• US President Trump instructs USTR to consider 25% tariffs, instead of 10%, on USD 200bln of Chinese goods
• USD strengthening and equities sliding on tariff concerns
• Looking ahead, highlights include, BoE rate decision, minutes and QIR, US weekly jobs, factory orders and a slew of large cap earnings

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 (-2.2%) and Shanghai Comp. (-2.0%) 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. China Commerce Ministry said China will have to fight back against the US to defend its dignity and people's interests; adding China upholds using dialogue to resolve disputes. (Newswires/ CNBC)

Indian retaliatory tariffs on US good may be delayed by 45 days, according to sources. (CNBC TV18)

PBoC skipped open market operations for a net neutral daily position. (Newswires)

PBoC set CNY mid-point at 6.7942 (Prev. 6.8293)

EU/UK/US

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. (Guardian)

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)

EU Producer Prices MM Jun 0.4% vs. Exp. 0.3% (Prev. 0.8%). (Newswires)

EU Producer Prices YY Jun 3.6% vs. Exp. 3.5% (Prev. 3.0%). (Newswires)

EQUITIES

European equities trade firmly in the red (Eurostoxx 50 -1.3%) as sentiment is soured amid the rise in 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. China’s MOFCOM replied that China will fight back to defend its people’s interests and dignity. Germany’s DAX 30 is heavily underperforming, dragged down by heavyweight Siemens (-4.8%) following earnings, while Commerzbank (-4.5%), Deutsche Bank (-3.3%) and the German auto names also pressure the index. Material names continue to underperform, on the back of softer base metal prices. As such, we see UK miners resting at the bottom of the FTSE.

Other notable post-earning movers include: LSE (+2.6%), Altice (-14.5%), Hugo Boss (-6.0%) and Inmarsat (-4.9%)

FIXED INCOME

Bunds and Gilts have both retreated further from best levels, but the latter is now markedly underperforming having dipped below 122.00 to 121.99 (-13 ticks vs +7 ticks at best) on the back of a significant UK construction PMI beat that should have put any residual doubts about a BoE hike later to rest, before rebounding to 122.21. Meanwhile, the 10 year German benchmark is probing fresh Eurozone peaks at 161.42 (+51 ticks vs +14 ticks at the 161.05 low), with some underlying/renewed support coming via another downturn in Italian BTPs. Elsewhere, US Treasuries are closer to overnight highs and the curve fractionally flatter amidst more Chinese verbal warnings about retaliation against latest more penal US tariffs, and ahead of a busy post-Fed agenda before NFP on Friday. 

FX

USD - The Greenback is broadly firmer in wake of the latest FOMC statement that saw growth, inflation and labour market assessments all upgraded to underpin September rate hike expectations and keep the Fed on track to deliver another ¼ point tightening by year end. Heightened trade and other global tensions have also boosted the Buck as the DXY nudges back up to 95.000 having hit lows very close to the big figure below just 2 days ago.

GBP - In stark contrast, the Pound has been on the back foot even though the BoE is almost unanimously expected to raise rates by 25 bp at midday, and barely derived any support or traction from a much stronger than forecast UK construction PMI. Cable remains sub-1.3100 having hit a circa 1.3070 low after support around 1.3095 also gave way and stops were reportedly tripped from 1.3090. Back to ‘super’ Thursday, many believe that guidance and the general tone from the MPC minutes will be cautious, if not dovish, with risks to growth and inflation from ongoing Brexit uncertainty and global trade wars likely to be flagged and highlighted in latest QIR projections.

AUD/NZD - The other G10 laggards and both back under big figure levels (0.7400 and 0.6800 respectively) vs their US counterpart on the aforementioned ramp up in US-China import tariff threats and counter measures or verbal retaliation. The Aud got a temporary lift overnight from a significantly wider than anticipated Aussie trade surplus, but faded above the round number yet again and could also be wary about a hefty option expiry (1 bn) at the 0.7350 strike.

EUR - The single currency has lost more traction vs the Usd on the downturn in risk sentiment, and retreated further from 1.1700 towards 1.1600 having breached Fib support near 1.1616 and a daily cloud base at 1.1648 on the way down. However, more layered expiry interest in decent size between 1.1600-10 and 1.1625-35 (both in 1.1 bn) could exert some directional influence ahead of and into the NY cut.

CHF - Somewhat mixed after Wednesday’s Swiss national day break with declines vs the Dollar towards 0.9950, but outperformance against the Eur in wake of stronger than expected retail sales data and manufacturing PMI – cross hovering just below 1.1550.

CAD - Back below 1.3000 vs its US rival, but not really due to anything Loonie-specific.

EM -Broad losses vs the generally bid Usd, but the Lira’s almost inevitable further depreciation on latest US sanction proposals down through 5.0000 is eye-catching as the Try tumbles to fresh all time lows (circa 5.0900 at one stage).

COMMODITIES

 WTI and Brent slip lower with the complex pressured by USD strength following the latest tariff news. Energy news flow remains light, however, sources reported that  Russia, the largest oil producer,  is forecasting  an output around 11.2mln bpd to the year-end. Of note: Russia’s July oil production stood at 11.2mln bpd (vs. June output of 10.93mln bpd). Meanwhile, the Shanghai International Energy Exchange are looking into the possibility of setting up a market maker scheme for crude oil futures after the exchange asked brokers to help boost trading volumes and liquidity.

Spot gold is flat as USD strength outweighs safe-haven flows. Copper continues its decline amid demand concerns fuelled by the rise in trade tensions.