• Asian equities traded mixed after failing to benefit from the momentum in the US
• Stocks were firmer across major US indices with a clear tilt to small-cap Russell 2k vs SPX/NDX
• The RBA maintained the Cash Rate Target at 0.10% but dropped the April 2024 government bond yield target
• The DXY remains sub-94.00, JPY has gained vs. the USD whilst AUD lags post-RBA
• Looking ahead, highlights include EZ Manufacturing (Final) PMIs, ECB's Elderson, supply from the UK
• Earnings: Adecco, AP Moeller Maersk, Ferrari, Fresenius Medical Care, Fresenius, BP, Flutter, Standard Chartered, T-Mobile, Pfizer

CORONAVIRUS UPDATE

US CDC recommended avoiding travel to Russia and Belgium over 'very high' COVID-19 cases. (Newswires)

Beijing reportedly locked down primary and middle schools due to the virus, with 18 schools closed due to the virus outbreak. (Newswires)

ASIA

Asian equities traded mixed as upcoming risk events kept participants cautious and offset the momentum from the US, where stocks began the month on the front foot in a continuation of recent advances to lift the major indices to fresh record highs. Nonetheless, ASX 200 (-0.6%) was pressured by underperformance in the top-weighted financials sector and notable weakness in mining names, while quasi holiday conditions due to the Melbourne Cup in Australia’s second most populous state of Victoria and the crucial RBA policy announcement in which it maintained the Cash Rate Target at 0.10% but dropped the April 2024 government bond yield target and tweaked its guidance, further added to the cautious mood. Nikkei 225 (-0.4%) was lacklustre as it took a breather from the prior day’s surge after stalling just shy of the 29,600 level and with the index not helped by a slight reversal of the recent beneficial currency flows. Hang Seng (-0.3%) and Shanghai Comp. (-1.4%) were varied as the former initially atoned for yesterday’s losses led by strength in tech and biotech including Alibaba shares with its Singles Day sales event underway. In addition, Hong Kong participants were seemingly unfazed by the recent weaker than expected GDP for Q3 as the data showed it narrowly averted a technical recession, although the gains were later wiped out and the mainland suffered following another substantial liquidity drain and with Chinese commodity prices pressured including iron futures which hit limit down. Finally, 10yr JGBs were flat with price action muted despite the subdued mood for Tokyo stocks and with the presence of the BoJ in the market for over JPY 1tln of JGBs in mostly 1yr-5yr maturities, doing little to spur demand.

PBoC injected CNY 10bln via 7-day reverse repos with the rate at 2.20% for a CNY 190bln net daily drain. (Newswires) PBoC sets USD/CNY mid-point at 6.4009 vs exp. 6.4003 (Prev. 6.4192)

BoJ September meeting minutes stated the economy is to improve as the impact from the pandemic subsides and a few members stated that chip shortages and supply chain disruptions are weighing on global output and trade. Furthermore, many members said pent-up demand has yet to materialise in Japan and a member said that consumption could pick up but sustainability of the recovery is uncertain due to weak summer bonus payments. (Newswires)

• South Korean CPI MM (Oct) 0.1% vs. Exp. 0.1% (Prev. 0.5%)
• South Korean CPI YY (Oct) 3.2% vs. Exp. 3.2% (Prev. 2.5%); fastest pace of growth since January 2012.

UK/EU

French President Macron said fishing rights dispute talks between UK and France will resume on Tuesday and that retaliatory measures against the UK over the fishing dispute will not be implemented at midnight as talks are ongoing. There were also comments from a UK government spokesperson that they welcome France's calls for in-depth discussions to resolve a range of difficulties in the UK-EU relationship, while Brexit Minister Frost will visit Paris on Thursday for talks with French Secretary of State for European Affairs Beaune to find a way to bridge the gap on licences for French fishers. (Newswires/ITV/LBC)

In German coalition negotiations, parties are discussing ways in which to finance major investments. One plan discussed is to use the state bank KfW to finance investments. Another, Politico's Playbook was told by people close to the negotiations, is joint EU borrowing. (Politico)

FX

In FX markets, the DXY remained beneath the 94.00 level after fading Friday’s rally and with price action constrained ahead of upcoming risk events. Fundamental news was relatively thin with Democrat lawmakers continuing their efforts to get President Biden’s agenda bills through this week. EUR/USD initially benefitted from recent USD weakness but was less decisive overnight with the single currency stuck near the 1.1600 level. GBP/USD was also rangebound as attention remained on cross-Channel tensions after the UK recently gave its own 48-hour ultimatum for France to backdown on its threats or face legal action, although it was later reported that France will not proceed with its retaliatory measures regarding the fishing dispute as talks continue between the sides and with UK Brexit Minister Frost to travel to Paris for discussions on Thursday. USD/JPY and JPY-crosses continued to pullback from yesterday’s best levels amid the cautious mood, while AUD/USD was pressured following the RBA policy meeting despite the central bank abandoning its April 2024 bond yield target which was not much of a surprise given its decision to refrain from defending the target in the week leading up to the meeting. The RBA tweaked its guidance in which it now suggested that conditions for a hike is likely to take some time vs. prev. no hikes to 2024 at the earliest, although this also failed to underpin the currency as the central bank stuck with a dovish tone in which it noted uncertainty on the health front and that the board is prepared to be patient, while it added that inflation has picked up but remains low in underlying terms and it only sees a gradual pick up in inflation, as well as only a marginal increase in wage growth. Furthermore, Governor Lowe later suggested uncertainty to the timing of a rate increase with 2023 and 2024 both plausible and that pricing for early rate hikes was extremely unlikely.

