• European equities are firmer shruging off US-China tariff action, with 10% seen not as severe as anticipated
• Brent jumps over 1% as Saudi Arabia is said to be happy with oil over USD 80/bbl
• Looking ahead, highlights include, Hungary’s Interest Rate Decision and GDT

ASIA

Asian equity markets were mixed with focus centred on the escalation of trade tensions after the US confirmed tariffs on USD 200bln of Chinese imports effective September 24th which will begin at 10% and increase to 25% at year end, while US President Trump also warned that if China retaliates he will immediately pursue tariffs on another USD 267bln of Chinese goods. This pressured ASX 200 (-0.4%) with the index dragged by commodity-related sectors as well as tech stocks following similar underperformance in their US counterparts, while Nikkei 225 (+1.5%) showed resilience on return from its extended weekend amid reports that Japan is to offer measures to lower the trade surplus with US in an effort to avert auto tariffs. Elsewhere, Hang Seng (+0.5%) and Shanghai Comp. (+1.0%) traded choppy as participants digested the tariff announcement and a substantial CNY 200bln liquidity effort by the PBoC, with participants also cautious as they await China’s response as Vice Premier Liu He was said to convene a tariff response meeting. Finally, 10yr JGBs were subdued amid gains in Japanese stocks and after the BoJ Rinban announcement for JPY 690bln of JGBs in the belly to super-long end also failed to spur demand. 

PBoC injected CNY 150bln via 7-day reverse repos and CNY 50bln via 14-day reverse repos. (Newswires)
PBoC set CNY mid-point at 6.8554 (Prev. 6.8509)

Indian Finance Minister says that the INR could come under pressure once again after US sanctions come into place

TRADE

White House confirmed to impose tariffs on approximately USD 200bln of China goods effective September 24th which will begin at 10% and increase to 25% at year end, while US President Trump warned that if China retaliates he will immediately pursue tariffs on another USD 267bln of Chinese goods although the administration said it remains open to negotiations with China. Furthermore, reports noted that USTR Lighthizer removed about 300 product categories and reduced some subsets, but the total value is still approximately USD 200bln. (Newswires)

China Vice Premier Liu He was said to convene a tariff response meeting, while there were separate reports which cited an unnamed Beijing source that China will likely not send a delegation to Washington for trade discussions following the US announcement of fresh tariffs. China said later in the day they had no choice but to retaliate to US tariffs, and that these will occur simultaneously; In their statement, China did not offer details of this retaliation (South China Morning Post)

China Commerce Minister said China has confidence and ability to reach this year's targets and will increase opening up to a higher level, while the minister added there is no winner in a trade war and that cooperation between US and China is the only correct option on trade. (Newswires)

China CSRC official said Trump's tactics to pressure China will not work and that China has ample fiscal and monetary policy tools to cope with trade frictions with US. The official added that trade actions by US could negatively impact itself but added that China still looks forward to good trade relations with US in the long term and hopes both sides could sit to negotiate on trade. Furthermore, the official stated the US move on trade has poisoned atmosphere for negotiations, although both sides can sit down to talk about reducing trade deficit and that China will push ahead with financial market opening. (Newswires)

EU/UK/US

Senior EU diplomats are said to predict the UK government will have to go through its darkest hour and stare into the abyss of a no-deal Brexit before it will give in to EU demands. (The Guardian)

EU officials are reportedly insisting on guarantees that the UK cannot renegotiate any agreement on Brexit and is preparing to demand assurances any agreement cannot be unpicked by a future successor. (Times)

Some EU members could put pressure on Ireland to drop its resistance to EU corporate tax reform in return for support on Brexit. (Newswires)

UK PM May has suggested that EU migrants will not get preferential treatment, post-Brexit. (Telegraph)

UK Brexit Secretary Raab expects the EU to make concessions, according to German press reports. (Newswires)

Spain is seeking firmer legal guarantees on Gibraltar as part of the Brexit settlement, a decision which could pose further hurdles for the UK as they aim to leave the bloc. (FT)

Italy Deputy PM Di Maio has reportedly once again threatened to seek the removal of Finance Minister Tria. (Newswires)

Italian Economy Minister says public investments have to get back to at least 3% of GDP, the current level of 2% is too low. (Newswires)

EU are not set to release a statement on Brexit at Salzburg, according to an EU official. (Newswires)

