• Asian equity markets traded mixed as caution lingered ahead of upcoming risk events including the FOMC
• Participants also digested the latest Evergrande developments and China’s return to the market from the Mid-Autumn Festival
• Evergrande’s main unit Hengda Real Estate will make coupon payments due tomorrow
• In FX, the DXY is rangebound, activity currencies lead and havens lag in the G10 FX space
• US House voted 220 vs 211 to pass the bill to fund the government through to December 3rd and suspend the debt limit until end-2022
• Looking ahead, highlights include US Existing Home Sales, FOMC rate decision and Fed Chair Powell press conference, supply from UK & Germany

CORONAVIRUS UPDATE

Eli Lilly (LLY) signed a pact with the EU Commission for monoclonal antibody treatment for COVID-19 patients. (Newswires)

Chinese President Xi said China aims to provide 2bln COVID vaccine doses to the world by year-end. (Newswires)

ASIA

Asian equity markets traded mixed as caution lingered ahead of upcoming risk events including the FOMC, with participants also digesting the latest Evergrande developments and China’s return to the market from the Mid-Autumn Festival. ASX 200 (+0.5%) was positive with the index led higher by the energy sector after a rebound in oil prices and as tech also outperformed, but with gains capped by weakness in the largest-weighted financials sector including Westpac which was forced to scrap the sale of its Pacific businesses after failing to secure regulatory approval. Nikkei 225 (-0.6%) was subdued amid the lack of fireworks from the BoJ announcement to keep policy settings unchanged and ahead of the upcoming holiday closure with the index only briefly supported by favourable currency outflows. Shanghai Comp. (+0.1%) was initially pressured on return from the long-weekend and with Hong Kong markets closed, but pared losses with risk appetite supported by news that Evergrande’s main unit Hengda Real Estate will make coupon payments due tomorrow, although other sources noted this is referring to the onshore bond payments valued around USD 36mln and that there was no mention of the offshore bond payments valued at USD 83.5mln which are also due tomorrow. Meanwhile, the PBoC facilitated liquidity through a CNY 120bln injection and provided no surprises in keeping its 1-year and 5-year Loan Prime Rates unchanged for the 17th consecutive month at 3.85% and 4.65%, respectively. Finally, 10yr JGBs were flat amid the absence of any major surprises from the BoJ policy announcement and following the choppy trade in T-notes which were briefly pressured in a knee-jerk reaction to the news that Evergrande’s unit will satisfy its coupon obligations tomorrow, but then faded most of the losses as cautiousness prevailed.

PBoC injected CNY 60bln via 7-day reverse repos and CNY 60bln via 14-day reverse repos with the 7-day reverse repo rate kept at 2.20% and 14-day reverse repo rate kept at 2.35%, for a net daily injection of CNY 110bln. (Newswires) PBoC set USD/CNY mid-point at 6.4693 vs exp. 6.4637 (prev. 6.4527)

• PBoC 1-Year Loan Prime Rate (Sep) 3.85% vs Exp. 3.85% (Prev. 3.85%)
• PBoC 5-Year Loan Prime Rate (Sep) 4.65% vs Exp. 4.65% (Prev. 4.65%)

EU and US are seeking increased enforcement of investment screening rules and trying to keep tech from being misused to threaten security and human rights, which are part of efforts to curb China risks. (Newswires)

Chinese President Xi said China will never invade or bully others neither will it seek hegemony, while he also stated that China is to stop building new coal-fired power projects abroad. There were separate comments from US Climate Envoy Kerry that he is absolutely delighted by Chinese President Xi's announcement that China will not build any more coal-fired power plants abroad, while he added it is a great contribution and good start to achieve success at Glasgow climate summit. (Newswires)

China Evergrande (3333 HK) main unit Hengda Real Estate will make coupon payments for onshore bonds due tomorrow after negotiating with bondholders, although other sources noted the coupon payment refers to an onshore bond payment of around USD 36mln and there was no mention of the offshore bond payments valued at USD 83.5mln that are also due tomorrow. (Newswires/Twitter)

IMF Chief Economist Gopinath said they are following developments regarding China Evergrande closely and that downside risks associated with Evergrande could have implications for China's economic activity and financial stability, while she added that China has tools and policy space to prevent Evergrande situation from turning into a systemic crisis. (Newswires)

BoJ maintained policy settings as expected with the bank rate kept at -0.10% and 10yr JGB yield target at around 0% with the decision on Yield Curve Control made by 8-1 vote as Kataoka remained the lone dissenter. BoJ cut the assessment of output and exports in which it noted that exports and output continues to rise although are temporarily impacted by supply constraints, while it reiterated that Japan's economy remains in a severe state but is picking up as a trend and is likely to recover as impact of pandemic eases. Furthermore, it stated the overseas economy is recovering as a whole and that capex is picking up but with some sectors seeing weakness and that consumption continues to stagnate. (Newswires)

UK/EU

UK PM Johnson and US President Biden discussed China and Russia during their meeting, while they also discussed the importance of European partners in the Indo-Pacific. Furthermore, President Biden talked a little about trade with UK PM Johnson in which he stated that he does not want to see a closure of Irish borders and noted a trade agreement with the UK will continue to be discussed. In related news, the UK is reportedly hoping on joining the USMCA trade agreement if it is unable to secure a direct FTA. (Newswires/FT)

