In a quiet start to the week, European, and Asian stocks fell with S&P futures fractionally in the red, as Chinese markets tumbled the most since June and crude oil surged, even as the Nikkei erased all losses for 2016 on continued weakness in the Yen.

The big story continues to be crude oil which surged 5% to the highest in 17 months, with WTI and Brent trading near $54 and $57 respectively, following Saturday's agreement by NOPEC (mostly Russia and Oman) nations to cut as much as 600kbpd in production as described in Saudi "Shock And Awe" Sparks Buying Panic In Crude - WTI At 17-Month Highs.

Oil jumped after after Saudi Arabia, whose output just hit a new all time high when it told OPEC it pumped 10.72 million barrels per day last month, up from 10.625 million bpd in October, signaled it will cut output by more than previously agreed amid a weekend deal to tackle oversupply with competitors such as Russia. Longer-dated securities led declines as government bonds around the world tumbled, while climbing energy shares bucked a drop in Europe’s wider benchmark stock gauge.

The jump in oil continues to push up the outlook for global inflation, sending 10-year Treasury yields above 2.5% for the first time since October 2014, as longer-dated government bonds around the world tumbled. The prospect of increased price pressures is filtering through into the market’s outlook for central-bank policy, with traders seeing 100 percent odds of a rate hike at this week’s Federal Reserve meeting, and a two-in-three chance of additional tightening by June, according to Bloomberg calculations based on fed fund futures.

“The spike in oil is behind the further cheapening in global bonds,” said Craig Collins, managing director of rates trading at Bank of Montreal in London. “It’s a foregone conclusion that we’re going to have a 25 basis-point rate hike.”

China stocks suffered their biggest fall in six months as blue chips were knocked by fresh regulatory curbs to rein in insurers' aggressive stock investments and rising bond yields prompted profit-taking in equities.China's insurance regulator, which recently warned it would curb "barbaric" acquisitions by insurers, said late on Friday it had suspended the insurance arm of China's Evergrande Group from conducting stock market investment.

The Shanghai Composite Index sank the most since June as a gauge of smaller companies in Shenzhen plunged more than 5%, and the ChiNext index slumped 5.5% amid concerns about the outlook for the property market, while intermarket liquidity tightened, with various funding indicators once again showing funding stress and rising tightness as regulators continued their crack down on insurers’s stock investments and Donald Trump raises concern about a possible trade war, said Ken Peng, Asia investment strategist at Citigroup Global Markets Asia. Hong Kong’s Hang Seng Index slipped 1.5%.

"The decline in stocks was the result of amplified impact on market sentiment after the cumulative events of higher government bond yields, a weaker yuan against the dollar and regulatory curbs on insurance funds,” said Chen Li, a strategist at Credit Suisse in Hong Kong.

The Yuan tumbled above 6.90 for the dollar, and will likely continue to face pressure, as Trump tying Taiwan policy to trade deals with China raises the risk of trade conflict. According to Bloomberg. domestic liquidity would stay tight to support yuan, which is negative for stock market. The recent crackdown on insurers’ acquisitions in listed companies has raised concern that insurance fund inflows to equities may slow until authorities clarify rules. As a result, investors are taking profits as good news is largely priced in and regular position adjustments start before year- end. However, analysts note that as interest rates are more likely to rise in China, and property prices decline, investors will still favor stocks in 2017.

Japanese shares rose, with the Nikkei 225 Stock Average recouping losses for this year as the yen slid to a 10-month low against the dollar before the Federal Reserve sets interest rates this week. The equity gauge advanced for a fifth day, its longest rally in two weeks. The Topix index fluctuated between a gain of 1.2 percent and a decline of 0.3 Japanese stocks have staged a dramatic rebound in the second half, riding on a global recovery in risk appetite, with investors betting that U.S. President-elect Donald Trump will boost economic stimulus.

The Nikkei and Topix have climbed more than 10% over the past two months, entering a bull market in November after rising by more than 20 percent from their respective 2016 lows set in June. “Markets are moving ahead quite a bit based on expectations, which may be the case until January,” Masahiro Ichikawa, a senior strategist at Sumitomo Mitsui told Bloomberg “Policy expectations for the Trump administration are basically a tailwind for cyclical shares, and export-reliant businesses will continue see positive momentum.”

