• The Fed stood pat on rates as expected with little in the way of fireworks from the release. Markets continue to back a September hike at the FOMC
• Asian equity markets were weaker across the board with sentiment weighed on by increased global trade tensions after US officials confirmed recent reports about potential hikes to Chinese tariffs
• Looking ahead, highlights include UK construction PMI, BoE rate decision, minutes and QIR, US weekly jobs, factory orders and a slew of large cap earnings

FOMC

US Fed Funds Target Rate 1.75 - 2.00% vs. Exp. 1.75 - 2.00% (Prev. 1.75 - 2.00%). (Newswires)
- Fed stated that economic activity has been rising at a strong rate, job gains have been strong recently, unemployment rate stayed low, inflation remains near two percent and that long-term inflation expectations are little changed.
- Fed also expects further gradual increases in fed funds rate will be consistent with sustained economic expansion, strong jobs market and inflation objective, while it repeats monetary policy stance remains accommodative and that near-term risks to economy are roughly balanced.

There was also no major commentary on trade wars despite concerns that agents’ expressed in the latest Beige Book and accordingly, the market reaction was muted since there was no real new information and the outcome was generally in line with expectations.
 

ASIA

Asian equity markets were weaker across the board with sentiment weighed by increased global trade tensions after officials confirmed US President Trump instructed Trade Representative Lighthizer to consider a higher tariff of 25% on USD 200bln of goods from China which had earlier warned of retaliation. ASX 200 (-0.5%) and Nikkei 225 (-1.1%) were lower with the mining sector the worst performer in Australia amid losses in Rio Tinto following a miss on earnings, while a firmer currency, various corporate updates and weak US sales among automakers dampened Tokyo trade. Elsewhere, Hang Seng (-2.4%) and Shanghai Comp. (-2.5%) took the brunt of the increased US tariff threats as well as further inaction by the PBoC which refrained from conducting reverse repos for a 10th consecutive occasion. 10yr JGBs were choppy and initially continued on from yesterday’s slump at the open as the 10yr yield rose to its highest since February last year of 0.145%. However, yields then pulled back to provide much needed reprieve for JGBs which were also supported amid safe-haven flows. In addition, the latest securities flows data showed foreign investors upped their purchases of Japanese bonds by around 9-fold from the prior week, while Daiwa also suggested there should be good demand for 10yr JGBs at yields between 0.15%-0.20% at least until next BoJ policy meeting. Today’s 10yr year auction was another catalyst for price action with all metrics pointing to a weaker result which saw 10yr JGBs decline nearly 30 ticks, before bouncing back towards 150.00.

US President Trump asked USTR to consider 25% tariffs on USD 200bln of Chinese goods, while officials also commented that stronger actions are needed on China but added that President Trump is open to negotiating with the Chinese President. (CNBC)

PBoC skipped open market operations for a net neutral daily position. (Newswires)
PBoC set CNY mid-point at 6.7942 (Prev. 6.8293)

UK/EU

German sources denied that Germany is willing to offer UK PM May a vague Brexit deal to prevent the UK crashing out of the EU without an agreement. In separate news, there were also comments from EU’s Barnier that he is optimistic Brexit talks will result in satisfaction. (Guardian/Newswires)

UK environment minister Gove has privately discussed a backstop plan that would keep the UK in the EU single market if PM May’s Brexit strategy failed. (FT)

UK PM May has been warned that UK-only passport lines at airports will simply generate longer queues for Britons at home and abroad. (Times)

FX

In FX markets, the DXY was flat for most the session in a continuation of the prior day’s indecision and after the FOMC failed to trigger any significant reaction. EUR/USD was lacklustre after having recently failed to reclaim the 1.1700 handle and GBP/USD initially bided its time ahead of the BoE’s Super Thursday where the central bank is expected to hike rates by 25bps, although pressure later resumed as risk sentiment continued to deteriorate. Elsewhere, JPY-crosses were dampened amid the risk averse tone and AUD/USD retreated below 0.7400 as a larger than expected Trade Surplus only provided brief support against the gloomy backdrop of recent commodity declines and trade-related concerns, while TRY printed fresh record lows against the USD and briefly broke above 5.00 on news of US sanctions on Turkey.

Australian Trade Balance (AUD)(Jun) 1873M vs. Exp. 900M (Prev. 827M). (Newswires)
Australian Exports (Jun) M/M 3% (Prev. 4.0%)
Australian Imports (Jun) M/M -1% (Prev. 3.0%)
 

COMMODITIES

Commodities were mixed overnight in which prices mostly languished near the prior day’s lows amid a wide spread risk averse tone due to increased tariff concerns. As such, WTI crude futures were relatively flat as attempts to nurse some of the losses from the surprise builds in API and DoE crude inventory reports was thwarted by resistance around the USD 68.00/bbl level. Elsewhere, gold prices only saw marginal gains as support from safe-haven flows was counterbalanced by the greenback, while copper continued on its downward path amid trade concerns and weakness in Chinese metal prices.

China is said to plan restricting steel output in more cities during winter. (Newswires)

GEOPOLITICAL

Israeli PM Netanyahu warned that Iran will find an international coalition against them which includes Israel if it attempts to block the Bab-el-Mandeb straits, while there were separate reports that Iran is said to be readying military exercises in the Persian Gulf. (Newswires/CNN)

White House said the US is sanctioning Turkish officials over the detention of American Pastor Brunson and had reportedly prepared a list of Turkish entities as well as individuals that it will target, while the Turkish Foreign Ministry strongly condemned the US sanctions and that it will retaliate against the hostile stance by the US. (Newswires)

US

Yields were higher and the Treasury curve bear-steepened on Wednesday, amid decent ADP data that hints at a solid NFP report on Friday, as well as increased issuance due out of the US Treasury over the coming quarter (see below), while the FOMC’s latest statement still alludes to a course of gradual hikes that will see the fed funds rate target lifted on another two occasion in 2018. 10-year yields once again returned to above 3.00% (just) rising around 4bps in the session, while longer-dated yields were up by around 5bps at settlement. US 10YR T-notes settled 8 ticks lower at 119-05+.

Senior Mexican official said Mexico and US are getting close to a deal on autos and rules of origin of NAFTA, while the official added the US is still pressing for a sunset clause and that Mexico are suggesting this could be reviewed every 5 years. (Newswires)

US President Trump stated that he is open to shutting the government down, before or after the election. (Newswires)

Trump lawyer Giuliani stated that the President will not terminate the Mueller probe, while there were separate reports that Special Counsel Mueller wants to ask President Trump regarding obstruction of justice. (CNN/ABC)