• EUR, EU equities and BTPs hit as Italian budget targets seen as a “serious concern” for the European Commission
• China returns with a RRR cut, but can’t stop the rot for Chinese equities and the CNH
• Looking ahead the highlight is ECB’s Nowotny; NOTE: US Columbus Day is today, US equity markets are open

ASIA

Asian stocks traded on the backfoot as the region mimicked the lead from Wall St. where the S&P 500 posted its worst week in nearly a month as the tech sector underperformed, while Nasdaq Comp. pulled back over a percent as tech giants lagged and the Dow notched its second straight weekly declines as the index was pressured by heavyweights Intel and Caterpillar. ASX 200 (-1.3%) was weighed on by material and financial names following ANZ’s profit warning which dragged the likes of CBA, WBC and NAB lower in sympathy, while KOSPI (-0.6%) initially outperformed amid positive developments in the Korean peninsula before dipping in the red and Nikkei 225 is closed due to a public holiday in Japan.  Elsewhere, Shanghai Comp. (-3.7%) plummeted as mainland China played catch-up, with participants re-entering the market and reacting to last week’s trade developments, rising yields, China downgrades and weak Caixin manufacturing data. Hang Seng (-1.3%) eroded initial gains as sentiment turned sour along with the mainland.

PBoC cut the RRR for some banks by 100bps to 14.50% from 15.50% (effective Oct 15th) in order to release CNY 750bln of liquidity. This is the fourth cut this year, while the central bank said it will continue to adopt prudent, neutral monetary policy and added the cut will not lead to pressure of CNY depreciation. (Newswires)

PBoC set CNY mid-point at 6.8957 (Prev. 6.8792) (weakest since May 11th 2017)
PBoC skipped open market operations for a net daily drain of CNY 100bln.

US Commerce Secretary Ross said he does not expect movement on China talks until after midterms, he added the USMCA 'non-market country' clause to act as a poison pill against potential trade deals with China, and the US could be replicated in future trade deals with EU and Japan. (Newswires)

US Department of Homeland Security said they have no reason to question denials by US tech firms that Chinese spies infiltrated US computer networks via microchips. (Newswires)

Chinese Caixin Services PMI Sep 53.1 vs. Exp. 51.4 (Prev. 51.5) (Newswires)
China Caixin Composite PMI (Sep) 52.1 (Prev. 52.0)

EU/UK/US

Head of the European Commission Jean-Claude Juncker told Austrian press that the chance of the UK and the EU agreeing a Brexit deal has grown in the last few days. He added that while he was not sure an agreement could be reached by October, it could be by November. Juncker declined to comment on whether he believed that Brexit might yet be avoided, given the divisions in the British government and parliament on the issue. (BBC/ The Guardian)

The EU is preparing to offer Theresa May a “supercharged” free trade deal this week but will reject Mrs May’s demands for frictionless trade, it has emerged. The offer from Brussels, which will be put to British negotiators on Wednesday, is said to contain “30 to 40 per cent” of the demands made in Mrs May’s Chequers proposal. (The Telegraph/Times) The Telegraph also reports that UK PM May will soon have to tell the UK that the country will be forced to stay in the Customs Union. (The Telegraph)

The Telegraph reported that Brexiteers offered UK PM May a lifeline that will see EU officials based at UK borders in a package of concessions to help unlock a Canada-style trade deal with Brussels. (The Telegraph) Reports in the Independent took a slightly different spin on the situation by stating that Conservative Brexiteers are giving UK PM May an ultimatum, that if her negotiating strategy fails she must accept plans for a Canada-style trade deal or face a leadership challenge. (The Independent) Further to this, the Times reports that Brexiteers have issued a last-ditch threat to vote down the budget and destroy the government unless UK PM May takes a tougher line with Brussels. The Times also reported that Brexiteers warned UK PM May that she could keep the UK within the EU customs arrangements only until 2022. (The Times)

