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The U.S. Dollar posted strong gains on Friday as investors piled into the greenback amid global concerns. This led to most of the currencies giving up the gains logged from earlier in the week.

Economic data on the day showed that the Eurozone flash manufacturing PMI was at 51.4, which was lower than the forecasts of 51.9. Flash services PMI was also the same, rising to 51.4 and came in below than estimates of 53.4.

Data from the U.S. showed that core retail sales rose 0.2% matching estimates. Previous month's data rose 1.0%. Headline retail sales were up 0.2% which was better than the forecasts of a 0.1% increase. Past month's data was revised higher to show a 1.1% increase.

Industrial production data showed a 0.6% increase beating forecasts of a 0.3% increase. The data follows the downward revised estimates of a 0.2% decline.

Looking ahead, the economic data on the day will see the Eurozone's final inflation data coming out for November. Inflation is forecast to remain steady at 2.0%. Data for the rest of the day covers the second tier data.

Investors regularly search the Internet for the Santa rally as we head into the final trading days of the year. This time around, the term ‘recession’ is being searched the most since 2011 according to Google trends. Fears of a recession ahead of us explains the roller coaster ride in equity, credit, and other financial assets over the past couple of weeks. Unfortunately, these threats are not coming out of thin air.

Economic data is clearly indicating a worsening outlook, particularly figures from Europe and China. A key leading indicator, IHS Markit's Flash Eurozone Composite PMI slumped to 51.3 in December. This was below most pessimistic forecasts and the weakest expansion in the private sector in four years. Meanwhile China, which has been relying on local consumption to boost its economy, saw its retail sales growing at their weakest pace in 15 years. Political concerns are also a key factor to consider, whether it’s Trump’s trade policies, Brexit, the yellow vest movement, orgeopolitical tensions in the Middle East and elsewhere will all keep investors on the defensive.

This week will bethe last interesting one for the remainder of the year with multiple risk-events including tier-one economic data and monetary policy decisions.

The Federal Reserve meeting this week is what investors will be monitoring very closely. A final key rate hike for 2018 is almost a done deal, but what is more important is how the Fed’s dot plots shift in 2019 and beyond. If US monetary policymakers are seeing a serious risk of economic slowdown, those dots should be pulled downwards. The statement needs to be more balanced between slight optimism and a willingness to react fast, in case recession fears materialize. Fed Chairman JeromePowell is likely to be faced with many questions about the threat of a US economic slowdown especially given the inversion of the yield curve recently. Investors need to be reading between the lines to understand what the Fed’s position is at this stage.

The Bank of England and Bank of Japan are also meeting this week, but both are likely to be non-events. In the UK it’s all about Brexit and the BoE can’t makeany new decisions until the political clouds clear. Meanwhile in Japan, monetary policy still seems far from tightening given the latest contraction in itseconomy.

On the data front, there areinflation figures from the EU, UK, Canada and the US. Final US GDP numbers will also be released this week with other data including durable goods orders, existing home sales, housing starts and building permits. Further weakness in the US housing sector is likely to add to concerns of economic slowdown in the year ahead.

Market movers today

Key market themes continue to be Brexit and US-China trade talks . Markets will also be looking ahead to the Fed meeting on Wednesday. While a rate hike is widely expected, focus will be on signals on monetary policy in 2019. In the Scandies, an expected rate hike from the Riksbank on Thursday is likely to take centre stage.

In terms of data today, we will get final euro area inflation for November and the US Empire index , which is the first regional US business survey for December. We expect euro inflation to be unchanged from the initial release, which showed headline inflation at 2.0% y/y and core inflation at 1.0% y/y. The US empire index is still at very high levels but is estimated to show a small decline in November.

The US NAHB housing index for December is also due today. It dropped sharply in November and added to signs of a slowdown in the housing market.

Selected market news

Risk markets struggled on Friday as poor economic data arrived first from China and then Europe, sparking renewed anxiety over global economic growth. US and European equity markets fell and government bonds rallied. The dollar rose against developed and emerging market currencies. Consequently, the US dollar index flirted with year-high levels. This morning, S&P 500 futures are slightly up along with most Asian equity indices.

Friday's Chinese industrial production data confirmed that growth is weakening further into year-end and adds to expectations that we will see more easing from China soon. Industrial production growth dropped from 5.9% y/y to 5.4% y/y, whereas consensus expected the growth rate to remain unchanged. Retail sales growth slipped further from 8.6% y/y to 8.1% y/y, with consensus expecting 8.8% y/y. Fixed asset investments increased slightly, however, from 5.7% y/y to 5.9% y/y.

