• Risk tone soured in Europe as US tariffs concerns and German political instability lead all equity markets into negative territory
• US President Trump said he spoke to Saudi Arabia’s King Salman on raising production by as much as 2mln barrels and that prices were too high, which the Saudi ruler agreed with
• Looking ahead, highlights include, US mfg PMIs, US construction spending, ISM manufacturing and ECB’s Praet

ASIA

Asian equity markets began H2 softer with the region constrained by disappointing data releases including Chinese Official & Caixin Manufacturing PMIs which both fell short of estimates, while the latest BoJ Tankan survey was mixed with headline Large Manufacturing Index also below forecasts. As such, ASX 200 (-0.3%) and Nikkei 225 (-2.2%) were lacklustre although strength in Property and Healthcare sectors kept Australia afloat for most the session, while Japan was dampened following mixed Tankan data but with a weaker JPY intiially limiting the downside. Elsewhere, Shanghai Comp. (-2.5%) was among the underperformers after both the Official and Caixin Manufacturing PMI missed estimates, while PBoC inaction resulting to a net daily drain and the absence of participants in Hong Kong for public holiday also ensured a subdued tone. Finally, 10yr JGBs were marginally higher amid the cautious risk tone in Japan and BoJ’s presence in the market, while the less than impressive BoJ tankan survey and source reports the BoJ are to revise lower its CPI forecasts at this month’s Outlook Report is also seen to likely to keep the BoJ maintaining its ultra-loose policy for a prolonged period.

PBoC skipped open market operations for a net daily drain of CNY 20bln. (Newswires)

PBoC set CNY mid-point at 6.6157 (Prev. 6.6166)

Chinese Manufacturing PMI (Jun) 51.5 vs. Exp. 51.7 (Prev. 51.9).

Chinese Non-Manufacturing PMI (Jun) 55.0 vs. Exp. 54.8 (Prev. 54.9)

Chinese Composite PMI (Jun) 54.4 (Prev. 54.6)

Chinese Caixin Manufacturing PMI Final (Jun) 51.0 vs. Exp. 51.1 (Prev. 51.1)

Japanese Tankan Large Manufacturing Index (Q2) 21 vs. Exp. 22 (Prev. 24).

Japanese Tankan Large Manufacturing Outlook (Q2) 21 vs. Exp. 20 (Prev. 20)

Japanese Tankan Large Non-Manufacturing Index (Q2) 24 vs. Exp. 23 (Prev. 23)

Japanese Tankan Large Non-Manufacturing Outlook (Q2) 21 vs. Exp. 22 (Prev. 20)

Japanese Large All Industry Capex (Q2) 13.6% vs. Exp. 9.3% (Prev. 2.3%)

New Zealand Treasury said March quarter Real GDP grew 0.5% which was below forecast in the Budget Economic and Fiscal Update and that annual current account deficit widened to NZD 7.9bln or 2.8% of GDP from NZD 7.7bln or 2.7% of GDP. Furthermore, the Treasury also stated it is seeing signs of less momentum in the economy. (Newswires)

EU/UK/US/MEXICO

Andres Manuel Lopez Obrador won a decisive victory in the Presidential election with quick count results showing he received 53.0%-53.8% of votes, while an exit poll also showed that Lopez Obrador is set to get a majority at the lower house. (Newswires)

UK PM May has vowed to defy cabinet plotters, telling aides that she will not be bullied out of office by ministers or hardline Brexiteers opposed to her EU plans. May has opted to stand and fight if Conservative MPs force a vote to oust her, adding that she is content to “win by one vote”. (Sunday Times)

UK PM May representative in Brexit discussions Robbins is said to have told ministers there is no chance for a bespoke trade deal with EU. (Times)

Downing Street has produced a third model for handling customs after the UK leaves the EU, specifics of the new plan have not been revealed publicly but senior ministers will discuss it at Chequers, the prime minister's country retreat, on Friday. One Senior UK Minister, in regards to the third model, said "I think it'll be a hybrid, complex fudge specifically tailored for a different regime for goods and services"; according to Sky News Senior Political Correspondent Rigby (BBC/Twitter)

Sky News Journal tweets "it looks like the White Paper has been pencilled in for July 12th, the very day that Donald Trump arrives in the UK". (Twitter)

UK Business Secretary Clark hinted the Brexit transition could be extended beyond 2020 to allow companies more time to prepare for Britain’s future relationship with the EU. (The Guardian)

Jacob Rees-Mogg has threatened UK PM May with a rebellion by Brexiteer Tory MPs if she doesn’t deliver a hard Brexit. (Sky News)

BoE's Cunliffe has warned that escalating trade wars, strains in emerging markets and a rising possibility of a Chinese credit crisis could combine into a “painful” experience for the British economy. (Sunday Times)

Italian Deputy-PM Salvini states that 2019’s European elections are an opportunity to create an “international alliance of populists” and overcome a “Europe of the elites”. (FT)

Germany Interior Minister and CSU party leader Seehofer offered to resign, which follows a meeting over the weekend with Chancellor Merkel that Seehofer described as pointless and in which he rejected the migration deal that was negotiated at the EU summit. However, reports later stated that Seehofer is said to remain in politics if Chancellor Merkel's CDU party backs down regarding migration, while he also said he wants to avoid the collapse of Merkel's government and is said to be seeking one more discussion with the CDU. (Newswires) CSU caucus chief Dobrindt opposed the resignation and requested an internal vote, while there were also comments from Economy Minister Altmaier who stated that the German coalition is in a serious situation. (Newswires)

