Futures are modestly higher, but well off session highs, led by small-caps as bond yields fall 10ps in the long-end of the curve after dovish comments by Fed officials and reports of more economic stimulus from China brought some risk appetite back to markets while investors continue to evaluate the potential impact of the Israel-Hamas conflict. Asian and European shares also rallied. At 7:45am ET, futures on the S&P 500 and Nasdaq 100 rose about 0.1% after Monday’s solid gains on Wall Street which took place with the Treasury cash market closed.

BBG reported that China may use an additional $137bn in fiscal stimulus to achieve growth targets, although as usual the market balked at the number which it viewed as too little. Treasuries jumped, catching up with Monday’s global government bond rally, when cash trading in the US was closed. The yield on the policy-sensitive 2Y Treasury dropped by the most since the end of August, while the benchmark 10-year had its best day since March. The dollar was steady after four days of declines. Commodities are muted despite the bullish China news; the USD is weaker for the 4th day in a row as the market appears to disregard geopolitical risk. Today lacks any major macro data with PPI tomorrow and CPI Thursday, while bank earnings kick off later this week.

In premarket trading, US-listed Chinese stocks including Alibaba Group Holdings Ltd. and JD.com Inc. were among the notable gainers after Bloomberg reported that China is preparing to unleash a new round of measures to support its economy.  PepsiCo climbed almost 3% after raising its profit forecast. Rival drinks-maker The Coca-Cola Co. gained more than 1%. Mobile-chip makers Skyworks Solutions Inc. and Qorvo Inc. declined after Citigroup Inc. downgraded the stocks to sell. Lexicon Pharmaceuticals shares rose 10% in premarket trading on Tuesday after getting preferred status at Express Scripts, the pharmacy benefits management business of The Cigna Group’s Evernorth.

At the end of last week, traders had boosted bets on another Fed hike this after US employment unexpectedly surged in September. That narrative switched on Monday, however, as central bank officials tamped down the speculation. Fed Vice Chair Philip Jefferson said officials could “proceed carefully” following the recent rise in Treasury yields, and Fed Bank of Dallas President Lorie Logan said the surge in long-term rates may mean less need for further tightening. Another slate of Fed speakers today may add to the picture.

Fed Vice Chair Philip Jefferson said he would “remain cognizant of the tightening in financial conditions through higher bond yields” in assessing the future path of policy. Fed official Lorie Logan said the recent rise in long-term Treasury yields may indicate less need for the US central bank to raise rates again

“The latest comments from Fed speakers have had a clear risk-on influence on the market,” said Benjamin Melman, global chief investment officer at Edmond de Rothschild Asset Management. “There’s been a clear change of tone.”

“I’ll be cautious here considering that market has been seeing the Fed as dovish many times in the past year and that got proven wrong time and time again,” said Mingze Wu, a currency trader at StoneX. “If the Israel-Palestinian conflict expands and we see more countries joining in, risk positivity will likely erode quickly”

Europe's Stoxx 600 index jumped 1.6%, heading for its best day this year, with all industry sectors in the green. The region is ripping given the combination of dovish Fedspeak, a lack of escalation of the Israeli conflict to a regional conflict, and potential additional stimulus from China. Vol/Cyclicals are leading, Quality is lagging; Value over Growth. UKX +1.5%, SX5E +1.6%, SXXP +1.5%, DAX +1.5%. Miners led the advance as copper and nickel prices rose on hopes further stimulus from China would boost demand for metals. Anglo American Plc advanced more than 5%, while Glencore Plc, Rio Tinto Plc and ArcelorMittal added more than 3% each. Carmakers rose the most in four months, lead by Volvo Car AB-B. Here are some other notable European movers:

