Global markets begin the last full week of trading of the year in subdued fashion, with U.S. equity futures rising 0.1%, to 2,258.5, European shares decline halting two straight weeks of gains, and Asian shares hitting a four-week low. The Dollar extends losses, yen and gold rise amid geopolitical concerns as the fallout from China's seizure of a U.S. continues to reverberate. Volumes are thinning before the December holiday season and end of the year, with trading in German bund futures about half the average for the past five days. The Bank of Japan’s policy decision on Tuesday is the last Group of Seven central bank meeting for 2016.

Top overnight news stories include Fairfax agreeing to buy insurer Allied World for $4.9b, Danone warning on lower sales, Aramco IPO possibly still happening in U.S., Disney’s ‘Rogue One’ posting the second-biggest December opening weekend ever.

"As we enter the Christmas, year-end holiday season, volumes could decline and lead to choppy price action. Traders should watch out for higher volatility due to restricted holiday trading volumes," said Ipek Ozkardeskaya, senior market analyst at London Capital Group

Wall Street hit record highs and the dollar rose to a 14-year peak last week, but investors chose to take some of those chips off the table. The profit-taking spread to Europe, where bank stocks were among the biggest fallers following two weeks of strong gains on the back of rising bond yields. Their decline pushed the broader European indices into the red.

In FX trading, the dollar has retreated against the yen as traders took stock following a six-week rally in the currency. The Stoxx 600 Index edged modestly lower after reaching the highest point of the year on Friday as Banca Monte Paschi tumbled 8.5%, headed for the biggest decline in more than a week ahead of a share issue. The yen strengthened before a Bank of Japan policy review Tuesday, ending a two-day advance in the Nikkei, which was down less than 0.1%. Oil gained, extending a climb from last week amid speculation an increase in maritime tensions could crimp deliveries. Gold headed for the first back-to-back advance in three weeks.

With books for 2016 closing, traders are ready to lock in gains in the greenback, with the Bloomberg Dollar Spot Index heading for its best quarter since 2008 following the election of Donald Trump and the U.S. Federal Reserve’s decision to boost interest rates and signal a steeper path of increases in 2017 last week according to Bloomberg.

“People are pulling in their horns a bit coming into year end and getting ready to reconsider when they come out of holiday period,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. “We have a couple of big events coming up in January and people need to reassess how they think things will play out.”

MSCI's broadest index of Asia-Pacific shares outside Japan fell for the third straight day, shedding 0.3 percent to a four-week low. It has lost 3.7 percent since Trump was elected. Investors turned cautious after China's top leaders said over the weekend they would stem asset bubbles in 2017 and place greater importance on the prevention of financial risk.

The Stoxx Europe 600 Index was down 0.1% in subdued trading, with miners leading declines. In a reversal of the recent rotation into cyclical shares, defensive stocks including utilities, real estate and technology firms rose. The volume of Stoxx 600 shares traded on Monday was almost 30 percent lower than the 30-day average. Banca Monte dei Paschi di Siena fell 8.6% after the lender said it will begin selling shares to institutional investors this week as it aims to complete raising 5 billion euros ($5.2 billion) by the end of the year to avoid a rescue by the Italian government.

In rates, yields on 10-year Treasury notes declined one basis point to 2.58 percent after touching the highest level since September 2014 on Thursday. German bonds were little changed, while yield on Spanish 10-year securities fell three basis points to 1.40 percent.

Meanwhile, China’s bond selloff continued, with 10-year yields rising five basis points to 3.40 percent. The yield surged 25 basis points last week, to 3.35 percent, as hawkish comments from the Federal Reserve and waning liquidity weighed on bond prices.

Of the things to look out for today, Fed Chair Yellen will deliver her final address of the year this evening at 6.30pm GMT when she speaks at the University of Baltimore. The title of her discussion is the state of the job market although given that this is a mid-year commencement address its unlikely that the speech will throw up much new information.

