• Asia-Pac bourses traded mostly lower after failing to sustain the initial momentum from Wall St
• Major US indices closed higher as buyers returned to tech and the higher yield environment provided support for financials
• The White House commented that President Biden has confidence in Fed Chair Powell "at this time"
• In FX, the DXY marginally extended above 94.00, EUR/USD sits sub-1.16, NZD lags after RBNZ support proved to be fleeting
• RBNZ hiked the OCR by 25bps to 0.50% as expected and noted a further removal of monetary policy stimulus is expected over time
• Looking ahead, highlights include Eurozone Retail Sales, US ADP Employment Change, Fed's Bostic, supply from the UK and Germany

CORONAVIRUS UPDATE

Report suggested that COVID-19 was spreading "virulently" in Wuhan as early as summer 2019 which is earlier than previously thought, according to an article citing intelligence analysis of spending on PCR testing equipment. (Telegraph)

ASIA

Asia-Pac bourses traded mostly lower after failing to sustain the initial momentum from Wall St, where all major indices gained as investors bought back into tech and with sentiment helped by better-than-expected ISM services PMI, while continued upside in oil prices and a higher yield environment also underpinned energy and financials. This initially lifted the overnight benchmark indices although gains in the ASX 200 (-0.7%) were later reversed as the strength in energy and tech was overshadowed by weakness in the broader market including underperformance in the top-weighted financials sector after the regulator announced a loan curb measure targeting mortgage lending. Nikkei 225 (-1.3%) faded its opening gains and brief foray into 28k territory with auto names among the laggards amid ongoing production disruptions and with PM Kishida’s new cabinet beginning on shaky ground as polls showed his approval rating was at just 55% heading into the upcoming election, which was also the lowest for a new leader in 13 years, while KOSPI (-1.4%) gave up initial spoils with firmer than expected CPI data supporting the case for another hike by the BoK this year. Hang Seng (-0.9%) conformed to the soured mood amid weakness in property and biotech with participants also focusing on Chief Executive Lam’s final policy address of her current term where she proposed measures to address the housing issue, although this failed to lift the property sector as Evergrande concerns lingered after Hong Kong property agencies sued the Co. to recover overdue commissions and with shares in its New Energy Vehicle unit suffering double-digit percentage losses. Finally, 10yr JGBs were lower on spillover selling from T-notes and despite the downturn in stocks, while the absence of BoJ purchases in the market today added to the lacklustre demand with the central bank instead offering to buy JPY 125bln in corporate bonds from October 11th with 1yr-3yr maturities.

US President Biden said he spoke with Chinese President Xi about Taiwan and they agreed to abide by the Taiwan agreement, while the report noted that Biden appeared to be referencing last month’s phone call with Xi. In relevant news, there were also comments from Taiwan's Defense Minister that China will have the ability to mount a full-scale invasion of Taiwan by 2025 and noted that tensions with China are the worst in over 40 years. (Newswires)

US President Biden's National Security Adviser Sullivan confirmed he is to meet China's top diplomat Yang Jiechi in Switzerland. Furthermore, FT sources noted that the meeting in Switzerland on Wednesday will include negotiations about a possible virtual summit between Xi-Biden which could be a possible compromise given Xi has not left China since the start of the pandemic, while other reports also noted that Chinese diplomats stated that President Xi does not currently plan to visit Rome for the G20 summit later this month. (Newswires/FT)

USTR is seeking public comment on whether to reinstate 549 previously extended exclusions from tariffs on Chinese imports, while it will consider if the products are only available from China and the potential economic harm from granting or denying requests. Furthermore, USTR added the Chinese imports that will be considered for exclusions include thermostats, medical equipment, industrial components, bicycles and textiles. (Newswires)

US nuclear power regulator suspended the shipment of radioactive materials and a hydrogen isotope used in reactors to China's largest state-owned nuclear company, CGN, amid growing national security concerns. (Newswires)

Hong Kong Chief Executive Carrie Lam said they will develop a new metropolitan area in northern Hong Kong and will move some government office to the northern metropolis, while she added they will establish listing regime for SPACs in HK after consulting the market and are looking into specific measures to enhance demand for issuance of RMB securities. (Newswires)

• South Korean CPI MM (Sep) 0.5% vs Exp. 0.3% (Prev. 0.6%)
• South Korean CPI YY (Sep) 2.5% vs Exp. 2.3% (Prev. 2.6%)
• South Korean Core CPI YY (Sep) 1.5% (Prev. 1.3%); fastest pace of growth since October 2017.