In Europe, the Stoxx Europe 600 Index fell 0.4 percent in early trading, following its biggest weekly rally in almost two years. Still, commodity producers and miners gained, with the Stoxx 600 Oil & Gas Index up 2.1 percent. Amundi SA rose 6.7 percent after the firm agreed to buy Pioneer Global Asset Management from Italy’s UniCredit SpA. Banca Monte dei Paschi di Siena SpA shares advanced as much as 10.3 percent after the lender’s board met on Sunday and agreed to stick with its original deadline for its capital plan.

“Weakness out of China and Hong Kong has somewhat dampened the prevailing bullish sentiment,” Markus Huber, a trader at City of London Markets, wrote in emailed comments.

Banks and technology shares drove the S&P 500 to a 3.1 percent climb last week, with the U.S. benchmark reaching successive all-time highs as the Dow Jones Industrial Average also rose to records. S&P futures fell 0.2 percent on Monday.

Ten-year Treasury yields rose as much as six basis points to 2.53 percent. The U.S. Treasury auctions 10-year notes later Monday, and 30-year bonds Tuesday. Hedge funds and other large speculators raised bearish bets on 10-year Treasuries to the highest in almost two years last week, more than doubling them to a net 228,604 contracts, according to the latest Commodity Futures Trading Commission data. Germany’s yield curve, as measured by the spread between two- and 30-year bonds reached the steepest since 2014, based on closing prices, while a similar gauge for Japan widened for a fifth day U.K. 10-year yields climbed three basis points to 1.48 percent, while those on similar-maturity bunds also added three basis points, to 0.39%.

The main event this week is of course the likely 2nd US rate hike (Wednesday) in this cycle 10 and a half years on from the last hike in the previous cycle. On rough calculations we've seen over 670 rate cuts globally since the GFC but not much more than a handful of hikes. So this is a pretty monumental event. Yellen’s words will be the most closely watched part of the day but it would be a surprise if she deviated too far from her remarks to Congress back on November 17th with perhaps the key message being that it was too early for her to judge the impact of President-elect Trump's potential fiscal plans. With little additional info to add on this since the testimony she's unlikely to rock the boat. Whether other members feel the same will be unveiled in the dots. So keep an eye out for that.

* * *

Market Snapshot

• S&P 500 futures down 0.1% to 2252
• Stoxx 600 down 0.3% to 354
• FTSE 100 down 0.1% to 6946
• DAX down 0.4% to 11157
• German 10Yr yield up 4bps to 0.4%
• Italian 10Yr yield up 5bps to 2.09%
• Spanish 10Yr yield up 2bps to 1.53%
• S&P GSCI Index up 2.6% to 400.9
• MSCI Asia Pacific down 0.4% to 138
• Nikkei 225 up 0.8% to 19155
• Hang Seng down 1.4% to 22433
• Shanghai Composite down 2.5% to 3153
• S&P/ASX 200 up less than 0.1% to 5563
• US 10-yr yield up 3bps to 2.5%
• Dollar Index down 0.18% to 101.41
• WTI Crude futures up 5.1% to $54.13
• Brent Futures up 5% to $57.03
• Gold spot down 0.5% to $1,155
• Silver spot down 0.4% to $16.80

Top Headlines

• Saudi Minister Jolts Oil Market in Whatever It Takes Moment: OPEC seals first oil-cuts deal with non-members in 15 years
• China Warns Trump Against Using Taiwan for Leverage on Trade: Trump says other nations shouldn’t dictate who U.S. speaks to
• Philips to Sell Lumileds to Apollo for Discounted $2 Billion: Philips confident deal will go through this time around
• Amundi Agrees to Buy UniCredit’s Pioneer for $3.7 Billion: Purchase makes Amundi 8th biggest global asset manager
• Qatar Air Plans Move to GE-Powered Airbus A320 in Blow for Pratt: Gulf carrier could take CFM engine for at least some of order
• Fox-Sky $14 Billion Deal Talks Said to Hinge on Structure: Fox said weighing outright bid versus ‘scheme of arrangement’
• Bill Gates, Other Rich Individuals, Back $1 Billion Energy Fund: Group revealed a new $1 billion investment fund to foster major advances in clean energy production.
• Tencent Hunts for Hollywood Deals to Feed China’s Film Boom: Film unit “very open” to acquisitions as ambitions grow: CEO
• Teledyne Tech to Acquire E2V for 275p/Share in Recommended Deal