The Bank of Japan started its two-day policy meeting on Monday and is widely expected to hold policy, including its twin targets of minus 0.10 percent interest on a part of excess reserves and the zero percent 10-year government bond yield. No surprises or changes in policy are expected, but given that a potentially big theme for next year is whether the BoJ’s yield cap is tested by the market, it’s still worth listening out for any interesting comments from Governor Kuroda in the press conference that follows.

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Bulletin Headline Summary from RanSquawk

• European equities and fixed income markets have seen a tentative start to the week as markets begin to wind down for the festive break
• Markets descend into consolidation mode, but FX markets will be more reactive than anything else
• Today's highlights include US Services PM! and comments from Fed Chair Yellen

Market Snapshot

• S&P 500 futures up 0.1% to 2258
• Stoxx 600 down 0.2% to 359
• FTSE 100 down 0.2% to 6998
• DAX down less than 0.1% to 11402
• German 10Yr yield up less than 1bp to 0.32%
• Italian 10Yr yield down 3bps to 1.84%
• Spanish 10Yr yield down 3bps to 1.4%
• S&P GSCI Index down less than 0.1% to 393.5
• MSCI Asia Pacific down less than 0.1% to 136
• Nikkei 225 down less than 0.1% to 19392
• Hang Seng down 0.9% to 21833
• Shanghai Composite down 0.2% to 3118
• S&P/ASX 200 up 0.5% to 5562
• US 10-yr yield down 1bp to 2.58%
• Dollar Index down 0.08% to 102.87
• WTI Crude futures up 0.3% to $52.07
• Brent Futures up 0.3% to $55.38
• Gold spot up 0.2% to $1,137
• Silver spot down 0.3% to $16.04

Top Global News

• Watsa’s Fairfax Agrees to Buy Allied World for $4.9 Billion: $54 per-share, cash-and-stock offer amounts to 18% premium
• Danone Says Sales Growth to Miss Target on Spain, Activia: Revenue increase will be slightly below 3% to 5% goal
• Disney’s (DIS) ‘Rogue One’ Surges With $155 Million Weekend Haul: Movie sets second-best mark for an opening in December
• Goldman Warns China Outflows Rising in Both Yuan Payments, Forex: Pressures could worsen in first quarter of next year: analyst
• Aramco IPO Could Still Be in U.S. as Kingdom Plays Down Rift: Location of IPO ‘work in progress,’ Foreign Minister al- Jubeir says
• Barclays Severing Ties With Up to 7,000 Clients to Boost Returns: Bank’s top 500 markets clients ranked gold, platinum, diamond
• Citigroup’s (C) Larsen Exits as Retail Banking, Mortgage Head: Larsen joined bank in 1998; known for pushing digital banking
• BAT Said to Consider Adding $8/Share to RAI Bid: Sunday Times
• Fed’s Bullard Ups His Interest-Rate Forecast by a Quarter Point
• Pentagon Says China to Return Drone; Trump Says They Can Keep It

Asian equity markets traded mixed following Friday's lacklustre lead from Wall St, where weakness in tech and financials alongside growing tensions with China dampened sentiment. ASX 200 (+0.5%) outperformed on broad-based gains with energy supported after WTI crude futures rose above USD 52/bbl, while Nikkei 225 (flat) was also dampened by a pullback in USD/JPY to below 118.00. Elsewhere, Chinese markets traded mixed with financials in the Hang Seng (-0.9%) weighed after China regulators further tightened restrictions on mainland purchases of Hong Kong insurance products, while Shanghai Comp. (+0.2%) was choppy as participants digested a continued increase in property prices which could attract funds away from stocks, alongside a firm injection by PBoC which also extended emergency loans to avoid a liquidity crunch. Finally, 10yr JGBs traded higher amid the dampened risk appetite in Japan and with the BoJ in the market for JPY 1 .25tln of government debt ranging between 1yr-10yrs. However, gains were capped with participant awaiting tomorrow's BoJ conclusion while the yield curve flattened amid outperformance in the super-long end.
Chinese House Prices (Nov) Y/Y 12.6% (Prey. 12.3%). China House Prices rose M/M in 55 out of 70 cities (Prey. 62) and Y/Y in 65 cities (Prey. 65).

