Another attempt to rally S&P futures overnight has fizzled, this time as a result of weakness in Europe and a mixed session in Asia, following a sharp decline in European retailers due to a record plunge in UK online retailer Asos Plc which collapsed after warning that Christmas shopping got off to a disastrous start, dragging its shares to a 2 year low and hitting the sector.

In an otherwise quiet session as traders prepare for this week’s critical Fed meeting, shares in European retailer Asos plunged by over 40% after the company cut expectations for the current financial year.  The last time its shares traded this low was back in 2015/16. The company said it was experiencing a “significant deterioration” in the trading month of November and that conditions remain challenging. Guidance is slashed to 15% from earlier expectation of 20-25%. As Inezfrans notes, “the move lower is absolutely astonishing.”

Asos cut its full-year sales-growth guidance on a “significant deterioration” in November, blaming a high level of discounting amid economic uncertainty and low consumer confidence, which has been undermined in the U.K. by the continuing Brexit saga.

The rest of the Europe’s big retailers including Marks & Spencer, JD Sports, Next and Boohoo all fell in London, while German giant Zalando has also joining the implosion of the retailers, falling by 15% on Xetra.

Commenting on Europe’s “retail apocalypse“, Bloomberg notes that the gloomy update from the online retailer – which competes with Amazon.com and has furnished fashions to the likes of Meghan Markle – shows that retail weakness is widespread in the runup to the holidays. Last week, Sports Direct International Plc Chief Executive Officer Mike Ashley said sales were “unbelievably bad” in November, sending the shares off a cliff.

“This goes against the script,” said Stephen Lienert, a credit analyst at Jefferies. “It was supposed to be bricks and mortar that’s dying and online is the future, but that headline gets ripped up today.”

The Asos news shows that retailers can’t rely on online operations to make up for a decline in stores this year. If December doesn’t improve, the New Year may bring more profit warnings, or worse, to the sector. Meanwhile, other retailers such as Debenhams Plc and Marks & Spencer, which are in the midst of turnaround plans, may be particularly vulnerable. The U.K.’s shopping districts have already been decimated by a series of collapses, including the insolvency of department-store chain House of Fraser, which Ashley rescued earlier this year.

Investors in retail debt are also feeling the pain. Debenhams’ 200 million pounds of bonds due July 2021 have plummeted 35 pence on the pound since the start of the year to 64 pence, the lowest since the notes were sold in 2014, according to data compiled by Bloomberg.

Europe’s Stoxx 600 Index dropped to session lows, down 0.5% following the Asos plunge and retail sector weakness. In contrast, mining shares are up 1% after China managed to close modestly higher after the PBOC injected a net CNY150BN in reverse repo liquidity after 36 days of silence. Among Europe’s other biggest decliners are Novartis -1%, Adidas -3.4% and H&M -7.2%.

Earlier in the session, Asian markets began the week cautiously following the downbeat lead from Wall Street in which the three major indexes closed lower by around 2% each with the Dow plunging almost 500 points to its lowest level since early May, led
lower by shares in Apple and Johnson & Johnson, while the S&P and Nasdaq were dragged down by tech names as the sector
lagged. Australia’s ASX 200 (+1.0%) was buoyed by material and mining names after MOFCOM confirmed the suspension of retaliatory tariffs on US vehicles and auto parts, while Nikkei 225 (+0.7%) initially outperformed on currency effect as the export-heavy index benefitted from the weaker JPY. Elsewhere, Hang Seng (Unch) and Shanghai Comp. (+0.1%) traded choppy and swung between gains and losses in which the indices initially dipped in the red as industrial names were again pressured in a continuation from the weak IP data last week, housing names then provided the bourses with some support amid an improvement in house prices data.

Futures on the Dow, S&P and Nasdaq fluctuated before dipping in the red, dragged lower by Europe’s weakness.

Treasuries posted modest gains to start the week, with the 10Y yield dipping 1 basis point to 2.8786% and have seen some bull steepening with 2s/10s and 10-year futures uneventful ahead of an action-packed central bank week, that kicks off with the Chinese Central Economic Work Conference from Tuesday ahead of the FOMC on Wednesday, with BoJ, BoE and more thereafter, alongside US housing data tomorrow.