Looking at regional markets, Asian stocks traded mixed after the region failed to sustain the momentum from last Friday's US gains where indices printed fresh record highs and posted the largest weekly gain since the US election. Nikkei 225 (+0.8%) outperformed and briefly rose above 19,200 as exporters benefited from JPY weakness after USD/JPY rose above 115.00, while ASX 200 (flat) closed relatively flat as gains in the energy sector was counterbalanced by weakness in gold miners. Hang Seng (-1.6%) and Shanghai Comp. (-2.5%) declined amid losses in the property sector after several downbeat industry-related reports, while insurers were pressured after Evergrande Life were banned from Chinese stock investments last week amid a crackdown on insurers' riskier investments. Shenzhen Comp. (-4.5%) underperformed on weak foreign investor inflows via the Stock Connect and surges in Chinese money market rates. 10yr JGBs traded lower amid the heightened risk appetite in Japan, with the yield curve steepening as the super long-end underperformed. This also coincided with continued downside in T-notes and the US 10yr yield rising to its highest in 18-months of 2.4950% ahead of this week's FOMC. PBoC injected CNY 80bIn in 7-day reverse repos, CNY 30bIn in 14-day reverse repos, CNY 20bIn in 28-day reverse repos.

Top Asian News

• China Warns Trump Against Using Taiwan for Leverage on Trade: Trump says other nations shouldn’t dictate who U.S. speaks to
• In Global First, India Offers Discounts for Payments Made Online
• Hong Kong’s Finance Chief Resigns, Signaling Run at Top Job *Bill English’s Daunting Task: Replacing a Popular Prime Minister

In Europe, with a particularly light economic calendar kicking off the week, this morning has seen relatively subdued price action in European equities, with most of the major indices trading flat on the session. The notable exception comes in the form of the FTSE MIB, with the Italian banks lifting the index after Banca Monte dei Paschi (+9%) benefitted from reports the Co. are to go ahead with recapitalisation plans and possible support from Italian government if needed, while UniCredit (+3.7%) rose after confirmation of USD 4.1 bin Pioneer sale to Amundi. Fixed income markets saw a continuation of the overnight downside, with yields yet again on the rise as the US 10yr broke above 2.5% for the first time since 2014, while global bonds see some further bear curve steepening. Plenty of supply is seen throughout the week, with today seeing US 3 and 10Y note auctions, while corporates may also choose to front load ahead of the FOMC's expected hike on Wednesday.

Top European News

• EU Takes on Trump in Final Push for Free-Trade Pact With Japan: Brussels sends envoy to Tokyo in bid for a year-end agreement
• May Faces New Legal Case Over Post-Brexit Single Market Plan: Campaigners seek to separate EU divorce, market access action
• Monte Paschi Pursues Its Capital Plan to Avoid State Rescue:

In currencies, oil-exporting currencies lead gains against the dollar, with the Russian ruble gaining 2.2 percent and the Norwegian krone and Mexican peso advancing 0.6 percent. The Turkish lira tumbled for a third day, slumping 1.4 percent after twin bombings in Istanbul on Saturday killed 38 and wounded more than 150 people. The Korean won retreated for a second session, losing 0.2 percent amid concern the political instability sparked by President Park Geun-hye’s impeachment could hurt the economy.

In commodities, West Texas Intermediate crude gained 4.9 percent as of 9:52 a.m. London time, climbing to $54 a barrel as Brent added 4.8 percent to $56.92. Both are headed for their highest settlement prices since July last year. The deal between OPEC members and outside nations, including Russia, was agreed at a meeting in Vienna at the weekend. It should usher in the first global petroleum cuts in 15 years and covers about 60 percent of the world’s output. Copper futures rallied as much as 1.4 percent in New York before erasing gains and retreating 1.1 percent. Gold fluctuated, trading down 0.4 percent in the spot market at $1,155.01 an ounce.

Looking at the day ahead, it’s a quiet start to the week today. There’s no notable data to highlight in Europe while the sole release in the US is the November monthly budget statement

US Event Calendar

• 2pm: Monthly Budget Statement y/y, Nov., est. -$130b (prior - $44.2b)

DB's Jim Reid concludes the overnight wrap

It seems rather apt that in 2016, those of us in the UK last night voted a Finnish lady and resident as the runner-up in the X-Factor TV singing competition. Perhaps globalisation and even the UK's relationship with Europe is not dead after all! Is it too much though to think this could herald the odd vote for the UK in next year's Eurovision Song Contest to return the favour?