• Tele2 shares rise as much as 3.9% after Redburn Atlantic raises the telecom operator to buy from sell, saying the cash-flow problems that the company has faced since 2022 are now behind
• Elis rose as much as 6.6%, their biggest jump since March 2022, after Brazilian asset manager BW Gestão de Investimentos acquired a 6% stake in the French cleaning services group
• Eiffage gains as much as 3.5% as Jefferies upgrades to buy in European infrastructure sector earnings preview while staying cautious on Fraport and Skanska
• About You shares gain as much as 7.2% after the online fashion retailer said it expected to significantly improve its margin year-on-year
• Greencore shares jump as much as 17%, the most since November 2020, after the Irish packaged food company forecast full-year adjusted operating profit that beat the average analyst estimate
• Ubisoft shares fall as much as 6.3%, the most intraday since May. The French company said its free-to-play first-person shooter game XDefiant will be delayed
• Vitesco Technologies shares are trading around 0.2% below the value of Schaeffler offer, signaling a high certainty for the deal to close
• PGS dropped as much as 8% after it reported preliminary revenue for the third quarter of about $141 million, estimate $196.3 million
• EuroAPI falls as much as 61% in Paris trading following another profit warning from the French drug-ingredients maker

Earlier in the session, Asian stocks rose, on course for their biggest daily gain since July, as dovish comments from Federal Reserve officials lifted risk sentiment and fueled expectations that the US central bank may pause rate hikes. The MSCI Asia Pacific Index climbed as much as 1.6%, led by industrial and consumer discretionary shares. Key benchmarks climbed in Japan and South Korea after holidays, while stocks also gained in Hong Kong and Southeast Asia. Mainland Chinese stocks fell amid concerns about the strength of economic recovery. Taiwan’s market was closed for a holiday.

• Hang Seng and Shanghai Comp. were mixed with Hong Kong lifted by strength in tech and property, while the mainland lagged amid underwhelming holiday spending and lingering debt concerns after Country Garden flagged it would not be able to meet all offshore obligations.
• Australia's ASX 200 was lifted as utilities and tech led the broad-based gains across sectors and with the index unfazed by the mixed consumer and business confidence data releases.
• Japan's Nikkei 225 outperformed on return from holiday and got its first opportunity to react to the key market themes including last week’s US jobs data, the Israel-Hamas conflict and recent Fed rhetoric.
• Korea's KOSPI gained with chipmakers boosted after reports that Samsung Electronics and SK Hynix will be allowed to supply US chip equipment to their China factories indefinitely without separate US approvals.
• Stocks in India climbed the most in more than three months, tracking regional peers, as a softer tone by the Federal Reserve lifted risk sentiment. The S&P BSE Sensex rose 0.9% to 66,079.36 in Mumbai, while the NSE Nifty 50 Index advanced by a similar measure. All the sectoral gauges of the BSE recorded gains, with a basket of real estate companies soaring 5% and touching the highest since 2008.

The Bloomberg Dollar Spot Index slipped as much as 0.1%, extending losses for a fifth straight day, as investors focused on dovish Federal Reserve comments. The Norwegian krone underperforms its G-10 peers, falling 0.4% versus the greenback after CPI slowed more than expected in September. Spot gold falls 0.2%.

In rates, treasuries rally as they catch up with Monday’s move in futures after some dovish Fed speak, however they pared the gap lower when cash trading resumed following Monday’s US holiday. Futures, which rallied steeply Monday, are lower by around 8 ticks in 10-year note contracts; on Monday futures implied a 10Y yield as low as 4.60%, a move which tracked gains in core European rates driven by flight-to-quality flows and dovish Fed speakers. On Tuesday, treasury yields remain richer on the day by 8bp to 13bp across the curve with front-end lagging slightly, flattening 2s10s spread by 4bp on the day; 10-year yields around 4.70% after opening just under 4.62%. The Treasury auction cycle begins at 1pm with $46b 3-year note sale, followed by 10- and 30-year reopenings Wednesday and Thursday. Tuesday’s session includes a packed speaker slate, following comments from Logan and Jefferson on Monday.

In commodities, oil prices pared an earlier fall to trade little changed, with WTI around $86.40 as investors keep a close eye on the Hamas-Israel war.

Turning to the day ahead, we have a much busier day data-wise than yesterday, with the release of the US September NFIB small business optimism (down to 91.0 from 91.3, but above exp. 90.8) , NY Fed 1-yr inflation expectations and August wholesale trade sales, as well as Italian August industrial production. We will also hear from a number of central bankers, including the Fed’s Bostic, Waller, Kashkari, Perli and Daly speak, as well as from the ECB’s Villeroy, and the BoE will release the minutes of their financial policy meeting. Finally, PepsiCo releases its earnings report.

