• Asian equity markets struggled for direction after the subdued performance on Wall St, where major indices failed to sustain initial gains
• DXY rests above 98.00 in a mild breakout from the prior day’s flat performance, while its major counterparts were lacklustre
• Italian Deputy PM Di Maio said the 5-Star leadership will support a new government only if party members approve it through an online vote planned by next week
• WTI crude futures are firmer with the gains exacerbated by a much larger than expected drawdown in headline API crude inventories
• Looking ahead, highlights include EZ M3 Annual Growth, DoEs, Fed Beige Book, Fed’s Barkin, German EUR 3.0bln 2029 & US USD 41bln 5yr auctions

ASIA-PAC

Asian equity markets struggled for direction after the subdued performance on Wall St, where the major indices failed to sustain initial gains amid the recent mixed signals on US-China trade and as the US yield curve inversion deepened. ASX 200 (+0.4%) was led higher by strength in tech and miners although gains were capped by weakness amid telecoms as and with earnings in focus, while Nikkei 225 (+0.1%) also lacked firm direction amid an uneventful currency. Hang Seng (+0.1%) and Shanghai Comp. (-0.3%) traded tentatively and failed to benefit from the government’s recent announced measures to boost consumption with markets wary after the recent flip-flopping in the US-China trade saga, while a neutral PBoC liquidity operation and deluge of earnings ahead of the Big 4 bank results added to the cautious tone. Finally, 10yr JGBs were slightly higher as super-long yields declined to multi-year lows with both 30yr and 40yr JGB yields at the lowest since July 2016, while the moves also followed the bull flattening seen in their US counterparts where the 2s/10s inversion briefly widened past -5bps.

PBoC injected CNY 60bln via 28-day reverse repo for a net neutral daily position. (Newswires) PBoC set CNY mid-point at 7.0835 vs. Exp. 7.1027 (Prev. 7.0810)

China issued 20 directives to boost domestic consumption which reportedly will make it increasingly difficult for the US to press China to make concessions including gradually relaxing and removing restrictions on auto purchases, as well as building more shopping malls and rolling out state-of-the-art methods for consumers to spend money. (Global Times)

US Federal Register confirmed the US is to raise tariffs on USD 300bln of Chinese goods to 15% from 10% beginning on Friday, while there were separate reports that China will to take in the 2nd batch of tariff exemption applications on September 2nd. (Newswires)

US President Trump’s credibility has become a key obstacle for China with respect to them reaching a deal with the US., according to Chinese officials. (Newswires)

US Department of Defense is in discussions with Australia on processing rare earth minerals as an attempt to lower dependency on China. (Newswires) 

UK/EU

UK PM Johnson said there will be a no-deal unless the WA was reopened and the backstop abolished but noted they had "positive and substantive" talks with EU Commission President Juncker. (Newswires) EU President Juncker told UK PM Johnson he would look at any concrete proposals as long as they are compatible with the Withdrawal Agreement and that the EU will do everything it can to avoid a no-deal Brexit. Juncker also stated EU 27's support for Ireland is steadfast and they will remain attentive to Ireland's interests, while Irish Foreign Minister Coveney said the new proposals did not fulfil what the backstop did. (Newswires)

UK opposition Labour Party leader Corbyn urged Tory MPs to help block no-deal Brexit, while it was separately reported that former chancellor Hammond plans to spearhead efforts to block a no-deal and intends to advocate a cross-party plan to force a Brexit delay by several months. (Newswires/Telegraph)

UK government is reportedly planning to declare an intention to raise public spending beginning September 4th. However, there were separate reports that UK Chancellor Javid will warn today that the government will not break fiscal rules heading into the Brexit and will not issue blank cheques to Whitehall departments. (FT/Telegraph)

UK BRC Shop Price Index (Aug) Y/Y -0.4% (Prev. -0.1%). (Newswires)

Italy Deputy PM Di Maio said the 5-Star leadership will support a new government only if party members approve it through an online vote planned by next week, while there were comments from a PD lawmaker that talks with the 5-Star party are progressing in a fruitful way and they will continue their meeting on Wednesday. PD are willing to accept Conte as PM of a new government, although they wish to limit the role of current Deputy PM Di Maio (5SM), according to a PD Official. (Newswires)

FX

DXY was slightly higher and prodded above the 98.00 level in a mild breakout from the prior day’s flat performance, while its major counterparts were lacklustre in which EUR/USD languished below 1.1100 after recent data confirmed the German economy contracted in Q2 and ECB’s Vice President de Guindos suggested the central bank must act with determination. GBP/USD pulled back after it met resistance around 1.2300 but held on to the majority of the recent gains spurred after UK opposition party leaders met and agreed a legislative route was the most promising path to blocking a no-deal scenario. Elsewhere, USD/JPY was flat amid the inconclusive risk appetite and antipodeans traded subdued as early support from a firmer than expected reference rate setting was overshadowed by disappointing Australian Q2 Construction Work data.

Australian Construction Work Done Q2 -3.8% vs. Exp. -1.0% (Prev. -1.9%, Rev. -2.2%). (Newswires) 

COMMODITIES

Commodities were mixed with WTI crude futures higher as they caught a bid heading into yesterday’s settlement, with the gains further exacerbated by a much larger than expected drawdown in headline API crude inventories and declining stockpiles across all product components. Elsewhere, gold prices declined as the mild upside in the greenback provided an opportunity to book some of the profits in the precious metal, while copper traded sideways in fitting with the indecisive overnight risk tone.

API Crude Inventories: -11.1mln vs. Exp. -2.1mln (Prev. -3.5mln). (Newswires)

GEOPOLITICS

Photos reportedly suggested North Korea could be building a submarine capable of launching nuclear missiles. (NBC)

US House of Foreign Affairs Committee tweeted that US President Trump must sanction Turkey over its purchase of the S-400 air defense system as required by US law. (Newswires)

US

The TPLEX made headway with decisive bull flattening, where the 2-year yield was 2.5bps lower and the 30-year yield fell 7.5bps, taking it beneath the S&P 500 dividend yield for the first time since March 2009. Most of the bid in Fixed came shortly after the US equity open amid haven flows, which helped the 2s10s fall further into inversion, and the TYU9 contract remained firmer through till settlement. At the US 2-year auction, USD 40bln was sold at 1.516%, the lowest yield since September 2017, tailing by 0.1bps (vs. 6-auction average 0.6bps) and an above average bid-to-cover of 2.6x; indirects took slightly more than average, but so did primary dealers, and directs took less than average. US T-note futures (U9) settled 11+ ticks higher at 131-04+.

Fed Discount Rate Minutes stated half of the Fed regional banks wanted no change to the discount rate ahead of the July FOMC meeting in which the directors of New York, Boston, Cleveland, Atlanta, Kansas City, and Richmond Fed wanted no change to the discount rate, while 5 Fed regional banks wanted a 25bps cut and the Minneapolis Fed wanted a 50bps cut. (Newswires)

US President Trump reiterated Fed criticism in which he stated the Fed loves watching our manufacturers struggle with their exports to the benefit of other parts of the world and that the Fed has been calling it wrong for too long. (Twitter)