Top Asian News

• China Rejects Trump’s Comment That It Stole U.S. Naval Drone: Military negotiating with U.S. over return of unmanned vehicle
• Hong Kong Equity Investors Get That Sinking Feeling, Again: Hang Seng Index has fallen almost 10% from 2016 high
• Indonesia’s Central Bank Revives Plan to Redenominate Rupiah: President Joko Widodo says proposal should be a priority
• Gone in 60 Seconds: Chinese Snap Up Dollars as Yuan Tanks: U.S. dollar WMPs provide alternatives to sending money abroad
• China Home-Price Growth Slows as Property Curbs Dent Demand: Values gained in 55 cities in November, versus 62 in October

European stocks have seen a slow start to the week, with major indices trading modestly lower amid light newsflow. In what has been a subdued morning, Banca Monte Dei Paschi (-6.2%) are the notable underperformer as they begin their capital raising, while Danone are also one of the major laggards after lowering their sales forecast. On a sector breakdown, energy hovers just in positive territory, while financials drag on the indices, with Deutsche Bank also softer after a negative broker move. Fixed income markets have seen a similarly tight range this morning, with Bunds steady above 162.00, while the periphery has seen tightening against the German 10Y amid little in terms of data. In terms of data highlights so far, IFO has been the only notable release, with the components largely higher than expected.

Top European News

• German Business Confidence Improves on Signs of Stronger Growth: Ifo business climate index rises to 111 vs estimated 110.6
• SCA Enters Wound Care With $2.9 Billion Deal Ahead of Spin: Acquisition would add 1 billion kronor to pro forma profit
• EU Interferes With National Powers in Apple Case, Irish Say: Ireland’s government releases details of Apple tax appeal
• Deutsche Bank (DB) Axes Executive Bonuses to Offset DoJ Fine: Times

In currencies,  the dollar declined 0.4 percent to 117.51 yen, after gaining for the past six weeks. A broader Bloomberg gauge of the dollar has little changed, after strengthening 7.2% this quarter. Markets descend into consolidation mode, but FX markets will be more reactive than anything else. If USTs hold recent ranges and stock markets are buoyed, there is little to expect from the likes of EUR/USD and USD/JPY, as the medium term picture remains that of USD strength. This has accelerated against the AUD and NZD in particular, more so in the latter case on Friday after NZD/USD took out .7000 support. Losses have slowed since, but this is more down to inactivity than anything else. AUD/USD below .7300 points to further losses also, but limited momentum (and range) seen so far today. USD/CAD has also taken a breather on the upside as 1.3400+ drawing in fresh selling interest for now. Oil prices grinding higher to provide some modest support near term. GBP will continue to seesaw inside familiar levels, with Cable losses through 1.2400 last week drawing in longer term buying interest, but sellers coming in above 1.2500 again. EUR/GBP support seen ahead of .8300, but pre .8600 should cap to set a near term range in play. Brexit headlines continue to dominate, with the debate on EU budget payments the latest 'stand off' between the UK and Europe.

In commodities, oil extended gains above $52 a barrel as a planned production boost from Libya stalled, while OPEC’s November agreement to curtail output continued to support prices. Futures climbed as much as 1.2 percent in New York after rising 2 percent on Friday. Gold advanced for a second day as the dollar weakened. Bullion for immediate delivery rose as much as 0.7 percent to $1,142.40/oz. Zinc and copper fell as base metals retreated. Copper prices have retreated and will continue to do so at these better levels though as China demand constantly a concern. Gold has risen slightly on the modest USD pullback, but fresh gains in equities should see pressure resume. USD1100-1050 major support lower down.

Looking at today's calendar, the sole release in Europe this morning comes from Germany where the December IFO was released, printing at 111.0, higher than 110.4 in November, and above the 110.7 expected. In the US the only data of note are the remaining December flash PMI’s (services and composite readings).Also, keep an eye on Yellen's speech at 1:30pm when the Fed chair will speak on the state of the job market at the University of Baltimore 2016 Midyear Commencement, in Batimore, Maryland.

