• Asian indices are subdued following on from their US counterparts where the E-mini S&P dropped below the 2800 level as US-China tensions remain a key trading theme
• US Treasury released their currency report placing 9 countries, including China, on the watchlist but did not name any as manipulators
• Looking ahead, highlights include French GDP, German Unemployment, BoC Rate Decision, ECB’s Weidmann, Mersch, Rehn & Visco, supply from Germany and the US

ASIA-PAC

Asian equity markets were mostly lower following the headwinds from US where all major indices declined on return from the extended weekend and in which the E-mini S&P eventually broke below the 2800 level. The weakness was attributed to lingering trade tensions after Chinese press pointed the blame on US for the recent breakdown in talks and as the outspoken Global Times Editor suggested China is seriously considering restricting rare earth exports to the US. ASX 200 (-0.8%) and Nikkei 225 (-1.3%) were negative with broad weakness seen across nearly all sectors in Australia and with financials subdued by the recent declines in global yields, while currency strength added to the pressures for Tokyo stocks. Hang Seng (-0.5%) and Shanghai Comp. (-0.1%) declined amid the trade uncertainty and as early data indicators reportedly suggested China’s economy weakened this month, although the losses were cushioned by a substantial liquidity operation of CNY 270bln which resulted to the PBoC’s largest daily net injection since mid-January. Finally, 10yr JGBs were higher as they tracked the upside in global counterparts amid declining yields and the negative risk sentiment, which lifted prices of the Japanese 10yr benchmark to above 153.00 and its best level since early April.

PBoC injected CNY 270bln via 7-day reverse repos for a daily net injection of CNY 250bln. (Newswires) PBoC set CNY mid-point at 6.8988 (Prev. 6.8973)

UK/EU

Further reports suggest UK opposition Labour Party leader Corbyn is reportedly ready to back a 2nd Brexit referendum and may announce backing it within days. (The Mirror)

UK PM May says Brexit is now a matter for her successor, which indicates PM May will not put the WA to a vote in Parliament next week. (Newswires)

UK HoC Speaker Bercow said he has no plans to stand down as Speaker of the House of Commons, despite speculation that he would retire this summer. The Guardian infers that this moves risks angering hardline Eurosceptics who believe he wants to thwart a no-deal Brexit. (BBC/Guardian)

UK Foreign Secretary Hunt is losing support to Environment Secretary Gove after stating yesterday that seeking a policy of leaving without a deal would be political suicide, though he has previously said he would chose no-deal over no-Brexit; subsequently, MP’s have reportedly stated they are no longer backing Hunt, with some switching to supporting Gove. (Times)

CBI stated that business and professional services companies reported the steepest drop in work volume since August 2012 and were extremely negative regarding outlook for year ahead. (Newswires)

German Chancellor Merkel said the EU summit on top jobs was good and harmonious, while she wants the Commission President candidate settled by the June summit. (Newswires) However, reports suggest that German Chancellor Merkel and French President Macron are at odds over appointments for top jobs within the EU with Macron continuing to resist Merkel’s suggestion of Manfred Weber for EU Commission President, suggesting EU Chief Negotiator Barnier as a potential compromise candidate. (Newswires) Note, a formal decision will be made at the June 20-21st EU summit.

UK BRC Shop Price Index (May) Y/Y 0.8% (Prev. 0.4%). (Newswires)

FX

DXY was steady overnight and remained within close proximity to retest the 98.00 level to the upside after having found support from better than expected US Consumer Confidence data, while its major counterparts traded subdued after EUR/USD and GBP/USD recently failed attempts to reclaim the 1.1200 and 1.2700 handles respectively. Elsewhere, the risk averse tone dampened USD/JPY and early upside in antipodeans was thwarted as the Australian 10yr yield dropped below the RBA Cash Rate Target of 1.5% and with JPMorgan calling for 4 rate cuts by the RBA to 0.50% by mid-2020, while NZD/USD was lacklustre after the RBNZ Financial Stability Report proved to be a non-event and as Business Confidence data remained at a contraction. CNH also marginally softened as the PBoC continued to set the mid-point closer towards 6.9000 and after the US Treasury released its long-awaited currency report in which it refrained from naming any countries as currency manipulators but placed 9 in its monitoring list including China (others included Ireland, Italy, Vietnam, Singapore, Malaysia, Japan, South Korea and Germany; Switzerland and India were removed) which it urged to avoid a persistently weak currency.