Moving swiftly on so as to gloss over the fact that I watch the X-Factor, outside of Bronte's second birthday today (what an impact my first dog has had on me), the main event this week is of course the likely 2nd US rate hike (Wednesday) in this cycle 10 and a half years on from the last hike in the previous cycle. On our rough calculations we've seen over 670 rate cuts globally since the GFC but not much more than a handful of hikes. So this is a pretty monumental event. Yellen’s words will be the most closely watched part of the day but it would be a surprise if she deviated too far from her remarks to Congress back on November 17th with perhaps the key message being that it was too early for her to judge the impact of President-elect Trump's potential fiscal plans. With little additional info to add on this since the testimony she's unlikely to rock the boat. Whether other members feel the same will be unveiled in the dots. So keep an eye out for that. We'll preview in full on Wednesday.

There's a fair amount of US data alongside the FOMC this week. Given the ECB meeting last week and the recent run up in oil we'll be particularly interested in CPI on Thursday. The reason we mention the ECB and oil is that the discussion within DB research last week was how crucial oil has been to the ECB's policy in recent years (the hike in 2011 and negative rates and QE more recently) and how we may have to watch it in 2017 for any signs that the taper announced last week looks set to go much further in 2018. Obviously the opposite could also happen but the news over the weekend that non-OPEC countries have joined in with production cuts makes things interesting. Indeed the latest update is that Russia along with 10 other non-OPEC members have agreed to a production cut of 558k barrels per day. That’s in conjunction with the 1.2m barrels per day reduction agreed upon by OPEC members at the Vienna meeting on November 30th. That’s not all as Bloomberg is also reporting that Saudi Arabia is supposedly signalling that it might be ready to cut output more than it had initially suggested at that meeting. Saudi’s Oil Minister was reported as saying that ‘effective January 1st we’re going to cut and cut substantially to be below the level that we have committed to on November 30th’.

Unsurprisingly the news of a now coordinated agreement has seen Oil rally again this morning. WTI is currently +4.76% as we type and around $54/bbl (and the highest since July 2015) while Brent is up a similar amount and trading above $56/bbl. While energy stocks are generally outperforming in Asia this morning its still been a much more mixed start to the week. The Nikkei (+0.52%) is leading the way and in the process has bounced back into positive territory for the year, although it has pared back much stronger gains at the open. The ASX (+0.14%) is also slightly higher while the Kospi is flat. The Hang Seng (-1.12%) and Shanghai Comp (-2.03%) have weakened however with property names in particular under pressure after the president of one of the largest Chinese property companies painted a bleak view about the prospects for real estate sales in the year ahead. Some weakness in the insurance sector is also weighing.

The other big story for markets at the moment is Italy. More specifically, its Italy’s banking system that’s in the spotlight after being under pressure again on Friday following the news that the ECB had rejected a timeline extension for a proposed recap in the sector. Reports this morning suggest that a planned capital raising is to still go ahead in the next couple of days following a meeting yesterday. The FTSE Italia Banks index was down -2.25% on Friday (versus the FTSE MIB at -0.73%) while sub spreads on 3 of the nation’s banks were 9bps to 18bps wider. Still, Italian Banks closed over +12% higher last week while the simple average of the 4 Italian banks in the sub financial index rallied 36bps (versus a 12bp rally for the wider index). We’ve also since had the news that Foreign Minister Paolo Gentiloni has been appointed as the new PM and given a mandate to form a new government. According to newswires, this will allow current Finance Minister, Carlos Padoan, to stay in his current role and manage the banking sector troubles.

So this should be another big focus for markets this week. For more on the subject, on Friday, DB’s Marco Stringa (Economics), Paola Sabbione (Bank Equity) and Michal Jezek (Credit) published a joint piece “Italy: Options to address the bank problem”. They focus on two key short-term priorities for Italy: 1) a new electoral law and 2) a solution to the bank problem. On 1), they argue that while it may be controversial (higher risk of 5SM in power in the short term), it may be more beneficial in the medium term for Italy to have a strong majoritarian electoral system in both Houses. That would give rise to stable governments capable of reforms which are necessary for Italy to grow out of its debt. 2) They discuss the size of the NPL overhang in the Italian banking sector and argue that the most efficient solution, if purely private efforts fail, would be a public backstop greater than the size of the problem. They also discuss the option of a possible ESM involvement, as reported by some media last week, explaining that it is very unlikely at this point. For more details, see the following link.