UK PM May has appealed to Labour voters unhappy with Labour leader Corbyn's leadership to consider switching to the Conservatives. Writing in the Observer the PM insisted her party had a "moderate and patriotic programme". (BBC) May has also drawn up plans for a secret charm offensive aimed at persuading dozens of Labour MPs to back her Brexit deal even if it costs Labour leader Corbyn the chance to be PM, the Guardian has learned. Senior Tories say they have been in private contact with a number of Labour MPs over several months. (The Guardian) The Telegraph reported that UK Government whips in talks with 25 Labour MPs to push Chequers deal through Parliament. (The Telegraph)

SNP leader Sturgeon has said her MPs would back a new Brexit referendum if there is a vote to approve one in parliament. (The Independent)

Japanese PM Abe said he would welcome the UK to a TPP trade deal with "open arms". (FT)

The ECB warns banks to curtail booking trades and loans in UK post-Brexit; three people familiar with the situation said the ECB had written to financial institutions and told them to limit their reliance on back-to-back booking models by 2022. (FT)

EU Commission letter stated the targets in Italy budget are a source of "serious concern". (Newswires)

Italian PM Conte’s office reportedly said Italy wants constructive dialogue with the EU. (Newswires)

Italian Deputy PM Salvini said they will not backtrack on their budget plans, despite market pressure. (Newswires)

German Economy Minister Altmaier said the government is willing to talk with the US about equal tariffs on cars. (Newswires)

Turkish Finance Minister says they are to announce a plan to counter inflation tomorrow. (Newswires)

BRAZILIAN ELECTION

Far-right candidate Bolsonaro won the first round of elections but failed to get an outright victory, as he managed to bag 46.1% of valid votes (short of the 50% needed for an outright victory) while left-wing Workers’ Party candidate Haddad came second with 29.2%. The runoff election is to take place on 28th October 2018 where opinion polls conducted before the election predicted that the candidates would be tied, according to the BBC

GEOPOLITICS

An official who is part of US Secretary of State Pompeo’s delegation said the US-North Korea deal is to be a “long haul”, while he added the trip has been better than the last one. North Korean Leader Kim Jung Un said he is satisfied with the talk with US Secretary of State Pompeo and has offered to stop ICBMs in return for war ending. (Newswires)

US Secretary of State Pompeo said US and North Korea are close to an agreement on logistics for a second summit and added that the North Korean leader said he is ready to allow international inspectors to a nuclear site and a missile engine test site. (Newswires)

There were reports that North Korean leader Kim Jung Un is to visit Russia soon. Furthermore, Chinese President Xi is to visit North Korea. (Newswires)

CENTRAL BANKS

Fed's Bullard (Non-voter, Dove) reiterated he does not see much inflationary pressure in the US economy, and added that wage growth is where it should be, while he said in his opinion, the Fed is close to the neutral level. Bullard also said there is plenty of prospects for trade talk going forward with China and he does not see recessions in the horizon right now. He also said that the US needs quicker productivity growth to maintain GDP growth rates. (Newswires)

EQUITIES

Key European indices are down, with DAX Dec-18 futures testing 12,000 to the downside and the FTSE MIB significantly lagging its peers, down over 1.5%. This follows an EU commission letter stating that Italy’s budget targets are a source of serious concern in particular impacting Italian banks. Weakness in Italian banking stocks has pressured the financial sector, with this segment down by almost 1%

Major sectors are all down, with energy down by over 1% following comments that the White House may alleviate some Iranian sanctions, and IT names lagging their peers in continuation of price action seen in the US on Friday

In terms of individual equities Norsk Hydro are leading equities being up 4.6% following reports that aluminium refining is to restart at half capacity. Additionally, Schroders are up over 1% following speculation around a GBP 13bln joint venture with Lloyds. Deutsche Bank is down over 1.5% amidst reports that MIFID II is affecting revenues.

