After some initial weakness early in the Monday session which pushed S&P futures as low as 2,750 on Sunday night, below their Thursday lows, animal spirits were rekindled and S&P futures rebounded by almost 30 points from session lows...

... with global stocks and futures generally a sea of green...

... after Chinese stocks extended the torrid Friday rally, soaring by 4.1% and jumping the most in three years after Beijing doubled down its pledge of support for the economy and companies which included promises of tax cuts and coordinated official statements of support for stock markets.

A barrage of verbal interventions on Friday from authorities culminated with Chinese President Xi Jinping vowing "unwavering” support for the country’s private sector, which sent the Shanghai Composite back over 2,600 after the index touched a 4 year low below 2,500 late last week.

Chinese consumer stocks were among the best performers after the government released a detailed draft plan for personal income tax cuts over the weekend. China’s draft plan for sweeping personal tax cuts, together with a recent rise in the tax threshold, is a big positive for growth, writes Chang Shu, the Chief Asia Economist for Bloomberg Economics, adding that the move could buttress an economy suffering from tight funding conditions and provide a boost as a trade war intensifies. The news sent consumer staples surging with Yonghui Superstores jumping as much as 7.7%, most this year; Jiangsu Yanghe Brewery gains as much as 6.7%; Inner Mongolia Yili +5.8%; Moutai +2.5%, and so on.

Renewed Chinese optimism helped other Asian markets enjoy healthy gains, with Japan’s Nikkei rising 0.4%, while the MSCI Asia ex Japan rose 0.8%.

European stocks also opened higher after Moody’s kept Italy’s sovereign rating stable on Friday instead of cutting it to negative.  The decision fueled a rally in Italian government bonds and boosted shares in the country’s banks. “Moody’s opens the door for a euro bounce, while Chinese verbal support for the economy and markets has given us a risk-friendly mood to start the week,” Societe Generale said in a note to clients.

Optimism over the avoidance of an imminent downgrade to junk also sent Italian 10Y yields to two week lows, at least temporarily, before fading all gains after Italy submitted its response to the EU's criticism of its 2019 budget proposal.

Specifically, Italy's Treasury said the government is conscious its budget policy is not in line with EU's stability pact and the decision was hard but necessary; adding it is committed to reducing structural deficit in direction of medium term objective from 2020. Rome said it would go off path of structural deficit adjustment in 2019 but does not intend to further expand deficit in the 2020-21 period, and added that its recognises different views with EU but will continue to have constructive and loyal talks with EU. Ultimately, if debt/GDP and deficit/GDP dies not evolve as planned, government is committed to take all intervene adopting all necessary measures; the response concluded that strengthening Italian economy is in the interest of the EU

Following the release of Italy’s response to the EU, BTPs pared gains in choppy trade prompting Bunds to touch a new session high. BTP futures drop to the low of the day at 120.77 before rallying after Italy says it’s ready to intervene to ensure that objectives are respected, while Finance Minister Tria says Italy is ready to act if debt and deficit ratios are not in line with goals.

Meanwhile, in European equities, the Stoxx Europe 600 was up only 0.1% after gaining as much as 0.7% in early trade, while Italy’s FTSE MIB pared gains to 0.6% after gaining as much as 2%. The FTSE Italia All-Share Banks Index was up 0.4% after surging 3.6%; as a reminder, the sector index hit its lowest since late 2016 on Friday, and is down about 35% since mid-May

Amid concerns of a renewed standoff between Italy and the EU, the euro gave up a gain and the dollar erased a drop, while the pound retreated as the U.K. blurred more red lines in the Brexit negotiations, heightening the danger to Prime Minister Theresa May.

Meanwhile, as Bloomberg notes, risks still abound across global markets, from tension surrounding the death of a Saudi journalist and the ongoing trade showdown between some of the world’s biggest economies to Italian budget fears and President Donald Trump’s ad hoc actions ahead of American midterm elections. Still, equities are attempting to bounce back after a miserable couple of weeks, and company results from the likes of Amazon, Alphabet, Microsoft and Intel as well as U.S. growth data may provide a welcome distraction in the coming days.

Indeed, this will be the busiest week for corporate profits this earnings season with Amazon, Alphabet, Microsoft and Caterpillar among the companies reporting. Helped by a strong economy and deep corporate tax cuts, S&P 500 earnings per share are expected to grow 22% in the third quarter, according to consensus data.