RBA kept the Cash Rate Target at 0.10% and bond purchases at AUD 4bln per week through to mid-February, as expected, while it discontinued the target of 10 basis points for the April 2024 Australian Government Bond yield. RBA stated that it will not raise Cash Rate until inflation is sustainably within 2%-3% target range and that this will require the labour market to be tight enough to generate wages growth that is materially higher than currently. Furthermore, it stated that this is likely to take some time (dropped reference to no hikes to 2024 at the earliest) and the Board is prepared to be patient with the central forecast for inflation to be no higher than 2.5% at end-2023 and for only a marginal increase in wage growth. RBA added that an important source of uncertainty continues to be possibility of a further setback on the health front and that inflation has picked up but remain low in underlying terms, with a further but only gradual pick-up in inflation expected. (Newswires)

RBA Governor Lowe said it is entirely plausible that the first increase in the Cash Rate will not be before the maturity of the current target bond which is April 2024, but it is also plausible that a hike could be appropriate in 2023 and noted that there is genuine uncertainty as to the timing of future adjustments in the Cash Rate. Lowe added that he wants to make it clear that the decision does not reflect the view that the Cash Rate will be increased before 2024 and that inflation and wages allow the Board to be patient regarding a rate lift-off. Furthermore, they are prepared to look through spikes in inflation and will be including April 2024 bond in regular auctions from next week, while he also noted that market pricing of early 2022 hikes is well away from where we are now and that pricing for early rate hikes extremely unlikely. (Newswires)

COMMODITIES

Commodities were constrained amid the cautious risk tone in which WTI crude futures marginally retreated below the USD 84.00/bbl level but with downside stemmed following a recent newswire survey noted that OPEC+ production in October rose less than half the expected 400k BPD rise amid operational issues in Nigeria and Libya. There were also recent comments from Kuwait's Energy Minister ahead of Thursday's OPEC+ meeting that they support the output increase plan from OPEC+ and that the 400k BPD plan ensures sufficient market supply. Gold prices were little changed beneath USD 1800/oz with the precious metal restricted by higher real yields and heading into Wednesday's FOMC, while copper prices were pressured by the lacklustre risk appetite and alongside a continued drop in Dalian iron ore prices which hit limit down as China steels curbs weighed on demand.

US

Treasuries were choppy in thin volumes with a fall in ISM New Orders reversing earlier selling from a pick-up in IG issuance, while post-settlement Treasury Q4 financing estimates have seen selling resume; real yields continue to rise ahead of FOMC. Post settlement, 2s +1.6bps at 0.511%, 3s +2.5bps at 0.781%, 5s +0.8bps at 1.196%, 7s +0.8bps at 1.462%, 10s +2.1bps at 1.577%, 20s +1.9bps at 2.009%, 30s +3.6bps at 1.977%; TYZ1 volumes were low/beneath averages. 5yr TIPS +7.2bps at -1.664%, 10yr TIPS +10.2bps at -0.934%, 30yr TIPS +10.9bps at -0.271%. Eurodollars see heavy put buying activity in thin volume futures trade, whites and reds hold firmer than greens and blues. Month-end saw EFFR fall to 7bps from 8bps, although SOFR remained unchanged at 5bps. T-Notes struggled to break above 130-22 before a rally in stocks from the European open saw the selling pressures return to the curve, with the contracts printing lows of the session of 130-12+ into the ISM Mfg. print amid the buildup of IG USD supply post earnings blackout. The mixed ISM report, which saw a smaller-than-expected fall in headline sentiment overshadowed by a chunky decline in New Orders, prevented further selling in Treasuries, with bidders slowly emerging as the dust settled into the Fed's long-end buyback operation. T-Notes reversed all their losses before selling a few ticks in late trade as Manchin gave a presser saying he would not vote for the reconciliation bill without more clarity, casting doubts on any quick passing of a spending bill. There was some more selling pressure right at the settlement too as the Treasury released its Quarterly Financing Estimates ahead of the refunding announcement on Wednesday. That pressure was seemingly after the Treasury raised its Q4 total debt issuance estimate from what it gave in August, citing a lower starting cash balance. However, given the Treasury doesn't like to make last-minute surprises, it seems unlikely that it would walk back on coupon auction cuts, with it more likely to up its bill issuance to bridge that difference in estimates. T-notes (Z1) settled 1+ ticks lower at 130-21.

US Senate Democratic Leader Schumer said talks on Biden's social spending bill continue to make "good progress" and that they are working this week to get the bill over the line. (Newswires)

US moderate Democratic Senator Manchin said political games over the infrastructure bill must stop and that it is time to vote on the infrastructure bill, while he added that Democratic leaders should not hold the vote on infrastructure hostage to the reconciliation bill and that they must allow time for complete transparency on the spending bill. Furthermore, he said he will not support a multi trillion bill without greater clarity and stated that elected leaders continue to ignore soaring inflation. (Newswires)

US progressive House Representative Jayapal said that they will vote for both bills in the House together and are ready to vote for both infrastructure and spending bills as soon as Tuesday. (CNN)

US Treasury Secretary Yellen said she is uncertain about the lasting nature of a drop in labour force participation and expects to see some revival of the labour force participation over time, while she added that COVID could leave lasting scars on the workforce. (Newswires)

US Treasury Department report said Congress must 'urgently' pass new law regulating stablecoins and noted that stablecoin issuers should operate under the same regulatory structure as banks. (Newswires)