Market Snapshot

• S&P 500 futures up 0.2% to 4,377.00
• MXAP up 1.2% to 156.73
• MXAPJ up 0.8% to 489.75
• Nikkei up 2.4% to 31,746.53
• Topix up 2.1% to 2,312.19
• Hang Seng Index up 0.8% to 17,664.73
• Shanghai Composite down 0.7% to 3,075.24
• Sensex up 0.9% to 66,132.23
• Australia S&P/ASX 200 up 1.0% to 7,040.64
• Kospi down 0.3% to 2,402.58
• STOXX Europe 600 up 1.4% to 450.14
• German 10Y yield little changed at 2.79%
• Euro up 0.3% to $1.0595
• Brent Futures little changed at $88.19/bbl
• Gold spot down 0.2% to $1,858.17
• U.S. Dollar Index down 0.17% to 105.91

Top Overnight News

• China may raise its budget deficit as the government prepares to unleash more stimulus, people familiar said. Policymakers are weighing the sale of at least 1 trillion yuan ($137 billion) of sovereign debt for spending on infrastructure. An announcement may come as soon as this month. BBG
• Country Garden, the Chinese property giant, failed to make an int’l debt payment and warned it wouldn’t be able to meet all its obligations. WSJ
• Norway’s CPI for Sept falls far below expectations (the underlying CPI came in at +5.7%, down from +6.3% in Aug and below the Street’s +6.1% forecast). BBG
• European Central Bank policymakers consider a spike in Italy's bond yields to be justified by the government's projection of higher deficits, but see it as a warning sign that should cool talk of ending a bond-buying scheme early, six sources said. RTRS
• The Israel-Hamas conflict entered its fourth day, with at least 1,500 fatalities. Overnight, Israel struck the Gaza Strip and is now building a base to accommodate thousands of soldiers. The US warned Iran to not get involved. Joe Biden will speak at 1 p.m. ET. FT
• The IMF boosted its global inflation forecast for next year to 5.8% from the 5.2% predicted three months ago. In most countries, the institution sees CPI remaining above central bank targets until 2025. It also expects global growth of 2.9% for next year, down 0.1% from its outlook in July. BBG
• Neither Israel nor the US has explicit proof linking Iran to the Hamas attack from Saturday (in terms of directly authorizing or coordinating), although the terrorist group received logistical help and military training from allies in Tehran. WaPo
• Tesla’s top-selling electric vehicles now compete directly with gasoline cars on price after the latest round of price reductions. The lower prices could cost the company $1.2 billion a year, according to at least one investor. BBG
• PepsiCo rising premarket on a core EPS beat and higher full-year outlook. RTRS

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mostly positive as key markets reopened from the long weekend and following the recovery seen on Wall Street owing to a bout of dovish-leaning Fed commentary. ASX 200 was lifted as utilities and tech led the broad-based gains across sectors and with the index unfazed by the mixed consumer and business confidence data releases. Nikkei 225 outperformed on return from holiday and got its first opportunity to react to the key market themes including last week’s US jobs data, the Israel-Hamas conflict and recent Fed rhetoric. KOSPI gained with chipmakers boosted after reports that Samsung Electronics and SK Hynix will be allowed to supply US chip equipment to their China factories indefinitely without separate US approvals. Hang Seng and Shanghai Comp. were mixed with Hong Kong lifted by strength in tech and property, while the mainland lagged amid underwhelming holiday spending and lingering debt concerns after Country Garden flagged it would not be able to meet all offshore obligations.

Top Asian News

• China reportedly weighs new stimulus and higher deficit to meet growth target, according to Bloomberg sources. Policymakers are weighing the issuance of at least CNH 1tln (USD 137bln) of additional sovereign debt for spending on infrastructure. Could raise this year’s budget deficit to "well above" the 3% cap set in March sources added. An announcement could come as early as this month, but talks are ongoing and plans can change.
• PBoC set USD/CNY mid-point at 7.1781 vs exp. 7.2758 (prev. 7.1789).
• China's Commerce Minister Wang said in talks with the delegation of US senators that the US-China economic and trade relationship is very important to the two countries and China will not avoid competition but it should be fair and based on international rules. Wang said both sides had rational and pragmatic discussions and China hopes the US is to specify the boundaries of security accurately, as well as avoid politicising and generalising security issues, according to Reuters.
• Country Garden (2007 HK) said it took various measures to alleviate liquidity pressure to minimise the impact on project construction and operations, while its liquidity position is expected to remain very tight in the short to medium term. Co. also said it had not made a due payment in the principal amount of HKD 470mln under certain of its indebtedness and expects that it will not be able to meet all offshore obligations when due or within relevant grace periods.
• BoJ is reportedly mulling raising its FY23/24 core CPI target to near 3% from 2.5% forecast in July, according to Kyodo

