• Major European indices are all in the green with Italian banks supporting the FTSE MIB
• EUR has been encouraged by Italy escaping a deeper rating cut by Moody’s to stay one rung above junk
• Looking ahead, today's calendar sees a lack of Tier 1 data

ASIA

Asian equity markets traded mostly higher as a rally in Chinese stocks helped most the regional bourses shrug-off the cautious open. ASX 200 (-0.58%) and Nikkei 225 (+0.37%) were both initially lower with Australia dampened by political uncertainty as PM Morrison’s governing coalition is on track to lose its 1-seat parliamentary majority following a by election in eastern Sydney, while the early downbeat tone was also attributed to geopolitical concerns after Trump announced the US would leave the Intermediate-Range Nuclear Forces Treaty. However, most of the losses in the region were later pared as the Shanghai Comp. (+4.09%) surged on a rebound from 4-year lows which inspired the Hang Seng (+2.32%), while officials were also conducive to the risk sentiment in which President Xi reiterated unwavering commitment to the private sector, China released its draft of tax cuts and the PBoC announced a liquidity injection of CNY 120bln. Finally, 10yr JGBs were amid the turnaround in sentiment for the region and lack of BoJ presence in the market today.

PBoC injected CNY 120bln via 7-day reverse repos. (Newswires)
PBoC set CNY mid-point at 6.9236 (Prev. 6.9387)

China released draft of tax cuts which include lower cost of housing, education and health to boost consumption effective from start of 2019. (Newswires)

Chinese House Prices (Sep) Y/Y 7.9% (Prev. 7.0%). (Newswires)

UK

UK PM May is to tell parliament 95% of withdrawal agreement has been settled and will reiterate her opposition against Northern Ireland backstop. (Sky) Furthermore, PM May was said to have been warned she will face a revolt by 40 Tory party rebels this week if she does not succumb to fresh demands by Brexiteers in the next 48 hours after ERG’s Baker proposed amendments that could sink a backstop; which are to be discussed this week. (Times/BBC)

ITV’s Peston noted that a UK Tory MP said "We need 60-70 letters, not 48...I know people who are putting letters in today. I think we are the closest ever to her going”, in reference to the 48 letters needed to trigger a vote of no confidence, as this MP wants a comfortable margin above that, so that the PM can see that a sizeable number of her colleagues want her to go. (Facebook)

UK Brexit Secretary Raab has stated that the UK must not agree to extend the Brexit transition period unless the EU ditches its demand for a backstop. (Telegraph)

UK Transport Secretary Grayling said that good progress has been made on the future EU relationship. (Newswires)

Irish Foreign Minister Coveney said the extension of post-Brexit transition cannot be an alternative to the NI backstop, adding there will be no withdrawal agreement without the backstop. (Newswires)

Former Brexit Secretary David Davis in a column published in the Mail on Sunday wrote “now is the time to stand up for the national interest and plot a better course” adding that “The government is in serious danger of treating Brexit as a problem to be minimized when, properly handled, it is a golden opportunity”. (Mail on Sunday)

Former Education Secretary Nicky Morgan wrote a piece in the Sunday Times suggesting that “The only way to resolve the present impasse is either to station the prime minister and Dominic Raab, her Brexit secretary, permanently in Brussels until a compromise is found — or to stand back, take a long, hard look at both the substance and perspective of the negotiations, and press the reset button”. (Times)

BoE Governor Carney said the BoE is focusing on the possible consequences of a cliff-edge Brexit and that in preparing for Brexit outcomes, the central bank is preparing for the worst-case scenarios rather than hoping for the best. (Newswires)

EU

EU Commission confirmed it has received Italy's response to criticism of 2019 budget. (Newswires)

Italy Treasury said the government is conscious its budget policy is not in line with EU's stability pact and the decision was hard but necessary, it is committed to reducing structural deficit in direction of medium-term objective from 2020 ,and added if debt/GDP and deficit/GDP does not evolve as planned, the government is committed to take all intervene adopting all necessary measures, while stating they will go off path of structural deficit adjustment in 2019 but does not intend to further expand deficit in the 2020-2021 period. Italy recognises different views with EU but will continue to have constructive and loyal talks with EU. (Newswires)