In foreign exchange markets, most currencies were little changed. The dollar fell after a strong week that took it to the highest in a month, following bizarre strength in the euro which hit fresh session high even as data show annual euro-area inflation slipped to 1.9% in November, the lowest since May, from 2.2% the previous month; the yen was steady after a bout of risk aversion hammered global equities in recent sessions.  Emerging-market shares and currencies edged higher thanks to the drop in the dollar: Mexico’s peso rallied after President Andres Manuel Lopez Obrador promised a surplus in next year’s budget.

“The market appears to be underpricing the Fed, and any indication of additional gradual increases is likely to bring potential dollar upside versus rate-sensitive currencies,” Barclays strategists wrote in a note.

Core EU bonds have recovered some ground after touching session lows (163.04 and 123.37) with Bunds deriving some support from another retreat in BTPs (trading near lows at 125.20), that has pushed German benchmark futures back above par to print  new highs at 163.29. Italian bond yields edged higher even as Prime Minister Giuseppe Conte forged a deal with populist leaders to submit a revised budget proposal to the European Commission in a bid to avert fines: The new plan confirms the 2019 deficit target will be lowered to 2.04 percent of GDP from 2.4 percent as Conte flagged to Brussels last week. Meanwhile Gilts have been further depressed by the accounting changes at the ONS which “effectively wipes out the Brexit buffer” after the Brexit-driven downturn, that has pushed the benchmark to trade in close proximity to lows of the day.

Elsewhere, Malaysia turned up the heat on Goldman Sachs Group Inc., filing criminal charges against the U.S. bank.

Markets are expected to be relatively quiet until this week’s FOMC announcement, when the Fed is expected to raise interest rates for a fourth time this year, but it will be Chairman Powell’s remarks that will be closely studied for hints on their future path and whether the dot plot is trimmed to forecast 2 rate hikes in 2019 instead of 3; a failure to turn more dovish would lead to another rout in risk assets as global growth forecasts for next year are being trimmed at an accelerating pace.

“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 U.S. monetary policymakers are seeing a serious risk of economic slowdown, those dots should be pulled downwards,”said FXTM strategist Hussein Sayed.

In this week’s other key events, investors will be looking to a speech by China’s President Xi Jinping on Tuesday marking the 40th anniversary of China’s reforms and opening up. China – where the economy has been rapidly losing momentum – is also expected to hold its annual Central Economic Work Conference later this week, where key growth targets and policy goals for 2019 will be discussed. The top decision-making body of the Communist Party, the Politburo, said last week China will keep its economic growth within a reasonable range next year, striving to support jobs, trade and investment while pushing reforms and curbing risks.

“It’s generally assumed that you will need to expand fiscal and monetary support to achieve those goals,” said Tokai Tokyo Research strategist Wang Shenshen.

The optimism before Xi’s speech helped base metals rise, although weak economic indicators capped gains.

Meanwhile political uncertainty still grips investors. There are yet more personnel changes within the Trump administration and confusion remains over Britain’s future relationship with the European Union.

“There’s been a reevaluation of growth and inflation prospects over 2019 with the trade war now looking extremely negative,” Steve Goldman, fund manager at Kapstream Capital, told Bloomberg TV in Sydney. “We’re going to see a lot of volatility.”

As reported over the weekend, Trump’s Interior Secretary Ryan Zinke will leave at the end of the year amid a swirl of federal investigations.

Elsewhere, in the neverending Brexit drama, investors will monitor Theresa May’s comments after her team pushed back against reports they are warming to a second referendum on Brexit. The U.K. prime minister will face Parliament on Monday.

In commodities, Brent (+1.0%) and WTI (+1.0%) have shown a modest upside in prices which is more a by-product of currency effects as the dollar drifts lower. This morning there have been reports that Russia’s oil output has been at a record high of 11.42mln BPD in December, with prices unreactive to this news. Additionally, the UAE Energy Minister has said that he expects everyone to cut oil supply following the OPEC agreement, and separately reports state that China’s Shenghong has begun building a 330k BPD refinery in Jiangsu. Gold has traded within a tight USD 4/oz range, but has recently begun to firm slightly as the DXY has remained largely unchanged ahead of this week’s FOMC meeting. Elsewhere, steel and iron ore prices have begun to rise due to winter production cuts, as Chinese authorities are trying to reduce air pollution levels.