The data is broadly in line with our expectation that it will get worse before it gets better from around Q2. It also underlines why China would like to make a trade deal with Trump soon, to ease some of the downside pressure on the economy.

Euro area December flash PMIs were weak overall and do not point to a reversal of the growth slowdown this quarter, which began in Q3. The usual culprits remain in place, i.e. Brexit, politics, the global trade/China slowdown and have been accompanied by other downside risks such as the Yellow Vest protests in France.

Manufacturing PMI edged down slightly to 51.4. There were some signs of stabilisation in the subcomponents such as in new export orders and output indices. However, new orders at 48.6 are at the lowest level still since 2013. Service PMIs registered a marked fall from 53.4 to 51.4, likely to be driven mainly by France. New incoming business was at the weakest level in four years, but still in expansion territory at 51.4.

The disruption to French activity is particularly disappointing, as France was one of the key euro area growth drivers in Q3. In addition, judging from survey and car registrations data, it seems likely that the car sector will continue to act as a drag on growth in Q4.

May faces miserable festive period as opposition grows

The final couple of weeks of the year aren’t typically the most exciting in markets but with the Brexit debacle rumbling on and the Fed and BoE meeting this week, we may not be in full holiday mode just yet.

As this isn’t exactly the most liquid time of year for markets, we could see some interesting moves over the course of this week, with Brexit being a particularly likely trigger point. Growing speculation about a second referendum comes as Theresa May bounces from a position of strength (ish), to weakness, strength again (post-no confidence vote) and back to weakness.

May came back from her most recent cap in hand visit to Brussels empty handed as she sought the assurances needed on the backstop to get her deal over the line. With Labour also just biding its time before launching its own no-confidence vote – this time in the government – to avoid the humiliation of the vote against May, the PMs hurdles are getting higher and closer together. I’m not sure May will have the legs to get over the line.

Peaceful start to festive period expected

As far as today is concerned, it could be a more peaceful start to the week. The economic calendar looks a bit light and traders around the world will be starting to check out with the festive period upon us. Asia traded a little in the green overnight and we’re expected similar movements at the open in Europe and the US as well.

Gold below $1,240 as dollar bears made to wait

Gold is a fascinating one right now as it continues to wait for the much talked about and as yet, non-existent, dollar decline. Despite the apparent growing list of dollar bears for 2019, the currency is holding up well with others, most notably the euro and pound, putting forward strong cases themselves to remain under pressure in the near-term. Positive developments on Brexit and the Italian budget would likely swiftly change that though.

Gold has dipped back below $1,240 despite strong efforts to stay above. This could point to short-term weakness in the yellow metal, with $1,220 being the next line in the sand below and $1,200 below that.

Oil remains near lows as Saudis target US stockpiles

Oil appears to have checked out for the holiday period, with the OPEC+ announcement earlier this month seemingly blunting the case for bulls and bears alike. Prices have since stabilised around their lows, which may come as a relief to producers hoping to arrest the decline, but it’s now over to the data to provide a case for the bulls and push prices back towards more sustainable levels. Reports of Saudi Arabia reducing exports to the US in an attempt to diminish the country’s stockpiles looks an exercise in just this, with the country being fully aware of just how closely traders monitor those inventory numbers.

General Trend:

• Equities weaker on the open before trading mixed, as markets remain risk off awaiting the next move in China/US trade war
• China Ministry of Finance confirms 3 month suspension of 25% tariff on US vehicle and auto parts, starting Jan 1st
• Australia Mid-year Economic and Fiscal Outlook cuts 2018/19 GDP to 2.75% from 3.0% in May
• China PBoC resumes the use of reverse repos with its first injection after 36 consecutive skips
• South Korea Govt cuts GDP outlook for 2018 and 2019 ; affirms inflation
• Renault calling for EGM to discuss management and board changes with Nissan
• Japanese companies raise inflation expectations in the coming years
• US says it will allow Canada court to move ahead with Huawei case and will not interfere
• Canada confirms it has been able to speak to its second citizen detained in China
• Japan 2019 JGB issuances expected to decline again as 2019 budget chatter starts to leak out
• Italy seems to have reached a consensus on budget to present to EU

Headlines/Economic Data

Japan

• Nikkei 225 opened +0.1%
• 7201.JP Renault acting CEO Bollore has asked Nissan to call an EGM as soon as practicable in order to discuss the future of the alliance including possible senior management and board changes - FT
• (JP) Japan may cut FY2019/20 annual JGB issuance to ¥129.4T v ¥134.2T this year (making it 6th consecutive year of cuts) – press
• (JP) Bank of Japan (BOJ) Tankan survey shows companies see y/y inflation at 0.9% in 1-yr (prior 0.8%); 1.1% in 3-yrs (prior 1.1%) and 1.2% in 5-yrs (prior 1.1%)