UK public inflation expectations for the year ahead rose to 4.1% (prev. 3.1% M/M) and 5-10yr expectations rose to 3.8% (prev. 3.4%), while risk expectations could become "de-anchored" to the upside, according to Citi/YouGov. (Newswires)

The Times' shadow MPC unanimously agrees that the BoE should end its QE programme early and begin preparing for an increase in interest rates. (Times)

FX

In FX markets, the DXY traded rangebound following the prior day’s choppy performance which reflected the tentative risk sentiment and with a non-committal mood ahead of the approaching FOMC meeting where market participants will be eyeing any clues for when the taper will begin and the latest dot plot forecasts. In addition, the US House voted to pass the bill to fund the US government through to December 3rd and suspend the debt limit to end-2022, although Politico suggested odds of a US default and shutdown have increased with the GOP gearing to block the increase in the debt limit. EUR/USD lacked firm direction after it recently pulled back from resistance at 1.1750, while GBP/USD lacked firm direction with the pair largely ignoring an upgrade in UK public inflation expectations for the year ahead which was raised to 4.1% from 3.1%. USD/JPY and JPY-crosses were lifted on the positive news concerning the looming Evergrande coupon payment which also underpinned antipodeans although gains were capped due to the cautious mood, with AUD/USD also not helped by a wider contraction in Westpac Leading Index and reports of some damages to buildings in Melbourne from a magnitude 6 earthquake.

RBA Assistant Governor Bullock said they are watching developments in the housing market and credit very closely, while they are also continually assessing if macro-prudential tightening is needed whereby macro-prudential rules should be targeted at risks arising from highly indebted borrowers. Furthermore, she stated that recent housing market strength is positive for the economy, but also noted risks to financial stability from housing could be increasing. (Newswires)

Magnitude 6.0 earthquake reportedly struck near Melbourne, Australia which shook buildings although no Tsunami warning was issued. (Newswires)

COMMODITIES

Commodities traded higher overnight with WTI crude futures climbing back above the USD 71/bbl level following the larger than expected draw to headline crude stockpiles in the latest private sector inventory data. This added to the momentum from the prior day's rebound after prices briefly dipped beneath USD 70/bbl amid reports of increased European refinery output, while Nigeria was said to be engaging OPEC+ as it seeks a higher quota under the output agreement and was very confident it can raise production. Gold prices were steady with price action constrained and copper gained on return of its largest purchaser China from the holiday closures and with some slight relief regarding Evergrande's looming onshore coupon payment.

US Private Energy Inventory Data (bbls): Crude -6.1mln (exp. -2.4mln), Cushing -1.8mln, Gasoline -0.4mln (exp. -1.1mln), Distillate -2.7mln (exp. -1.2mln)

BSEE Gulf of Mexico oil production shut-in at 16.64% or 321k for Tuesday (prev. 18.2% on Monday). (BSEE)

GEOPOLITICAL

Iran President Raisi said that sanctions are the US's new means of war and reiterated that Iran believes in nuclear talks that result in lifting US sanctions, while there were separate comments from the White House Press Secretary that the US is open to returning to talks with Iran. (Newswires)

South Korean President Moon reiterated call for a declaration to end the Korean War. (Newswires)

US

Treasuries were a tad steeper Tuesday after earlier losses reversed into the US session as risk assets failed to make a sustained bounce. By settlement, 2s +0.0bps at 0.216%, 3s +0.0bps at 0.452%, 5s +1.0bps at 0.831%, 7s +1.4bps at 1.125%, 10s +1.7bps at 1.326%, 20s +0.8bps at 1.801%, 30s +1.2bps at 1.859%. TYZ1 volumes were below average. 5yr TIPS +2.9bps at -1.690% 10yr TIPS -0.2bps at -0.975% 30yr TIPS +1.6bps at -0.327%. EFFR and SOFR both unchanged at 8bps and 5bps, respectively. T-Notes hit session lows into the European morning at 132-30+, coinciding with global stock futures hitting their peaks. Bidders then emerged for duration gradually to see bonds flip slightly richer by the time the NY cash equity open arrived. There had been some tailwinds in the pre-market also after headlines hit the tape confirming some debt repayments not being made by Evergrande, which was expected given it had been reported it would miss such in advance, but goes to show the sensitivity of the tape to such matters. After the chunky bullish flow subsided, T-Notes pared slightly into the 20yr auction, which all things considered, saw respectable demand (more details below). Otherwise, traders look to Wednesday's FOMC, with trade likely to be thin ahead of such and dominated by any remaining pre-positioning. T-note (Z1) futures settled 2+ ticks lower at 133-06.

US House voted 220 vs 211 to pass the bill to fund the government through to December 3rd and suspend the debt limit until end-2022, although it was also reported that US Senate Republicans unveiled a stopgap bill with no debt limit increase. Furthermore, Politico noted that default and shutdown odds are said to have increased with the GOP buckling up to block the increase in the debt limit.(Newswires/Politico)

US President Biden will meet with House Speaker Pelosi and Senate Majority Leader Schumer on Wednesday. There were also comments from Senate Majority Leader Schumer that the Senate will not pass the reconciliation bill by September 27th when the House votes on the infrastructure bill, while the Senate passage had been demanded by House progressives as prerequisite for their support of infrastructure, according to Erik Wasson. (Newswires/Twitter)