• BTP yields hit 4 year highs and FTSE MIB underperforms after Borghi suggests Italy would be better off without the EUR
• GBP the G10 laggard after poor PMI’s and negative Brexit commentary via the Tory conference
• Looking ahead highlights include, US APIs and potential comments from BoE’s Haskel, Fed’s Quarles, ECB’s Villeroy, Fed’s Barkin, Powell, and BoE’s Haldane

ASIA

Asian stocks traded mostly lower as the upbeat sentiment from the USMCA deal seen on Wall St. faded away and trade concerns re-emerged after White House Economic Advisor Kudlow said a trade deal between US and China is not “imminent”.  ASX 200 (-0.8%) was dragged lower by the financial sector as Australia’s big four traded with losses in excess of a percent after the ACCC said they will examine the banks, while Nikkei 225 (+0.1%) was cushioned on the back of currency effect. Elsewhere, Hang Seng (-2.4%) underperformed as participants come back from the long weekend to downbeat trade comments from the US, meanwhile KOSPI (-1.2%) was also weighed by the sour sentiment as the index shrugged off optimistic industrial production data.

US Treasury Secretary Mnuchin said US will listen to China if they show willingness. (Fox)

China's narrowing interest rate spread with the US and declining current account surplus have led to some concerns regarding capital outflow. (FT)

China's Defense Ministry said they resolutely opposed the US "freedom of navigation" adding it's a threat to sovereignty which China will take necessary measures to defend. (Newswires)

BoJ’s September Tankan Corporate Price Expectation Survey stated Japanese firms sees Y/Y inflation at 0.8% (Prev. 0.9%); 3yr and 5yr expectations unchanged at 1.1%. (Newswires)

EU/UK/US

UK PM May is preparing to limit Britain's ability to strike free-trade deals after Brexit in a significant concession to the EU aimed at breaking the deadlock in negotiations. She is to propose “Grand Bargain” to keep Britain tied to European customs rules on goods after transition period ends in December 2020. Northern Irish DUP MP stated that UK border proposals reported in the Times had not been presented to their party and they will not comment on it; will continue to support May. The DUP leader added they are speaking to the UK government regarding Irish border proposals and they need to see text before decisions can be made. (The Times/Newswires)

UK Immigration Minister Nokes believes the government seeks a post-Brexit immigration system that treats all nations equally but gives ministers the flexibility to tailor rules for countries negotiating trade deals. (Newswires)

EU diplomats have rejected UK PM May’s conference pitch that Brussels must move first to break the deadlock over negotiations. (Guardian)

Former UK Foreign Minister Johnson told senior conservatives that he would delay Brexit by at least six months if he became PM. (Newswires) This comes ahead of Johnson’s speech today at the Conservative Party Conference which many see as essentially his pitch to succeed PM May. (FT)

Senior Brexiteers believe they’ve got just two weeks left to kill off Chequers, according to sources familiar with their discussions (Buzzfeed)

UK Markit/CIPS Cons PMI Sep 52.1 vs. Exp. 52.5 (Prev. 52.9)

League's Economic Head said that Italy would solve most of its own problems if it had its own currency and adds that Italy would set the deficit at 3.1% if it wanted to confront the EU. Italian Government Source said PM Conte is to meet key ministers at 6:00PM BST over the budget targets. Italian Deputy PM DI Maio said they will not change the 2.4% debt/GDP target, and that the 2019-21 budget will be completed today, adding that the Italian Government is not willing to exit the Euro or the EU. (Newswires)

EU's Dombrovskis stated that the EU are open to dialogue with Italian authorities regarding the budget. (Newswires)

EU's Juncker stated that the EU want a deal on Brexit but are united on the Irish border issue. (Newswires)

GEOPOLITICS

North Korean government spokesperson said US is still trying to subdue the country via sanctions, while he reiterated that North Korea is taking substantial steps to implement the joint statement. (Newswires)

EQUITIES

European equities have started the day in the red. This comes after suggestions from Italian Lawmaker Borghi hinting that the country would be better off leaving the Euro. Despite an intention to leave the Euro later denied by the Deputy PM, Italian assets are seeing significant losses, with Italian Bank stocks down over 2%, and the FTSE MIB once again at the bottom of the index pile. 

