• European stocks are negative across the board in a continuation of the sell-off experienced in Asia overnight; Pre-market: Amazon -10.2%. Alphabet -5.9%
• DXY trades marginally firmer, extending on gains seen yesterday which pushed the index back above 96.50
• Looking ahead, highlights include US GDP, PCE Prices, Baker Hughes, S&P on Italy, Fed’s Bostic, ECB’s Draghi, Coeure

ASIA

Asian stocks were broadly negative as early attempts to nurse the prior day’s sell-off and replicate the rebound seen on Wall St, were thwarted amid Amazon revenue disappointment which weighed across equity futures. ASX 200 (Unch) traded choppy but managed to pare back losses towards the end of the session and Nikkei 225 (-0.4%) failed to hold on to opening gains as the Japanese benchmark gradually deteriorated with earnings dominating news flow. Elsewhere, Shanghai Comp. (-0.2%) and Hang Seng (-1.1%) both conformed to downbeat tone, although the mainland briefly outperformed after this week’s substantial liquidity injection and with China also said to be considering additional tax and fee reductions including a VAT adjustment. Finally, 10yr JGBs eventually traded higher amid the widespread risk-averse tone in the region and with BoJ’s present in the market for JPY 1.1tln in 1yr-10yr JGBs.

PBoC skipped open market operations for a net weekly injection of CNY 460bln vs. Prev. CNY 30bln injection W/W. (Newswires)
PBoC set CNY mid-point at 6.9510 (Prev. 6.9409)

China views USD/CNY 7.00 as an 'important' level and would likely intervene at that stage to prevent a rapid decline, according to sources. (Newswires)

PBoC Vice Governor says the central bank will take necessary and target measures to deal with those who short the yuan. (Newswires)

BoJ officials are said not to want sharp moves in 10yr yields, while reports noted some at the BoJ are said to see a 10yr yield limit of over 0.2%. (Newswires)

Japanese Tokyo CPI (Oct) Y/Y 1.5% vs. Exp. 1.5% (Prev. 1.3%). (Newswires)
Japanese Tokyo CPI Ex. Fresh Food (Oct) Y/Y 1.0% vs. Exp. 1.0% (Prev. 1.0%)
Japanese Tokyo CPI Ex. Fresh Food & Energy (Oct) Y/Y 0.6% vs. Exp. 0.7% (Prev. 0.7%)

EU

Bank of Italy, on request of ECB, has asked Italian banks for periodic update on their state bond portfolios. (Newswires)

EU Financial Affairs Commissioner Moscovici says they are having constructive and "firm" talks regarding the Italian situation, while he added that if Italy does not resubmit budget, the EU has options. Furthermore, he stated that the EU would look at other ways of Italy debt reduction. (Newswires)

EU and Italian officials are closely watching the impact of the increasing IT/GE 10yr spread on domestic Italian lenders, according to sources. (Newswires)

ECB Survey of Professional Forecasters downgraded 2018 GDP to 2.0% (Prev. 2.2%), 2019 to 1.8% (Prev. 1.9%) and maintained 2020 at 1.6%. The survey also showed the CPI forecast maintained at 1.7% for 2018, 2019, and 2020. (Newswires)

CENTRAL BANKS

Fed's Mester (Voter, Hawk) said US policy remains accommodative and need to raise rates into neutral territory. Mester also said she expects further gradual US rate hikes, while she added the Fed is nearing end of extraordinary policy and is close to normal. (Newswires)

ECB's Villeroy said ECB is increasingly confident in the inflation path and that the question of TLROs will need to be considered, while there were separate source reports that the ECB is looking to distribute large PSPP reinvestments over a longer period from next year. (Newswires)

Norges Bank Governor Olsen said the key policy rate will remain low and moderate for a long time and emphasised that the increase will be gradual. He also stated that underlying inflation is approaching the NB’s target. (Newswires)

EQUITIES

European stocks are negative across the board in a continuation of the sell-off experienced in Asia overnight. Almost 80% of the Stoxx 600 companies are in the red, while Eurostoxx 50 (-2.0%) flirts around levels last seen in November 2016, with the biggest losers consisting of German and French heavyweights such as Deutsche Bank (-4.5%), Airbus (-3.9%) and Total (-3.5%)

France’s CAC 40 (-2.3%) underperforms its peers with the index pressured by Valeo (-21.1%) after the company cut revenue guidance for FY 18. Over in Germany, the DAX (-2.0%) is weighed on by index heavyweight BASF (-2.2%) after the company forecasts adjusted EBIT guidance to the lower end of their previously guided range, while Covestro (-5.4%) rests at the foot of the index amid a downgrade at Berenberg. Sectors are experiencing broad-based losses with energy names pressured by price action in the complex and IT names uninspired following a revenue-miss reported by Alphabet (-5.9% pre-market).

