• US 10-year yields hit 4 year highs as markets react to a hawkish Powell
• Positive vibes from EU sources on the new Irish backstop proposal lifts Brexit spirits and the GBP
• Looking ahead, highlights include, weekly US jobs data, US factory orders, Banxico rate decision, Fed’s Quarles and ECB’s Coeure

ASIA

Asia-Pac stocks traded mostly lower despite the positive lead from Wall St as the effects of rising rates spooked investors following a concoction of strong US economic data and upbeat comments from Fed’s Powell. ASX 200 (+0.5%) bucked the trend as the index was supported by energy and financial names, while Nikkei 225 (-0.6%) eroded initial gains and fell in the red on currency effects. Elsewhere, Hang Seng (-1.7%) underperformed as the healthcare sector also weighed on the index, while mainland China was closed due to the Golden Week holiday. Finally, JGB yields rose across the curve with the 10yr and 30yr yields hitting levels last seen at the front end of 2016.

US Vice President Pence is to say that US "will not be intimidated" by China following the dispute at the South China sea. According to the excerpts, Pence is also to say that China laid out a strategy in June to split US groups with "covert actors, front groups, and propaganda outlets". In related news, the US Navy is reportedly to propose a "major" show of force to warn China after the South China sea quarrel. (Newswires)

EU/UK/US

UK PM May's officials plan to rush the Brexit deal through parliament in an attempt to stop Tory rebels from voting down her treaty. PM May's team want MPs to get a meaningful vote two weeks after striking a deal with the EU; according to sources (Newswires)

France warned it would prefer Britain to crash out of Europe without a Brexit deal rather than accept a compromise.  (Telegraph)

Pre-market reports suggested that Ireland back UK PM May's plan for an all-UK customs union with the EU. UK PM May suggested the whole of the UK to participate in a customs union with the EU if no solution is found on the Irish border issue. EU's Chief Negotiator Barnier rejected the idea but officials in Dublin privately argued that it could settle the border issue and open the way to a deal. A senior Irish Official said, "it looks like it would solve the issue [of the Irish border], whether the EU accepts it or not is another conversation". (FT) Later, EU Sources said that the new Irish Border proposal after Brexit is a "step in the right direction" and a compromise is possible after this. Irish Foreign Minister Coveney responded, saying he is not aware of any Irish backstop proposals yet, hopes to see them in the next week. (Newswires)

An increase in the EU’s pension costs and spending promises rose by 10’s of billions of EUR, according to an official report which has subsequently raised the prospect of an increase in the Brexit divorce bill. (Guardian)

The Italian Government were reportedly looking at GDP Growth of 1.5% in 2019, 1.6% in 2020 and 1.4% in 2021. Italy's Deputy Economy Minister says the Government has set the 2019/20 GDP target at 1.6%. Italian Interior Minister Salvini then said that citizens income and pensions measures in budget are to cost EUR 16bln and that they are not taking a step back on the deficit targets even if the German-Italian 10-year spread widens to 400BPS. Italian Industry Association has said they are "partially satisfied" with the new budget plan. (Newswires)

EU sources suggested that the report in Italian media that the European Commission has drafted a letter rejecting Rome's budget plan is 'unfounded'. (Newswires)

CENTRAL BANKS

Fed Chair Powell (Neutral) said the Fed may raise rates past the neutral level. He is happy where the economy is, unemployment is lowest in 20 years and inflation is at the 2% goal. He expects to see gradual increases in wages, while labour market data shows US pretty close to full employment. He added the next downturn will not look like the last as risks are moderate (Newswires)

ECB's Rehn said he sees no big contagion from Italy, adding that the ECB sets the policy for the whole of the EZ, not for one member. He also stated that rates will remain at current levels until at least September 2019 and agrees with market expectations for the timing of the Bank's first rate hike (Newswires)

GEOPOLITICS

Guardian's Elgot tweets "New info that Dutch intelligence, backed up by Brits, disrupted Russian intelligence cyber attack on OPCW - the body investigating chemical attacks in Salisbury and Douma". (Newswires)

EQUITIES

European equities are once again on the back foot, as concerns about a more hawkish Fed and resurfaced worries about Italy’s budget plans have hit stocks. The negative risk tone has led all major European bourses into the red, with the FTSE lagging its peers due to additional pressure offered by a bid GBP.

