• Asian stocks were mostly negative on spill-over selling from the US. Sentiment also soured after North Korea cancelled a high-level inter-Korean meeting
• UK government is to publish its Brexit White Paper next month. Italy’s M5S leader Di Maio said there are still issues to resolve
• Looking ahead, highlights include Eurozone CPI, US industrial production, DoE’s, ECB’s Draghi, Praet and Constancio, Fed’s Bullard and Bostic

ASIA

Asian stocks were mostly negative on spill-over selling from US where the DJIA snapped an 8-day win streak and stocks posted their worst performance in around 3 weeks amid rising yields as markets priced the chances of 4 hikes this year. Furthermore, Nikkei 225 (-0.4%) was also dampened by disappointing GDP data from Japan which contracted for the first time in over 2 years and the KOSPI (+0.2%) was kept subdued for most the session by a withering of the geopolitical climate after North Korea cancelled a high-level inter-Korean meeting in resentment to US-South Korea joint military drills and also threatened to reconsider summit with US if they insist on North Korea giving up its nuclear program. Elsewhere, the widespread downbeat tone overshadowed a firm liquidity injection by the PBoC which ensured the Shanghai Comp. (-0.3%) and Hang Seng (-0.1%) conformed to the losses, while ASX 200 (+0.5%) bucked the trend with gains seen across a broad range of sectors and after subdued wage growth data added to the case for the RBA to continue holding off on rate adjustments. Finally, 10yr JGBs were relatively flat and held near the prior day’s lows as yields attempted to track the upside in US counterparts after the US 10yr briefly approached 3.1% and its highest in around 7 years.

PBoC injected CNY 140bln via 7-day & CNY 120bln via 14-day reverse repos for a net daily injection of CNY 200bln. (Newswires)
PBoC set CNY mid-point at 6.3745 (Prev. 6.3486)

Chinese House Prices (Apr) Y/Y 4.7% (Prev. 4.9%). (Newswires)

Japanese GDP (Q1) Q/Q -0.2% vs. Exp. 0.0% (Prev. 0.4%). (Newswires)
Japanese GDP Annualised (Q1) -0.6% vs. Exp. -0.1% (Prev. 1.6%); 1st contraction in 9 quarters.

UK/EU

BoE Deputy Governor Broadbent said that the UK economy is approaching a ‘menopausal’ stage after passing peak productivity which risks a once-in-a-century downturn. (Telegraph)

UK government is to publish its Brexit White Paper next month, according to sources. The paper will touch on issues such as customs, regulatory divergence and the financial services sector, ahead of the EC meeting next month. (BBC/FT)

UK PM May has been urged to make a quick decision over Britain’s customs relationship with the EU as she promised clarity in time for a key meeting in Brussels next month. (Telegraph)

UK Brexit Minister Davis reportedly warned PM May regarding the legality of the customs plan and has reportedly raised the threat of a legal challenge to May in a letter to the PM. (Times)

Italy’s M5S leader Di Maio said there are still issues to resolve with League’s Salvini, but later added that a deal may be sealed on Wednesday. (ANSA)

Riksbank’s Skingsley said they are in a nice spot to discuss rates and that SEK slid a bit more than warranted by data, while she also added that path accommodates a rate hike in October. (Newswires)

US Trade Representative said unless the EU stops breaking rules on Airbus subsidies (AIR FP), the US will have to move forward with counter measures on products in the EU, while the French government announced they will respect the international commitments by adopting new measures to comply with the WTO ruling that EU failed to eliminate all subsidies for Airbus. (Newswires)

FX

USD remained firm with the DXY above the 93.00 level after the rise in US yields and with markets leaning more towards the likelihood of 4 hikes this year following an upward revision to Retail Sales. This kept the greenback’s major counterparts subdued, while data was also in focus for Asia-Pac currencies as AUD staggered on softer than expected wages which the RBA have cited on numerous occasions as a factor for the subdued inflation. Elsewhere, the risk averse tone spurred flows into safe-haven JPY, but with price action relatively contained as disappointing GDP data also stoked some calls for future BoJ action.

Australian Wage Price Index (Q1) Q/Q 0.5% vs. Exp. 0.6% (Prev. 0.6%); (Q1) Y/Y 2.1% vs. Exp. 2.1% (Prev. 2.1%). (Newswires)

COMMODITIES

Commodities were lacklustre mainly due to a firmer greenback which pressured gold heavily in the prior session and although the precious metal has nursed losses overnight, prices still remain as a sub-USD1300/oz level. Elsewhere, copper traded flat after the prior day’s declines as the negative risk tone kept prices subdued, while WTI crude futures were marginally weaker and struggled to hold above USD 71.00 following the USD-induced pullback and surprise build in API crude inventories.

US API Weekly Crude Stocks (May 11) +4.854mln vs. Exp. -0.8mln (Prev. -1.850mln). (Newswires)

GEOPOLITICS

North Korea cancelled a high-level meeting with South Korea that was set for today and threatened the cancellation of summit with US amid anger regarding US-South Korea joint military drills. (BBC/Nikkei)

North Korea said it will never engage in economic trade with US in return for dropping nuclear program and that it rejects Libya-style denuclearization for the country, according to state media reports. Furthermore, North Korea added that it will need to reconsider summit with US if it insists on North Korea giving up nuclear program and that US President Trump will remain as failed leader if he chooses to follow along the lines of past US presidents. (KCNA)

South Korea Unification Ministry said the decision by North Korea to cancel high-level meeting for today is regrettable and it urged North Korea to return to talks, while the South Korean Defence Ministry said it will go ahead with drills with US as planned. (Newswires)

Iranian Foreign Minister Zarif stated that after Brussels talks we are on the right track and a lot will depend on what we can do in the next few weeks, while he also stated it is a good start and that political was agreement reached on steps to take. Elsewhere, the Iranian Nuclear Chief stated on state TV the EU should make up for US withdrawal from the deal or else Tehran will enrich uranium “stronger than before”, while the top adviser to Iran’s Supreme leader stated that Tehran will not renegotiate the nuclear deal and will not talk about its missile programme. (Newswires)

US

Treasuries were sold in heavy volume on Tuesday amid upbeat retail sales and a slightly more aggressive tone from Fed’s Kaplan and Fed’s Williams, with heavy corporate supply also adding further downward pressure to the complex. The curve bear-steepened with 2yr yields higher by c.3bps and 30yr yields higher by c.7bps. The10yr yield hit the highest level since May 2011 and took out the April 25th high at 3.033%, 2s30s and 2s10s both widened by c.4bps. US 10yr T-Notes futures settled down 20+ ticks lower at 118-19+.

Fed’s Williams (Voter, Hawkish) said gradual rate rises and 3 or 4 hikes this year are the right direction for policy but also stated he is conscious rates will remain lower versus historical levels. Williams also commented that he is not concerned if inflation overshoots its target by a few tenths and sees wages rising later this year as economy continues to strengthen, while he added that guidance on ‘accommodative’ policy may need to be tweaked at some point. (Newswires)

Fed’s Kaplan (Non-Voter, Neutral) said the US could achieve 3% economic growth but hinges on Labour participation and productivity, while he also stated he is not set on 2 or 3 more hikes this year and is watching the yield curve. (Newswires)