Moody’s downgraded Italy by one notch from Baa2 to Baa3; Outlook Stable. (Newswires)

US

Yields were higher by 2-4bps across the curve by settlement, with the Treasury complex taking cues from the situation in Italy, which injected choppy trade into Bunds and BTPs. However, as EU Commissioner Moscovici struck a positive, constructive tone, flows moved back into risk, allowing the T-Note to move lower and settle into a range. Despite the higher yields, major curve spreads flattened by 0.5-1.5bps. US T-note futures (Z8) settled 6 ticks lower at 117-30+.

US President Trump reportedly has no intention of relaxing tariffs against China and is said to want Chinese leaders to suffer which he thinks would give him more leverage in future discussions. In other news, US President Trump said they are studying a major tax reduction for middle-income citizens which they will provide details of next month. (Axios/Newswires)

US Treasury Secretary Mnuchin is said to be open to changing the test on how US determines currency manipulators which opens the possibility for China to be named a manipulator and in turn could be used as leverage in trade discussions. In other news, US Treasury Secretary Mnuchin's team reportedly told China there is no point in floating plans to buy US products as key priorities need to be addressed such as structural issues including IP theft and market access. (Newswires)

US President Trump says there has been deception and lies regarding Saudi Arabia's explanation for Khashoggi's death. (Washington Post)

Fed's Bostic (voter, dove) said there is no sign of dark clouds on the horizon that could trip the economy which is 'chugging along' and reiterated that trade policy remains a risk to outlook. (Newswires)

Fed's Kaplan (non-voter, dove) said two or three more rate hikes would take the Fed to neutral and that he is not committed on the need to raise above neutral levels which will depend on productivity. Kaplan also commented that the US economy is 'basically' meeting the Fed's dual mandate on employment and inflation and he is skeptical about further US wage growth from current levels, while he also noted that current market gyrations are not a concern and that corrections can be 'healthy' in addressing imbalances. (Newswires)

GEOPOLITICS

US President Trump has announced to pull the US out of the Intermediate-Range Nuclear Forces Treaty, stating that Russia are violating the agreement. The Kremlin said that Russia would be forced to take measures to restore the balance of Nuclear power in the event of US treaty exit; treaty will be broached at talks with Trump advisor Bolton in Moscow this week. (Newswires)

EQUITIES

Major European indices are all in the green, with the exception of the AEX (-0.1%) which has been dragged down by Phillips (-5.5%) amid a miss on their earnings. The FTSE MIB leads the gains following a Moody's Italy downgrade to one level above junk, which was less than some had anticipated. Italian banks, such as Intesa Sanpaolo (+1.0%) are supported a result of this; however, the index is being led by gains in Fiat Chrysler (+5.0%) after the confirmation of their Magnetti Marelli unit sale to KKR for EUR 6.2bln.

Sectors are mostly in positive territory, with the exception of healthcare and energy. Consumer discretionary and financials are some of the best performers with the former supported by car names moving sympathy to Fiat Chrysler, while the latter is buoyed by Italian banks after the FTSE MIB Banking Index opened higher by over 3%.

In terms of individual equities, the aforementioned Phillips are at the foot of the Stoxx 600. Danone (-1.3%) are lower after the CEO stated that they are not going to bid for Horlicks. Lloyds Banking Group (+2.0%) are in the green following the Co’s plans to buy back around GDP 2bln of shares in 2019.

FX

EUR - The single currency has been encouraged by events in Rome, and specifically the fact that Italy escaped a deeper ratings cut by Moody’s to stay one rung above junk. BTPs and Italian stocks have rallied in response or rather in relief, and Eur/Usd is back above 1.1500 as a result, albeit off best levels having faded around 1.1550 and clearing its 10 DMA at 1.1527 along the way.

