• Asian equity markets traded mostly higher as the region benefitted from the mild tailwind in the US
• UK PM Johnson told EU's Tusk in a letter he hopes the UK will leave the EU with a deal, but the backstop must be scrapped
• DXY held on to recent gains although price action was uneventful ahead of this week’s FOMC Minutes and Jackson Hole symposium
• Looking ahead, highlights include Norwegian GDP, APIs, Italian PM Conte addressing the Senate, Fed’s Quarles
• Earnings: Persimmon, Home Depot, Medtronic

ASIA-PAC

Asian equity markets traded mostly higher as the region benefitted from the mild tailwind after the strong performance in US where stimulus hopes as well as trade optimism underpinned the S&P 500 and DJIA to a 3rd consecutive win streak. ASX 200 (+1.0%) and Nikkei 225 (+0.4%) gained with outperformance in Australia fuelled by the energy sector after recent gains in oil prices and with earnings heavily in focus including BHP, while advances in Tokyo were limited by an uneventful currency and despite reports Japan permitted additional exports of high-tech material to South Korea. Elsewhere, Hang Seng (-0.1%) and Shanghai Comp. (+0.1%) traded indecisively as participants digested the mixed signals from the PBoC which conducted reverse repos but resulted to a net daily drain, and set its Loan Prime Rate at 4.25% which was lower than the previous 1yr LPR of 4.31%, as well as the Lending Rate of 4.35%, although not as low as some had anticipated. Finally, 10yr JGBs were subdued amid the mostly positive overnight risk tone and following mixed results at the 20yr auction which showed weaker demand amid higher accepted prices.

PBoC set the 1yr Loan Prime Rate at 4.25% vs. Exp. 4.24% (Prev. 4.31%) and set 5yr LPR at 4.85%. (Newswires) PBoC injected CNY 50bln via 7-day reverse repos for a net daily drain of CNY 10bln. PBoC set CNY mid-point at 7.0454 vs. Exp. 7.0445 (Prev. 7.0365)

PBoC Deputy Governor Liu said China will not scrap benchmark lending rate for the time being and still needs to observe effects of LPR reform, while Liu added that future interest rate policy is to focus on LPR and that benchmark rates may not be changed in the near term. Liu also stated that there is room for RRR and Lending Rate cuts and that urgency for interest rate reform is due to US-China trade war, industrial transformation and easing among global central banks. (Newswires)

PBoC stated interest rate reform cannot replace monetary policy and other policies, while it added that it will work with other government departments to take steps to lower corporate funding costs especially for small and private firms. There were also comments from PBoC Monetary Policy Department Director Sun that there is room to cut RRR in the future but not as big as people thought and that China will keep the benchmark deposit rate for a relatively long time. (Newswires)

US Vice President Pence said Beijing must respect the integrity of HK laws through the Sino-British joint declaration, in order for the US to make a trade deal with China. In related news, China People's Daily commentary later stated that China will not make trade concessions if US presses H issue as part of trade discussions which would be a miscalculation. (Newswires)

Hong Kong Chief Executive Lam said she hopes the peaceful march on Sunday is the beginning of restoring peace in the city, while she noted the says Hong Kong police monitoring body will hire overseas experts and that the government will set up a platform for dialogue with people from all backgrounds. Furthermore, Lam said she is willing to talk with peaceful protesters to narrow differences and that the extradition bill is dead with no plan to revive the bill. (Newswires) 

UK/EU

UK PM Johnson told EU's Tusk in a letter he hopes the UK will leave the EU with a deal, but the backstop must be scrapped. In other news, there were reports that UK PM Johnson instructed trade ministers not to discuss NHS in any deal with the US and is prepared to look constructively and flexibly at what commitments may help to replace the Northern Ireland Backstop. (Sky/Newswires/The Sun)

UK diplomats across the EU are preparing for a government-wide no-deal Brexit dress rehearsal named "Exercise Yellow Rehearse", which reports suggested is the latest signal that a no-deal Brexit is seen as an increasingly likely outcome. (BuzzFeed)

FX

DXY held on to recent gains although price action was uneventful ahead of this week’s FOMC Minutes and Jackson Hole symposium. EUR/USD and GBP/USDhave also not provided much excitement with EUR/USD subdued below 1.1100 and with GBP/USD confined to the prior day’s tight range within the 1.2100 handle amid a continued lack of a breakthrough with the UK government unwilling to negotiate until the backstop is dropped and with officials preparing for a no-deal Brexit ‘dress rehearsal’, Elsewhere, USD/JPY and JPY-crosses were contained amid a lack of fresh catalysts and data releases, while antipodeans traded choppy as initial weakness in AUD/USD was later reversed following the RBA Minutes in which the central bank reiterated it would consider further policy easing if needed and that it is reasonable to expect extended period of low rates, but also noted firmer growth in Q2 and a more balanced outlook for consumption.

