• Asian equity markets traded mostly higher as a rally in Chinese stocks helped most regional bourses shrug-off the cautious open
• PM May is 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
• In FX, USD was little changed while AUD/USD briefly weakened to below 0.7100 as Australia heads towards a hung parliament
• Looking ahead, today’s calendar sees a lack of tier 1 highlights

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 (-0.7%) and Nikkei 225 (+0.4%) 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. (+4.2%) surged on a rebound from 4-year lows which inspired the Hang Seng (+1.7%), 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/EU

UK PM May told business leaders that EU leaders are committed to a Brexit deal this autumn according to sources on Friday, while there were also reports on Friday that the UK is said to drop Brexit demand on a time-limited backstop to ease deal. (Newswires)

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)

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)

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)

Italy's government may cut 2019 deficit target to 2.1% from 2.4%. (Il Foglio) However, the latest reports suggest Italy are to tell the EU that it will move ahead with budget plan and are to send budget response by 10.55BST. (La Repubblica)

Moody’s downgraded Italy by one notch from Baa2 to Baa3; Outlook Stable. Fitch upgraded Cyprus from BB+ to investment grade of BBB-; Outlook Stable. (Newswires)
 

FX

FX markets began the week quiet in which the DXY was little changed as its main counterparts struggled for direction with EUR/USD stuck near 1.1500 and as GBP/USD took a breather from the Brexit-related mood-swings at the 1.3000 handle. Elsewhere, AUD/USD briefly weakened to below 0.7100 as Australia heads towards a hung parliament although losses were contained considering that the ruling coalition would only need the support of just one of the independent MPs to pass laws or win a confidence vote, while USD/JPY was choppy alongside a similar reversal in Japanese risk sentiment.

Australian PM Morrison’s governing coalition is on track to lose its 1-seat majority in parliament following a by-election in Sydney, which means that the Liberal Party and coalition partners would need to rely on support from independent MPs to pass legislation and in the event of a confidence vote. (BBC)
 

COMMODITIES

Commodities were mostly quiet with WTI crude futures range-bound after having found support ahead of the USD 69.00/bbl level, while gold prices mirrored the uneventful price action in the greenback. Conversely, copper prices outperformed in a continuation of Friday’s rebound and amid the aggressive surge in Chinese stocks overnight.

Baker Hughes Rig Count (19/Oct) showed total rigs rose by 4 to 1067. (Newswires)

IEA Chief Birol sees potential for further increases in oil prices due to strong global demand growth and is not worried about Saudi Arabia cutting oil exports as a response to international pressure related to Khashoggi's death. (Newswires)

GEOPOLOTICS

Saudi Arabia claimed journalist Khashoggi was killed during a fight inside the consulate which contradicted its prior claim that Khashoggi had left the embassy, while there were also comments from the Saudi Foreign Minister that they do not know how journalist Khashoggi was killed or where the body is. Elsewhere, US President Trump said there has been deception and lies regarding Saudi Arabia's explanation for Khashoggi's death, while Turkish press reported that Saudi Crown Prince Mohammed bin Salman contacted Khashoggi by phone directly and tried to convince him to return to Riyadh shortly before he was killed. (Newswires/Washington Post/Yeni Safak)

US President Trump President announced to pull the US out of the Intermediate-Range Nuclear Forces Treaty and stated that Russia was violating the agreement. (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)

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)