Expected data include Empire State Manufacturing Survey. Heico, Oracle, and Red Hat are reporting earnings.

Market Snapshot

• S&P 500 futures up 0.2% to 2,610.50
• STOXX Europe 600 down 0.4% to 345.76
• MXAP up 0.3% to 149.57
• MXAPJ up 0.3% to 482.53
• Nikkei up 0.6% to 21,506.88
• Topix up 0.1% to 1,594.20
• Hang Seng Index down 0.03% to 26,087.98
• Shanghai Composite up 0.2% to 2,597.97
• Sensex up 0.9% to 36,290.73
• Australia S&P/ASX 200 up 1% to 5,658.27
• Kospi up 0.08% to 2,071.09
• German 10Y yield rose 0.3 bps to 0.255%
• Euro up 0.2% to $1.1327
• Italian 10Y yield fell 1.7 bps to 2.577%
• Spanish 10Y yield rose 0.7 bps to 1.419%
• Brent futures up 0.7% to $60.70/bbl
• Gold spot little changed at $1,239.59
• U.S. Dollar Index down 0.2% to 97.23

Top Overnight News from Bloomberg

• The dollar’s gains over the past three months have spurred hedge funds to cut bullish bets to the lowest since June. Leveraged funds trimmed positions wagering on gains in the greenback by the most since September, according to the latest data from the U.S. CFTC based on eight currency pairs
• Donald Trump won’t be sitting down with Special Counsel Robert Mueller to answer more questions in his investigation into election interference, Rudy Giuliani, the president’s attorney, vowed on Sunday
• U.K. Prime Minister Theresa May will attack supporters of a second Brexit referendum on Monday as she explains to Parliament why European Union leaders rebuffed her attempt to make her divorce deal more attractive to lawmakers
• Australia is on track to return to the black for the first time since the global financial crisis, almost doubling the size of its projected surplus in fiscal 2020, according to projections from the Treasury
• The Italian government will trim its deficit target for next year in its latest proposal that seeks to avoid EU sanctions for violating the bloc’s budget rules, the Ansa news agency reported
• The toll Brexit is taking on the U.K. housing market was laid bare in surveys published Monday

Asian equity markets began the week somewhat cautiously following the downbeat lead from Wall St. in which the three major bourses closed lower by around 2% each. The Dow plunged almost 500 points to its lowest level since early May, led lower by shares in Apple and Johnson & Johnson, while the S&P and Nasdaq were dragged down by tech names as the sector lagged. ASX 200 (+1.0%) was buoyed by material and mining names after MOFCOM confirmed the suspension of retaliatory tariffs on US vehicles and auto parts, while Nikkei 225 (+0.7%) initially outperformed on currency effect as the export-heavy index benefitted from the weaker JPY. Elsewhere, Hang Seng (Unch) and Shanghai Comp. (+0.1%) traded choppy and swung between gains and losses in which the indices initially dipped in the red as industrial names were again pressured in a continuation from the weak IP data last week, housing names then provided the bourses with some support amid an improvement in house prices data. Finally, 10yr JGB yields touched over 5-month lows as fears of slower global growth boosted demand for the debt.

Top Asian News

• China Built a Global Economy in 40 Years, Now It Has a New Plan
• JDI Posts Record 2-Day Rally as Company Hints Demand May Improve
• Takeda Downgraded by Moody’s on Lofty Debt After Shire Deal
• 1MDB USD Bonds See Biggest Drop In 2 Weeks After Malaysia Charge
• China Bond Issuers Shorten Process to Clinch Year-End Deals

Major European indices are in the red [Euro Stoxx 50 -0.3%], with losses generally broad-based although there is some underperformance in the SMI (-0.6%) with heavyweight UBS (-0.4%) in the red having lost ground against rivals after USD 3.1bln was removed from their ETF business in November; alongside Swatch (-3.0%) and Richemont (-0.9%) who were both downgraded at Morgan Stanley. Similarly, sectors are in the red with some underperformance seen in Consumer Discretionary alongside the European Retail Sector, the latter dropping to its lowest level since July 2016. This follows Asos (-40.0%) plummeting after cutting their full year outlook, which has pulled other retail names down in sympathy. In addition, ABB (+0.8%) are up after the Co has reached a deal with Hitachi regarding their power grids division valued at USD 11bln. SSE (-2.0%) are lower as they have been unable to come to an agreement with Innogy (-1.0%) on revised commercial terms.

