• European Indices have drifted lower as the day progressed [Euro Stoxx 50 -0.6%], in-spite of reports that China’s VP Liu He is to attend trade talks in the US providing a boost to sentiment
• In FX, AUD is outperforming after the RBA stood pat and were less Dovish than anticipated in their statement; remaining G10 currencies are little changed vs USD.
• Looking ahead, highlights include US JOLTS EIA Short Term Energy Outlook, Fed's Kaplan & Quarles, BoE's Haldane, Supply from US

ASIA-PAC

Asian equities traded mixed as sentiment remained at the whim of the ongoing US-China trade uncertainty with Nikkei 225 (-1.5%) and KOSPI (-0.9%) the underperformers on return from holiday closures as they got their first opportunity to react to US President Trump’s tariff threat. Nonetheless, there was no lack of success stories in Japan with Sony among the biggest gainers after having waited through a 10-day closure to finally benefit from a return to profit in Q4 and with SoftBank boosted as it considers an IPO for its USD 100bln Vision Fund. ASX 200 (+0.2%) was positive with the index led by strength in mining names and after mostly encouraging Trade Balance and Retail Sales data, while some participants were also hopeful for a rate cut by the RBA although this failed to materialize and subsequently saw the index give back some of the gains. Hang Seng (+0.5%) and Shanghai Comp. (+0.7%) nursed some of the prior day’s sell-off in which the mainland bourse had dropped nearly 6% due to the heightened trade tensions. Furthermore, the recovery also followed a substantial rebound on Wall St after reports that the China delegation will still travel to Washington D.C. provided a glimmer of hope, although this was later clouded after-hours as US Treasury Secretary Mnuchin and Trade Representative Lighthizer confirmed a deterioration in negotiations and that tariffs will be increased if there is no agreement by Friday. Finally, 10yr JGBs were higher as the risk-averse tone in Tokyo spurred demand government bonds and with the BoJ also present in the market for JPY 940bln of JGBs.

PBoC injected CNY 20bln via 7-day reverse repos. (Newswires) PBoC set CNY mid-point at 6.7614 (Prev. 6.7344)

US Trade Representative Lighthizer confirmed the US will increase tariffs on China on Friday if there is no deal and that China was reneging on commitments. Lighthizer also commented we have seen an erosion of commitments from China over the last week and that there has been no contact with China Vice Premier Liu He over the last 24 hours. (Newswires)

US Treasury Secretary Mnuchin said US-China trade deal was 90% done and that talks saw a big change in direction. Mnuchin added that there were communications over the weekend that moved the agreement substantially backwards and that the US were in the process of planning a Trump-Xi summit, while he also suggested the US would reconsider the duties if talks get back on track. (Newswires)

Subsequently reported that, China's Vice Premier Liu He is to go the US for trade talks, for the 9th - 10th May, according to China. (Newswires) And the US side still has a willingness to reach a deal, China's delegation demonstrates their will by postponing the US trip. And Thursday will be the deceisive moment between US and China., according to the Editor of the Chinese Global Times. (Twitter)

US

Fed's Kaplan (Non-Voter. Dove) said he would currently stand pat and doesn't see a need to lower rates to address inflation, while he added that he doesn't have a bias for the direction of the next rate move. Furthermore, Kaplan said he has been trying to flag issue of risky corporate debt which could be a burden on the economy in a downturn and is concerned global growth is decelerating. (Newswires)

UK/EU

UK PM May is facing fresh calls from within her party to step down as she attempts to secure a deal with Labour to break the Brexit deadlock. (Times) These reports were also echoed by pieces in the Telegraph and Sky News. PM May is reportedly set to meet with the Graham Brady, Chair of the 1922 Committee today amid calls for her resignation. However, Downing Street insists that the meeting is routine. (BBC)

Key to achieving an agreement in Labour-Conservartive cross party talks on Brexit is the promise of a 'temporary customs union', though Labour sources warn that if this is all there is, it is what is already encompassed in the WA., BBC's Kuenssberg. (Twitter)

- Senior government source say it IS possible though to see a way to a deal, but unlikely to be resolved this week, adding that their aim is to path to get the Withdrawal Bill to Commons with a fair wind.