“The season on an absolute basis will likely wind up being ‘strong’ and the vast majority of companies will exceed consensus expectations,” said analysts at JPMorgan in a note. “However, headwinds are building at the margin in the form of U.S. dollar strength, supply chain disruptions owing to all the trade uncertainty, and rising costs. Even the mere hint of a turn in profit fundamentals would have severe ramifications.” The outlook for global growth in 2019 has dimmed for the first time, according to Reuters polls of economists, who cautioned that the U.S.-China trade war and tightening financial conditions would trigger the next downturn.

In the latest Brexit news, Prime Minister Theresa May will tell parliament that 95% of Britain’s divorce deal has now been settled. But she will repeat her opposition to the EU’s proposal for the land border with Northern Ireland and many see the risk of a leadership challenge being mounted.

In FX markets, an early advance in the euro lost steam as Italian bonds pared gains. Euro-area periphery debt was still bid after Moody’s kept Italy’s rating above junk with stable outlook, while the pound fell before U.K. Prime Minister May’s speech to parliament. The dollar was little changed, as were Treasuries; U.S. bonds traded choppy through Asian hours, initially gaining on Donald Trump’s plan to exit an arms control treaty with Russia, only to pare gains as a rally in Chinese stocks supported a swing in risk sentiment. The yen swung to a loss as the risk-off move was curbed while the Australia’s dollar fell to a one-week low after a by- election on the weekend looked set to deprive the federal government of its one-seat majority in parliament

In rate, the yield on 10-year Treasuries climbed one basis point to 3.20%. Germany’s 10-year yield also increased one basis point to 0.47 percent. Britain’s 10-year yield rose less than one basis point to 1.577 percent, while the spread of Italy’s 10-year bonds over Germany’s declined seven basis points to 2.9583%, the smallest premium in more than a week.

Saudi Arabia has remained in the spotlight after Riyadh called the killing of journalist Jamal Khashoggi a “huge and grave mistake” but sought to shield its powerful crown prince from the crisis. U.S. President Donald Trump and European leaders are pushing Saudi Arabia for more answers.

With concerns about the Saudi response to the Khashoggi murder lingering, most commodities advanced. Brent crude climbed to about $80 per barrel and WTI edged close to $70 with U.S. sanctions against Iran’s crude exports due to be implemented next month. Gold slipped. Emerging-market stocks jumped. The South African rand rallied before the country’s budget.

Market Snapshot

• S&P 500 futures up 0.2% to 2,771.75
• STOXX Europe 600 up 0.2% to 361.98
• MXAP up 0.4% to 153.69
• MXAPJ up 0.8% to 484.84
• Nikkei up 0.4% to 22,614.82
• Topix up 0.2% to 1,695.31
• Hang Seng Index up 2.3% to 26,153.15
• Shanghai Composite up 4.1% to 2,654.88
• Sensex up 0.3% to 34,412.26
• Australia S&P/ASX 200 down 0.6% to 5,904.94
• Kospi up 0.3% to 2,161.71
• German 10Y yield unchanged at 0.461%
• Euro up 0.03% to $1.1517
• Brent Futures up 0.6% to $80.29/bbl
• Italian 10Y yield fell 19.8 bps to 3.111%
• Spanish 10Y yield fell 4.5 bps to 1.69%
• Brent Futures up 0.6% to $80.29/bbl
• Gold spot down 0.3% to $1,223.23
• U.S. Dollar Index down 0.03% to 95.68

Top Overnight News from Bloomberg

• White House economic adviser Larry Kudlow accused China of doing “nothing” to defuse trade tensions ahead of a likely meeting between President Trump and President Xi Jinping at the G-20 in Argentina next month, the Financial Times reported
• Trump has promised a new middle-income tax cut plan to land days before the mid-term election, a move aimed at boosting his party’s chances of holding its Congressional majorities -- yet Republican tax policy-makers know nothing about it
• Treasury Secretary Steven Mnuchin is open to changing how the U.S. determines which nations are gaming their currencies, a move that could give Trump the chance to officially brand China an exchange-rate manipulator
• Italy’s populist coalition hinted that it may eventually be prepared to temper its budget for next year as the European Union demands an explanation of its deficit plans
• As impending U.S. sanctions curb Iranian exports, Iraq has quietly increased shipments to Asia, Europe and the Mediterranean region to offset Iran’s missing barrels
• Hedge funds cut bets on rising West Texas Intermediate crude prices for a sixth straight week, to the lowest since October 2017
• Saudi Arabia’s evolving account of the death of journalist Jamal Khashoggi elicited skepticism from officials in the U.S. and its allies weighing how to respond. France demanded more information, while Germany put arms sales to the oil-rich nation on hold

Asian equity markets traded mostly higher as a rally in Chinese stocks helped most the regional bourses shrug-off the cautious open. ASX 200 (-0.58%) and Nikkei 225 (+0.37%) 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. (+4.09%) surged on a rebound from 4-year lows which inspired the Hang Seng (+2.32%), 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. China released draft of tax cuts which include lower cost of housing, education and health to boost consumption effective from start of 2019.