US Event Calendar

• 9:45am: Markit U.S. Services PMI, Dec. P, est. 55.2 (prior 54.6)
• 1:30pm: Janet Yellen speaks on the state of the job market at the University of Baltimore 2016 Midyear Commencement, in Batimore, Maryland.

DB Concludes the overnight wrap

Welcome to the penultimate week of 2016. That gives you two weeks to complete any final New Year’s resolution goals that were set 354 days ago, or in some cases start them. As you might expect with markets winding down ahead of the holiday season this week’s diary shouldn’t prove to be too much of a distraction. Of the things to look out for though, Fed Chair Yellen will deliver her final address of the year this evening at 6.30pm GMT when she speaks at the University of Baltimore. The title of her discussion is the state of the job market although given that this is a mid-year commencement address its unlikely that the speech will throw up much new information. We’ll also have the final big Central Bank meeting of the year when the BoJ take up centre stage tomorrow morning. Neither us nor the market is expecting any surprises or changes in policy but given that a potentially big theme for next year is whether the BoJ’s yield cap is tested by the market, it’s still worth listening out for any interesting comments from Governor Kuroda in the press conference that follows. On the politics front one event which could be interesting comes tomorrow when UK PM Theresa May is due to be questioned by the House of Commons Liaison Committee about her Brexit plans. Finally on the data front the day to probably focus on is Thursday where in the US we’ll get the third revision to Q3 GDP along with a first look at the November durable and capital goods orders data.

As well as that to look ahead to then, it’ll be interesting to see if there is much further reaction in markets today after geopolitical tensions rose on Friday following that news concerning China’s seizure of a US naval drone. Unsurprisingly this has largely dominated the column inches over the weekend and while the Pentagon has confirmed that China has agreed to return the surveillance device that came after President-elect Trump had already taken to twitter to voice his criticism at the act. China’s Communist Party-affiliated Global Times has since portrayed a mocking of Trump’s demeanour and called it as ‘lagging far behind the White House spokespersons’. It’s worth noting that debates over the South China Sea issues have intensified in the wake of Trump’s victory so incidents like these are worth monitoring closely.

Away from that, with much of the focus having been rightly on the Italian Banking sector recently, it’s worth noting the news out of the Ukraine too late last night where the country’s government announced that it is to nationalize Ukraine’s largest and (as per the FT) most systemically important commercial bank, PrivatBank, with looming concerns about the state of the bank’s balance sheet. This follows a failed rescue bid by the billionaire owners with the Government now acquiring 100% of the bank as a result in a coordinated transaction with the IMF.

Back to China quickly, our China Chief Economist, Zhiwei Zhang, highlighted in a note late last week that the Central Economic Working Conference (CEWC) concluded on Friday. He noted that the press release indicated that the government will focus on stability in 2017 and will target a growth rate of 6.5%. This target hadn’t been disclosed in the press release but is set to be officially announced in the National People’s Congress on March 5th.

Refreshing our screens this morning it’s been a fairly mixed start to trading in Asia. The Nikkei (-0.22%) and Hang Seng (-0.79%) are both in the red while the Shanghai Comp and Kospi are little changed. The ASX (+0.69%) is the notable outperformer although we should note that volumes generally in the region are at the usual holiday-season lows. Meanwhile the US Dollar has continued to edge a bit lower and Treasury yields have also dipped a bit. There’s also been a bit of data this morning. Exports in Japan were reported as falling -0.4% yoy in November which was a bit better than the consensus (vs. -2.3% expected) and also up from -10.3% in the month prior. Meanwhile in China property prices (excluding government subsidized housing) were reported as rising in 55 of the cities tracked by the government in November, compared with 62 in October.

