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.

First it was the Fed, then the ECB (which last week tapered when it reduced the monthly amount of bond purchases under its QE program). Now attention shifts to the Bank of Japan, because as the WSJ writes, one of central banking’s most aggressive easers – Kuroda’s Bank of Japan – may soon have to think about tightening for the first time since 2007.

While it has yet to permeate the markets (confirmation would send the Yen soaring), the latest buzz in Japanese monetary-policy circles is that the BOJ may have to lift the 10-year government-bond target from a recently set zero, in the process tightening financial conditions even more. Indeed, as the WSJ notes, such a changed view on BOJ policy is quite a turnaround.

Just a few months back investors and economists world-wide were discussing what would be the next easing steps in the bank’s 15-year fight to boost the economy and produce inflation. More certainly seems needed: Japan’s economy grew more slowly than expected in the latest quarter and prices are falling.

So why switch gears now? Blame Donald Trump, stupid, whose miraculously adverse impact on the Yen has been more profound than either of Japan’s recent QEs…. and that is before Trump is even inaugurated, or reveals any of the details behind his fiscal stimulus plans.

The U.S. dollar and Treasury yields have been climbing since soon after Trump was elected president on Nov. 8, triggered by expectations that his policies would boost U.S. growth, inflation and interest rates. So far, that has been good for Japan, where the weaker yen is brightening exporters’ prospects, helping send Tokyo stocks to 11-month highs. A weaker yen bolsters their bottom lines by making their products cheaper overseas and inflating the value of repatriated income. As of Friday, one dollar buys ¥114.50, 9.6% more than the day before the U.S. election.

While that may be fine as far as it goes, according to various central-bank watchers who spoke to the WSJ, the BOJ’s latest easing policy raises the risk of far greater, and potentially damaging, depreciation. That is because as a result of the curve “anchoring”, the wider the yield spread between JGBs and foreign bonds, the greater the outflows, the more aggressive the selling of the Yen. For example, since U.S. Election Day, U.S. 10-year Treasury yields have risen to 2.426% from 1.862%, far outstripping the Japanese benchmark bond’s rise to 0.056% from minus 0.064%.

As yields rise around the world—led by the U.S., whose Federal Reserve is expected to raise rates on Dec. 14—the gap between Japan and other markets widens. That draws money out of Japan as investors search for better returns, which puts further pressure on the yen.

So what happens if US TSY yields spike even higher (the 10Y was at 2.493% moments ago, the highest since June 2015)? Should 10Y yields climb to 3% or higher next year, as some economists think it could, “the BOJ may be forced to raise its yield target in response, even if it hasn’t achieved its policy goal of 2% inflation.”

The pressure to raise the target could be especially intense if the yen weakens to levels like ¥130 to the dollar.

While for those who believe an imploding yen is what the doctor ordered, referencing Abe’s plan to goose the economy with easy money, there are notable downsides.

Sure, a weaker yen could boost optimism and inflation expectations among Japanese companies, argues Abe adviser Etsuro Honda, making them more willing to invest and raise wages. If the result was increased upward pressure on bond yields, the “natural course of action” would be for the BOJ to raise the 10-year yield target a touch from zero, he said. Two months ago Mr. Honda was calling on the BOJ to lower its targets as an added jolt of easing.

However for Abenomics skeptics, the yen’s deteriorating prospects ring alarm bells. BNP Paribas chief Japan economist Ryutaro Kono said in a recent note for clients that a fall to ¥115 to the dollar could upset consumers by raising the cost of living.

The Yen is already below that level.

When BOJ easing weakened the yen to ¥125 to the dollar from ¥110 between autumn 2014 and summer of 2015, it cast a chill over the economy as rising costs for imported food and necessities battered consumers while companies held back from raising wages.

Then there is the yield curve argument: Japanese economists say the BOJ may have to raise its bond-yield target just to give more breathing room to the country’s banks, whose profits are dwindling as their longer-term lending rates fall dangerously close to what they’re paying on deposits.

“It’s like they’re submerged under water and holding their breath,” said Kazuo Momma, a former BOJ executive director who is now executive economist at Mizuho Research Institute. “If this situation becomes protracted, they could drown.”

