• European bourses are diverging somewhat after a lacklustre open following the similar APAC handover, Stoxx 50 +0.1%
• US futures are mixed but relatively contained though the NQ -0.2% lags marginally given pressure in TSLA, -6.0% pre-market
• DXY has been erring higher throughout the session to the detriment of peers with AUD lagging post-RBA; USTs are firmer and the yield curve steeper
• The RBA maintained the Cash Rate Target at 0.10% but dropped the April 2024 government bond yield target
• Looking ahead, highlights include earnings from T-Mobile & Pfizer

CORONAVIRUS UPDATE

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.

US

Several sources told Punchbowl that a group of middle-of-the-road Democrats is ready to block consideration of the Build Back Better deal unless leadership gets a Congressional Budget Office score. (Punchbowl)

UK/EU

UK 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)

A senior UK government official commented that "All the options are being looked at – from small to big" when it comes to Article 16 notification/trigger, according to Eurasia group's Rahman. (Twitter)

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)

EU Markit Manufacturing Final PMI (Oct) 58.3 vs. Exp. 58.5 (Prev. 58.5)

EQUITIES

Bourses in Europe have now adopted more of a mixed picture (Euro Stoxx 50 +0.1%; Stoxx 600 -0.2%) Stoxx 600 following the lacklustre cash open and downbeat APAC handover. US equity futures meanwhile are somewhat mixed with the RTY (+0.2%) narrowly outperforming the ES (-0.1%), YM (Unch), and NQ (-0.2%) – with the latter also seeing some pressure from Tesla (-6.0% pre-market) after CEO Musk said no deal was signed yet with Hertz and that a deal would have zero impact on Tesla's economics. Back to Europe, a divergence is evident with the DAX 40 (+0.4%) outpacing amid post-earnings gains from HelloFresh (+14%), Fresenius SE (+4.6%) and Fresenius Medical Care (+2.0%). The FTSE 100 (-0.5%) meanwhile lags with the Dec futures and cash both under 7,250 – with the index pressured by heft losses in some of its heaviest sectors. Basic resources sit at the foot of the bunch due to softer base metal prices across the board, which saw Dalian iron ore futures hit limit down at least twice in the overnight session. Travel & Leisure closely follows as sector heavyweight Flutter Entertainment (~23% weighting) slipped after cutting guidance. Oil & Gas and Banks closely follow due to the recent declines in crude (and BP post-earnings) and yields respectively. On the flip side, some of the more defensive sectors stand at the top of the leader board with Healthcare and Food & Beverages the current winners. In terms of other individual movers, THG (-6.1%) resides near the bottom of the Stoxx 600 second-largest shareholder BlackRock (9.5% stake) is reportedly planning to sell 55mln shares equating to around 4% of its holding. It’s also worth noting Apple (-0.1% pre-market) has reportedly reduced iPad production to feed chips to the iPhone 13, according to Nikkei sources; iPad production was reportedly -50% from Apple's original plans, sources added. In terms of broad equity commentary, Credit Suisse remains overweight value in Europe, whilst raising US small caps to overnight and reducing the UK to underweight. Looking at the rationale, CS notes that European value tend to outperform while inflation expectations or Bund yields rise. US small caps meanwhile have underperformed almost all macro drivers, whilst earnings momentum takes a turn for the better. Finally, CS argues UK small caps are much more cyclical than large caps and could face further tailwinds from UK’s macro landscape and with some tightening potentially on the table this week.

Tesla (TSLA) CEO Musk said no deal was signed yet with Hertz (HTZZ) and that a deal would have zero impact on Tesla's economics. (Twitter)

FX

AUD/NZD - The Aussie has reversed even more sharply from its recent core inflation and yield induced highs in wake of the RBA policy meeting overnight and confirmation of the moves/tweaks most were expecting. To recap, YCT was officially withdrawn after the Bank allowed the 3 year target rate to soar through the 0.1% ceiling and guidance on rates being held at the same level until 2024, at the earliest, was also withdrawn and replaced by a more flexible or conditional timeframe when inflation is sustainably in the 2-3% remit range. However, Governor Lowe retained a decidedly dovish tone in the aftermath, pushing back against more aggressive market pricing for tightening and stressing that it is entirely plausible that the first increase in the Cash Rate will not be before the maturity of the current April 2024 target bond, though it is also plausible that a hike could be appropriate in 2023 and there is genuine uncertainty as to the timing of future adjustments in the Cash Rate. Aud/Usd is now closer to 0.7450 than 0.7550 and the Aud/Nzd cross nearer 1.0400 than the round number above with added weight applied by weakness in copper and iron ore prices especially (latter hit limit down on China’s Dallian exchange). Meanwhile, the Kiwi also felt some contagion after a drop in NZ building consents and as attention turns to the Q3 HLFS report, with Nzd/Usd eyeing 0.7150 having got to within pips of 0.7200 only yesterday.