Moving on and a quick wrap of how markets closed out Friday. For the most part it was a fairly dull end to an eventful week. After equity markets had generally edged a bit higher in Europe (Stoxx 600 +0.34%) mainly as a result of a decent boost across the energy sector with WTI (+1.96%) rebounding back towards $52/bbl, US equity markets largely faded into the close. Indeed the S&P 500 closed -0.18% and as a result nudged back into a very modest loss (-0.06%) for the week.

As has been the recent trend however moves in the rates market were a bit more exciting. Indeed most notable in the early going was the move lower for yields across the Bund curve culminating in 2y Bund yields closing at a fresh record low of -0.815% (down a couple of basis points on the day). US Treasuries were also initially stronger before some hawkish Fedspeak (more on that shortly) sent yields spiking higher. In fact 10y yields touched an intraday high of 2.619% and a shade away from the recent high in the cycle. That was before the China drone news hit the wires however which sent yields scurrying lower. The 10y finished little changed around 2.593% by the end of play but still with another decent near 7bps high-to-low intraday range. There was a similar trend for the Greenback which pared early gains into the close for the same reason.

In terms of the data that was released, in the US housing starts were reported as falling sharply in November (-18.7% mom vs. +12.8% expected) to an annualized rate of 1090k. That comes following an upwardly revised +27.4% mom surge in October however. Meanwhile permits were also down unexpectedly (-4.7% mom vs. +3.3% expected) although again follows a +2.9% mom in the month prior. Meanwhile, in Europe all eyes were on the November CPI report for the Euro area although there was little in the way of surprise with the headline CPI print confirmed at -0.1% mom and +0.6% yoy. In France confidence indicators generally edged higher (business confidence to 105 from 102) while in the UK the December CBI manufacturing survey reported orders of 0 versus -3 in the month prior.

Back to that Fedspeak quickly, one of the more hawkish policy makers, Jeffrey Lacker, said that ‘there is a range of paces of interest rate hikes that would qualify as gradual, including paces more rapid than one or two or three a year’. Indeed Lacker went as far as to say that ‘my guess would be more than three’. Separately, St Louis Fed President, James Bullard, confirmed that with regards to the new Trump administration, ‘we think there is some upside risk because the new administration wants faster growth and it is possible some of the things they are talking about will drive productivity higher’. He did however also suggest that this would be more of a 2018 or 2019 consideration, rather than in 2017.

Turning over to this week’s calendar now. The sole release in Europe this morning comes from Germany where the December IFO survey will be released. This afternoon in the US the only data of note are the remaining December flash PMI’s (services and composite readings). Tomorrow morning we kick off in Japan with the BoJ decision followed just after by Governor Kuroda’s press conference. Over in Europe we start with Germany again with the latest PPI print while in the UK the latest CBI reported retail sales data for this month will be out. There’s nothing of note in the US tomorrow afternoon. Wednesday is another quiet day with France PPI, UK public sector net borrowing data, Euro area consumer confidence and US existing home sales data due up. We’ll finally get a bit of action on Thursday. While the morning session is quiet, with Germany’s import price index reading the only data, during the afternoon in the US we’ll get the third reading for Q3 GDP along with a first look at the November durable and capital goods orders data. Also due out will be the November personal income and spending reports, core and deflator PCE readings, initial jobless claims, FHFA house price index, Kansas City Fed’s manufacturing survey and the Conference Board’s leading index. We close out the week in Asia on Friday with the MNI business indicator in China. During the European session we’ll get consumer confidence data in Germany along with the final UK and France Q3 GDP revisions. We finish the week in the US on Friday with new home sales data and the final University of Michigan consumer sentiment reading.

There’s not a huge amount else away from the data. Fed Chair Yellen is due to deliver the keynote address at the University of Baltimore’s Midyear Commencement this evening while the ECB’s Weidmann also speaks today. UK PM Theresa May is then due to by questioned by the UK Parliament Panel about her plans for leaving the EU tomorrow. Finally it’s worth noting that the US Treasury market and London Stock Exchange are due to close for a half day on Friday ahead of the holiday weekend.