Top Asian News

• A Big Secret in Japan Debt Market Is Getting Harder to Keep
• China’s $195 Billion Debt Splurge Has Less Bang Than You Think
• BOJ Signals Financial System Able to Withstand Easing for Now
• Thanks to the Trade War, Southeast Asia Has an Investment Boom

Major European indices are all in the green, with the exception of the AEX (-0.1%) which has been dragged down by Phillips (-5.5%) amid a miss on their earnings. The FTSE MIB leads the gains following a Moody's Italy downgrade to one level above junk, which was less than some had anticipated. Italian banks, such as Intesa Sanpaolo (+1.0%) are supported a result of this; however, the index is being led by gains in Fiat Chrysler (+5.0%) after the confirmation of their Magnetti Marelli unit sale to KKR for EUR 6.2bln. Sectors are mostly in positive territory, with the exception of healthcare and energy. Consumer discretionary and financials are some of the best performers with the former supported by car names moving sympathy to Fiat Chrysler, while the latter is buoyed by Italian banks after the FTSE MIB Banking Index opened higher by over 3%. In terms of individual equities the aforementioned Phillips are at the foot of the Stoxx 600. Danone (-1.3%) are lower after the CEO stated that they are not going to bid for Horlicks. Lloyds Banking Group (+2.0%) are in the green following the Co’s plans to buy back around GDP 2bln of shares in 2019.

Top European News

• U.K. Softens Brexit Red Line as May Faces Lawmaker Backlash
• Philips Tumbles on Disappointing Profit, Growth at Health Unit
• Sweden’s Government Talks Reach a Record With No End in Sight
• Euro Front-End Demand for Wings Drops on Italy Before ECB Meet
• Investors Aren’t Eager to Short-Sell Mining Equities, Citi Says

In FX, the Euro has been encouraged by events in Rome, and specifically the fact that Italy escaped a deeper ratings cut by Moody’s to stay one rung above junk. BTPs and Italian stocks have rallied in response or rather in relief, and Eur/Usd is back above 1.1500 as a result, albeit off best levels having faded around 1.1550 and clearing its 10 DMA at 1.1527 along the way. CAD/CHF/GBP/NZD - All narrowly mixed vs the Greenback, as the DXY pivots 95.500 within a relatively tight 95.756-469 range, and the Loonie straddles 1.3100 ahead of Canadian wholesale trade data and then the BoC policy meeting on Thursday with a 25 bp hike pretty much factored in. The Franc is also anchored and confined around 0.9950, while Cable nudged higher alongside Eur/Usd earlier, but topped out ahead of 1.3100 and last Friday’s 1.3105 high to sit just above 1.3050, awaiting more from UK PM May on Brexit. The Kiwi has drifted back below 0.6600 having lost some pre-weekend event risk premium. AUD/JPY - Both underperforming vs G10 counterparts, the former on domestic political developments as the Government lost its slender majority by virtue of failing to retain its seat at the Sydney by-election. However, Aud/Usd is just holding above 0.7100 in wake of a short squeeze in Chinese equities overnight, which in contrast has weighed on the Jpy as a safe-haven proxy, with Usd/Jpy climbing above a key 112.74 Fib towards 112.90 vs sub-112.50 at the low. EM - Early Monday/week outperformance for the Rand, as Usd/Zar trade under 14.3000 ahead of Wednesday’s MTBS amidst press reports noting improved budget revenues relative to 2017 and more on track with forecasts. Elsewhere, the Rouble is outpacing the Lira in the run up to this week’s CBR and CBT meetings, with the Rub deriving some support from a rebound in Brent to just over Usd 80/brl.

