• European equities positive as auto names drive gains, on suggestions that US is ready to give car tariffs a break
• UK markets react to an upbeat Carney after the BoE chief suggests Q1 softness was largely due to weather
• Looking ahead, highlights include, US ADP, ISM non-MFG, DOEs, FOMC minutes, and ECB’s Weidmann and Mersch

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 (-0.8%) 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 (-0.2%) 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)

EU/UK/US

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)

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)

BoE Governor Carney said data gives him confidence that the soft UK economy in Q1 was largely due to weather and not economic climate; reiterating tighter monetary policy will be needed. Added that pay and domestic cost growth have continued to firm broadly as expected, widespread evidence that slack is largely used up. (Newswires)

CENTRAL BANKS

ECB's Praet says the uncertainty about the inflation outlook has been declining significantly, and the risk of deflation has vanished, there are grounds to be confident that the sustained convergence of inflation will continue in the period ahead. Added that the expectation is that policy rates will remain at their present levels at least through the summer of 2019 and, in any case, for as long as necessary. (Newswires)

ECB's Dolenc looks for the Bank's key rate to remain 'relatively low for long' until late next year. (Newswires)

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)

GEOPOLITICAL

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)

EQUITIES

Automotive names are driving European stocks higher after reports of compromises being close on auto tariffs, with a reduction in tariffs being touted. As such the DAX is outperforming on the back of strength in index heavy-weights Daimler (+3.9%), Volkswagen (+4.3%), BMW (+5.2%) and Continental (+2.8%), with traders eyeing the 100DMA of 12,515 on the upside, currently trading at 12,454. Peugeot (+3.3%) and Michelin (+3.0%) are also driving the CAC, with the bourse breaking through its 100DMA and approaching its 200DMA of 5,374. Further support is offered to the French index after Sodexo (+6.7%) reported positive sales figures.

Associated British Foods (-4.6%) reported uninspiring earnings, and have increased concerns over their sugar business not meeting profit targets. This is pressuring consumer staples (-0.5%) which is currently the worst performing sector. The materials sector is outperforming on the back of mining names (FTSE 350 mining index +1.9%) moving in sympathy with Glencore (+3.3%) post announcement of a USD 1bln share repurchase.

Linde (+1.3%) have said that a sale of Praxair’s European gas businesses will allow for a merger clearance by the European Commission. Praxair have agreed to sell their assets to Taiyo Nippon Sanso

FIXED INCOME

Bunds continue to fall after increasingly brief periods of consolidation, respite and flatter rebounds, with the 10 year debt future just registering a new Eurex low at 162.06, -49 ticks from yesterday’s close, and Gilts have corrected lower from the Liffe open as anticipated, to a 122.80 base and 29 tick decline on the day, with independent bearish impetus via an upbeat Carney. Aside from the hawkish ECB vibes, via sources, market contacts note that a chart gap was filled around 162.44 and Wednesday’s 162.37 session base has subsequently been breached, along with a downside technical objective at 162.22 to expose 162.01 ahead of 161.85, while for Gilts the nearest technical support is now around 122.66. Elsewhere, US Treasuries also slipping deeper into negative territory and re-steepening a tad awaiting the return of market participants from their Independence Day celebrations and a busy line up of data, including anecdote/proxies for Friday’s NFP report.

FX

EUR - The single currency has extended gains vs the Usd through the 1.1700 handle and first heavy expiry option hedges at the strike (2.3 bn today, and a further 1.7 bn on Friday), albeit briefly, in wake of latest ECB sources claiming market expectations for an end 2019 rate hike would be too late, and with perhaps some added momentum from upbeat German data (industrial orders). Eur/Jpy also boosted by M&A-related flows, but capped around 129.50 and just ahead of its 55 DMA (129.54).

NZD/AUD - The Kiwi is vying with the Eur for top G10 spot, but again largely on short covering, technical retracement and cross-winds, as Nzd/Usd remains supported above 0.6750 and Aud/Nzd slips below 1.0900, while Aud/Usd retreats further from 0.7400 on the persistent US-China/global trade war threat and declining metals prices.

GBP/CAD/CHF/JPY - All relative stable vs the Greenback, with Cable building a firmer base above 1.3200, but not able to clear 1.3250 and its 21 DMA just above ahead of a speech from BoE Governor Carney and the next big Brexit event (Chequers on Friday). In the event the MPC head was positive on growth and the inflation outlook, lifting near term rate hike expectations and the Gbp through the aforementioned psychological and technical resistance levels albeit briefly. The Loonie is essentially stuck around 1.3150, Franc equally tight within 0.9940-10 bounds and hardly responding to in line Swiss CPI data (albeit weaker vs the Eur circa 1.1600), while the Jpy hugs 110.50 eyeing decent expiries between there and 110.60 (1 bn).

SEK - Onward and upward for the Krona, and latest catalyst comes in the form of strong Swedish data (industrial output), with further gains vs the Eur that is strong in its own right, as mentioned earlier – Eur/Sek inching close towards 10.2000.

COMMODITIES

Oil prices were down with WTI languishing around the USD 74 level after US President Trump reiterated his position on Twitter overnight vs. OPEC of prices being too high. This was reversed in later trade however, with WTI positive and Brent negative on the day as traders look ahead to today’s holiday-delayed DoE inventory report.

In the metals scope Gold is pulling back after hitting a one week high in yesterdays trade of USD 1,261/oz, currently at USD 1,253/oz. Base metals are slipping as the threat of a trade war looms, with zinc and nickel sulking around one-year lows. Copper is also being hit by these worries, with the bellwether metal down 2.8% in Shanghai.