Korea

• Kospi opened +0.1%
• (KR) According to North Korea press leader Kim Jong-un made more public appearances in relation to economic and diplomatic affairs than military this year - Yonhap
• (KR) New South Korea Fin Min Hong to meet with BOK Gov Lee later this week - Korean press
• 012330.KR To introduce a windshield display technology for its autonomous vehicles that can play movies and be controlled with hand gestures – Yonhap
• (KR) North Korea foreign ministry: Condemns US administration for stepping up sanctions and pressure on North Korea to drop nuclear program; if US doesn't ease there could be a return to "exchanges of fire" and disarming could be off the table completely – press
• 005380.KR Class action lawsuit filed against Hyundai Kia alleges dangerous defect affecting certain vehicle models can cause premature engine failure and spontaneous fires in the engines, putting owners at risk of accident, injury and death
• (KR) South Korea President Moon: Will adjust minimum wage increase policy if needed – Yonhap
• (KR) South Korea cuts 2018 GDP outlook to 2.6-2.7% (prior 2.9%); Cuts 2019 GDP 2.6-2.7% (prior 2.8%)

China/Hong Kong

• Hang Seng opened +0.3%, Shanghai Composite -0.3%
• (CN) China Nov New Home Prices m/m: 0.9% v 1.0% prior; y/y: 9.3% v 8.6% prior
• HUAWEI.CN According to US, a presentation given by CFO Meng Wanzhou to a HSBC banker in 2013, describes the links between Huawei and Skycom, a “partner” doing business in Iran, US alleges that Skycom is an unofficial subsidiary, helping Huawei evade sanctions on Iran – SCMP
• (CN) Development Research Center of the China State Council chief Li Wei: China's steady and improving economic fundamentals are favorable for its development goals – Xinhua
• (CN) China Nov raw coal production 320Mt, +4.5% y/y – Xinhua
• 2388.HK Lowered property mortgage rates - HK press
• (CN) PBoC Adviser Sheng Songchen: China should defend yuan at 7 yuan per dollar level or attempts to stabilize the currency will become more costly on the foreign exchange reserves – press
• (CN) China PBoC: Will guide reasonable growth of credit and social financing
• (CN) CHINA PBOC OPEN MARKET OPERATION (OMO): INJECTS CNY160B IN 7-DAY REVERSE REPOS V SKIPS PRIOR; Net injects CNY160B (1st injection after 36 consecutive skips)
• (CN) China PBoC sets yuan reference rate: 6.8908 v 6.8750 prior
• (CN) China Ministry of Finance confirms 3 month suspension of 25% tariff on US vehicle and auto parts, starting Jan 1st

Australia/New Zealand

• ASX 200 opened -0.1%
• ANZ.AU Follow up to RBNZ capital review paper: Sees potential capital increase for New Zealand of NZ$6.0-8.0B
• (NZ) New Zealand Nov Performance of Services Index: 53.5 v 55.4 prior
• (AU) Australia Mid-year Economic and Fiscal Outlook: Cuts 2018/19 GDP to 2.75% from 3.0% in May
• Looking ahead: Tomorrow will see the release of RBA Dec meeting minutes

Other Asia

• (SG) SINGAPORE NOV NON-OIL DOMESTIC EXPORTS M/M: -4.2% V 2.3%E; Y/Y: -2.6% V 1.8%E; Electronic Exports y/y: +4.5% v -3.5% prior

North America

• (CA) Canada ambassador to China John McCallum met with second detained Canadian, Michael Kovrig - SCMP
• (US) Federal judge in Texas rules the Affordable Care Act (Obamacare) is unconstitutional – press
• (US) Pres Trump names Budget Director Mick Mulvaney as acting Chief of Staff, replacing John Kelly

Europe

• (FR) France PM Philippe: Large company tax cut to be delayed for 1-yr - French press
• (CN) Germany looking to update international trade regulation that would allow Govt to review on EU-bloc purchases of stakes as low as 10% in "security relevant" companies; seen as a move to target China – SCMP
• (IT) Italy League Leader spokesperson: Italy governing coalition leader and PM are in total agreement on 2019 budget figures that will be proposed to EU
• (UK) PM May allies want parliament members to vote on Brexit options – Times
• (UK) Dec Rightmove House Prices m/m: -1.5% v -1.7% prior; y/y: +0.7% v -0.2% prior
• (FR) France National Assembly President Ferrand: 2019 budget deficit is likely to overshoot the EU's limit of 3.0% of GDP next year and reach 3.4% - financial press

Levels as of 12:50ET

• Hang Seng 0.0%; Shanghai Composite 0.0%; Kospi +0.2%; Nikkei225 +0.7%; ASX 200 +1.0%
• Equity Futures: S&P500 +0.4%; Nasdaq100 +0.5%, Dax +0.5%; FTSE100 +0.2%
• EUR 1.1313-1.1301; JPY 113.31-113.52 ; AUD 0.7169-0.7182;NZD 0.6785-0.6802
• Feb Gold -0.1% at $1,240/oz; Feb Crude Oil +0.2% at $51.53/brl; Feb Copper +0.2% at $2.76/lb

Daily Pivots: (S1) 1.5698; (P) 1.5760; (R1) 1.5819; More....

