• Asian stocks were higher as they followed suit to the rebound across their global peers amid a more conciliatory tone from US President Trump
• US President Trump suggested that negotiations with China will begin shortly and thinks a deal will be reached
• Trump was also optimistic about reaching a deal with EU and was open to meeting Iran President Rouhani under the right circumstances
• Italy's 5-Star and PD were reportedly on track towards an agreement where Conte can return as PM according to two PD sources
• Looking ahead, highlights include German GDP (Detailed), US Consumer Confidence, Fed Discount Rate Minutes, BoE’s Broadbent & Tenreyro, ECB’s de Guindos, Norges Banks Matsen, supply from Germany and the US

ASIA-PAC

Asian stock markets were higher as they followed suit to the rebound across their global peers after US President Trump provided a more conciliatory tone at the G7 regarding US-China trade, while he was also optimistic about reaching a deal with EU and was open to meeting Iran President Rouhani under the right circumstances. ASX 200 (+0.6%) was led by the tech sector amid trade hopes and as retailers cheered encouraging earnings from Wesfarmers, while Nikkei 225 (+1.2%) rode on the currency wave and eyed a reclaim of the 20.5k level. Shanghai Comp. (+1.7%) was underpinned after US President Trump’s softer tone on China in which he suggested that negotiations will begin shortly and thinks a deal will be reached. Furthermore, the PBoC injected liquidity through reverse repos and Chinese Industrial Profits returned to growth, although Hang Seng (Unch.) lagged amid a deluge of earnings, ongoing unrest and continued contraction in both Imports and Exports. Finally, 10yr JGBs weakened amid the improvement in risk sentiment and as prices homed in on the 155.00 level to the downside, although it eventually found some mild support following improved demand at the enhanced liquidity auction for super-long JGBs.

PBoC injected CNY 80bln via 7-day reverse repo for a daily net injection of CNY 30bln. (Newswires) PBoC set CNY mid-point at 7.0810 vs. Exp. 7.1055 (Prev. 7.0570)

Chinese Industrial Profits (Jul) Y/Y 2.6% (Prev. -3.1%). (Newswires)

US President Trump said he wants a deal with China only if it is a good and fair deal for the US, while he thinks he will make a deal with China and is confident that China is sincere in wanting a trade deal. Trump reiterated criticisms that China is taking hundreds of billions per year from the US but also stated the US has collected tariffs of nearly USD 100bln and that China’s economy has recently taken a hit with 3mln jobs lost. (Newswires) 

UK/EU

UK PM Johnson said EU are tough negotiators but that does not mean UK will not get a deal, while he reiterated the backstop must be removed from the agreement. Furthermore, PM Johnson refused to rule out suspending parliament to push through a no-deal Brexit, while he suggested that EU tends to take talks to the last minute and that if there is a no-deal, substantial sums would be made available to spend domestically from the EUR 39bln Brexit bill. (Newswires)

UK PM Johnson reportedly plans to stack the House of Lords with dozens of “Brexit heroes” as an effort to wipe out the overwhelming pro-EU majority in the upper house. (Express)

UK PM Johnson's Europe Adviser David Frost will visit Brussels on Wednesday to discuss alternatives to Brexit plan. (Telegraph)

US President Trump said he thinks he will make a deal with the EU without imposing auto tariffs and suggested the EU are very hard to get a deal with, while he also reiterated criticism that US has been losing money to the UK. (Newswires)

Italy's 5-Star and PD were reportedly on track towards an agreement where Conte can return as PM according to two PD sources, while PD leader Zingaretti said the meeting with Di Maio was positive and talks are going ahead to form a new government in which he is optimistic a deal with 5-Star will be reached but declined to comment on Conte returning as PM. In addition, it was later reported that that coalition discussions between PD and Five Star will continue today and that talks are stuck regarding 2020 budget. (Newswires) However, the FT reported that activists from within the 5SM have threatened to desert the party if they enter into an agreement with the opposition PD party. (FT) 

FX

DXY slightly pulled back to below 98.00 after the prior day’s gains which were spurred by the positive shift in tone from US President Trump at the G7, although its major counterparts remained subdued in which EUR/USD struggled to hold above 1.1100 and with GBP/USD at the bottom end of the 1.2200 handle after PM Johnson repeatedly refused to rule out suspending parliament to push through a no-deal Brexit and implicitly reiterated the view of not paying the divorce bill if there is no agreement. USD/JPY retraced some of the prior day’s rebound as it oscillated through the 106.00 level and antipodeans lacked firm direction amid choppy price action in CNH after the PBoC set the weakest reference rate in more than 11 years but at a firmer than expected level, with mild pressure in AUD seen following comments by RBA’s Debelle that the currency could have further to decline.

RBA Deputy Governor Debelle said floor rates in Australia are likely between 0.0%-0.5% and that they have looked closely at minimum rates in other developed countries but hope we never have to get down to those levels. Debelle also stated that AUD has come down some and may well go down further, while he added that a fall in AUD would be helpful and they would have to consider other option if rates decline to 0.5%. (Newswires)

COMMODITIES

Commodities were relatively flat overnight in which WTI crude futures edged mild gains as price action steadied after the prior day’s swings where an initial advance was cut short by resistance just above the USD 55.00/bbl level, and as comments from French President Macron who hoped for a US-Iran summit, resulted to an unwinding of some of the geopolitical risk premium. Elsewhere, gold was relatively unchanged with the precious metal restricted by a slight pullback in USD and the improved risk tone, while copper prices conformed to the uneventful trade across the complex. 

GEOPOLITICS

Iranian President Rouhani said he is open to talks with the West although there were separate reports that Iran has rejected French President Macron's proposal for negotiations over its ballistic missile programme and regional issues, while US President Trump suggested he would meet with Iran’s President if the circumstances were right. (Newswires)

US

Treasuries were in negative territory, largely on optimism regarding a medley of factors, although it is notable that yields, while largely recovering the downside seen on Friday, have not matched the optimism of equity markets, which were trading up by over a percent at one point. It has taken yields longer to rise (at the time equities were up around 1%, yields were only up by around 1bps across the curve; however, at pixel time, equities are off the highs by a margin, and yields are up around 3bps at the short end, and around 2bps at the long-end. Curve spreads are relative flat (+/- 1bps for the major spreads, at settlement); 2s10s once again entered inversion in the European afternoon, although it did not have a detrimental impact on the risk environment. Some traders are more interested by this week’s bund auctions, rather than Treasury auctions. The Treasury will this week sell a new 2-year note (Tue, USD 40bln), new 5-year note (Wed, USD 41bln) and new 7-year note (Thu, USD 32bln). Analysts at UBS say this week will bring USD 85bln of cash (excluding SOMA holdings) but including around USD 76bln of redemption, as well as around USD 8.5bln of coupons. US T-note futures (U9) settled 5+ ticks lower at 130-25.

House Democrats are reportedly pushing a short-term funding bill that would keep the US Government running after 30th September. (CNBC)