• European Indices [Euro Stoxx 50 -1.6%] are firmly in negative territory, as the risk-off sentiment spills over from the Asia-Pac session
• US Treasury’s currency report stated that no major trading partner met the currency manipulation list; but 9 countries, including China, have been placed on the watchlist
• Looking ahead, highlights include, BoC Rate Decision, ECB’s Visco, supply from 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 (-0.7%) and Nikkei 225 (-1.2%) 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 (-0.6%) 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

Chinese Foreign Ministry hopes that US will refrain from conducting unilateral assessments of other countries currency levels, and that the US is not in a position to decide which countries manipulate currencie. (Newswires)

US

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)

UK/EU

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.

Italian PM Conte is reportedly seeking support from Deputy PM Salvini to maintain current government coalition. Separately, 5 Star Senator Paragone is reportedly to offer resignation it Italian Deputy PM Di Maio. (Newswires)

ECB Financial Stability report states that challenges to financial stability are increasing amid downside risks to the economic outlook.

- Economic recovery in the Euro area has been delayed but not derailed

- Corporate bond markets and liquidity conditions remain fragile despite bond price recovery in 2019

ECB’s Mersch (Hawkish) states that as central banks we must remain true to the core mandate, the capacity to adapt to evolving needs must be retained but this must not come at the expense of independence or accountability. (Newswires)

ECB's Rehn (Neutral) says that the ECB should review their monetary policy strategy in the medium and long term; at some point a strategy review is needed, but he would not touch the ECB mandate; need credible guidance and backed up if needed. Should look at the definition of price stability, view is that 2% is not a ceiling. And that it is no secrete they have discussed negative rates impact, on the idea of of ECB guaranteeing Govt. debt, says central banks are forbidden from monetary financing. Separately, states that the first hike is now further away than it was a few months ago. (Newswires)

German Unemployment Chg SA (May) 60k vs. Exp. -8.0k (Prev. -12.0k); Labour office cites special effects and slowing economy. (Newswires)

GEOPOLITICAL

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)

Iranian President Rouhani says the door to discussions with the US is not closed as long as they lift sanctions on Iran and fulfills its commitments. (Newswires)

EQUITIES

European equities are lower across the board [Eurostoxx -1.6%] following on from a downbeat session in Asia as sentiment took the queue from Wall Street after the E-Mini S&P took out the 2800 level to the downside. Sectors are all in the red with IT names lagging after Huawei signalled that it is pressing ahead with its lawsuit against the US government as US-China tech tensions intensify. Defensive stocks such as utilities and healthcare names are somewhat faring better, albeit still in the red. In terms of individual movers, ProsiebentSat1 (+4.0%) spiked higher amid reports that Mediaset (-0.8%) are to purchase a 9.1% stake in the company, which would grant 9.9% of voting rights, although Mediaset noted that they do not seek board representation. Elsewhere, Casino (-4.6%) shares slid after the company announced that it will not pay an interim dividend this year, whilst S&P downgraded its credit after its parent company entered French safeguard procedures. Finally, ArcelorMittal (-4.0%) opened lower by as much as 7% after cutting production guidance in Europe amid weak market demand. In light of the recent sell-off in stocks amid trade woes, Nomura believe that the downside can be seen as orderly and sentiment is not out of control. The analysts state that the recent sell off in equities is being fuelled by transient stock selling via speculative players and a seasonal rise in volatility, as global equities pass through a predictable second wave of selling. Following the E-mini S&P’s declined below 2800, eyes turn to the cash market at the US open where Nomura warns that “CTAs have been pressed to close out long positions and cut their losses once the S&P 500 broke below 2,820”, but CTAs have already unwound over 80% of their longs, thus the risk of a chain reaction sell-off has diminished.

FX

CHF/JPY/USD - The Franc’s resurgence or rebound from yesterday’s lows seems symptomatic of the wider safe-haven demand and deeper risk-off sentiment. Usd/Chf has retreated towards 1.0050 again vs a fraction shy of 1.0100 at one stage on Tuesday, while Eur/Chf is drifting back down to 1.1200 compared to almost 1.1280, albeit with the single currency under pressure independently on the back of latest bleak German data – see below. Usd/Jpy has also recoiled to retest key Fib support ahead of 109.00 at 109.23 (Fib retracement level) having bounced firmly to just over 109.60, but decent option expiry interest may prop up the headline pair (1 bn between 109.00-15) on top of anticipated buying interest at the big figure. Note also, the Buck has extended its recovery in wake of upbeat US consumer confidence and with the aid of gains vs riskier/high beta currencies, with the DXY back above 98.000, albeit just and eyeing last week’s 98.373 ytd best within a 98.043-97.861 range.

