• Trump targets USD 200bln in fresh China tariffs; China says to fight back firmly
• Asia-Pac equity markets were mostly lower amid a further escalation of trade tensions
• Looking ahead, highlights include speeches from ECB’s Draghi, Praet, Lane and Fed’s Bullard

TRADE TARIFFS

US President Trump asked the US Trade Representative to identify USD 200bln in Chinese goods for further tariffs of 10% which will be imposed if China refuses to change its practices and goes ahead with its retaliation threat, while he also stated that China raising tariffs is unacceptable and that the US will pursue tariffs on another USD 200bln of Chinese goods if China increases tariffs yet again. (Newswires)

China Mofcom said China will have to adopt comprehensive steps to fight back firmly and warned it will take qualitative and quantitative measures if US publishes additional tariff list. (Newswires)

ASIA

Asia-Pac equity markets were mostly lower amid a further escalation of trade tensions after President Trump asked the US Trade Representative to identify USD 200bln in Chinese goods for further tariffs of 10% which will be imposed if China goes ahead with reciprocal tariffs, while he also threatened tariffs on another USD 200bln of goods if China retaliates yet again. This wasn’t taken sitting down by China as Mofcom responded that China will take strong counter measures if US issues a new list. As such, US equity futures sold off and Asia stocks were mostly pressured with Hang Seng (-2.4%) and Shanghai Comp. (-3.0%) feeling the brunt of the blaring sabre-rattling between the world’s 2 largest economies as they move closer to the brink of a trade war. In addition, the mainland blood bath was also exacerbated by the Shanghai Comp.’s decline below the 3000 level for the first time in 2 years. Elsewhere, Nikkei 225 (-1.5%) was also negative alongside the widespread risk averse tone and on JPY strength, while ASX 200 (+0.2%) bucked the trend led by strength in energy following the recent rebound in oil prices. Finally, 10yr JGBs traded marginally higher amid the risk averse tone in the region, but with gains limited as focus was centred on stocks and amid a mixed 30yr JGB auction.

PBoC injected CNY 70bln via 7-day reverse repos, CNY 20bln via 14-day reverse repos and CNY 10bln via 28-day reverse repos for a net daily injection of CNY 50bln, while it also PBoC announced CNY 200bln in 1yr MLF loans. (Newswires)

PBoC set CNY mid-point at 6.4235 (Prev. 6.4306)

UK/EU

UK government was defeated in the House of Lords concerning plans to give lawmakers a ‘Meaningful Vote’ in the final Brexit deal. (Newswires)

Brexit deal is unlikely until the end of the year due to continue deadlock between the UK and the EU on Irish border, according to reports. (FT)

UK Chancellor Hammond warned the cabinet to refrain on any new spending and that funds for other policies have been depleted after being forced to find GBP 25bln for the NHS. (Times)
 

FX

In FX markets, the USD was weaker on heightened trade tensions between the US and China, which in turn provided some support for EUR/USD and GBP/USD. However, price action was focused on JPY which was bolstered by safe-haven flows and saw USD/JPY decline below the 110.00 handle, while JPY-crosses were equally pressured. Elsewhere, antipodeans were mixed with NZD/USD seemingly oblivious to the ongoing trade jitters and with AUD/USD briefly testing 0.7400 to the downside amid the increased US-China tariff threats.

RBA Minutes from June 5th meeting reiterated that low rates support the economy and steady policy is consistent with targets. The minutes also repeated that gradual a stronger AUD would slow pick-up in inflation and growth of the economy, while it added progress on unemployment and inflation is anticipated to be only gradual. (Newswires)

COMMODITIES

Commodities were mixed overnight with WTI crude futures weaker as prices pulled back from the prior day’s strength amid the risk averse tone due to the heightened trade tensions, which also kept copper subdued and weighed on Chinese metal prices at the open. Conversely, gold prices were higher overnight due to its safe haven status and which was also facilitated by a weaker greenback.

Ecuador's oil minister said OPEC is to discuss oil production increase, while he added that Saudi Arabia and Russia want to release some production and that OPEC has a proposal to increase output by 1.5mln bpd. (Newswires)

US

US Treasuries were little changed on Monday though some downside pressure was seen across the complex in afternoon trade as the dollar weakened moderately, and as equities recovered some of the losses seen previously after China retaliated to US tariffs. Bumper issuance from Bayer added downside pressure to the complex, launching an 8-part USD 15bln to finance the acquisition of Monsanto. Volumes were generally thin, and at settlement, major curve spreads were little changed. US 10YR T-notes futures (Sep 2018) unchanged at 119-19.

Fed's Williams (Voter, Hawkish) said US growth and labour market are strong, while he also commented that inflation is near target. (Newswires)

Fed’s Bostic (Voter, Dovish) said Fed is comfortable with continuing to raise rates towards the neutral level, but added he is not sure how many more hikes it will take to get there. Bostic also said he still sees three hikes this year for a base case and warned about being cavalier about possible yield inversion. (Newswires)