• Asian equity markets began the week cautiously as oil prices surged and geopolitical concerns heightened following drone attacks on Saudi refineries
• Disappointing Chinese Industrial Production and Retail Sales data, as well as this week’s heavy slate of central bank activity added to the tentative tone
• WTI crude futures surged briefly towards USD 64.00/bbl and Brent crude rallied by as much as 20% following the attack on the Saudi facilities
• US pointed the blame on Iran in which US President Trump suggested the US was ‘locked and loaded’ depending on verification
• Looking ahead, highlights include US NY Fed Manufacturing, BoE’s Haldane, ECB’s Coeure & Lautenschlaeger

ASIA-PAC

Asian equity markets began the week cautiously as oil prices surged and geopolitical concerns heightened following drone attacks on Saudi refineries which shut down 5.7mln bbls or more than half of the kingdom’s production. Furthermore, the US are pointing the blame on Iran which the latter have denied, while disappointing Chinese Industrial Production and Retail Sales data, as well as this week’s heavy slate of central bank activity added to the tentative tone. ASX 200 (+0.1%) traded indecisively as weakness in the broader market was counterbalanced by strong gains in commodity-related sectors, especially energy stocks after oil prices briefly spiked as much as 20% due to the attacks on OPEC’s largest producer and although it expects to restore a third of the disrupted output today, some sources suggested a large percentage of the offline crude could be lost for some time. Hang Seng (-1.1%) and Shanghai Comp. (+0.1%) were mixed with underperformance in Hong Kong following another weekend of violent protests and with the mainland choppy as disappointing data and downbeat comments on China’s economy from Premier Li, fuelled stimulus hopes and as the PBoC’s previously announced 50bps RRR cut took effect today. As a reminder, Japanese markets remained shut for Respect for the Aged Day.

PBoC skipped open market operations and said liquidity remains at a relatively high level as RRR cut takes effect. (Newswires) PBoC set CNY mid-point at 7.0657 vs. Exp. 7.0713 (Prev. 7.0846)

China Premier Li said maintaining economic growth at 6% or higher is very difficult and that the Chinese economy faces certain downward pressure due to slowing global growth, protectionism and unilateralism. (Newswires)

China stats bureau said China will increase counter cyclical adjustments and that China's economy faces downward pressure, while it sees significantly increasing external uncertainties. Furthermore, the stats bureau said China is able to reach full-year growth target and will move forward with local government special bond issuance to support infrastructure investment. (Newswires)

Chinese Industrial Production (Aug) Y/Y 4.4% vs. Exp. 5.2% (Prev. 4.8%). (Newswires) Chinese Retail Sales (Aug) Y/Y 7.5% vs. Exp. 7.9% (Prev. 7.6%) 

UK/EU

UK PM Johnson said he believes he can strike an EU deal within weeks but added that the UK will leave on October 31st deal or no-deal. PM Johnson stated that he intends to go to EU summit on October 17th and finalize an agreement if we can make enough progress, while he added that leaving without a deal is not the outcome he wants but preparations are by now very extensive. (Telegraph) Note, PM Johnson will be heading to Luxembourg today for a meeting with European Commission President Juncker

EU officials denied UK PM Johnson's claim there has been real signs of movement and that huge progress is being made on removing the backstop. (Newswires)

UK Brexit Secretary Barclay has conceded that Britain could remain tied to the EU until 2022 if the transition period under the Withdrawal Agreement is extended. (Telegraph)

British Chambers of Commerce cut 2019 growth forecast to 1.2% from 1.3% and lowered 2020 growth forecast to 0.8% from 1.0%, while it added that its outlook assumes UK avoids a no-deal Brexit. (Newswires)

French Finance Ministry sources stated 2020 budget is to be based on deficit of 2.2% (April est. 2.0%), while growth is seen at 1.4% in 2019 (Unch.) and 1.3% in 2020 (Prev. 1.4%). Furthermore, it is expected to save EUR 3bln from lower borrowing costs in 2019 and EUR 8bln in 2020. (Newswires)

UK Rightmove House Prices (Sep) M/M -0.2% (Prev. -1.0%). (Newswires) UK Rightmove House Prices (Sep) Y/Y 0.2% (Prev. 1.2%)