In commodities, both WTI and Brent are easing off intra-day highs with the former hovering around USD 69.50/bbl while the latter retests USD 80.00/bbl to the downside. Early in the session, Saudi Energy Minister Al-Falih emerged stating the kingdom has no intentions to use oil as a weapon, while he added he cannot guarantee prices won't rise above USD 100/bbl. Elsewhere, on Friday the Baker Hughes rig count showed an additional 4 oil rigs in operations, rising to the highest figure since March 2015, applying downward pressure on prices. Gold trades lower as the yellow metal mirrors moves in the dollar, albeit still at levels close to it’s 2 month peak. In terms of metals China’s winter anti-pollution restrictions are beginning to take an effect with this expected to boost the demand for high grade iron ore as producers priorities the best quality iron, lowering the overall market supply of iron ore, with prices currently at USD 71/tonne. Separately, China has introduced a system which allows for faster customs clearance for some imported ores, including iron ore which China are the world’s biggest importer of. Copper prices have continued to rise following a pledge from China’s central bank that it would support firms which have liquidity problems.

Iranian Energy Minister Zenganeh said that Saudi Arabia and Russia's crude output are near their highest ever levels and added that Saudi Arabia and Russia have no spare oil capacity. Saudi Energy Minister Al-Falih said he cannot guarantee oil prices will not rise above USD 100/bbl and Saudi production is likely to increase in the near future to 11mln BPD, adding new OPEC+ oil agreement might be signed on Dec 7th . He added if 3mln BPD of oil supplies disappear in 2019, Saudi cannot cover this volume and will have to use reserves.

It’s a very quiet start to the week: in Europe, we get the Euro-area's 2017 government debt to GDP ratio. In the US, we get the September Chicago Fed National activity index.

US Event Calendar

• 8:30am: Chicago Fed Nat Activity Index, est. 0.2, prior 0.2

DB's Jim Reid concludes the overnight wrap

By the time you read this I’ll be in my surgical gown ready for another knee operation - my third in 3 and a half years. This time it’s on my “good” knee due to a torn meniscus. My advice to all readers is if you take up skiing in your 30s please make sure you’re not an overconfident, speed hungry person who doesn’t listen to anyone when they tell you skiing is dangerous and to slow down. Markets are also unlikely to slow down much this week even if it is half-term here in the UK but let’s hope they don’t end up in the operating theatre by the end of the week. Indeed it’s another busy week full of interesting events including an ECB meeting (Thu) , S&P’s review of Italy's sovereign ratings (Fri) after Moody’s completed theirs late on Friday (see below), the advance Q3 GDP release in the US (Fri), and the preliminary October PMIs in Europe and the US (Wed).

In addition, Saudi Arabia will hold its troubled “Davos in the Desert” conference (Tue) with global political tensions high. Earnings releases also pick up pace during the week on both sides of the pond. Given that Q3 saw Turkey and Italy in some turmoil, European banks may be the earnings highlight this week, especially as they start the season at 2-year lows not helped by the Spanish banking woes from last week (see below).

Staying in Europe, the ECB meet on Thursday. Although policy rates are expected to be left unchanged, the meeting is likely to be closely watched for more colour on how the ECB will reinvest maturing QE proceeds post the likely end of QE in December this year. Focus will also be on Draghi’s comments on Italy. It’s hard to imagine the ECB will lower the pressure on Italy but they are also unlikely to want to escalate tension further so expect some element of diplomacy.

Interestingly late on Friday Moody’s decided to leave Italy’s rating at stable after a 1-notch downgrade to Baa3. If there’s one thing the outlook isn’t for Italy at the moment it’s stable but rating agencies are unlikely to want to create a vicious circle. With S&P opining on Friday it’s possible we’ll see a similar response for a similar reason. Italy rallied strongly on Friday (10yr BTPs -20bps, 24.6bps tighter to Bunds) before Moody’s decision which came after the US close. There was some talk late in the session on Friday (via the Italian newspaper Foglio) that the deficit could be lowered to 2.1% for 2019, which would be a substantial de- escalation. However the weekend mood music from the Government doesn’t suggest this is about to happen. Indeed the Government are expected to respond to the EC today in a letter confirming the 2.4% deficit target but according to the weekend press in Italy explain that its a temporary measure to kick start the economy. Interestingly over the weekend an Ipsos survey published by the Corriere della Sera newspaper indicated that 59% of Italians back the Government’s deficit target. The survey also found that 55% believe that higher government debt is needed to stimulate the economy. After years of very weak growth and continued austerity you can’t blame the voters for wanting something different whether it eventually works or not. Europe needs to tread very carefully as it responds.

This morning in Asia, markets are off to a positive start with China’s Shanghai Comp (+4.17%; highest daily gain since March 2016), CSI 300 (+4.40%) and Shenzhen Comp (+4.96%) leading the way after China’s government announced tax cuts over weekend (more on this below). In the meantime, the Nikkei (+0.53%), Hang Seng (+2.40%) and Kospi (+0.18%) are also up along with most Asian markets.

