• Asian equity markets tracked last Friday’s hefty losses on Wall Street and the continued weakness in US index futures at the reopen due to the escalation in the US-China trade war
• US President Trump announced on Friday he is to raise tariffs on China by another 5ppts on the current and incoming tariffs
• China Global Times Editor stated that China is seriously preparing for a scenario in which China-US trade relations further deteriorate
• In FX markets, the DXY steadied, EUR/USD traded flat, USD/JPY initially extended on Friday’s retreat due to safe-haven flows but then gradually recovered, USD/TRY saw a flash crash
• Looking ahead, highlights include German Ifo, US Durable Goods and UK Summer Bank Holiday

US-CHINA TRADE

US President Trump announced to raise tariffs on China on Friday by another 5ppts in which the tariffs on USD 250bln of goods from China will be increased to 30% from 25% on October 1st, while the planned 10% tariffs on the remaining USD 300bln of goods from China which are due from September 1st will be taxed at 15%. (Twitter)

US President Trump suggested that he has the absolute right to order US companies out of China under the 1977 International Emergency Economic Powers Act but added we'll see how it goes. In related news, there were separate reports that the US Chamber of Commerce rejected US President’s Trump's call for US firms to find alternatives to China, while it stated that continued constructive engagement is the right way forward and it does not want to see a further deterioration of US China relations. (Newswires/ABC)

China Vice Premier Liu He said China is willing to resolves trade dispute with US through calm negotiations and resolutely opposes escalation of trade war which is not beneficial for both sides. (Newswires)

China Global Times Editor stated that China is seriously making preparations for a scenario in which China-US trade relations further deteriorate. He also suggested that if US and China decouple, China can independently develop technology but the US can't find an alternative market with China's potential, while he added that China will meet short-term difficulties without the US and that the US will lose driving force of long-term growth without the US. In related news, the editor also stated that without China's market, US farm goods will have nowhere to go which would result to farmland being abandoned and farmer bankruptcies, while US energy products will lose an infinite market. (Twitter)

ASIA-PAC

Asian equity markets tracked last Friday’s hefty losses on Wall Street and the continued weakness in US index futures at the reopen due to the escalation in the US-China trade war. ASX 200 (-1.4%) was led lower by underperformance in energy after the recent slump in oil and as the tech sector suffered the brunt of the latest trade aggressions, although gold miners bucked the trend after the precious metal surged on a safe-haven bid. Nikkei 225 (-2.2%) was heavily pressured with losses for exporters exacerbated by detrimental currency flows, while Hang Seng (-2.9%) and Shanghai Comp. (-1.0%) slumped amid the trade concerns. Furthermore, Hong Kong was the worst performer amid further unrest as police were said to have beaten protesters and fired tear gas at an anti-surveillance rally over the weekend. Conversely, some of the losses were later pared after China’s Vice Premier Liu He stated that China is willing to resolve the dispute through calm negotiation and resolutely opposes escalation of the trade war, while India markets were intially underpinned after the Finance Minister recently announced several measures to support the economy including a withdrawal of capital gains tax enhanced surcharge and a INR 700bln bank recapitalization but then gradually deteriorated alongside the broad risk averse tone. Finally, 10yr JGBs were underpinned by a safe-haven bid and which coincided with upside in USTs as the US 10yr yield drop to a fresh 3-year low, with the BoJ also present in the market for 10yr+ and inflation indexed bonds. 

PBoC skipped open market operations but announced CNY 150bln of medium-term lending facility operations at 3.3% vs. Prev. 3.3%. (Newswires) PBoC set CNY mid-point at 7.0570 vs. Exp. 7.0528 (Prev. 7.0572)

Hong Kong riot police were said to have beaten protesters and fired tear gas at an anti-surveillance rally over the weekend, while the police were also said to have used a water cannon for the first time ever and an office reportedly fired a warning shot. (Newswires)

US and Japan reached a framework for a trade agreement in which auto tariffs will remain unchanged and US will delay decision on Japan auto tariffs. Furthermore, reports added that Japan will reduce tariffs on US beef and pork, while Japan is said to have agreed to import an additional 2.5mln tonnes of feed corn from the US and the sides aim to sign a deal by September. (Newswires/Nikkei)

UK/EU

BoE Governor Carney said the UK Economy is operating just below potential with inflation just above target and that limited as well as gradual interest rate hikes likely to be needed if there is a Brexit deal and that surveys point to the UK economy stagnating in Q3. Carney also stated the likelihood of a no-deal Brexit has increased but it is not a given and that ability of monetary policy to smooth the impact from a no-deal Brexit would be constrained by the limits to MPC tolerance of above target inflation, while his view is that easing monetary policy would be more appropriate than not in the case of a no-deal Brexit. (Newswires)

UK PM Johnson at the G7 Summit said the prospect of a Brexit deal is ‘improving’ but that the situation still remains ‘touch and go’, adding that Britain would not be obliged to pay the GBP 39bln divorce bill in the event of a no-deal.However, UK Government lawyers have reportedly drawn up a range of scenarios for no-deal; including one where Britain is legally obliged to pay the GBP 39bln. (Times/Sky/Telegraph)