RBA Minutes from August 6th meeting stated the board would consider further policy easing if needed and that it is reasonable to expect extended period of low rates, while it added risks to economy tilted to the downside, there are few signs of inflationary pressures emerging and noted downside risks to CPI components. However, the minutes also stated the RBA saw firmer GDP growth in Q2 and outlook for consumption is more balanced than for some time, while it noted consumption was helped by tax rebates and there was stabilization in housing markets. (Newswires)

COMMODITIES

Commodities traded quiet overnight in which WTI crude futures plateaued following yesterday’s gains which were fuelled by the positive risk appetite and although prices have come off their highs, the pullback was stemmed by support at the USD 56.00/bbl, while focus turns to the upcoming inventory reports with today’s API expected to show a draw of 1.9mln bbls. Gold languished after its retreat below USD 1500/oz level with the precious metal subdued by the positive risk tone and as the greenback remained steady, while trade in copperconformed to the uneventful picture across the commodities complex, not helped by the indecisive tone in its largest buyer China.

GEOPOLITICS

US and South Korea will wrap up week-long military exercises as scheduled, while North Korea condemned South Korea for joint military drills and warned of consequences. In related news, US Special Representative for North Korea Stephen Biegun's upcoming trip to South Korea is fanning speculation of a possible meeting between him and North Korean officials on the inter-Korean border this week. (Yonhap)

US President Trump spoke to India PM Modi and Pakistan PM Khan regarding trade, strategic partnerships and for the countries to work towards reducing tensions in Kashmir, while he suggested the situation is tough, but they had good conversations. (Twitter) US conveyed its strong position to Greek government regarding Iranian oil tanker it alleged is carrying illicit oil to Syria, while US warned any effort to assist the tanker could be viewed as material support to a US-designated terrorist organization. (Newswires)

US

The Treasury curve started out the week on a steeper footing, with traders latching on to US comments from the weekend on China/Huawei. As US traders got to their desks, major spreads were between 1-2bps higher. There was also news, which came in post-settlement trade on Friday, where the Treasury is sounding out investors about a potential 50- or 100-year issuance. The Treasury in 2017 mulled similar moves, and the talk has been reignited after 30-year yields recently narrowed to record lows. Austria's recent 100-year supply was digested well by the market, highlighting the demand for longer-dated sovereign issues with higher yields. The TPLEX is also taking cues from EGBs; amid fears of secular stagnation and heightened trade risks, the recent dovish remarks from the ECB's Rehn calling for a September bazooka (underscored them today), combined with the notion of looser fiscal policy out of Germany to help cushion any economic downturn, has seen German debt sell-off. Meanwhile, there was little reaction to a hawkish set of comments from Fed’s Rosengren. The curve, however, gave back most of its steeper bias, and had mostly bear-flattened by settlement, though 5s30s and 10s30s were just under 1bps wider. US T-note futures settled 15+ ticks lower at 130-14.

US President Trump tweeted the economy is strong despite the Fed, while he repeated his calls for the Fed to cut rates by 100bps and perhaps some QE as well, which he said would make the US economy better. (Newswires)

Fed's Rosengren (voter, hawkish dissenter) said US economic conditions are still pretty good and that his view at the last FOMC meeting was to focus on unemployment and inflation. Rosengren also commented that he would want to react to global weakness if it slows down the domestic economy but doesn't see a need to take action at this point and that they have to be careful not to ease too much when we don’t have significant problems, while he added it is a good time to "sit-back" and look at the data. (Newswires)

There were initial reports that the White House is mulling a payroll tax cut to support the economy with discussions said to be still in early stages and no decision has been made whether to push for Congress to approve the reduction. However, it was later reported that White House officials stated cutting payroll taxes is not under consideration at this time. (Washington Post/Twitter)