Naturally, the BOJ – just like the ECB – which are both agreeable to steepening the yield curve even more (seemingly unaware that will also crash the housing market), is allergic to any discussions of tightening. After all, if there is one thing that could crash this market, it is further hints of tightening and the yanking of billions in reserves. Then again, just like in the case of the ECB, perhaps all Kuroda needs to do is come up with a fancy-sounding economic name for its imminent tightening, one which doesn’t wake up the algos. Perhaps “inverse massive QE” should do the trick…

While the domestic US audience was focused on what Trump would say about the latest scandal of alleged Russian intervention in the US presidential elections, which as a reminder, he called “ridiculous” and suggested that democrats are behind the report, China was more curious by Trump’s foreign policy thoughts, which may have sparked yet another diplomatic spat, because one week after Trump snubbed America’s long-running “One China” policy, today the President-elect questioned whether the United States had to be bound by its long-standing position that Taiwan is part of “one China” and brushed aside Beijing’s concerns about his decision to accept a phone call from Taiwan’s president.

“I fully understand the ‘one China’ policy, but I don’t know why we have to be bound by a ‘one China’ policy unless we make a deal with China having to do with other things, including trade,” Trump said. Trump’s decision to accept a congratulatory telephone call from Taiwan President Tsai Ing-wen on Dec. 2 prompted a diplomatic protest from Beijing, which considers Taiwan a renegade province.

Following Trump’s decision to nominate Iowa Governor Terry Branstad as the next U.S. ambassador to China, choosing a long-standing friend of Beijing after rattling the world’s second largest economy with tough talk on trade and the call with the leader of Taiwan, pundits thought that Trump would moderate his diplomatic outbursts vis-a-vis China. However, in the Fox interview, Trump brought up a litany of complaints about China which he had emphasized during his presidential campaign, and which may provoke an fresh bout of harsh criticism from China.

“We’re being hurt very badly by China with devaluation, with taxing us heavy at the borders when we don’t tax them, with building a massive fortress in the middle of the South China Sea, which they shouldn’t be doing, and frankly with not helping us at all with North Korea,” Trump said. “You have North Korea. You have nuclear weapons and China could solve that problem and they’re not helping us at all.”

Here, contrary to Trump’s allegations, over the past two years China has been doing everything in its power to prop up its rapidly devaluing currency, which recently hit record lows against the dollar as a result of ongoing capital flight by domestic depositors who are scrambling to park their savings offshore realizing just how insolvent local financial institutions are.

The President-elect further criticized China over its currency policies, its activities in the South China Sea and its stance toward North Korea and said it was not up to Beijing to decide whether he should take a call from Taiwan’s leader.

“I don’t want China dictating to me and this was a call put in to me,”Trump said. “It was a very nice call. Short. And why should some other nation be able to say I can’t take a call?”

“I think it actually would’ve been very disrespectful, to be honest with you, not taking it,” Trump added.

Trump  questioning of long-standing U.S. policy risks antagonizing Beijing further and analysts have said it could provoke military confrontation with China if pressed too far. As of early noon Eastern time – and thus late at night in China’s capital – Beijing had no comment on Trump’s remarks.

The call with Trump was the first such contact with Taiwan by a U.S. president-elect or president since President Jimmy Carter switched diplomatic recognition from Taiwan to China in 1979, acknowledging Taiwan as part of “one China.” Taiwan is one of China’s most sensitive policy issues, and China generally lambastes any form of official contact by foreign governments with Taiwan’s leaders.

After Trump’s phone conversation, the Obama administration said senior White House aides had spoken with Chinese officials to insist that Washington’s “one China” policy remained intact. The administration also warned that progress made in the U.S. relationship with China could be undermined by a “flaring up” of the Taiwan issue. Following Trump’s latest comments, a White House aide said the Obama administration had no reaction beyond its previously stated policy positions.

* * *

Meanwhile, as Trump postures in an attempt to jockey the greatest possible diplomatic leverage in his negotiations with China, and drums on about ending free-trade agreements, China is widening its economic footprint in the U.S. backyard: Latin America.

As Bloomberg notes in its daily Macro piece, the region has long been thought of by the U.S. as under its umbrella of influence. President Teddy Roosevelt famously used the phrase “speak softly, and carry a big stick” emphasize region hegemony in the Americas.

But the world is shifting. With U.S. influence waning, China is carrying a big carrot: trade. President Xi paraded through Latin America in November, boosting trade ties, and a few days ago the state-owned oil behemoth CNOOC purchased a deep-water oil block in Mexico. As the Middle Kingdom’s economy shifts to a larger middle class and more consumption, demand for agriculture produce is expected to increase on top of an already strong desire for metals and oil, which have been the staple exports from South America over the last decade.

The benefits will spread unevenly across the region with countries such as Brazil, Chile and Peru will likely continue to profit more from China trade (Sorry Mexico, China probably won’t bail you out from Trump shocks). Brazil and Chile already run sizable trade surpluses with China. Their top exports are, unsurprisingly, raw materials and agricultural products.