UK/EU

UK PM Johnson is to announce a significant increase in minimum wage within weeks and will accept recommendations of independent advisers that will likely increase pay for the lowest earners from GBP 8.91/hr to GBP 9.42/hr. (The Times)

ECB President Lagarde said she will pay close attention to wage developments and inflation expectations to ensure that inflation expectations are anchored at 2%. Furthermore, Lagarde suggested to not overreact to supply shortages or rising energy prices as monetary policy cannot directly affect those phenomena. (Newswires)

FX

In FX markets, the DXY marginally extended above the 94.00 level amid mild support from the higher yields and recent stronger than expected ISM Non-Manufacturing PMI data, as well as the soured overnight risk tone. There were notable comments from the White House that President Biden has confidence in Fed Chair Powell "at this time” and it was also reported that a majority of Senate Banking panel Republicans said they would vote for Fed Chair Powell if he were re-nominated, helping boost PredictIt's odds for Fed Chair Powell's re-appointment to USD 0.75 from USD 0.62. On the congressional front, US Senate Majority leader Schumer said talks on Build Back Better with the White House are making good progress and the Senate is planning a vote today to advance the debt limit measure, which is expected to fail amid opposition from the GOP, although Schumer also noted the Senate will stay put until the debt limit is addressed. EUR/USD was lacklustre beneath 1.1600, while GBP/USD was rangebound with the currency largely unaffected by the lingering Franco-British tensions and reports that UK PM Johnson is to announce a significant increase in minimum wages within weeks. USD/JPY and JPY-crosses mostly ignored the deterioration in risk appetite with JPY weakening on yield differentials and antipodeans were pressured by the soured risk mood with NZD/USD only momentarily supported by the RBNZ decision to hike rates by 25bps to 0.50% as expected. The central bank also repeated that the further removal of monetary policy stimulus is expected over time although didn’t allude to a timing and instead stated that future moves are contingent on the medium-term outlook for inflation and employment.

RBNZ hiked the OCR by 25bps to 0.50% as expected and the committee noted further removal of monetary policy stimulus is expected over time. RBNZ added that it is appropriate to continue reducing the level of stimulus and that future moves are contingent on the medium term outlook for inflation and employment, while policy stimulus will need to be reduced to maintain price stability and maximum sustainable employment over the medium term. Furthermore, it noted that cost pressures are becoming more persistent and capacity pressures are still evident, but added that demand shortfalls are less of an issue than the economy hitting capacity constraints and that economic activity will rebound quickly as alert level restrictions ease. (Newswires)

COMMODITIES

Commodities were mostly softer overnight with prices hampered by the soured risk appetite and firmer greenback although the brief pullback in WTI beneath the USD 79.00/bbl level was contained amid the ongoing fuel crisis and recent OPEC+ decision. Furthermore, the surprise build for headline crude stockpiles in the latest private sector inventory data and reports of Saudi reducing its official selling prices had little impact on oil. Gold prices were pressured as the greenback strengthened overnight but with downside in the precious metal cushioned by support at USD 1750/oz, while copper underperformed as Asia stock markets wiped out their initial gains.

US Private Energy Inventory Data (bbls): Crude +1.0mln (exp. -0.4mln), Cushing +2.0mln, Gasoline +3.7mln (exp. -0.3mln), Distillate +0.3 (exp. -1.0mln). (Newswires)

Saudi Arabia cut November Arab Light crude oil OSP for Asia to Oman/Dubai plus USD 1.30/bbl (prev. plus USD 1.70/bbl), cut November Arab light crude oil OSP for NW Europe to ICE Brent settlement minus USD 2.40/bbl (prev. minus USD 1.70/bbl) and cut November Arab light crude oil OSP for North America to ASCI plus USD 1.25/bbl (prev. plus USD 1.30/bbl). (Newswires)

