federal prosecutors are investigating whether US President Trump's inaugural committee misspent some of the record amount of funds it raised, while there were later comments from White House Press Secretary Sanders that President Trump had limited engagement with the inauguration committee. (WSJ/Newswires)

US President Trump is said to be considering Kushner for Chief of Staff, while there were separate reports that US President Trump is said to have met with Chris Christie to discuss Chief of Staff position. (Huffington Post/Axios)

Axios reports that US President Trump sees Chris Christie as a top contender to replace John Kelly as Chief of Staff. (Newswires)

EQUITIES

European equities are poised to finish the week on the backfoot (Eurostoxx 50 -0.9%) following the weak lead from Asia as sentiment turned sour amid the release of disappointing Chinese industrial production and retail sales, highlighting weakness in the Chinese economy. As such, around 75% of the Stoxx 600 (-0.9%) are in the red, Switzerland’s SMI (-1.4%) marginally lags peers with all 20 stocks in negative territory. In terms of sectors, IT names underperform alongside auto names (seen as trade proxies due to heavy exports) as a result of the aforementioned Chinese retail sales signalling an impact from ongoing trade disputes. However, European auto names spiked higher following reports that China are to lift retaliatory tariffs on US autos for 3-months from January 1st next year (i.e. suspending the 40% tariff plan and sticking to 15%). In terms of individual movers GVC Holdings (+8.8%) shares rose to the top of the UK benchmark with Citi citing next week’s Parliament vote on FOBT stakes being “significantly positive” as shareholders will be paid out GBP 676mln if the legislation is not passed by 28th March 2019.

FX

AUD/NZD

The Antipodean Dollars have derived some scant support from reports that China will freeze and backtrack on a proposed increase in US auto tariffs w/e January 1 next year, in line with recent speculation, but the Aussie and Kiwi remain on the backfoot and significantly weaker than their G10 counterparts following sub-forecast Chinese data overnight and RBNZ consultations about lifting high grade bank capital requirements by 100%. Aud/Usd is holding just off a fresh December low around 0.7155 after breaching 0.7200 and tech supports below the figure at 0.7186 (55 DMA) and 0.7163 (Fib), while Nzd/Usd has lost grip of 0.6800 as the Aud/Nzd cross pivots 1.0550.

EUR/GBP 

Also major underperformers, as the single currency extended post-ECB losses on the back of further declines in EZ PMIs (French readings especially dire as manufacturing, services and composite all tumbled into sub-50 contractionary territory) and through recent support just ahead of 1.1300 vs the Greenback to 1.1286 before finding some bids. Note, a decent 1 bn option expiry at the 1.1300 strike may provide some traction. Meanwhile, Brexit remains the big bane for Sterling and given the ongoing impasse between UK PM May and EU leaders on the back-stop, Cable has retreated sharply towards 1.2570 and chart-wise back below the 10 DMA circa 1.2660.

CAD/CHF

The Loonie has reversed further from recent highs vs the Usd and back down towards 1.3400, as the Canadian-Chinese diplomatic spat compounds broader risk aversion and a retracement in oil prices. However, the Franc is still somewhat betwixt and between, as Usd/Chf continues to bounce off 0.9900 and over 0.9950 amidst general Dollar strength (DXY 97.500+), but Eur/Chf slips under 1.1250 on the aforementioned single currency depreciation.

JPY

As usual, demand for the safe-haven Yen is just keeping Usd/Jpy depressed within a tight 113.70-40 range, along with 1.4 bn expiries at 113.75.

EM

An unexpected, though far from total surprise ¼ point CBR rate hike has underpinned the Rub against the grain of overall regional currency weakness on risk-off flows, with the Rouble comfortably above 66.5000 vs the Usd.

FIXED INCOME

The more recent EZ PMI and Brexit driven rally in EU core bonds has tapered off with Gilts and Bunds trading with a 123.30 and 163.10 handle (vs. 123.53 and 163.30 at best) as tariff tensions abate amidst the Chinese temporary lift of 25% tariffs on US autos. The benchmarks now find support set at the 123.00 (yesterdays low was 122.98) and  163.20 levels respectively, with both looking for further direction ahead of the weekend from the ongoing EU Brexit summit. Elsewhere, BTPs are trading essentially flat on the day just under the 125.40 level as the bullish trend seen in recent days has dwindled following suggestions that the EU and Italy are still EUR 4.5bln apart on the budget, with further pressure seen after negative revisions to Italian CPI.

Turning to US Treasury futures, best gains have also been trimmed following the positive trade headlines with the 10-year benchmark perhaps losing some steam  having failed to breach chart resistance at 120-14 convincingly. Ahead, traders look to impetus from US flash PMI and output data later in the day and Fed next week.

COMMODITIES 

WTI (-0.7%) and Brent (-0.9%) swings between gains and losses following an uneventful overnight session as prices consolidated after yesterday’s rally.  The complex saw some upside in recent trade after Libya’s NOC chairman was pessimistic about reopening its 300k BPD El-Sharara after an armed group halted production at the oilfield. Traders will be eyeing this evening’s Baker Hughes rig count as fresh catalyst. Note, WTI Jan’19 options expire today at 19.30GMT.

Elsewhere, gold (-0.3%) is set for is biggest weekly fall in five weeks due to a firmer USD as traders focus on next week’s tabled Fed rate hike. Looking at base metals, copper is on track for a third consecutive weekly drop with downside exacerbated by the downbeat Chinese industrial production translating into weaker demand as the red metal faces a 15% yearly decline. Finally, Shanghai steel extended gains for a third day in a row after two major steelmaking cities (Tangshan and Xuzhou) demanded mills to curtail production amid worries that they will not meet pollution reduction targets this year. For context, Tangshan accounts for 10% of China’s total steel output while Xuzhou is in the number two steelmaking province

Oman announce a 2% oil production cut effective from January 2019, for a initial period of 6 months; according to documents. (Newswires)

Russia's Transneft sees Russia's oil output rising by 2mln tonnes in 2019. (Newswires)

Libya's NOC says "paying ransom to the militia" will not reopen the El-Sharara oil field. (Newswires)