In 2009, China overtook the U.S. to become Brazil’s biggest trade partner. Now, Brazil runs a $24 billion trade surplus with China, bigger than its total surplus last year.

Half of Chile’s exports are copper and related products, mostly bought by China. During Xi’s fall visit, the two countries agreed to begin talks to upgrade their free-trade agreement signed a decade ago.

While others benefit, Mexico will likely be left mostly on the sidelines, given its limited agriculture exports and falling oil output, at a time when it faces possible trade restrictions from the U.S., which buys more than three- fourths of its exports. Mexico has pumped out less and less crude oil during the last few years amid turmoil at state-owned Pemex. Scant Chinese interest in Mexican exports and a strong appetite for “Made in China” goods have contributed to a $22 billion trade deficit.

Although it opened up its energy sector to foreign investors last year, Mexico needs more funding and better technology to boost output and exports over time. Also, its industrial prowess and access to the U.S. may attract Chinese exporters looking to cut costs, but only when the fate of NAFTA becomes more certain.

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There was a time when China felt hedged in by the economic might of the U.S., but with America’s influence in Asia also starting to slip, the tables could be set to turn.

Trump should be careful how far he pushes Beijing, even if it is only with rhetoric.

The overnight exuberance in crude oil futures markets has fadednotably as the day has worn on. While news of supply cuts are unquestionably bullish (should one choose to believe it or not, remember the Saudis admission “we tend to cheat”), but the last few days have also seen a plethora of bearish-biased news that for now is being ignored.

The excitement is fading…

As large specs have never been more bullish crude… Investors are betting the rally will continue as we head into 2017. Money managers boosted wagers on higher Brent crude prices to a record before non-OPEC producers agreed Dec. 10 to join OPEC nations in cutting output. Their net-long position in the global benchmark surged by 46 percent in the week ended Dec. 6 to 452,585, the highest in data from ICE Futures Europe going back to 2011. Long positions also surged to a record.

But at the same time, US oil fund USO suffers the biggest 2-week outflows since 2009… U.S. Oil Fund had $197.1m outflow last week following $367.9m outflow the week before, biggest consecutive 2-week outflow since March 2009, according to data compiled by Bloomberg.

And while the front-end of the crude curve remains steeply contango,the belly has notably inverted into backwardation…

The biggest backwardation since Oct 2014 suggesting producers are hedging aggressively as opposed to believing the higher-for-longer hype.

Part of the steepness of the backwardated curve likely derives from the increasing belief that continued growth of crude supply in North America will have a tendency to drive cash prices in the future towards the marginal cost of production (i.e. lower)… and this is happening as Cushing crude inventories are soaring…

And up more this week according to Genscape: up 1.12mm barrels to 68.4mm

And remember, OPEC and Saudi production is at record highs and the biggest rig count increase in over 2 years in the US means more of the same is coming from US Shale.

‘Toys for Socialist Tots’ appears to be the latest scheme dreamed up by Venezuela’s President Maduro to keep the people from the verge of outright revolution. As Bloomberg reports, Venezuela price regulators on Friday seized almost 4 million toys from warehouses around greater Caracas and said they’d distribute them to low income children ahead of the Christmas holiday.

William Contreras, the country’s price czar, accused toy importer Distribuidora Kreisel of hoarding and price gouging and asked that the company’s directors be detained and prohibited from leaving the country.

Flanked by national guardsmen, he said the company had received preferential exchange rates for goods it imported as early as 2009 and then raised prices by as much as 50,000 percent.

“These products will be put to use by the Clap,” he said, referring to the government’s community-based network that distributes food to low income residents. “Venezuela’s boys and girls will have their baby Jesus guaranteed, and these companies will learn that they can’t play with the rights of the Venezuelans.”

Triple-digit inflation and a collapsing currency have made many non-essential items out of reach for most Venezuelans, where a monthly minimum wage buys only around $20 on the black market. Government authorities have in the past several years ordered price cuts ahead of the Christmas holiday, and price regulators ordered clothing stores in downtown Caracas to cut prices by 30 percent earlier this week.

In 2013, President Nicolas Maduro accused retailers across the South American nation of price gouging and deployed the military to slash prices at electronics and home appliance stores. The event became coined the “Dakazo,” after the socialist leader ordered an electronics chain called Daka to slash its merchandise prices to “fair” levels and liquidate their inventory on live television.

Since then, Venezuela’s government has cracked down on prices across the entire economy — everything from eggs to children shoes — levying sanctions or confiscating the merchandise of business owners who don’t comply.

With the nation’s currency hyperinflating faster than a CNN Russian hacking story, this confiscation of ‘unfairly-priced’ toys is likely the only way to keep the Grinch from the door of this socialist nirvana.