• Asian equity markets were cautious from the open with sentiment later deteriorating as focus turned to the looming July 6th tariffs
• UK Brexit Secretary Davis has written to PM May in a last-ditch attempt to warn her that her Brexit plan to be presented at Chequers is unworkable
• Looking ahead, highlights include US ADP, ISM non-MFG, DOEs, FOMC minutes, supply from Spain and France and a slew of speakers

ASIA

Asian equity markets were cautious from the open ahead of this week’s key risk events and following the US holiday closure, with sentiment later deteriorating as focus turned to the looming July 6th tariffs. Nikkei 225 (-0.9%) initially struggled for direction and remained at the whim of the currency before trade war fears eventually took its toll, while ASX 200 (+0.5%) bucked the trend with upside led by strength in telecoms and the heavily-weighted financials sector. Elsewhere, Hang Seng (-0.8%) and Shanghai Comp. (-0.9%) began choppy after the PBoC skipped open market operations for a net liquidity drain of CNY 140bln which coincided with its previously announced targeted RRR cut taking effect, before trade concerns and fears of a full-blown trade war proved to be the deciding factor. Finally, 10yr JGBs saw mild gains and approached closer to the 151.00 level, with the late support seen as risk sentiment soured on tariff fears and which also followed firmer demand in the 30yr auction.

PBoC skipped open market operations for a net daily drain of CNY 140bln, although its previously announced targeted RRR cut took effect from today, which is said to release CNY 700bln of funds. (Newswires)
PBoC set CNY mid-point at 6.6180 (Prev. 6.6595)

China Mofcom said China will respond if US implements tariffs, while Customs states that tariffs on US goods will immediately take effect after US tariffs on China are in place. (Newswires)

BoJ Board Member Masai said it may take some time to reach to reach 2% price goal and that it is appropriate to continue with strong monetary easing in a persistent and sustainable manner. Furthermore, Masai also suggested that structural problems in the banking industry should be discussed independently from monetary easing. (Newswires)

UK

UK PM May is said to have asked Chancellor Hammond and Business Secretary Clarke to warn colleagues of the dangers in pressing for a hard Brexit at the meeting on Friday at Chequers. Elsewhere, there were also reports that ministers warned PM May not to sidestep controversial Brexit issues at the meeting amid concern focus on customs may neglect issues such as services sector and freedom of movement. (Newswires/Guardian)

Downing Street has released some details of how EU-UK customs could be handled post-Brexit. The new plan (dubbed "facilitated customs arrangement") would allow the UK to set its own tariffs on imports to the UK. Technology would be used beforehand to determine where the goods will end up, and whether UK or EU tariffs would apply. Downing Street is confident the arrangement would partly be in place by the end of the transition period in December 2020. The arrangement has not been explained in full - and it is not clear whether the cabinet will back the plan. (BBC) However, it was later reported that UK Brexit Secretary David Davis wrote to PM May in a last-ditch attempt to warn her that her Brexit plan to be presented at Chequers is unworkable as it is merely a customs arrangement with some technical adjustments. (Telegraph)

ECB Supervisory Board Member Hakkarainen said 20 out of 50 UK banks and financial companies they had discussed exploring options on keeping banking passport with, have applied for a license to operate in EU in time to get approval before Brexit. (Newswires)

EU

Some ECB policymakers are said to be concerned regarding some investors’ expectations for a hike in end-2019 as they view this as too late, according to sources which also suggested that the door is open for possible rate move in September or October next year. (Newswires)

US ambassador to Germany told car industry bosses that US is ready to compromise regarding tariffs and that US would not impose tariffs if EU lifts tariffs on US cars. (Newswires)

FX

FX markets were uneventful amid a lack of tier-1 data and with participants looking ahead to the upcoming events for want of a better catalyst. As such, DXY was lacklustre following the Independence Day closure hangover and as its main counterparts across the pond traded little changed, with GBP also tentative ahead of PM May’s third customs proposal at Chequers on Friday. Elsewhere, USD/JPY and antipodeans conformed to the tedious trade seen across currency markets, while price action in CNH was also calm despite the PBoC setting its firmest reference rate since October 2017 which was relatively in-line with Nomura projections.

COMMODITIES

Commodities were subdued with WTI crude futures declining back below the USD 74.00/bbl amid the risk averse tone and renewed calls by US President Trump for OPEC to lower prices, with focus now turning to today’s holiday-delayed DoE inventory report. Elsewhere, gold traded sideways amid an uneventful greenback and tentativeness ahead of this week’s FOMC minutes and NFP data, while the trade-triggered jitters and early pressure in Chinese commodity prices ensured a glum day in copper.

US President Trump tweeted that OPEC must remember gas prices are up and they are driving prices higher, while he urged them to reduce pricing now. (Twitter)

China Hebei province is planning to reduce steel capacity by 40mln tons in 3 years. (Newswires)

Goldman Sachs said it maintains overweight view on commodities and commented that trifecta of higher rates, increasing commodity prices and firmer greenback is unsustainable and that they see USD to likely depreciate. (Newswires)

GEOPOLITICS

US officials are said to have dropped their all or nothing approach on North Korean denuclearization ahead of a US Secretary of State Pompeo's visit. (Newswires)