European bourses trade on the front-foot in a catch-up play to the afternoon gains on Wall Street which were brought about by dovish-leaning Fed rhetoric. Sectors in Europe are firmer across the board to varying degrees with Energy still the laggard while Basic Resources outperform following the aforementioned China sources; Real Estate names are cheering the pullback in yield whilst Travel & Leisure stocks are being granted some reprieve from yesterday’s selling pressure. US futures are trading slightly firmer, continuing to extend on gains seen in yesterday’s session.

Top European News

• ECB's Villeroy said interest rates are now on a good level, at this stage further rate hikes are not the right thing to do; adds the Israel situation is no reason for us to tweak inflation prospects for now, and still sees inflation at around 2% by 2025, according to Reuters.
• ECB's Holzmann said higher bond yields send a similar message to hikes. “If additional shocks come, and if the information we have proves to be incorrect, we may have to hike another time or perhaps two times", according to CNBC.
• EU is planning an anti-subsidy probe into Chinese steelmakers, according to FT.
• Kantar UK Supermarket update: Grocery inflation cools again as shoppers seek value during sunny September.
• BoE Financial Policy Summary and Record: maintains CCyB rates at 2%; some members suggested increasing the rate to build resilience, the case for lowering was also discussed.

FX

• Dollar depressed as risk appetite picks up and Fed VC Jefferson echoes sentiments about the tightening impact of higher yields, with DXY losing grasp of the 106.000 handle within a 106.250-105.760 range.
• Euro bounces firmly to probe 1.0600 vs Buck having survived a test of the big figure below at the height of risk aversion.
• Pound breaches semi-psychological resistance at 1.2250 against Greenback, Franc extends its rebound through 0.9050 and Aussie regains 0.6400+ status amidst reports of more Chinese stimulus.
• Yen underperforms as Japanese participants return from holiday and buy USD/JPY from the low 148.00 area for the Tokyo fix.
• Norwegian Crown down in wake of cooler than forecast CPI metrics, with EUR/NOK eyeing 11.5000 from sub-11.3850

Fixed Income

• Bonds futures settle down after Monday's Middle East safety flight.
• Bunds dangle within a 128.97-47 range alongside T-note between 107-16/30+ parameters, but Gilts stay afloat after peaking at 93.81 and retreating to 93.39.
• UK sold GBP 900mln 0.125% 2039 I/L Gilt: b/c 3.17x prev. (2.62x) & real yield 1.265% (prev. 0.986%)
• Germany sold EUR 464mln vs exp. EUR 600mln 0.10% 2033 I/L and 0.10% 2046 I/L Bund: 2033: b/c 1.47x (prev. 2.1x) & real yield 0.42% (prev. 0.19%), 2046: b/c 1.14x (prev. 1.1x) & real yield 0.56% (prev. 0.21%)

Commodities

• Crude front-month futures are choppy but briefly tilted firmer on the back of source reports that China is mulling new stimulus and higher deficit to meet growth target, although the upside was short-lived whilst IMF cut growth forecasts for China and the EZ.
• Dutch TTF prices continue to grind higher with desks citing tailwinds from the crude complex coupled with the revived Australian LNG strikes at Chevron facilities in the run-up to the winter heating season.
• Spot gold is flat/tilting lower after Monday’s risk premium led to intraday gains of almost USD 30/oz in the yellow metal. Spot gold remains north of USD 1,850/oz.
• OPEC Secretary General said they are not too worried about China in the medium-to-long term, according to Reuters.
• China's largest copper buyers expect to pay a premium of around USD 90/t for Codelco's copper, according to Reuters sources.