Intraday bias in EUR/AUD remains neutral at this point and consolidation from 1.5887 might extend. Downside of retreat should be contained by 1.5596 support to bring another rally. On the upside, break of 1.5887 will target 1.5984 support turned resistance first. Break will pave the way to retest 1.6357 high next. However, break of 1.5596 will suggest that the rebound is completed. Intraday bias would then be turned back to the downside for 1.5346 low.

In the bigger picture, no change in the view that 1.6357 is a medium term top. But the strong rebound ahead of 1.5271 cluster support (38.2% retracement of 1.3624 to 1.6357 at 1.5313) suggests price actions from 1.6357 are developing into sideway consolidation, rather than a deep correction. The range of 1.5271/6357 is likely set for the consolidation. And we don't expect a break of the range any time soon. But decisive break of 1.6357 will resume the larger up trend from 1.3624 (2017 low) to 1.6587 (2015 high).

Daily Pivots: (S1) 1.1250; (P) 1.1275; (R1) 1.1308; More...

Intraday bias in EUR/CHF remains neutral at this point. Considering bullish convergence condition in 4 hour MACD, a short term bottom is likely in pace. On the upside, break of 1.1301 minor resistance will target 1.1356 resistance first. Decisive break there should confirm near term reversal. In that case, further rally should be seen back to 1.1501 resistance. However, on the downside, below 1.1224 will invalidate this bullish case and extend the fall to 1.1173 low instead. But still, we'd expect strong support inside 1.1154/98 key support zone to bring reversal.

In the bigger picture, price actions from 1.2004 medium term top is seen as a correction only. Downside should be contained by support zone of 1.1198 (2016 high) and 61.8% retracement of 1.0629 to 1.2004 at 1.1154 to complete it and bring rebound. A break of 1.2 key resistance is still expected in the medium term long term. However, sustained break of the mentioned support zone will mark reversal of the long term trend. In that case, 1.0629 key support will be back into focus.

EUR/USD

Current level - 1.1306

We may expect another test at 1.1268 with next target 1.1213. Initial support in case of an opposite movement is 1.1350 and then 1.1400.

USD/JPY

Current level - 113.43

We can say the breakthrough of 113.00 was successful. The first resistance for the move upwards is the 113.80 zone. Historically strong resistance is 114.00 and for rallies further we'll have to see a successful break of that level, otherwise a failed test can bring the pair to 112.00.

GBP/USD

Current level - 1.2577

We expect the pair to test again the support level at 1.2480 with next target 1.2360.

IMF mission chief for Japan Paul Cashin said BoJ should maintain its massive stimulus program as "the so-called side-effects are not large enough to outweigh the benefits at present:. He added "the only game in town is achieving the target" of 2% inflation. He warned that "Tightening now is not going to help you get there. They're very much committed to reaching the target, and we think that's the right thing to do."

On to the planned sale tax hike, he said "we're not against putting them in and some of the revenue can be used for (tax breaks) but only on a temporary, time-bound basis." He emphasized "equally important is clear communication on what these measures are, when they will begin and what particular tax and subsidies will be involved ... because people plan ahead and won't wait until October to make consumption decisions."

Daily Pivots: (S1) 1.1258; (P) 1.1316; (R1) 1.1362; More.....

EUR/USD recovered ahead of 1.1267 support and intraday bias stays neutral first. On the downside, break of 1.1267 will suggest that larger decline is resuming and target 1.1251 low next. Decisive break there will confirm this bearish case. EUR/USD should drop through 1.1186 fibonacci level to 61.8% projection of 1.2555 to 1.1300 from 1.1814 at 1.1038 next. And in any case, near term outlook will remain bearish as long as 1.1472 resistance holds.

In the bigger picture, as long as 1.1814 resistance holds, down trend down trend from 1.2555 medium term top is still in progress and should target 61.8% retracement of 1.0339 (2017 low) to 1.2555 at 1.1186 next. Sustained break there will pave the way to retest 1.0339. However, break of 1.1814 will confirm completion of such down trend and turn medium term outlook bullish.