• Asian stocks approached the weekend with a brightened mood as the region nursed recent losses
• Gains overnight were in contrast to a soft US close with the S&P 500 down just shy of 1% for the week
• US President Biden and Chinese President Xi spoke for the first time in seven months
• The White House stated that the leaders "discussed the responsibility of both nations to ensure competition does not veer into conflict"
• The DXY is marginally softer and sub-92.50, activity currencies lead and JPY lags
• Looking ahead, highlights include UK GDP, CBR rate decision, US PPI, Canadian Labour Market Report, ECB's Lagarde, Fed's Daly, Mester

CORONAVIRUS UPDATE

US President Biden said the US has tools to combat the virus if they raise the vaccination rate and that they will turn the tide on COVID-19 with many frustrated by the roughly 80mln Americans that are unvaccinated. Biden added the US is in a tough stretch regarding COVID which could last a while but announced a new plan for vaccinations which combats those who are blocking public health and confirmed that the Labor Department is developing a rule to require all employers with 100 or more employees to ensure their workers are fully vaccinated for COVID-19 or provide a negative test weekly. President Biden also signed executive orders requiring all federal employees and contractors to be vaccinated, while reports earlier noted that federal workers who do not comply with vaccine/testing mandate are to face progressive disciplinary action and large employers who do not comply with planned rules to face fines of up to USD 14,000. (Newswires)

EMA announced increased manufacturing capacity for the COVID vaccine from BioNTech (BNTX) and Pfizer (PFE) in which sites will provide up to 50mln further doses in 2021. (Newswires)

Italy's Medicines Agency approved a third COVID vaccine dose for immunocompromised people, the elderly, nursing home residents and high-risk health workers, according to sources familiar with the matter. (Newswires)

ASIA

Asian stocks approached the weekend with a brightened mood as the region nursed some of the recent losses and shrugged off the cautious performance stateside where sentiment was constrained by recent bearish macro themes and amid concerns of high valuations ahead of looming policy normalisation. ASX 200 (+0.6%) was kept afloat by outperformance in mining names in which aluminium-related stocks led the gains after underlying prices extended on decade highs, although upside in the index was capped by losses in healthcare and property, as well as the ongoing Delta concerns. Nikkei 225 (+1.0%) was among the outperformers with a firmer footing above 30k and with the index unfazed by the recent currency strength, as attention reverts to the Suga-succession race and with M&A newsflow also spurring risk appetite resulting to a glut of buy orders for Shinsei Bank on reports SBI Holdings is expected to launch a tender offer. Hang Seng (+1.7%) and Shanghai Comp. (+0.4%) were positive amid several encouraging headlines including reports the PBoC called for average loan rates for SMEs be around 5.5% as it aims to lower cost of financing to SMEs and will be issuing an additional CNY 300bln for small business relending. There was also optimism from news that China is to allow Evergrande to reset debt terms for renegotiation, while reports of a Biden-Xi phone call was only marginally supportive in which the leaders were said to have discussed where interests converged and diverged, with the US side also somewhat tempering expectations and noted that the call was not seeking specific agreements or outcomes. Finally, 10yr JGBs were lacklustre with demand sapped by the improved risk tone and the lack of BoJ purchases in the government bond market, with the central bank instead seeking to purchase JPY 500bln in commercial paper from September 15th.

PBoC injected CNY 10bln via 7-day reverse repos with the rate at 2.20% for a net neutral daily position. (Newswires) PBoC set USD/CNY mid-point at 6.4566 vs exp. 6.4570 (prev. 6.4615)

US President Biden and Chinese President Xi had a broad and strategic discussion in which they discussed where interests converge and areas where interests, values and perspectives diverged, according to White House. US official said the call was a test of whether direct leader-level engagement can move relations forward and that low-level discussions have not been fruitful, while the call was not intended to discuss costs for Beijing's lack of cooperation and the US was not seeking specific agreements or outcomes, but broad strategic discussion about how to manage competition. Furthermore, the US will not trade away progress in transnational issues with China for something not in the US' interests and the call was said to have lasted 90 minutes in which the tone was familiar and candid, although the official also noted the US ability to change China may be limited. (Newswires)