NZD/CAD/GBP/AUD/EUR - All softer vs the Greenback, and with the Kiwi underperforming after the latest RBNZ FSR and NBNZ business survey showing that expectations remain weak. Nzd/Usd has slipped back below 0.6550 to around 0.6515, with the Aud/Nzd cross climbing over 1.0600 again even though the Aussie is also struggling to retain 0.6900+ status following yet another uber dovish RBA call overnight as JPM is now predicting a total of 100 bp worth of easing by mid-2020. Elsewhere, the Loonie is really trading on the defensive as the clock ticks down to a potentially dovish BoC with Usd/Cad not far from 1.3520+ late April peaks and options pricing a circa 53 pip break-even over the event – see our policy meeting preview on the Research Suite. Meanwhile, Cable is slipping further from 1.2700 towards the big figure below as another Tory leadership hopeful joins the list and the EU stresses no renegotiation of the WA, and Eur/Usd is hovering just above 1.1150 stops having failed to hold above the 30 DMA (1.1191) again. Note, a shock jump in German unemployment and uptick in the jobless rate that was only partly mitigated by a reclassification of the labour force also weighed on the Euro as noted above.

NOK/SEK - Divergence between the Scandi Crowns as Eur/Nok rebounds through 9.7500 amidst another retreat in oil prices (that may also be niggling the Cad), but Eur/Sek is capped around 10.7000 after significantly stronger than forecast Swedish Q1 GDP data (largely due to a healthy export contribution vs depressed domestic consumption however).

EM - Contrasting fortunes for the Lira and Rand as well, like yesterday, as Usd/Try revisits 6.0000, but Usd/Zar pivots 14.8000 within 14.8900-7000 parameters on a further fall-out from SA political developments and the return of Mabuza to Ramaphosa’s fold.

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

Swedish GDP QQ (Q1) 0.6% vs. Exp. 0.2%

- Swedish GDP YY (Q1) 2.1% vs. Exp. 1.7%

FIXED INCOME

Not quite déjà vu, but 10 year benchmarks have eased back from best levels ahead of the halfway stage in Europe as they did on Tuesday. However, Bunds remain in positive territory despite a strong Bono-led rebound across the Eurozone periphery including BTPs and relatively close to the 168.00 handle after a strong Bobl sale, while Gilts set a fresh Liffe high of 129.58 (+30 ticks) before losing momentum and US Treasuries are hugging the peaks of overnight session ranges after the 10 year note topped out at 125-24+ vs Fib resistance at 125-27. Note, the 10 year US yield has breached 2.25% and 7 year cash is sub-2.15% ahead of tonight’s supply that is normally well received by indirect bidders that comprise overseas buyers, but could conceivably see less demand from China due to ongoing trade/diplomatic strains, along with other foreign sponsors ruffled by the latest/longer list of names on the US FX manipulation list.

COMMODITIES

WTI (-2.3%) and Brent (-2.0%) futures continue to free-fall amidst the risk-off tone in the market, with the former extending loses below the psychological USD 58.00/bbl and under its 100 DMA at USD 58.46/bbl. Similarly, its Brent counterpart trades south of the USD 69/bbl level and closer to the USD 68.50/bbl mark. News flows has been relatively light in the complex although the Druzhba pipeline will be pumping clean oil to Hungary as of 1700BST following the halt in operations amid contaminated oil from Russia in mid-April. Turning to OPEC, ahead the upcoming meeting of the cartel (date yet to be confirmed), Kazakhstan’s Energy Minister noted that it stands ready to join the extension of the global oil cut deal if the decision in taken. On that front, Russia’s First Deputy PM noted that they will consider an extension to the deal but have arguments in favour and against an extension, adding that Moscow will continue to weight the arguments. Finally, as a reminder, the API crude inventory data will be released tonight due to US’ market absence on Monday, and thus the EIA release has been delayed until tomorrow.

Over in the metal complex, gold (+0.4%) continues to rise despite a firmer USD as investors flee to the safe haven amid the current risk aversion; meanwhile, copper (-0.8%) falls in tandem with the risk tone. Further for the red metal, workers at the Chilean Chuquicamata copper mine of have been voting on a potential strike after labour unions rejected management’s final offer on wages. The results of the vote are expected this evening.

Russian Deputy PM says we will consider an extension of the OPEC+ agreement. (Newswires)

Hungary has begun pumping oil through the Druzhba pipeline., Tass. (Newswires)

Russian Kremlin states that President Putin and Belarus President Lukashenko are yet to discuss compensation regarding the compensation for contaminated oil, Tass. (Tass)

Around 200 Norwegian oil workers are threatening strike action as of the 4th June, unless a wage deal is achieved., according to Labour Union. (Newswires)