So as discussed above the Chinese government announced details of a personal income tax cut on Saturday. This comes as a positive surprise for our economists. They estimate the size of the tax cut may be RMB 500-600bn (0.5% of GDP) in 2019, including RMB 320bn from the changes of tax brackets and RMB 200-300bn from new tax allowances. It could boost retail sales by about 1% if people spend 70% of tax savings on consumption. DB believe this is the beginning of a series of tax cuts, with VAT and corporate income tax potentially the next targets. These measures would help to offset the downside risks from the trade war, and keep growth in 2019 above 6%. It reinforces DB’s view that China's current account surplus will turn into a deficit and the RMB will depreciate to 7.4 against the US dollar in 2019. See the link here for more.

On Brexit, the UK PM May is likely to tell the British lawmakers today that “95% of the Withdrawal Agreement and its protocols are now settled,” according to remarks mailed by her office highlighting that headway’s been made over the past three weeks on topics including military bases in Cyprus, arrangements for Gibraltar, and dispute resolution with the EU after Brexit. In the meantime, Brexit Secretary Dominic Raab hinted on Sunday that the UK could provide an alternative to fixed time limited Irish “backstop” arrangements and showing some signs of flexibility over the issue as the EU wants the “backstop” arrangement to be open ended. This could pose fresh leadership challenges for UK PM May with the weekend press suggesting a potential challenge continues to bubble up in the background.

Tomorrow could be an interesting day in geopolitics as Mr Erdogan has suggested he will reveal Turkey’s interpretation of the events surrounding journalist Khashoggi death. This coincides with the start of the Saudi investment conference which is going to be plagued by mass international absenteeism. So all eyes on Turkey tomorrow as the current Saudi explanation for the death has not been particularly well received by the world’s media and politicians.

Reviewing last week now before we look at the week ahead. The S&P 500 eked out a +0.02% gain last week (-0.04% on Friday), but under the surface, investors continued to rotate into defensive sectors. The best performing sectors on the week were consumer staples, real estate, and utilities, while tech continued to be pressured. The FANGs shed -1.81% (-0.96% Friday), despite very strong earnings from Netflix and positive headlines about a potential IPO by Uber, which briefly supported the sector. The DOW gained +0.41% (+0.26% Friday) and the NASDAQ retreated -0.70% (-0.12% Friday). Chinese equities saw a wild ride with the Shanghai Comp falling -2.17% on the week but rising +2.58% on Friday as verbal intervention started before the weekend’s tax cuts added to this. Bonds sold off again, with two-year Treasury yields touching a new decade high, rising +5.1bps (+3.0bps Friday) to 2.90%. Ten-year Treasury yields rose +3.1bps (+1.4bps Friday), while Bunds rallied -5.7bps (+4.4bps Friday) amid the volatility in Italy (see below). The STOXX 600 gained +0.64% (-0.12% Friday), with German equities outperforming (DAX +0.26% on the week, -0.31% Friday), though Euro banks fell to a new two-year low, trading -2.29% on the week (-0.57% Friday), with Spanish banks leading losses (more below). Emerging markets were mixed, as equities lost -1.54% (+0.94% Friday) but currencies gained +0.45% (+0.02% Friday), and the VIX fell 1.4pts on the week (-0.17pts Friday) but remains elevated relative to the recent past at 19.89.

Spanish bonds underperformed last week, with 10-year yields rising +5.9bps (+0.7bps Friday) despite the 20bps rally in Italy. Spanish banks shed -2.91% (+0.38% Friday). A court ruling will shift a mortgage tax away from consumers, who used to pay it, onto banks, who will now have to pay it. The court may revisit the decisions, but for now it represents a significant surprise and a downside risk for the sector, since borrowers would be entitled to seek claims on up to 1.2 trillion euros of mortgages sold over the last 15 years, which could cost the system up to 24 billion euros.

Corporate earnings were mixed on the week, though they remain strong overall this season as we expected. With 17% of S&P 500 companies having reported, sales have grown +7.4% yoy and earnings are up +21.3% yoy. That’s 0.5% and 4.6% better than consensus for revenue and profits, respectively. Last week, Goldman Sachs and Morgan Stanley beat expectations and saw their share prices rally +6.09% and +6.91%, while Bank of America was a bit soft and fell -0.53% on the week. Shipping firm CSX reported healthy volumes, signaling strong macro momentum.

It’s a very quiet start to the week. In Europe, we get the Euro-area's 2017 government debt to GDP ratio. In the US, we get the September Chicago Fed National activity index.