Chinese President Xi said that US policy on China imposes great difficulties in relations and that they should push forward US-China relations to get back on right track. Furthermore, both sides agreed to maintain frequent contact through multiple means and agreed to ask working-level teams to step up communications, while Xi added that they will continue to cooperate in climate change. (Newswires)

US House Republicans raised concerns about US approval of automotive chips for Huawei. (Newswires)

UK/EU

Support for the UK Conservative Party (33% vs. 35% Labour) has fallen to its lowest level since the election after the government announced plans to increase national insurance, according to polling by The Times . (Times)

A group of hawkish EU finance ministers are preparing to take a tough line in talks over post-pandemic changes to the EU’s budget rules, insisting any reforms must not harm fiscal sustainability or water down debt reduction targets. (FT)

French Finance Minister said the public sector deficit is to be lower than anticipated this year and next year amid a strong economic rebound with French public deficit seen at 8.4% of GDP this year (prev. 9.0%) and at 4.8% next year (prev. 5.3%), while 2021 public debt seen slightly less than 116% of GDP for 2021 and 114% of GDP in 2022. (Newswires)

ECB's Holzmann says that PEPP should expire in 2022. (Wiwo)

FX

In FX markets, the DXY was slightly softer overnight and marginally declined beneath the 92.50 level amid the improved performance in Asia and in a continuation of the prior day’s weakness despite further Fed taper comments in which Fed's Bowman said the US is very close on goal of maximum employment and that it is likely appropriate to begin scaling back asset purchases this year if data comes in as expected. EUR/USD remained choppy after having whipsawed throughout the prior day amid the ECB policy meeting where the central bank announced it is to conduct PEPP at a moderately lower pace than the prior quarters with President Lagarde noting this was not tapering but instead was a recalibration. GBP/USD held on to recent gains amid the softer greenback and after having reclaimed the 1.3800 status before breaching its 200-DMA at 1.3824. USD/JPY was lacklustre and antipodeans were initially uneventful but then saw mild support as activity currencies and CNH were gradually underpinned on news of the Biden-Xi phone call.

BoC Governor Macklem said they are moving closer to a time when continuing to add stimulus through QE will not be necessary, but are not there yet and the timing of that move is a monetary policy decision that will depends on economic developments. Furthermore, he stated that once new QE stimulus is no longer needed, they will need to start on reinvestment phase and will signal this moment clearly. (Newswires)

Former Brazil President Temer suggested Bolsonaro publish a "peaceful manifesto" in the Official Gazette of the Union, according to local press. Furthermore, Bolsonaro was said to ready a statement to end crisis with top court and stated he never intended to attack any branch of government, while he is always open to dialogue with branches of the government and stated that disagreements with justice Moraes are to be resolved in courts. (Newswires)

COMMODITIES

Commodities benefitted overnight from the improved risk tone and weaker greenback which helped WTI crude futures reclaim some of the prior day's losses but with the rebound lacking conviction with prices stalling around USD 68.50/bbl and following yesterday's whipsawing where initial pressure was seen on news that China released national crude oil reserves and although this was later retraced, oil then saw renewed selling on bearish DoE inventory data. Gold prices eked marginal gains on the softer dollar but with upside limited by resistance at the psychologically key 1800/oz level and following the recent Fed taper rhetoric, while copper outperformed with prices bolstered by the improved risk appetite and recent PBoC efforts to support SMEs.