RBNZ Financial Stability Report said the financial system remains resilient to a broad range of economic risks but added that risks remain elevated and are largely unchanged in the past 6 months. Furthermore, it stated that there is a need for some insurers and non-bank deposit takers to improve capital buffers and that current LVR settings remain appropriate, while further easing in LVR is subject to continuing subdued credit and house price growth. (Newswires)

New Zealand ANZ Business Confidence (May) -32.0 (Prev. -37.5). (Newswires) New Zealand ANZ Activity Outlook (May) 8.5 (Prev. 7.1)

COMMODITIES

Commodities were mostly lower amid the risk avers tone with WTI crude futures back below the USD 59.00/bbl level in a continuation of this week’s choppy price action and Brent crude retreated from USD 70/bbl amid touted book squaring due to option expiries yesterday, while focus turns to the holiday-delayed inventory reports beginning with API stockpiles due after-hours in today’s US session. Conversely, gold prices were marginally underpinned by safe-haven demand, while copper was subdued by the downbeat sentiment and as Chinese benchmark iron ore futures pulled back from record levels.

Chile's Codelco said the US-China trade war has a "phenomenal" impact on copper and that the volatility makes investment decisions harder, while it sees copper demand growing 1.8% and supply growing 1.6% in 2021. (Newswires)

GEOPOLITICS

US StateDepartment said it is alarmed by Russian and Syrian government airstrikes in North West Syria, while it also commented that the entire weapons of mass destruction programme in North Korea violates the UN resolution. (AFP/Newswires)

US is considering suspending training for Turkish pilots on F-35 fighter jets due to Ankara's plan to buy Russian air defence system, according to sources. (Newswires) 

US

The Tplex traded directionally higher on Tuesday, with new contract highs made in Ultra longs, USM9s, Ultras and TYM9s. Looking at the curve, the belly saw the largest fall in yields, with 7-year yields posting 19-month lows; the front-to-belly saw curve flattening with the 2s/10s spread settling c. 2bps flatter, whereas the 10/s/30s steepened by c. 1.3bps. Elsewhere, the US 2-year auction was solid, stopped through the screens by 1bps (high yield 2.125%). Cover was firm at 2.75x (highest since August 2018), above recent averages and the previous. Dealer take down fell beneath recent averages as well as the prior (26.2%, the lowest since Jan 2018vs 36.1% six-auction average), leaving directs with 27.2% (largest since May 2016, six auction average 16.4%), and indirects with 46.6% (slightly beneath the 47.6% six-auction average). The 5-year auction was more in line with recent auctions, stopping through the screens by 0.2bps on a high yield of 2.065% (lowest yield since October 2017), covered 2.38x (six auction average 2.36x). Dealers took a touch below recent averages at 24.2% (largest share since January, six auction average 26.3%), directs took 18.4% (highest since February, and up from 15% six-auction average), leaving indirects with 57.5% (a shade beneath the 58.6% six-auction average). US T-note futures (M9) settled 16 ticks higher at 125-12+.

US Treasury said no major trading partner met currency manipulation list but added that China, Germany, Japan, Ireland, Italy, South Korea, Malaysia, Singapore and Vietnam warrant placement on its currency monitoring list (Switzerland and India were removed). Furthermore, it lowered 2 thresholds used to designate FX manipulators and urged China to take necessary steps to avoid a persistently weak currency. (Newswires)

FOMC Discount Rate Minutes stated that all 12 Fed regional banks supported keeping discount rates steady before 30th April meeting and that no sentiment was expressed for changing the rate, while directors said the FOMC should continue with patience on rate moves. (Newswires)

Canadian Government is to formally present a bill to its parliament on the ratification of the USMCA on Wednesday, according to a source. (Newswires)