Top European News

• SSE Pulls the Plug on U.K. Energy Retail Merger With Innogy
• Euro- Area Inflation Revised Down After ECB Pledged to Halt QE
• Italy Govt Has Resources to Cover 2.04% Deficit in 2019: Ansa
• DWS Head Asoka Woehrmann Reshuffles Regional Leadership Roles
• Toxic Politics and Fading Stimulus: East Europe’s 2019 Risks

In FX, the DXY has traded in a 97.199-463 range for the index almost says it all in terms of the lacklustre start in  currency markets to the final full week of the year. However, the Dollar is treading cautiously into the FOMC amidst an approximate 75% probability for a 4th 25 bp hike, with the focus firmly on updated policy guidance and fresh dot plots to see whether the consensus has shifted towards a pause in tightening or a shallower rate profile from 2019 out.

• NZD/AUD – The Kiwi is just about keeping its head above 0.6800 vs its US counterpart and in front of the G10 pack, but largely by default and relative weakness in the Aud after the Australian Treasury downgraded its 2018/9 growth forecast to 2.75% from 3% overnight. Indeed, Aud/Usd remains capped ahead of 0.7200 where a decent 1.1 bn option expiry resides, while the Aud/Nzd cross is back under 1.0550.
• EUR – The single currency has reclaimed 1.1300+ status vs the Greenback, but may also be hampered by expiry interest between 1.1320-35 as 1.1 bn runs off at the NY cut, or technical resistance at the 30 DMA circa 1.1353 if the headline pair manages to  clear option-related offers/hedges convincingly. No discernible reaction to final Eurozone inflation data even though the EU-harmonised measure was unexpectedly trimmed to 1.9% y/y from 2%
• JPY/CAD – Both relatively flat vs the US Dollar and rangebound (113.25-50 and 1.3375-90 respectively), with the former awaiting the last BoJ meeting of the year ahead of the Fed and the latter only deriving modest momentum from firmer crude prices.
• EM – The Mxn is benefiting from the broad Usd downturn and some bullish Peso sentiment following the Mexican budget projections to retest resistance ahead of 20.0000, but the Try is bucking the general trend in wake of considerably weaker than expected Turkish ip data, as the Lira struggles to hold above 5.4000.

In commodities, Brent (+1.0%) and WTI (+1.0%) have shown a modest upside in prices with this more a by-product of currency effects as the dollar drifts lower. This morning there have been reports that Russia’s oil output has been at a record high of 11.42mln BPD in December, with prices unreactive to this news. Additionally, the UAE Energy Minister has said that he expects everyone to cut oil supply following the OPEC agreement, and separately reports state that China’s Shenghong has begun building a 330k BPD refinery in Jiangsu. Gold has traded within a tight USD 4/oz range, but has recently begun to firm slightly as the DXY has remained largely unchanged ahead of this week’s FOMC meeting. Elsewhere, steel and iron ore prices have begun to rise due to winter production cuts, as Chinese authorities are trying to reduce air pollution levels. Separately, Vedanta may restart its 400ktpa Indian copper smelter following it’s forced closure by the government due to pollution. UAE Energy Minister says he expects “everyone” to cut oil supply as per the OPEC agreement. Kuwait Oil Ministers resignation is said to have been accepted, according to sources.

US Event Calendar

• 8:30am: Empire Manufacturing, est. 20, prior 23.3
• 10am: NAHB Housing Market Index, est. 60.5, prior 60
• 4pm: Total Net TIC Flows, prior $29.1b deficit
• 4pm: Net Long-term TIC Flows, prior $30.8b