Spain, Czech Republic, France, Romania and Greece have called on the EU to investigate the gas market. It was also reported that the European Commission is delving into complaints by some EU countries that Russia is using its position as a major supplier to push the rising price of gas in Europe. Furthermore, reports added that Gazprom has been fulfilling its sales requirement under long-term contracts but has not added more and therefore, has drawn allegations by EU lawmakers it is pushing up gas prices. (Newswires)

GEOPOLITICAL

US President Biden's National Security Adviser told his Israeli counterpart that the US believes diplomacy is the best way to ensure Iran does not get a nuclear weapon and said that President Biden has made it clear the US is prepared to turn to other options if diplomacy fails. (Newswires)

US

Treasuries sold off Tuesday as the ISM Services upside surprises accentuated the extended commodity rally. By settlement, 2s +0.9bps at 0.290%, 3s +2.4bps at 0.525%, 5s +3.4bps at 0.980%, 7s +4.5bps at 1.316%, 10s +5.2bps at 1.533%, 20s +5.5bps at 2.046%, 30s +5.4bps at 2.102%; TYZ1 volumes were below recent averages again. TIPS/BREAKEVENS: 5yr TIPS -4.1bps at -1.712%, 10yr TIPS -1.0bps at -0.918%, 30yr TIPS +0.9bps at -0.228%. 5yr BEI +7.0bps at 2.721%, 10yr BEI +5.5bps at 2.430%, 30yr BEI +4.4bps at 2.340%. SHORT RATES: The Bill curve continues to show a kink at the 1m tenors after Yellen affirmed the October 18th date for the debt limit; note that 8-day CMBs were sold at 14bps today, while Thursday's 1m and 2m auctions will be in focus. SOFR and EFFR both unchanged at 5bps and 8bps respectively. The Eurodollar strip bear-steepened on average volumes: EDZ1 -0.5bps at 99.83, M2 -1bps at 99.795, Z2 -1.5bps at 99.515, Z3 -4bps at 99.87, Z4 -5bps at 98.43, Z5 -5bps at 98.17. There was a red herring of a bid for bonds into the European open, only to reverse back to lows into the NY handover, with the belly of the Treasury curve most heavy. Supporting the sellers was the sustained rally in the energy space, while a growing roster of IG USD supply added some digestion pressure ahead of next week's Treasury refunding for 3s, 10s, and 30s. The sell-off gained traction further on the back of the ISM Services, which saw a surprise rise with upside in the New Orders and Prices Paid components. The positive activity data and commodity rally saw T-Notes hit session lows of 131-20+, while inflation breakevens also widened to see the 5yr BEI rise above 2.7%, multi-month highs and not far off its pandemic peak of c. 2.80%. Yields hovered close to highs after Europe closed up for the day, although note that the long-end saw additional selling to see the earlier belly relative underperformance fade (evidenced by the 10s30s widening into the afternoon). Attention now gravitates to the NFP report on Friday, with the notoriously inaccurate ADP report Wednesday likely to set the tone ahead of such regardless. T-note (Z1) futures settled 11 ticks lower at 131-23+.

White House said President Biden has confidence in Fed Chair Powell "at this time”, while it was separately reported that a majority of Senate Banking panel Republicans said they would vote for Fed Chair Powell if he were re-nominated by President Biden, according to journalist Wasson. (Newswires/Twitter)

US President Biden said means testing will be part of the reconciliation bill and that they will get a compromise on the agenda, while he suggested he was positive and will pass both bills to build the US economy. Furthermore, President Biden stated it 'sure seems like' Senator Manchin is moving on the spending topline and the White House also noted that President Biden had a "constructive" meeting and 'productive discussion' with House Democrats on infrastructure and build back better legislation. (Newswires)

US Democratic Senator Manchin responded that he is not ruling things out and just knows there is enough people here that will not allow the US to default, when asked if he's open to making changes to filibuster to lift the debt ceiling, according to WSJ's Lindsay Wise. (WSJ)

US Senate Majority leader Schumer said the Senate will stay put until the debt limit is addressed and there were earlier comments from GOP Senator Grassley that he would vote to raise debt ceiling if GOP was at the table. In relevant news, US President Biden later stated that a carve out for filibuster on debt ceiling is a real possibility and CNN's Raju tweeted that the Senate vote is set for 14:15EDT on Wednesday to break a filibuster on the bill to suspend the debt limit, but added it will fail amid opposition from the GOP. (Newswires)