US President Trump said that without the EU acting as an ‘anchor’ a ‘very big trade deal’ could be secured within around one year following Brexit. Although, PM Johnson cautioned that it could take longer. (Times)

UK Chancellor Javid is reportedly mulling an emergency budget if a no-deal Brexit seems imminent in late October. (Times)

EU Chief Brexit Negotiator Barnier stated we are ready to analyse UK proposals that are realistic, operational & compatible with our principles but added the WA is the best possible deal. (Newswires)

European Council President Tusk said the bloc will respond in kind if the US imposes tariffs on France regarding its digital taxation plan, while he suggested there could be a risk to whole world if US President Trump imposes tariffs for political reasons. (Newswires)

EU plans to simplify Eurozone budget rules and may soften debt reduction targets. (FT)

ECB’s Weidmann (Hawk) stated that any review of the ECB’s policy should take place under the new ECB President Lagarde, who is due to take office on November 1st. (Frankfurter Allgemeine Sonntagszeitung)

German government sees recession in Germany with successive GDP contraction in Q3 but doesn't see a need for short-term stimulus according to reports citing a government document. It was also reported that the German Economy Minister aims to keep the budget balanced despite higher spending and stated there is a lot of room for growth-stimulating measures without more debt addition. (Der Spiegel)

Italy’s 5-Star and PD parties are reportedly struggling to find a deal on a new government ahead of the Tuesday deadline. (Newswires) 

FX

In FX markets, the DXY steadied to provide some respite from the recent slump in which it nose-dived through the 98.00 level due to the trade war escalation and with President Trump renewing his Fed criticism after the lack of fireworks at Fed Chair Powell’s eagerly awaited Jackson Hole speech. As such, the greenback’s transatlantic counterparts seemed content to rest on their laurels as EUR/USD traded flat around the 1.1150 level where there is a notable option expiry for today’s New York cut, and with a pullback in GBP/USD from resistance near the 1.2300 handle amid UK closure for bank holiday and with PM Johnson somewhat pessimistic on achieving a Brexit deal in 30 days. USD/JPY initially extended on Friday’s retreat due to safe-haven flows but then gradually recovered and was helped by Chinese Vice Premier Liu He’s attempt to diffuse the situation. Elsewhere, antipodeans initially suffered due to their China exposure but have since recovered the majority of losses, while TRY was also volatile overnight in which a flash crash saw the currency weaken by around 15% in a matter of seconds before recouping nearly all the losses shortly after.

COMMODITIES

Commodities were mostly lower amid the widespread risk averse tone which saw WTI crude futures test USD 53.00/bbl level to the downside where it eventually found support, and Brent also tested last week’s lows around USD 58.00/bbl with futures already rolled over to the November contract. Elsewhere, gold extended to a fresh 6-year high with the precious metal boosted by safe-haven demand, while copper was kept lacklustre by the glum tone across the region.

Baker Hughes Rig Count: Oil rigs -16 at 754, Gas rigs -3 at 162, Total rigs -19 at 916; drillers cut for the 7th week in 8 and was the largest weekly fall since April. (Newswires)

GEOPOLITICS

EU diplomat stated that no agreement or progress was made towards persuading US President Trump to reissue oil sanction waivers at the G7, while there were separate reports Britain will be sending another warship to the Persian Gulf to support safe passage of shipping. (Newswires)

North Korea conducted another missile test over the weekend. (Newswires)

Iranian Revolutionary Guard said Iran tested a new missile. (Newswires)

China Defence Ministry urged the US to stop arms sales to Taiwan and cut its military ties with the country. (Newswires)

Russian President Putin has ordered Russia's military to prepare measures in response to US missile tests and wants the military to take exhaustive measures to prepare for a reciprocal response, according to Russia's Kremlin. (Newswires)

US

The TPLEX rallied higher in risk off flows on Friday, where China announcing fresh tariffs kicked off the move into Treasuries (and EGBs), before catching a second wave of inflows after US President Trump demanded via Twitter that US companies retreat from China and that his retaliation would be announced later on Friday. The mounting macro pessimism saw a clean march higher in the T-Note throughout the US session, where the short-end made its own headways, with the 2s10s flirting with inversion in the later session, exacerbating risk-off flows. At settlement, the curve was modestly inverted (2s10s -0.3bps), where the whole curve had seen yields fall between 8bps to 9bps and T-notes finished electronic trade higher by 19 ticks at 130.28+.

Fed's Clarida (Voter, Neutral) said global outlook has worsened since July meeting but the US economy is in a good place right now and that the Fed will act as appropriate to keep the economy in place. Clarida also commented that disinflationary pressures and global downturn show significant risks, while he added that US data has been coming in well since the July FOMC meeting and that some market indicators are pointing towards a recession but the Fed doesn't see one coming. (Newswires)

Fed’s Mester (Non-voter, Hawk) said she is undecided for September FOMC meeting but added that the Fed may need to cut rates to avoid restraining the economy if the economic outlook deteriorates, while she also stated that Chinese counter tariffs are just a continuation of the trade uncertainty that has been with us for some time and reiterated that the Fed should be data dependent. (Newswires)