The financial sector is lagging its peers due to the weakness in Italian banks, with the energy sector outperforming off the back of oil prices hitting 4 year highs.

The FTSE is the outperforming bourse off the back of a Brexit-hit GBP, but is trading in negative territory. The index is being pressured by a collapse in Royal Mail shares after a guidance cut in Monday’s trade, with the co. extending losses in the European morning. The stock is now at the foot of the Stoxx 600 and has hit the lowest level in its lifetime.

FX

EUR - The single currency is not the biggest G10 loser vs a generally firm USD, as the DXY rebounds to just over 95.700 amidst broad Dollar gains vs rivals, bar the safer-havens, but has been centre stage since Tuesday’s EU ‘open’ following more Italian budget headlines underlying a defiant stance on the 2019 deficit. Indeed, members of the coalition insist that the proposed 2.4% target is fixed ahead of another budget meeting and presentation to parliament on Wednesday, while the League party’s Borghi contends that the Government would have set the bar even higher at 3.1% if it really wanted to take on the EU, adding that the country’s fiscal problems could be solved if it was not in the Eur club. Eur/Usd has now fallen below a 50% fib (1.1558) through a daily support level (1.1529) and September’s low (1.1526) to trip stops under 1.1525 and 1.1520 ahead of a final downside technical target (1.1509) before 1.1500.

GBP - Another major underperformer amidst a raft of Brexit commentary from the Tory conference, but accelerating to the downside once stops were tripped on a break of 1.3012 in Cable and that pairing failed to keep hold of the 1.3000 handle. However, the Pound was also undermined by a weaker than forecast headline UK construction PMI and is currently eyeing bids ahead of 1.2950.

AUD/NZD - Already on the backfoot during overnight trade, partly due to ongoing US-China trade concerns, as President Trump stated that now is not the time to talk, but for the Aud also as RBA policy guidance remained neutral, the antipodean Dollars are extending losses and deeply through big figures that had been providing some traction (0.7200 and 0.6600 respectively). Aud now only just holding above 0.7150 and the Kiwi 0.6575 ahead of the latest GDT auction.

CAD - The Greenback’s resurgence has eroded more USMCA-inspired Loonie (and Peso) gains, with Usd/Cad rebounding a bit further above 1.2800 having held above key/strong technical support yesterday.

JPY/CHF - Relatively resilient against the overall Dollar bid, with Usd/Jpy retreating from 114.00+ peaks on a broad downturn in risk sentiment, but still technically bullish while not seriously threatening 113.50 and a series of chart supports below, while the Franc has rebounded to circa 0.9835 and 1.1325 vs the Eur.

EM - Losses across the board vs the Usd as recent recovery momentum stalls and reverses on largely negative external factors rather than anything new detrimental in the region. Indeed, even the Rub is weaker around 65.5000 and not deriving any support/impetus from the latest spike in oil prices.

FIXED INCOME

Another BTP boost for the 10 year German benchmark as Italian Government officials continue to stand rigidly by their fiscal guns and rail against the EU establishment with claims about Germany and France wanting the coalition to collapse, while one prominent League party member also suggests that the country would be able to solve its budget issues if it resorted to the Lira. Bunds gapped up to 159.06 off the Eurex open and advanced to 159.35 vs 158.77 at yesterday’s close before topping out, while their Italian counterparts have been as much as 152 ticks below parity at 121.20, but are now trying to regroup.  

COMMODITIES

In the oil market, WTI is hanging around the USD 75.40/BBL level and unchanged for the day after the benchmark hit four-year-long highs in early European trade.

Production figures were released from Russia for September, who said this stood at 11.36mln BPD vs. 11.21mln BPD in August.

In the metals sector, gold is marginally in the green as the yellow metal has caught a safe-haven bid in the Italy driven risk-off tone. Copper prices have fallen for the second straight session after slowing growth in the Chinese manufacturing sector has continued to stoke concerns over demand for the construction material.