Geopolitics

• US Pentagon said Chairman of Joint Chiefs of Staff Brown spoke with Israeli counterpart Halevi and discussed steps to strengthen US military posture in the region and bolster deterrence efforts. It was also reported that General Brown said the message to Iran is not to get involved in the crisis in Israel and he does not want the conflict to broaden.
• White House joint statement from the US, UK, France, Italy and Germany states their countries will support Israel in its efforts to defend itself, while they will remain united and coordinated to ensure Israel is able to defend itself, according to Reuters.
• UAE warned the Assad regime in Syria not to intervene in the Hamas-Israel war or to allow attacks on Israel from Syrian soil, according to Axios citing two sources briefed on the Emirati diplomatic effort.
• Senior UN official met with Russian officials in Moscow to discuss Russian and Ukrainian food and fertiliser exports, while talks are aimed at facilitating unimpeded access to global markets for food and fertilisers from Russia and Ukraine.
• North Korean state media said an important report is coming up but didn't provide details, while an official said the military spy satellite is an indispensable option to counter the US, according to Yonhap.
• China's Coast Guard said a Philippines navy boat illegally intruded into waters around the Scarborough Shoal and it took measures to drive away the Philippines vessel, according to Reuters.
• Russian Deputy Foreign Minister says would only resume nuclear testing if and after the US was to do the same, according to Interfax, and says they have seen signs that the US is making preparations for nuclear testing in Nevada, according to Reuters.

US Event Calendar

• 06:00: Sept. SMALL BUSINESS OPTIMISM, est. 91.0, prior 91.3
• 10:00: Aug. Wholesale Inventories MoM, est. -0.1%, prior -0.1%
  • Aug. Wholesale Trade Sales MoM, est. 0.4%, prior 0.8%
• 11:00: Sept. NY Fed 1-Yr Inflation Expectat, prior 3.63%

Central Bank Speakers

• 09:00: Fed’s Perli Speaks at NABE
• 09:30: Fed’s Bostic Speaks on Outlook for US Economy
• 13:00: Fed’s Waller Speaks at Monetary Policy Conference
• 15:00: Fed’s Kashkari Participates in Town Hall
• 18:00: Fed’s Daly Speaks At Chicago Council on Global Affairs

DB's Jim Reid concludes the overnight wrap

The aftermath of Hamas’ surprise attack on Israel early Saturday continues to reverberate around markets but with the risk moves relatively contained. Oil was the biggest beneficiary but European yields rallied strongly into the close though this was perhaps as much because Fed hawk Logan appeared more dovish than of late, helping equities in the process. Indeed, 10yr USTs have reopened this morning after the holiday yesterday and are -16bps (c.4.64%) as we type and looking set for their best day in around 7 months. The 2s10s curve has re-flattened 4bps this morning after a relentless steepening of late.

Starting with the oil moves, WTI crude gained +4.34% to $86.38/bbl, with Brent Crude up +4.22% to $88.15/bbl, the highest daily increase for both since May. The conflict has already affected commodity production, after it was reported that Chevron had been told to shut down output at its Tamar Gas Platform, a major gas field, by Israeli officials. This morning in Asia, oil prices have edged back down a touch with Brent Crude futures down -0.39% trading at $87.81/bbl. European gas futures rose +17.33% yesterday to €43.0/MWh, their highest close since April, with a suspected leak at a gas interconnector pipeline in the Baltic also adding uncertainty.

After a tough couple of weeks for fixed income, sovereign bonds rallied on Monday, as 10yr German bund yields fell -11.3bps. By lunchtime an early flight to quality had faded with bunds near unchanged on the day. The rally seemed to return after dovish comments by the Fed’s Logan, a renowned hawk. Logan stated that the higher yields may mean there is less need to raise Fed rates further, with financial conditions also tightening ‘substantially in recent months’. Logan noted that if these long-term rate increases were a result of higher term premiums, this would further add to the argument against another Fed hike. Following Logan’s comments, the rate priced in by Fed futures for December 2024 fell back -18.0bps to 4.46% .

The Fed’s Barr further added to the dovish Fed speak, stating that “significant progress” has been made “on bringing inflation toward the direction we want”, and is “not overly focused on one number coming in”. Barr also commented on the labour market, which “remains tight”, but supply and demand factors are coming “into better balance”. Fed’s Vice Chair Jefferson also struck a cautious tone, saying he would “remain cognizant of the tightening in financial conditions through higher bond yields” .