EUR/DXY - Technical forces seem to be having an influence on direction in Eur/Usd amidst somewhat mixed Eurozone manufacturing PMIs as the headline pair topped out precisely or pretty much bang on a 50% retracement of the reversal from 1.1692 to 1.1535 at 1.1613 and subsequently probed the 21 DMA that comes in at 1.1598 today. Moreover, the Euro appears reliant on hefty option expiry interest for support given 1.9 bn rolling off at 1.1585 if it cannot reclaim 1.1600+ status, as the Dollar regroups and trades firmer against most majors, bar the Yen. Indeed, in stark contrast to Monday, the index has bounced off a marginally deeper sub-94.000 low between tight 93.818-985 confines, albeit in cautious, choppy pre-FOMC mood.

CHF/CAD/GBP - No traction for the Franc via firmer than forecast Swiss CPI or a faster pace of consumption, while the Loonie is on the defensive ahead of Canadian building permits and Sterling is still on a softer footing awaiting the BoE on Thursday alongside what could be a make or break meeting in France where UK Brexit Minister Frost is due to tackle the fishing dispute face-to-face with Secretary of State for European Affairs Beaune. Usd/Chf is straddling 0.9100, Usd/Cad is hovering around 1.2400, Cable pivots 1.3650 and Eur/Gbp is probing 0.8500.

JPY - As noted above, the Yen is bucking the broad G10 trend with gains vs the Greenback amidst appreciably softer US Treasury and global bond yields, as Usd/Jpy retreats from 114.00+ peaks to test support circa 113.50.

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)

Notable FX Expiries, NY Cut:

• EUR/USD: 1.1490-1.1500 (1.4BLN), 1.1540-50 (648M), 1.1585 (1.9BLN), 1.1645 (810M), 1.1660-65 (400M), 1.1670-75 (1.1BLN)

FIXED

In contrast to the usual trend, short-dated DMO supply was not that well received just days before the BoE is expected to raise rates, even though the average yield on the 2025 Gilt was some 20 bp higher than at the previous sale. Hence, the 10 year UK bond has eased back from a marginal new 125.17 Liffe high and is lagging further behind Bunds that have now eclipsed last Friday’s Eurex best to expose 169.00. Meanwhile, US Treasuries remain firm just shy of overnight peaks with the profile of the curve barely changed ahead of a blank pm agenda aside from Redbook sales.

COMMODITIES

WTI and Brent front-month futures are moving sideways ahead of the OPEC+ meeting on Thursday, whereby expectations are skewed towards an unwind of current curbs by 400k BPD despite outside pressure for the group to further open the taps. Ministers, including de-facto heads Russia and Saudi, have been vocal in their support towards a maintained pace of production hikes. There have also been reports of Angola and Nigeria struggling to keep up with the output hikes, which may further dissuade the producer to further ramp up output. The morning also saw macro commentary from BP, whereby the CFO suggested global oil demand has returned to levels above 100mln BPD. The Co. expects oil prices to be supported by continued inventory draw-down, with the potential for additional demand from gas to oil switching. OPEC+ decision making on production levels continues to be a key factor in oil prices and market rebalancing. Gas markets were very strong in the quarter and BP expect the market to remain tight during the period of peak winter demand. In the fourth quarter industry refining margins are expected to be lower compared to the third quarter driven by seasonal demand. WTI Dec trades on either side of USD 84/bbl and Brent on either side of USD 85/bbl. Elsewhere, spot gold and silver are relatively flat with the former in close proximity to its 200 DMA (1,790/oz), 100 DMA (1,785/oz), 50 DMA (1,780/oz) and 21 DMA (1,778/oz). Over to base metals, Dalian iron ore futures were in focus overnight after prices hit limit down at least twice and nearly hit 1yr lows amid high supply and lower demand, with the latter namely a function of China cutting steel output forecasts. LME copper meanwhile has clambered off worst levels (USD 9,430/t) but remains just under USD 9,500/t as prices track sentiment.

Russia's Kremlin remains committed to start pumping additional gas to Europe, once domestic storage is replenished; in some cases deliveries may surpass contractual amounts; Spokesperson Peskov says they remain faithful to the OPEC+ oil output deal. (Newswires)

BP (BP/ LN) says that global oil demand is now above 100mln BPD. (Newswires)