Another report worth drawing readers’ attention to is an update from DB’s Chief China Economist, Zhiwei Zhang, over the weekend. Zhiwei noted that the Politburo of the Communist Party held a meeting on December 9th discussing the economic policies in 2017. The press release showed that the policy stance will remain broadly unchanged, with a focus on the stability of growth. At the same time progress on reforms will likely be slow. All of this was in line with Zhiwei’s expectations and he maintains his 6.5% China growth forecast in 2017.

Before we look at the week ahead, a quick recap of how we closed out Friday. Despite that leg lower for Italian banks that we highlighted at the top post the ECB story, it was on the whole another positive session which capped a strong week for risk assets. The Stoxx 600 closed up +0.97% to finish the week +4.72% which is the strongest weekly performance for the index since January 2015. In the US the S&P 500 (+0.59%) rallied for a sixth session in a row to turn in a +3.08% return for the week. All four major bourses struck new record highs in the process too with the Santa Claus rally in full flight. Credit indices were much the same. CDX IG finished 2bps tighter on Friday and 6bps tighter over the week while the iTraxx Main index was 1bp tighter on Friday and 5bps tighter over the 5 days. Despite financials having a weaker day (Senior and Sub +1bps and +5bps respectively) on Friday with the Italy news they still ended 6bps and 12bps tighter respectively during the week.

Meanwhile it was a much more mixed performance across rates. 10y Treasury yields finished 6bps higher on Friday at 2.468% which is the highest closing yield now since June last year. 10y Bund yields on the other hand finished a couple of basis points lower at 0.360% while 2y yields dived another 2.1bps lower to -0.771% and the lowest yield recorded.

As far as the data was concerned, in the US the first estimate of the University of Michigan consumer sentiment print rose 4.2pts in December to 98.0 (vs. 94.5 expected). That is the highest reading since January 2015 and was supported by a boost from both the current conditions (+4.8pts to 112.1) and expectations (+3.7pts to 88.9) components. Clearly President-elect Trump’s proposed policies having a clear positive impact on sentiment and it’ll be interesting to see if this is a one off honeymoon impact or we get some moderation in the next revision. Meanwhile, inflation expectations did soften with both 1y and 5-10y expectations easing one-tenth to 2.3% and 2.5% respectively. Elsewhere, there was no change to the final wholesale inventories reading of -0.4% mom in October.

In Europe we received the latest trade data in Germany where the surplus shrunk slightly in October owing to a +1.3% mom uptick in imports which more than offset the more modest +0.5% mom rise in exports. In France industrial production was unexpectedly weak in October (-0.2% mom vs. +0.6% expected) and which had the effect of lowering the YoY rate to -1.8% from -1.1%. Finally in the UK the trade deficit was reported as shrinking thanks to a sharp bounce back in exports.

Over to the week ahead now. It’s a quiet start to the week today. There’s no notable data to highlight in Europe while the sole release in the US is the November monthly budget statement. Tuesday morning kicks off in China where we’ll get the November industrial production, retail sales and fixed asset investment data. In Europe we’ll get final November CPI revisions in Germany, last month’s inflation report for the UK, Euro area employment data for Q3 and the ZEW survey in Germany. In the US the import price index reading for last month will be out. Japan gets things going on Wednesday where all eyes will be on the Q4 Tankan survey. There are a few notable reports in Europe including the final November CPI report in France, the latest employment report in the UK and also retail sales data for the Euro area. It’s busy in the US on Wednesday. We’ll get November retail sales data, PPI, industrial and manufacturing production, business inventories and then of course later in the evening concluding with the FOMC rate decision and also the updated Fed dot plots. Thursday is PMI day where we’ll get the flash December manufacturing, services and composite readings in Europe. Thereafter, UK retail sales data for last month will be released before we turn over to the BoE policy meeting outcome just after midday. In the US it’s another important day for data with the November CPI report being the focus. Also due out is empire manufacturing, initial jobless claims, Philly Fed survey, flash manufacturing PMI and NAHB housing market index. We close the week out in Europe on Friday with the final revisions to the November CPI report for the Euro area, along with various confidence indicators in France and CBI trends orders data for the UK. In the US we’ll get housing starts and buildings permits data.

Away from the data the Fedspeak this week comes on Friday when Lacker is due to speak in the evening. Fed Chair Yellen will of course also be hosting a press conference following the FOMC outcome on Wednesday. Other potentially interesting events include a meeting of EU leaders on Thursday to discuss migration issues and the Brexit process and a meeting between Japan PM Abe and Russia President Putin the same day.