Alongside the dovish news, the European afternoon saw conflicting reports that Hezbollah militants were mounting operations from Lebanon into Israel. Additional reports soon followed that pointed to escalating conflict at the border with Lebanon, including reports of Israeli air strikes being launched at the border area, as well as Israel directing northern residents to take safety in bomb shelters. There was also growing concern that Iran, a supporter of Hamas, and a major oil supplier, may be drawn into the conflict. Iran declared its support for Hamas’ operations (though it denied direct involvement), and Israeli intelligence stated on Monday that their ‘working assumption’ was that Iran may be ‘implicated’, although it remains ‘unclear’. A wider conflict including Iran may impact the oil trade through the Strait of Hormuz, a channel Iran has previously threatened to shut. You can read more about the developments in Israel over the weekend in our CEEMA team’s recent note here, or sign up to their webinar to be held later today at 2pm London time (here).

Rounding out the bond moves, 2yr bund yields closed -9.4bps so fairly parallel shift lower across the curve. Elsewhere, 10yr French OAT yields slipped -10.9bps and Italian BTP yields were down -7.3bps, with the BTP-Bund spread reaching its new highest level since January at 206bps. Across the channel, 10yr UK gilt yields fell -5.1bps. Gold similarly gained in the flight to safety, up +0.93%. Coupled with Friday’s rise this marks gold’s strongest 2-day gain since May, coming after a run of 9 successive down days.

The complex backdrop led to swings in US equities. T he S&P 500 was down half a percent just before Europe closed but rallied thereafter to close +0.63%. The equity gains were quite broad, but with energy stocks rallying +3.54% as oil prices climbed. The aerospace & defence sector was unsurprisingly another beneficiary (+5.63%), led by an +11.43% gain for Northrop Grumman . Meanwhile, semiconductors were a key underperformer within the S&P 500 (-0.37%), off the back of reports that the US was considering additional new rules on Chinese access to some advanced chips. Nvidia fell -1.07% on the day. The NASDAQ underperformed but still posted a +0.39% gain. The risk-off tone weighed more clearly on European equities, as the STOXX 600 fell back -0.26%, with larger declines in DAX (-0.67%) and CAC (-0.55%). Overall equities held up well given the weekend news with the fall in yields possibly being a big offset to the geopolitics.

Asian equity markets are mostly trading higher this morning shrugging off concerns in the Middle East with lower yields a big catalyst. Across the region, the Nikkei (+2.49%) is outperforming after coming back from Monday’s holiday with the Hang Seng (+1.26%) and the KOSPI also trading higher. Elsewhere, the S&P/ASX 200 (+1.20%) is extending its gains for a fourth straight session while stocks in mainland China are seeing losses with the CSI (-0.55%) and the Shanghai Composite (-0.49%) edging lower in early trade. S&P 500 (+0.10%) and NASDAQ 100 (+0.19%) futures are a touch higher.

Coming back to China, Real estate developer Country Garden Holdings indicated that it will not be able to meet all of its offshore obligations within the relevant grace period, including those issued in US dollars. It failed to make a debt repayment of 470 million Hong Kong dollars ($60 million) today. Meanwhile, the company had missed initial deadlines last month to pay interest on two dollar bonds, with grace periods set to end Oct. 17-18 and Oct. 27, respectively.

The developments in Israel were not the only geopolitical news on Monday. US Senate Majority Leader Schumer met with Chinese President Xi in Beijing to discuss US-China relations in Xi’s first meeting with US senators since 2015. The discussion emphasised that the two superpowers should focus on improving relations, with Xi commenting the countries “should respect each other and collaborate”, with a “thousand reasons to improve relations, no reason to make them worse”. At the same time, Schumer confronted China’s lack of condemnation of Hamas’ incursion into Israel.

Now turning to the day ahead, we have a much busier day data-wise than yesterday, with the release of the US September NFIB small business optimism, NY Fed 1-yr inflation expectations and August wholesale trade sales, as well as Italian August industrial production. We will also hear from a number of central bankers, including the Fed’s Bostic, Waller, Kashkari, Perli and Daly speak, as well as from the ECB’s Villeroy, and the BoE will release the minutes of their financial policy meeting. Finally, PepsiCo releases its earnings report.