FX

DXY was softer with price action lacklustre ahead of this week’s busy central bank roster headlined by the Fed on Wednesday. The greenback’s major counterparts were mixed with EUR/USD little changed below 1.1100 and GBP/USD pulled back from its recent outperformance after hitting resistance at the 1.2500 handle, while UK PM Johnson remained adamant he can strike an EU deal within weeks but reiterated the UK will leave on October 31st deal or no-deal, while EU officials denied PM Johnson's claims there has been real signs of movement and that huge progress was being made on removing the backstop. Elsewhere, USD/JPY was pressured as the geopolitical concerns spurred safe-haven flows, and antipodeans traded indecisive as they digested a firmer than expected PBoC reference rate and disappointing Chinese data. 

COMMODITIES

Commodities were mostly higher in which WTI crude futures surged briefly towards USD 64.00/bbl and Brent crude rallied by as much as 20% following the attack on the Saudi facilities which cut as the equivalent of around 5% of daily global supply, with prices also boosted by the geopolitical risk premium as the US pointed the blame to Iran in which US President Trump suggested the US was ‘locked and loaded’ depending on verification. However, oil prices have pulled back from intraday highs with WTI crude back below USD 60/bbl on profit taking and as Saudi expects to restore a third of the disrupted output, while President Trump also authorised the release of oil from the Strategic Petroleum Reserves if required. Elsewhere, gold prices were underpinned back above the psychological USD 1500/oz level due safe-haven flows and copper underperformed amid the cautious risk appetite as well as poor China data.

2 Saudi refineries were hit by drone attacks which cut as much as 5.7mln bbls of output or about half of Saudi's daily production. The attack was claimed to have been conducted by Houthi rebels although US have also pointed the blame at Iran which Iran have denied and think the US could be seeking a pretext to retaliate against Iran. Sources familiar suggested they are ‘fairly certain’ the attack on Saudi oil facilities was the work of Iranian Revolutionary Guards. (Newswires)

US President Trump said he authorized the release of oil from the Strategic Petroleum Reserve if needed at a to be determined amount following the attack on Saudi oil facilities, while he informed all appropriate agencies to expedite approvals of the oil pipelines currently in the permitting process in Texas and various other states. (Twitter)

Saudi Arabia expects to restore a third of the disrupted output on Monday, although other reports noted that a large percentage of Saudi Arabia's crude that went offline could be lost for some time, according to sources briefed on the situation. (FT)

Baker Hughes Oil rigs -5 at 733, Gas rigs -7 at 153, Total rigs -12 at 886. (Newswires)

GEOPOLITICS

US President Trump tweeted there is reason to believe that we know the culprit, are locked and loaded depending on verification, but are waiting to hear from the Kingdom as to who they believe was the cause of this attack and under what terms to proceed, while he tweeted that there is plenty of oil and suggested it is fake news he is willing to meet with Iran without conditions. (Twitter)

Turkish President Erdogan said he is to discuss with US President Trump the purchase of the US Patriot missile defence system and is to meet with Trump at the UN, while he suggested that a personal bond with Trump could overcome potential US sanctions. (Newswires) 

North Korea leader Kim reportedly sent a letter which proposes that US President Trump visit Pyongyang. (Newswires)

US

Yields continued their “back-up” to end the week amid further signs of progress on the US-China trade front. The large moves lower in the TPLEX came after the latest University of Michigan Survey, where losses extended as the Europeans closed up for the weekend. Treasuries were also taking some cues from EGB selling, as participants digest the latest ECB tiering system which gives leeway to banks to reallocate their reserves at the ECB at the tiered rate instead of in negative yielding government debt. US Treasury Secretary Mnuchin again stated that the US is looking whether there is proper demand for a 50-year bond and that the treasury will consider 100-year bonds. At settlement the curve had bear steepened significantly with yields up over 10bp in the belly to long end of the curve. US T-notes (z9) settled 27+ ticks lower at 128-18+.

US NEC Director Kudlow said a new US tax plan will be unveiled some time in the middle of next year and that US President Trump decided against an executive order to allow capital gains tax indexing as it would not benefit the middle class enough. Furthermore, Kudlow said he doesn't see a recession and expects a Fed rate cut as does the market. (Newswires)