The financial sector is outperforming as European banks are benefitting from the yield environment in fixed income, with Deutsche Bank, SocGen and Credit Agricole all up over a percent.

Danske Bank are close to the foot of the Stoxx 600 after reports the Danish bank have had to discontinue their share buyback programme amid dialogue with US authorities over their Estonian money laundering scandal. EasyJet are down around 1.1% following a 0.8% drop in their load factor compared to last September.

FX

USD - Some loss of momentum and a retracement from peaks, but the Greenback remains underpinned by elevated US Treasury yields and marked curve re-steepening in wake of Wednesday’s upbeat US macro releases and comments from Fed’s Powell acknowledging the latest ADP and services ISM survey strength. In fact, the FOMC head went as far as saying that rates may be hiked above neutral levels and expressed concern about the economy overheating, prompting further Dollar buying that pushed the DXY beyond 96.000 at best.

GBP/JPY/CHF/EUR - All attempting to regain composure, or fight the Fed, as Cable rebounds above 1.2950, Usd/Jpy retreats from 114.50+ highs, the Franc retests support around 0.9900 and the single currency pares some losses within a 1.1465-1.1500 broad range. However, the bounces look shallow if not futile and more technical than sustainable or based on anything fundamental, at this stage, with Eur/Usd eyeing key Fib levels above and below (1.1497-22), and wary about mega option expiries running off on NFP Friday from 1.1450 to 1.1500 in 3.7 bn.

AUD/NZD/CAD - The major casualties or victims of their US counterpart’s resurgence, as the antipodean Dollars failed to hold big figure/round number/psychological supports amidst the swathe of all round Greenback buying and slumped to lows circa 0.7065 and 0.6485 respectively. Note, the Aud only received fleeting respite from better than expected Aussie trade data overnight, while the Loonie has lost more of its USMCA lustre to trade further below 1.2800, through 1.2850 and not that far from 1.2900 again.

CROSSES - Aside from all the action in Usd/G10 pairings, some interesting price moves in Eur/Gbp that is inching closer to downside stops around 0.8850 and a strong chart support level (200 DMA is 0.8840), while Eur/Jpy has also retreated further to meander between 131.00-50, with an unusually large expiry at the 130.50 strike (1 bn) lurking.

EM - No shock to see the higher yield/beta/risk currencies suffer at the hands of widespread Usd demand, as Usd/Try rebounds further from recent sub-6.0000 lows, but the Cny and Cnh have pared some losses from the 6.9000+ area as Golden Week nears an end, perhaps conscious about intervention next Monday?

COMMODITIES

The oil market is hanging around 4 year highs, but is off best levels after Saudi Energy Minister confirmed the Middle-Eastern exporter has a spare capacity of 1.3mln BPD, whilst also saying that Saudi exports to the US are increasing markedly. The Energy Minister also said that they are to add and maintain another 1mln BPD of spare capacity by investing USD 20bln.

Oil relevant news has come in the form of a preliminary estimate of a 8-11mln cubic meter discovery in the Norwegian sea.

The gold market is recovering from the losses seen in the previous session (-USD 6/oz), with it currently testing USD 1200/OZ to the upside. This came after the DXY hit 6 week highs off the back of hawkish commentary from Fed Chair Powell. Aluminium has risen to its highest point in over 3 months and extending the gains driven by Norsk Hydro’s Brazilian site closure.

FIXED INCOME

Bonds are only just holding off worst levels and bracing for the return of US participants to see whether bears remain in control of the tape or bulls attempt to regain some influence over proceedings, Bunds and just back above 158.00 and Gilts off a new Liffe session low (120.11, -98 ticks) after a less than well received 2024 auction, while US Treasuries have pared some overnight losses, but maintain a clear negative and steepening bias. Looking at BTPs, early outperformance and forays in positive territory towards 123.00 have been thwarted, as the 10 year benchmark reverses to a 121.56 base (-53 ticks) amidst ongoing doubt regarding Italy’s budget. Back to the UK, and aside from the overall bearish trend in debt, latest Brexit headlines are weighing after reports that the EU deems new Irish border plans as a step in the right direction. However, technical factors may be propping up Bunds to a degree as September lows around 157.74 hold for now.