• European indices are mixed wih Italy’s FTSE MIB outperforming on coalition positioning
• Italy’s 5-Star Movement have suspended talks with PD unless they agree to have Conte as the coalitions PM
• In FX markets, USD has modestly pulled back and remains below 98.00, while Sterling is supported by improved Brexit deal prospects
• Looking ahead, highlights include US Consumer Confidence, Fed Discount Rate Minutes, BoE’s Tenreyro, ECB’s de Guindos & supply 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 (+0.5%) was led by the tech sector amid trade hopes and as retailers cheered encouraging earnings from Wesfarmers, while Nikkei 225 (+1.0%) rode on the currency wave and eyed a reclaim of the 20.5k level. Shanghai Comp. (+1.4%) 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)

China's Foreign Ministry say that have not heard of a phone call between the US and China on trade, adding they hope the US can stop their actions and create condition for talks; and oppose the mention of Hong Kong within the G7 statement. (Newswires)

China is considering relaxing and removing restrictions on auto purchases, looking through the full release it appears to be on the domestic front referring to restrictions around the circulation of used cars. (Newswires) Resulted in some immediate upside to European auto names and both European and US stock futures.

GEOPOLITICS

Iranian President Rouhani says if the US keeps sanctions on Iran, there will be no change of status quo. (Newswires)

Chinese Public Security Minister (on a visit to the Guangdong Province) says will crack down on violent terrorism and firmly safeguard the nation's political security. Note, the Guangdon Province borders Hong Kong. (Newswires)

The Trump Administration is preparing engage in talks with the Iranian backed Houthi militia in Yemen, and will attempt to bring the Saudi's into the talks in an effort to agree on a ceasefire., WSJ. (WSJ)

UK/EU

UK PM Johnson has set out a range of options as an alternative to the Irish backstop, PM says he wants a deal, according to a spokesperson. (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)

Italy's 5SM suspends talks with the Democratic Party unless the PD agrees on installing Conte as PM. Prior to this it was reported that, potential Italian 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)

PD spokesperson says PD/5SM coalition talks risk failure due to 5SM Leader Di Maio's demands to serve as a Deputy PM and Interior Minister in the potential coalition govt. Subsequently, Di Maio has denied that he demands to serve as Interior Minister. (Newswires)

German Economy Minister Altmaier says the upcoming trade talks with the US will be difficult, slowdown in global economy increases chances of reaching a trade agreement with the US. (Newswires)

German GDP Detailed QQ SA* Q2 -0.1% vs. Exp. -0.1% (Prev. -0.1%)

- German GDP Detailed YY NSA* Q2 0.0%

EQUITIES

European equities are mixed [Eurostoxx 50 +0.2%] following on from a mostly higher Asia-Pac handover as optimism surrounding President Trump’s conciliatory tone somewhat waned. Italy’s FTSE MIB (+1.0%) outperforms its peers as the Italian political landscape seems to be shifting away from a snap election, with a PD/5SM coalition seemingly materialising, albeit some sticking points remain around Conte’s role. Sectors are also mixed with the energy sector outperforming amid price action in the oil complex, whilst consumer discretionary follows a close second amid reports that China considers relaxing and removing restrictions on auto purchases, albeit it appears to be on the domestic front referring to restrictions around the circulation of used cars. Nonetheless, the European car and auto supplier index rose 1.0% amid hopes of spurred activity in China. In terms if individual movers, G4S (+1.9%) and E.ON (+1.5%) shares are supported by positive broker moves at RBC and Barclays respectively. Also of note, US judge ruled against Johnson & Johnson (JNJ) in a landmark opioid case in Oklahoma. JNJ have been ordered to pay USD 572mln; however, the fine is less than investors had feared it may be, thus the Co. are +1.9% in the pre-market.