Brexit talks will take place behind closed doors today, cabinet will be followed by more cross-party talks but Opposition Labour Leader Corbyn will not be attending, according to Sky's Political Editor Rigby. (Twitter)

A member of the 1922 executive has stated that if Graham Brady returns from the meeting with PM May without a firm departure date he will be sent back., ITV's Brand. (Twitter)

- Additionally following the local elections the committee may look into changing leadership election rule

- Adds that the push if for a June departure date for PM May

Riksbank Minutes: members supported the picture of the economic outlook and inflation prospects described in the draft Monetary Policy Report

- Minor differences in opinion were expressed regarding when it might be appropriate to increase the rate next time but the forecast for the repo rate path indicates that it will raised at the end of the year or at the beginning of next year. In light of the unexpectedly low inflation both in Sweden and abroad

- Ingves says if the inflation rate in the euro area does not increase in the way described in their draft monetary policy report, then this may have a decisive effects on Swedish inflation and therefore Swedish monetary policy

EQUITIES

Major European indices are broadly in the red, and after drifted lower as the day has advanced [Euro Stoxx 50 -0.6%] in spite of risk sentiment receiving a boost prior to the cash open when China announced that Vice Premier Liu He is to attend trade talks in the US on the 9th & 10th of May. The FTSE 100 (-0.2%) is mildly lagging its peers as UK markets return from a bank holiday, and as such are reacting to the US-China trade updates; although, downside in the index is limited by the likes of Vodafone (+1.4%) and AstraZeneca (+1.5%) in the green after making a deal with Telefonica Deutschland (+2.2%) and announcing that their Phase 3 Calquence study achieved its primary endpoints respectively. Sectors are similarly mixed with energy names down in tandem with the oil complex, and notably the auto sector is once again in the red dragged down by heavyweight BMW (-1.0%) post-earnings. Following the Co. posted Q1 EBIT significantly lower than the prior levels and that the Co. have set aside EUR 1.4bln for anti-trust provisions after the Co. were previously warned of a significant charge resulting from an EU probe into collusion over delaying the implementation of cleaner-emissions cars. Other notable movers this morning include, AB Inbev (-0.1%) who at first fell around 1% at the open due to a slight miss on Q1 revenues and stating that short term dividend growth will be impacted deleveraging commitments. However, Co’s shares subsequently retraced much of this downside after stating that they are considering the IPO of their Asia-Pacific unit in Hong Kong, which could reportedly value the business at up to USD 40-70bln. In contrast, Infineon (-0.3%) initially moved higher by around 1.3% but gave up much of this surge as the Co. initially posted a beat on Q2 revenues but did emphasise that the market environment remains competitive.

FX

AUD/NZD - Aud/Usd is firmly back above 0.7000, albeit off overnight recovery highs circa 0.7050, while Aud/Nzd remains nearer the top of its range (1.0640+) having reclaimed 1.0600 status from a low of 1.0575 ahead of the eagerly awaited RBA policy meeting. In sum, the OCR was maintained at 1.5% and the accompanying statement struck a less dovish tone than most were anticipating as rate expectations were finely balanced between 51% for on hold and the remainder predicting a 25 bp ease. However, the Bank reiterated that strength in the labour market outweighed weakness in wages and inflation, supporting the decision to stand pat again and monitor data/economic developments (domestic and external). Conversely, Nzd/Usd has drifted back down towards 0.6600 as the spotlight switches to the RBNZ amidst even greater expectations that an ease is in the offing – see the Ransquawk headline feed for a more detailed preview.

SEK/NOK - The next best performing G10 currencies as the Swedish Krona rebounds from recent lows vs the Euro through 10.7000 on a broad stabilisation in risk sentiment and despite Riksbank minutes reaffirming the more dovish shift at the last policy meeting. Similarly, the Nok has pared losses to trade back above 9.7500 against the Eur and the backdrop of steadier oil prices.

