• Asian equities failed to hold on to opening gains as trade concerns gripped sentiment ahead of China-US trade talks
• In FX, DXY is softer and underpinning its peers with GBP/USD also supported by reports that the UK is to tell the EU it is prepared to remain in the customs union arrangement beyond 2021
• Looking ahead, highlights include US weekly jobs, Philly Fed, ECB’s Constancio, Fed’s Kashkari, Kaplan and BoE’s Haldane

ASIA

Asian equity markets were mostly subdued as the initial tailwind from a rebound in US stocks gradually waned after trade protectionism concerns were stoked overnight. ASX 200 (-0.4%) and Nikkei 225 (+0.6%) both opened higher as they took cue from Wall St where markets shrugged off rising Treasury yields and US data including Industrial Production provided some encouragement. However, Australian stocks then retreated amid heavy losses in the Industrials sector and a deterioration in both Shanghai Comp. (-0.2%) and Hang Seng (-0.1%) in which the latter wiped out gains of over 1%. This was due to trade concerns after China’s Mofcom released its statement on previously announced tariffs in which it is to levy reciprocal taxes on some US products and halt tariff concessions on imports of US fruit and pork, which doesn’t bode well ahead of today’s US-China trade talks. Furthermore, Japan was also said to inform the WTO regarding its own trade response and that it is ready to retaliate against US tariff actions, although Chief Cabinet Secretary Suga later downplayed it and stated that nothing yet has been decided. Conversely, not all was not all was gloomy in the region as Tencent outperformed in Hong Kong with gains nearly 5% after it posted an over 60% increase in Q1 net. Finally, 10yr JGBs were lacklustre as yields played catch up to their US counterparts, while a 5yr JGB auction also failed to support as the b/c and accepted prices slipped from prior.

China is to levy reciprocal tax on some US products and will stop tariff concessions on imports of US fruits and pork, according to statement posted by China Mofcom regarding previously announced tariffs, although Mofcom also reiterated China doesn’t want to see trade tensions with US to escalate. (Newswires)

PBoC injected CNY 30bln via 7-day and CNY 20bln via 14-day reverse repos for a daily net injection of CNY. (Newswires)
PBoC set CNY mid-point at 6.3679 (Prev. 6.3745).

There were reports that Japan is said to inform WTO regarding retaliatory steps related to US tariffs and will also notify WTO it is prepared to retaliate against US tariff actions. However, Japanese Chief Cabinet Secretary Suga later answered a question on retaliatory measures on US tariffs, in which he stated Japan is considering steps under WTO framework but nothing has been decided yet. (Newswires)

Japanese Machinery Orders (Mar) M/M -3.9% vs. Exp. -3.0% (Prev. 2.1%). (Newswires)
Japanese Machinery Orders (Mar) Y/Y -2.4% vs. Exp. 0.3% (Prev. 2.4%)

UK/EU

UK is to tell EU it is prepared to remain in customs union arrangement beyond 2021. (Telegraph)

UK trade body EEF chief stated that “maximum facilitation’ customs plan backed by Boris Johnson and other Brexiteers has major flaws and won’t be ready in time for the end of the transition period in 2020. (FT)

Italy’s M5S and the League have completed the joint policy programme and passed on the document to leaders for its approval, although it is not due to be officially released until the weekend. Furthermore, the Five Star and League government contract is said not to include a Euro exit option. (Newswires)

FX

The DXY is weaker on a continuation of the prior day’s pullback and on the Chinese sabre-rattling ahead of trade talks. This underpinned its major counterparts with GBP/USD also finding solace on reports that the UK is to tell the EU it is prepared to remain in the customs union arrangement beyond 2021. Elsewhere. AUD/USD saw a bout of indecision on mixed jobs data as Employment Change topped estimates and the Unemployment Rate unexpectedly rose. However, AUD eventually extended on gains as the rise in unemployment coincided with an increase in the Participation Rate and as the data ultimately showed better quality of growth as it was solely fuelled by Full-Time jobs. NZD/USD also mirrored gains after the New Zealand budget showed forecasts for a larger surplus in the near term and that GDP guidance was raised to 3.8% from 3.4% for 2018/19.

Australian Employment Change (Apr) 22.6k vs. Exp. 20.0k (Prev. 4.9k, Rev. -0.7k). (Newswires)
Australian Full Time Employment Change (Apr) 32.7k (Prev. -19.9k, Rev. -25.1k)
Australian Unemployment Rate (Apr) 5.6% vs. Exp. 5.5% (Prev. 5.5%)
Australian Participation Rate (Apr) 65.6% vs. Exp. 65.5% (Prev. 65.5%)

Brazilian Selic Interest Rate 6.50% vs. Exp. 6.25% (Prev. 6.50%); vote was unanimous. (Newswires)

COMMODITIES

Commodities saw mild support overnight alongside the backdrop of a softer greenback with WTI crude futures making further headway towards the USD 72.00/bbl after prices were lifted during US trade by a larger than expected DoE crude inventory drawdown. Elsewhere, gold and copper were also marginally positive but with upside contained on lingering prospects of 4 Fed hike this year and by a subdued risk tone, respectively.

Iran Oil Minister Zanganeh stated Iran will be doing its best to maintain production and continue exports, while he also commented that oil prices at USD 60-65/bbl are ‘logical’ and the US wants to see high prices to boost shale production. (Newswires)

GEOPOLITICS

US President Trump said ‘we’ll have to see’ if the North Korea summit is still on and will insist on the denuclearisation of North Korea, while US National Security Adviser Bolton said that the Trump-Kim summit should still happen even though North Korea is threatening to back out. (Fox News)

Paris continues to work with Iran to expand the agreement by adding its missile programme and actions in the region to the deal whilst preserving original JCPOA, according to a French ambassador speaking to Russia. (Newswires)

US

Treasuries ended the day pretty much unchanged, despite decent volumes and a busy day in the European fixed income complex, where Italian BTPs tumbled amid political uncertainty whilst German bunds acted as a safe haven alternative. Treasury yields were higher by less than 1bps, with the exception of the 10yr yield which was higher by just about 1bps, consolidating yesterday’s gains above the 3% level. Heading towards settlement, 2s10s widened by c.1bps. US 10yr T-Notes futures settled 2 ticks lower at 118-17+.

Trump legal adviser Giuliani said Special Counsel Mueller told the Trump team that he will adhere to Justice Department guidance that a sitting president cannot be indicted. (CNN)

Fed’s Bullard (non-voter, dove) said US is close to neutral rate, while he also commented that there is no yield curve inversion danger just now and that it has a nice slope. Bullard later added that additional rate increases may depress inflation expectations and that Fed action which inverts yield curves is a very negative signal. (Newswires)

US Treasury Secretary Mnuchin, Commerce Secretary Ross and Trade Representative Lighthizer will be meeting with the Chinese delegation, while there were conflicting reports on whether Trump trade adviser and China-hawk Navarro will be attending. (Newswires)

US House Ways and Means Committee Chair Brady said Chinese Vice-Premier Liu wants to increase Chinese demand for US products and that he does see problems in trade relations, although he added that Liu is said to be optimistic about trade talks. (Newswires)

Mexican Economy Minister Guajardo said it is basically impossible to have a NAFTA deal by the 17th and that NAFTA ministers are exploring the possibility of meeting again. Guajardo added that the soft deadline has some margin of flexibility and does not rule out reaching a NAFTA deal from end of May onwards. Elsewhere, US Trade Representative Lighthizer is said to not be optimistic for an imminent NAFTA agreement. (Newswires)