Norges bank recommends that Norway's Sovereign Wealth Fund cuts European equity exposure and raise North American Investments. (Newswires)

- Current setup: 33.8% Europe, 41.2% North America, 14.6% Asia, 10.1% EM

FX

AUD/NZD - Not quite all change down under, but there has been shift in cross-currents to the detriment of the Aussie vs its Antipodean peer with Aud/Nzd back under 1.0600 and Aud/Usd slipping back below 0.6750. Comments from RBA’s Debelle overnight about the potential for further Aussie depreciation are weighing alongside guidance suggesting that other policy options would have to be mulled if the OCR was lowered to 0.5% (from 1% at present) and more stimulus is needed. Meanwhile, China’s Foreign Ministry continues to deny reports that calls were made to US trade negotiators over the weekend and maintains that Beijing will respond to additional US tariffs, but Nzd/Usd is holding up better between 0.6397-61.

JPY/GBP/EUR - All firmer vs the Dollar as the DXY loses grip of the 98.000 handle again and Yen retains an underlying safe-haven bid above 106.00 where decent option expiries reside (1.2 bn) as a counterweight to similar size interest at 105.00 (1.1 bn). Meanwhile, Cable is rebounding from the low 1.2200 area to 1.2250+ and Eur/Gbp has retreated from just shy of 0.9100 as Brexit deal hopes vie with expectations that Italy could be on the verge of forming a new Government coalition and avoid a snap election. However, talks between the 5SM and PD to that end are contingent on the former party’s insistence that PM Conte is reinstalled and Eur/Usd appears reluctant to rally too far from the 1.1100 mark in advance.

CAD/CHF - The Loonie and Franc are narrowly mixed against the Greenback, with the former recovering from recent lows and meandering between 1.3257-28 amidst firmer crude prices and technical resistance providing support vs expiries forming resistance (1.3260 Fib and 1.3 bn at the 1.3200 strike respectively). Conversely, Usd/Chf is back up around 0.9800 and Eur/Chf is closer to 1.0900 than 1.0850 in wake of latest weekly updates showing record high Swiss sight deposits.

SEK - The Swedish Krona is outperforming on the back of supportive data in the form of household spending and trade over mixed PPI, with Eur/Sek down around 10.7000 vs 10.7550+ at one stage, while Eur/NOK straddles 10.0000 in tighter parameters.

EM - The steady rise in official Usd/Cny fixes continues, but the on-shore and off-shore Yuans are still trading considerably weaker than the official rate despite Chinese bank intervention to calibrate the declines. Indeed, the former closed at 7.1670 compared to 7.0810 and Usd/Cnh is currently around 7.1725 even though reports are circulating that China may relax and/or remove restrictions on auto purchases.

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)

FIXED

Bunds have settled down after a few wobbles alongside Gilts and US Treasuries with latest Chinese commentary on trade still suggesting that relations are strained and tetchy compared to President Trump’s more cordial view of the current situation. However, BTPs have pulled back quite sharply from just a few ticks away from 144.00 towards 143.00 on more political party bickering in Rome and another delayed meeting before President Mattarella finally calls time and has to defer to another election. More immediately, some US data snippets scheduled and including consumer confidence before the 2 year auction and after Central Bank speak from the ECB and BoE.

COMMODITIES

WTI and Brent futures have come off worst levels but remain in largely side-ways trade with little by way of catalysts to influence price action thus far. The benchmarks have been fluctuating on either side of 54/bbl and 59/bbl respectively throughout most of the session after finding bases at 53.60/bbl and 58.60/bbl. Ahead of the 12th September JMMC meeting, the committee noted that healthy oil demand and slowing global oil inventory growth should lead to significant draws in the second half of this year. The JMMC also noted that average July compliance among members stood at 159%, +22ppts M/M. Looking further ahead, the committee notes that the forecast for oil market fundamentals by major forecasters remains robust in 2019 and 2020. Elsewhere, gold prices have retreated from overnight highs but remain comfortably above the 1500/oz mark with little news-flow to sway prices. Copper posts mild gains, albeit more on the back of a slightly softer Buck. Finally, Chinese steel fell in excess of 3%, declining the most since November amid fears of weakening demand.

JMMC highlight the importance of the Declaration of Cooperation in supporting market stability, alongside healthy oil demand and slowing global oil inventory growth should lead to significant draws in H2

- Overall conformity of 159% in July 2019 was 22 pp higher than in June

- Average conformity of 134% since January 2019 was the highest to date in 2019

- Going forward, the forecast for oil market fundamentals by major forecasters remains robust in 2019 and 2020