CAD/CHF/GBP/NZD - All narrowly mixed vs the Greenback, as the DXY pivots 95.500 within a relatively tight 95.756-469 range, and the Loonie straddles 1.3100 ahead of Canadian wholesale trade data and then the BoC policy meeting on Thursday with a 25 bp hike pretty much factored in. The Franc is also anchored and confined around 0.9950, while Cable nudged higher alongside Eur/Usd earlier, but topped out ahead of 1.3100 and last Friday’s 1.3105 high to sit just above 1.3050, awaiting more from UK PM May on Brexit. The Kiwi has drifted back below 0.6600 having lost some pre-weekend event risk premium.

AUD/JPY - Both underperforming vs G10 counterparts, the former on domestic political developments as the Government lost its slender majority by virtue of failing to retain its seat at the Sydney by-election. However, Aud/Usd is just holding above 0.7100 in wake of a short squeeze in Chinese equities overnight, which in contrast has weighed on the Jpy as a safe-haven proxy, with Usd/Jpy climbing above a key 112.74 Fib towards 112.90 vs sub-112.50 at the low.

SCANDI - Nok and Sek maintaining positive momentum before Norges and Riksbank policy convenes that are both seen underscoring hawkish policy guidance, and the former potentially signalling a December rate hike rather than the option to delay until February 2019.

EM - Early Monday/week outperformance for the Rand, as Usd/Zar trade under 14.3000 ahead of Wednesday’s MTBS amidst press reports noting improved budget revenues relative to 2017 and more on track with forecasts. Elsewhere, the Rouble is outpacing the Lira in the run up to this week’s CBR and CBT meetings, with the Rub deriving some support from a rebound in Brent to just over Usd 80/brl.

COMMODITIES

Both WTI and Brent are easing off intra-day highs with the former hovering around USD 69.50/bbl while the latter retests USD 80.00/bbl to the downside. Early in the session, Saudi Energy Minister Al-Falih emerged stating the kingdom has no intentions to use oil as a weapon, while he added he cannot guarantee prices won't rise above USD 100/bbl. Elsewhere, on Friday the Baker Hughes rig count showed an additional 4 oil rigs in operations, rising to the highest figure since March 2015, applying downward pressure on prices. 

Gold trades lower as the yellow metal mirrors moves in the dollar, albeit still at levels close to its 2-month peak.

In terms of metals China’s winter anti-pollution restrictions are beginning to take an effect with this expected to boost the demand for high grade iron ore as producers priorities the best quality iron, lowering the overall market supply of iron ore, with prices currently at USD 71/tonne. Separately, China has introduced a system which allows for faster customs clearance for some imported ores, including iron ore which China are the world’s biggest importer of. Copper prices have continued to rise following a pledge from China’s central bank that it would support firms which have liquidity problems.

Iranian Energy Minister Zenganeh said that Saudi Arabia and Russia's crude output are near their highest ever levels and added that Saudi Arabia and Russia have no spare oil capacity. (Newswires)

Saudi Energy Minister Al-Falih said he cannot guarantee oil prices will not rise above USD 100/bbl and Saudi production is likely to increase in the near future to 11mln BPD, adding new OPEC+ oil agreement might be signed on Dec 7th. He added if 3mln BPD of oil supplies disappear in 2019, Saudi cannot cover this volume and will have to use reserves. (Newswires)

FIXED INCOME

The 10 year Italian debt future and equivalent cash yield may have run into resistance and support respectively, at the aforementioned 122.74 level and circa 3.30%, or simply just lost momentum having rebounded and retreated so far from last Friday’s lows and highs. However, some sense of realism could also have set in as Rome still has to submit its official response to the EU and receive the verdict, while the sovereign rate was cut even if junk was just avoided. Whatever the reason or catalyst, BTPs are back below 122.00 and closer to mid-range between 121.01-122.74, while Bunds and Gilts have both regained composure and recently clawed their way up to fresh Eurex and Liffe intraday highs of 159.20 and 121.12 (-20 ticks and -1 tick vs -56 and -33 ticks at worst). Elsewhere, US Treasuries remain largely side-lined and the curve fractionally flatter.