EU warned that US car import tariffs could result to a global retaliation that could impact as much as USD 300bln of US goods. (FT)

US Commerce Department was reported on Friday to have begun a review of US export controls ordered by President Trump, which will align with CFIUS legislation requirement to review emerging and foundational technologies essential to US national security. In separate news, there were also reports on Friday that US President Trump is said to have told advisors he wants the US to withdraw from the WTO. (Newswires)

EU Markit Manufacturing Final PMI (Jun) 54.9 vs. Exp. 55.0 (Prev. 55.0)

UK Markit/CIPS Manufacturing PMI (Jun) 54.4 vs. Exp. 54.0 (Prev. 54.4, Rev. 54.3)

EU Unemployment Rate (May) 8.4% vs. Exp. 8.5% (Prev. 8.5%)

EQUITIES

European equities kick off the week in negative territory, albeit off lows (Eurostoxx 50 -1.0%) following the tone seen in the Asia-Pac session, with sentiment also dampened by the latest developments in Germany. Over the weekend, German Interior Minister Seehofer rejected Chancellor Merkel’s deal with the EU on migration whilst also threatening to resign. Trade war woes continue to linger after the EU threatened to impose new retaliatory tariffs worth USD 300bln if the US continues with the EU auto tariffs.

Financials and industrials underperform amid the uncertainty surrounding the potential fall of the German government (Interior Minister Seehofer is to meet Chancellor Merkel today) and the fall of base metals. Energy names take a hit following the recent decline in oil prices. In terms of stocks specifics, Microfocus (+5.1%) shares were lifted following reports they’re to sell their SUSE business to EQT partners for USD 2.4bln. Vedanta (+26.8%) shares spiked higher after Volcan approached the company with a buyout offer. Meanwhile, Playtech (-29.3%) shares slumped after the company lowered their guidance.

FX

EUR - The single currency has been under pressure in early EU trade, as 1.1700 held firm vs the Usd amidst reports of decent selling against vs the JPY after the cross breached 129.00 to the downside, from 128.95 to 125.80. Meanwhile, a prominent US bank has also implemented a short Eur position on unstable German political grounds and despite the prospect of SNB intervention via the CHF around 1.1550, targeting 1.1200 with a 1.1660 stop. Back to the headline pair, 1.1623 represents 10 DMA support just below the base so far.

USD - Although the Dollar has retreated from best levels vs several major counterparts the DXY remains underpinned above 94.500 with Usd/Jpy holding midway between 110.50-111.05 and the Greenback broadly firmer across the board. Sub-forecast Chinese PMIs suggest that trade wars may hit the world’s 2nd largest economy more than the US, and the YUAN continues to weaken in response if not by design.

AUD/NZD - Among the G10 underperformers on the latest downturn in overall risk sentiment, and with the Aud also undermined by a slower PMI print and decline in job ads overnight, as it slips further below 0.7400 vs its US peer and pivots 1.0900 against the Kiwi that is striving to keep its head above 0.6750 vs the Usd.

GBP - Fleeting respite and some welcome relief from the latest negative Brexit reports for the Pound as the UK manufacturing PMI beat expectations to remain relatively steady and comfortably above the 50.0 threshold. Cable has ticked up from sub-1.3150 levels, while Eur/Gbp has drifted down below 0.8850, albeit with the aid of aforementioned single currency weakness.

CAD/CHF - The Loonie and Franc are both relatively rangebound, but softer vs the Dollar on tariff factors, a softer Swiss manufacturing PMI and fall in retail sales. Usd/Cad is hovering in a 1.3140-90 range and Usd/Chf between 0.9900-30.

MXN - Off recent peaks vs the Usd, but with the Peso still holding above 20.000 in wake of the election and convincing win for AMLO

COMMODITIES

Commodities trade lower with WTI (-0.4%) and Brent (-0.9%) pressured as markets react to a tweet from US President Trump over the weekend that he spoke with Saudi Arabia’s King Salman on raising production maybe by as much as 2mln barrels and that prices were too high which the Saudi ruler agreed with. However, the White House were quick on clarifying that Saudi Arabia stated they could raise output if required and that there was no actual agreement to raising output by the said amount. In regards to this, Iran’s OPEC Governor Ardebili said on Saturday “there is no way one country could go 2mln BPD above their production allocation unless they are walking out of OPEC”. An Iranian official later stated that adjustments to the OPEC output levels would require an emergency meeting.

Amongst the weekend comments, Saudi crude output reached a near-record 10.7mln BPD according to a survey while Russian June output reached over 11mln BPD according to the oil ministry. Libya’s NOC declared a force majeure at Hariga and Zeutina ports while weekend reports suggested around 850K BPD may be offline in the country.

Elsewhere, gold (-0.3%) is subdued by a slightly firmer dollar as the yellow metal continues to be detached from the risk sentiments. Chinese iron ore futures fell almost 2% on Monday, due to a  fresh increase in iron ore stocks at China’s ports, after a hat trick of positive closes last week.

Note, Canadian tariffs came into play on Sunday, where a 25% levy imposed largely targeting US steel and aluminium products as well as a 10% tariff on over 250 other US goods (such as beer kegs, whisky, and orange juice).

Source: RANsquawk