EM - The Cnh is consolidating off Monday’s lows around 6.7750 vs 6.8000+ in wake of reports that China’s Vice Premier Lui will attend the next round of trade talks in Washington and the perception if not reality that his presence improves the chances that an agreement will be reached in time to avoid the 25% tariffs on a further Usd200 bn goods threatened by US President Trump over the weekend. However, this has not done much to lift the gloom for the Try as the Istanbul rerun is not due until June 23 and as such the uncertain domestic political scene will remain for another 1 1/2 months at least. The Lira has consolidated off a 6.2000 base vs the Dollar, but Turkish assets are still underperforming and looking vulnerable.

GBP/EUR/JPY/CAD - All relatively flat vs. the buck as news-flow somewhat slowed in EU trade, albeit Brexit remains in the background with Labour leader Corbyn not partaking to today’s cross-party talks, whilst PM May is speculated to receive her departure date before the 1922 committee. Sky News’ Rigby did however note that prospects have increased for a cross-party deal, citing a Cabinet source. Cable largely was unreactive to a technical speech by Cunliffe on post-Brexit financial stability. GBP/USD remains below the 1.3100 handle (having fallen below its 50 DMA around the figure), with the next technical at its 100 HMA at 1.3077. Elsewhere, the single currency remains just around the 1.1200 level, with the European Commission Spring Forecast pushed back to around 11:30BST due to an earlier speech by the Commission’s President. The focus of the release will be Italy as press reported that the EC may warn of widening Italian budget deficit to 2.6% of GDP, above the government’s forecast of 2.4%. Moving on, the Loonie straddles just below 1.3500 vs. the Greenback ahead of Ivey PMIs later. Elsewhere, JPY remains sub-111 vs. the Buck, holding onto most of its post-Trump risk premia ahead of further trade talks this week with Vice Premier Liu He now attending, signalling high-level talks. USD/JPY remains flat around 110.50 with around 1.3bln in option expiries around 110.00-40.

FIXED INCOME

More decent block buying in the belly of the US Treasury curve is representative if not catalytic in terms of a broad and firm rebound in debt futures that has seen Bunds forge a new Eurex intraday high at 165.80, +36 ticks vs -20 ticks in wake of Lui He low, while Gilts have pushed on further with the initial catch-up baton to hit 127.36. Further ahead, traders are now eyeing upcoming comments from BoE’s Cunliffe ahead of Fed’s Kaplan and Quarles later in the day; with US JOLTS and USD 38bln in supply also on the docket.

COMMODITIES

Brent (-0.6%) and WTI (-0.4%) prices are somewhat subdued, but have been relatively steady and are currently trading within a very narrow USD 1/bbl range this morning. News flow for the complex has been relatively light, with prices largely moving in-line with the US-China driven sentiment. However, there were reports that Israel has provided the White House with intelligence regarding a potential Iranian plot to target US interest in the Gulf. Looking ahead, we have the API weekly inventory report with expectations for crude inventories to increase by 2.5mln barrels; additionally, the EIA are releasing their Short Term Energy Outlook, where they previously forecast that the US crude oil production is to average 12.4mln BPD in 2019 and 13.1mln BOD in 2020. For reference, EIA weekly crude production stood at 12.3mln BPD in last week’s release.

Gold (U/C) prices are largely unchanged on the day, with the safe haven selling off slightly following China stating that Vice Premier Liu He is to attend trade talks in the US. With the yellow metal still holding firm above the USD 1280/oz level, currently around USD 1281/oz. Elsewhere, Vale state that the Brucutu mining complex has stopped operations due to a court decision; follows on from a prior lower court decision which had stated that mining activities could resume.

LME are in talks with Chinese authorities to open its first metal warehouse in the country. (FT)

Russian oil quality from the Baltic Sea port of UST-Luga is seeing a major improvement, though the quality is still fluctuating sharply day-to-day; though supplies via the Druzhba pipeline to Poland and Germany are still suspended., according to sources. (Newswires)

Russian Energy Minister Novak says the commission has determined the source of the Russian oil contamination, 4 people have been detained regarding the contamination. (Newswires)

- Adds that they expect clean oil to reach the UST-Luga port on May 8th

- Proposed tougher regulation on oil quality control

- Expects the oil situation to be normalised in the second half of May