BSEE reported that 1.392mln BPD of oil production in the Gulf of Mexico is shut in or 76.5% (prev. 1.399mln, or 76.8%), following Hurricane Ida. (Newswires)

US Department of Energy provided 1.5mln bbls of oil to Exxon (XOM) from the Strategic Petroleum Reserve after the Co. requested to borrow another 1.5mln bbls of oil amid slow resumption of operations at Gulf of Mexico post-Ida. (Newswires)

Louisiana Offshore Oil Port continuing to work with shippers to receive and deliver crude oil to regional refineries and noted that there will be no further updates given supply chain is functioning. In relevant news, Shell (RDSA LN) declared a force majeure which applies to several contracts the Co. anticipates will be impacted by damage caused by Hurricane Ida, while Chevron (CVX) said there was no significant damage to its operated platforms in Gulf of Mexico from Hurricane Ida and that the Fourchon terminal is ready to receive barrels from connecting pipeline when assets restart operations. (Newswires)

Kuwait set October KEC crude for Asia at Oman/Dubai + USD 1.25/bbl which is USD 1.10/bbl lower from the prior month. (Newswires)

GEOPOLITICAL

Russia President Putin said he and Belarus' Lukashenko agreed on a gas price and the two agreed on unified gas, oil and oil products market in which they will set up new joint ventures, while Putin added it is logical to hold large scale drills in Western Russia when NATO is building up its presence near their borders. In other news, Russian Defence Ministry said a Russian serviceman has been killed in a blast targeting an armoured vehicle in Syria's Homs province. (Newswires/Tass)

US

Treasuries bull-flattened amid tailwinds from no hawkish surprises at the ECB and a stellar 30yr auction. By settlement, 2s -0.2bps at 0.216%, 3s -0.5bps at 0.438%, 5s -1.4bps at 0.792%, 7s -2.6bps at 1.085%, 10s -3.6bps at 1.304%, 20s -4.7bps at 1.827%, 30s -5.2bps at 1.900%. 5yr TIPS -3.2bps at -1.831%, 10yr TIPS -4.5bps at -1.082%, 30yr TIPS -6.6bps at -0.359%. SOFR and EFFR both unchanged at 5bps and 8bps, respectively. T-Notes began trundling lower in the NY handover with another busy day of corporate supply weighing, printing lows of 133-04 and initially not so phased by the "sell the rumour, buy the news" reaction at play in EGBs as the ECB confirmed expectations for a "moderately slower" pace of PEPP purchases going forward. However, USTs soon entered catch up mode once IG supply's rate-lock related hedging flows subsided. The curve sat richer on the day heading into the 30yr auction (more below), with some caution given the lack of concession, although those concerns proved wrong, where an outstanding takedown saw the lifted further to new highs. T-note (Z1) futures settled 8 ticks higher at 133-16.

Fed's Bowman (voter) said the US is very close on goal of maximum employment and that it is likely appropriate to start scaling back asset purchases this year if data comes in as expected. Bowman remains encouraged about incoming data and ongoing expansion, while she noted it is important not to take too much signal from one month weak read on jobs and stated the US has made great progress on price stability. (Newswires)

Fed's Kaplan (2023 voter) said material supply-demand imbalance could last longer, while he added that the labour market imbalance may linger and affect prices. In other news, Fed's Kaplan said he will sell all individual stocks he owns by month-end and will reinvest in diversified index funds of cash, while Fed's Rosengren will also sell individual stocks he owns by month-end to address the appearance of conflict of interest with the proceeds to be reinvested in diversified index or cash and he will not trade on investment accounts while he is the Boston Fed President. (Newswires)

US Democrats released the health and energy portion of their USD 3.5tln plan where drugmakers would have to negotiate prices under the plan and which would give USD 190bln for home-based health care. It was also reported that Democrats are eyeing a new USD 1bln effort to crack down on Big Tech in sprawling economic package as they work to assemble a USD 3.5tln spending bill, while the Democrats' proposed budget reconciliation package includes USD 13.5bln for electric vehicle charging infrastructure and a new USD 5bln program for zero-emissions heavy duty vehicles. (Newswires/Washington Post/Politico)

US Democratic Representative Stephanie Murphy announced she will vote "no" on each piece of Biden budget bill until she sees the whole package and its costs/payfors. (Newswires)