A top EU official has told the Evening Standard they are ready to make minor changes for the sake of a deal, such as moving customs checks away from the border. But they were sticking to their original “backstop” proposal. (Evening Standard)

GEOPOLITICAL

North Korean Leader Kim greeted South Korean President Moon at Pyongyang airport for the summit this week. (Newswires)

CENTRAL BANKS

Riksbank's Jochnick says we need to be cautious, rate rises will go ahead slowly, developments in trade barriers is slightly worrying. (Newswires)

EQUITIES

European equites are currently in the green, as US-China tariff action has been digested as less severe than was first anticipated with ABN Amro saying that “Given regular FX fluctuations, input prices and flexibility for both importers and exporters to adjust margins somewhat, a 10% import tariff might not have a strong impact on bilateral trade flows”.

The DAX is outperforming, whilst the FTSE is the underperformer in Europe with a lack of upside catalysts and softness seen in index heavyweights such as British American Tobacco, ITV and Marks and Spencer.

The consumer discretionary sector is lagging its peers, dragged on by Zalando as the co. has issued its second negative guidance revision in as many months.

FX

G10 - An almost clear divide between winners and losers vs a still generally soft Usd (DXY struggling to sustain rebounds off sub-94.500 lows), with the AUD and NZD leading their major counterparts even though China has now hit back, or at least vowed to fight fire with fire in the latest exchange of import tariffs with the US. Aud/Usd is back on the 0.7200 handle and the Kiwi is hovering just under 0.6600 after little reaction to overnight RBA minutes, and ahead of the latest GDT auction that is expected to extend the run of price declines. The CHF and CAD are next best, with the Franc testing resistance around 0.9600 and Loonie recovering from another dip below 1.3050 following mixed NAFTA comments from Canadian PM Trudeau noting progress towards a deal with the US, but a determination to stand firm by its demands from a renegotiated accord.

The EUR, JPY and GBP have all been choppy vs the Greenback, with the single currency attempting to build on recovery gains beyond 1.1700, but retreating relatively sharply on the Beijing verbal retaliation, while Usd/Jpy was absorbing offers at 112.25 before reversing to sub-112.00 levels again on the same wire headlines. Note also, hefty option expiries may exert influence for both pairs into the NY cut, with 1.1 bn in Eur/Usd at the 1.1680 strike and 1.3 bn at 112.00 in Usd/Jpy. Elsewhere, Cable was climbing steadily above 1.3150 before stalling on the aforementioned strike back by China, but also more Brexit banter from all sides.

EM - Amidst a raft of rhetoric from Asia and South East Asia about trade wars, sanctions and local currency depreciation, the Lira has emerged weaker yet again, with Usd/Try up to circa 6.3800 at one stage and hardly reacting to more intervention via the CBRT jacking up its RRR to 13% from 7%. Conversely, the Zar and Rub are benefiting from the broadly softer Dollar.   

FIXED INCOME

Core bonds remain firm, but off intraday peaks in wake of a relatively comfortable if not solid German Schatz auction. Bunds are still relatively well bid ahead of 159.00 vs 159.26 (+24 ticks) at best, and Gilts are just 9 ticks shy of their 121.55 Liffe high (+14 ticks) in keeping with a pull-back in US Treasuries and marginal steepening, which may well be fuelled by firmer oil prices after Saudi Arabia implied tolerance, or an acceptance of Brent climbing to around $80/brl. Note also, the recovery in Italian debt futures may also be taking some of the shine away from Bunds and mainstream peers.

COMMODITIES

Oil is benefitting from source reports suggesting that Saudi Arabia is said to be comfortable with oil above USD 80/bbl, with the fossil fuel extending on gains seen in yesterdays trade, additionally WTI broke through its 100DMA to the upside. Russia's Novak also said the rise in oil to USD 70-80/bbl is temporary and sanction driven, and sees the long term price in the area of USD 50/bbl

In metals markets, gold is seeing an unwinding of safe-haven premiums driven by trade concerns, with the precious metal down on the day. Industrial metals are also largely negative, with all of copper, tin, aluminium and zinc down by over 0.5% on the day, and copper in the red for the third straight session.

Saudi Arabia is comfortable with oil above USD 80/bbl, as according to sources. (Newswires)

Russia's Novak says the rise in oil to USD 70-80/bbl is temporary and sanction driven, and sees the long term price in the area of USD 50/bbl. (Newswires)

Source: RANsquawk