On the flip side, gainers in the Stoxx 600 are fuelled by earnings with Neste (+7.0%), Fingerprint Cards (+7.0%) and Banco de Sabadell (+4.5%) all higher following their numbers.

FX

The DXY trades marginally firmer, extending on gains seen yesterday which pushed the index back above 96.50. Subsequently, EUR/USD remains on a 1.13 handle and below support at 1.1358 with relatively upbeat tones from Draghi yesterday unable to support the multi-bloc currency. Focus today for the EUR (absent of any negative Italian headlines), could well fall upon the slew of option activity with a slew of option expiries due to roll-off at the NY cut; 1.1350 (1.3bln), 1.1375 (1.3bln), 1.1400 (918mln), 1.1450-55 (1.1mln). From a tech perspective, if EUR/USD makes a break of 1.1350 to the downside, focus will turn to the August 16th low at 1.1336.

GBP/USD has breached yesterday’s lows in recent trade alongside the aforementioned USD strength, with the latest Brexit-related commentary also bringing markets back to reality. Sources suggest that Brexit talks are on hold as UK PM May's team cannot agree a way forward on how to proceed with negotiations and as such Cable is back below 1.2800. A sustained break below this level could open a test of YTD lows around 1.2660, particularly so, with November’s emergency EU leaders summit far from confirmed.

Given the current risk environment (post-disappointing after-market large cap US earnings; inc Amazon and Alphabet), JPY is bucking the trend vs. the USD and is currently sitting just below 112.00 where there were said to be strong bids from Japanese importers. If the US opts to accelerate losses in US equities, this could drag the pair back towards October lows around 111.62; notable options today for USD/JPY includes 111.50 (565mln), 112.00-20 (611mln), 112.50 (526mln), 113.00 (1.2bln).

Once again, focus during Asia-Pac trade continued to focus on the CNY after the PBoC opted to set the fix beyond 6.9500 for the first time since early January 2017. This subsequently prompted selling in high-beta currencies with AUD and NZD feeling the brunt with AUD/USD knocked below Feb 2016 lows of 0.7023. However, prices eventually bottomed out amid comments from the PBoC Vice Governor said the central bank will take necessary and target measures to deal with those who short the CNY; USD/CNY subsequently retreated from 6.9500 to 6.9350.

Looking ahead, EM focus could be guided by events in Russia with the CBR due to come to market with their latest policy announcement. After the CBR unexpectedly raised rates by 25bps at its previous policy meeting, the consensus expects the central bank to maintain its one-week auction rate at 7.50%. Analysts at Barclays suggest that September's rate hike has probably done enough to contain the pressure in the RUB and given the still below target inflation and a weak economy.

COMMODITIES

Gold is on target to notch a fourth week in the green, marking the yellow metal’s longest set of weekly gains since January; spurred on by ongoing economic constraints and concern over US corporate earnings. Prices continue to extend north of USD 1230/oz, while printing fresh session highs. Copper prices have retreated overnight as the red metal was weighed on by the market’s negative tone, eroding Thursday’s gains from a drop-in inventory.

WTI and Brent are both extending losses in excess of a percent with the latter losing the USD 76.00/bbl level, in-fitting with the risk sentiment and signs that global trade is slowing with both container and bulk freight rates dropping, while yesterday’s comments of an upcoming oversupply by Saudi Arabia’s OPEC governor Al-Aama also weighing on prices. Additionally, markets are waiting for today’s Baker Hughes rig count which showed an increase of four operational oil rigs last week.

The German government has reportedly released emergency oil reserves. (WiWo)

FIXED INCOME

After initially spiking higher to 160.56 at the Eurex open, Bunds staged a mild retracement before moving higher once again. Prices remain supported (+44 ticks) by the broader risk environment with events post-US close yesterday souring sentiment in the market. Investors await the lead from the US after market-darlings Amazon and Alphabet posted disappointing earnings metrics. Should sentiment on Wall St begin to waiver further, analysts have suggested a potential test of early September highs at 160.98 could be on the cards before an eventual play on 161.00. In the periphery, Italian paper trades a touch softer with losses of circa 26 ticks with markets mindful of rating agency action after-market from S&P, ahead of which, Italian League Lawmaker Borghi has suggested that any action is likely to be moderate. Perhaps more concerning for Italy was earlier cryptic comments from EU’s Moscovici who warned that, if Italy does not resubmit budget, the EU has options. Elsewhere, Gilts remain elevated with lingering Brexit concerns leading prices towards early September highs of 122.75, whilst USTs remain firmer amid the broader risk environment after topping resistance seen at 118.27+; 119.00 is the next target (last seen in late Sep).