FX

DXY - The index and broad Usd have rebounded further from last Friday’s post-NFP lows, albeit not uniformly as the safer-havens are bucking the trend, but enough to nudge the DXY back up towards 96.000. Market holidays in Japan and the US ahead (latter only partial) may have exacerbated price action/moves, but it’s certainly been a risk-off return from Golden Week in China and the Italian budget issue continues weigh on investor sentiment. Back to the Dollar, or rather the index, and beyond the big figure last week’s peak was 96.124.

CAD - The biggest G10 loser as oil prices retreat to compound the overall downturn in risk sentiment, and the Loonie retreats to 1.3000 vs its US counterpart, eyeing a couple of tech levels just above (1.3013 and 1.3018) having failed to derive any lasting support from Canadian jobs data.

EUR/GBP - The next major underperformers, and both losing grip of round numbers/psychological handles in relatively quick order amidst stops and the aforementioned bearish factors. The single currency is under 1.1500 and Cable sub-1.3100, but the former is holding above decent option expiry interest at 1.1450 (1.5 bn) and the latter has regained some poise having tested 1.3050 stops, with Brexit impulses still supportive on balance.

JPY - A clean break of stops at 113.50, and chart supports at 113.56/113.42 (Tenkan and Fib respectively) has propelled the Jpy up to almost 113.25 vs the Greenback as the more attractive currency of the pairing during periods of pronounced risk aversion.

NZD/AUD/CHF - All narrowly mixed vs the Usd, as the Kiwi and Aud pair some losses off fresh lows circa 0.6425 and 0.7040 respectively, while the Franc remains capped ahead of 0.9900, albeit bouncing firmly through 1.1400 against the Eur. 

EM - A bit of a mixed bag in terms of performance across the region, with the Rand hit hard after rumours/reports that SA Finance Minister may quit, but the Lira holding up better vs a strong Dollar ahead of the Government’s inflation combating measures due to be announced on Tuesday. Similarly, the Peso is benefiting from pre-positioning before the Real re-opens after Sunday’s Brazilian election and a bigger than anticipated 1st round victory by Bolsonaro. However, the Rouble has been undermined by a retreat in Brent and unable to reap the reward of speculation that US sanctions may be less harsh after mid-term elections. Usd/Zar around 14.8500, Usd/Try near 6.1600, Usd/Mxn close to 18.8300 and Usd/Rub hovering just under 67.0000.

COMMODITIES

The crude complex is in negative territory with Brent breaking the USD 83.00/BBL level to the downside amid suggestions from the US Government that exemptions may be granted to countries who have made efforts to cut Iranian oil imports. This also comes amid the possibility of a Saudi-Kuwaiti oil field restart and further confirmation by Saudi Energy Minister Al Falih that 1.3mln BPD of spare capacity can be used “if needed”. This has increased the possibility of rising supply to the oil market, and pushed both Brent and WTI down by over 1%.

In metals markets, gold has broken through the USD 1200/OZ level to the downside as the yellow metal is being hit by a stronger dollar. Aluminium prices are also in the red, with prices falling by over 4%, after a Brazilian court ruled that Norsk hydro’s aluminium plant may be reopened, albeit at a lower production level. Zinc and copper have also slipped due to the effects from a stronger USD.

FIXED INCOME

Some calm after a bout or several waves of fast market buying and selling in debt markets pushed Bunds clearly through the next set of upside chart targets and well beyond the 158.00 marker to a fresh Eurex peak of 158.23 (+62 ticks on the day), while the slide in BTPs once 120.00 finally gave way was even more dramatic, climaxing (for now at least) with the loss of 119.00 (118.94 low, -217 ticks). Elsewhere, shallower and tamer moves in Gilts and US Treasuries, but in line with German bonds as the former advanced to 120.04 (+32 ticks) on Liffe and the latter rebounded to new overnight session highs. Tech-wise, nothing much between here and 117-31 in 10 year USTs, 158.48 for Bunds and 120.10 for Gilts, while BTPs are looking below 118.00 if the latest attempt to recover fails.