• European Indices are firmly in negative territory [Euro Stoxx 50 -1.7%] following US Presidents Trump’s plans to place tariffs on Mexican goods at an initial level of 4%
• China’s Global Times Editor states that China will take major retaliatory measures against the US placing Huawei and other Chinese companies on an Entity List
• In FX, the Mexican Peso underperforms while safe haven JPY benefits from the risk-off tone
• Looking ahead, highlights include German CPI (Prelim), US Core PCE Price Index, Personal Income, Chicago PMI & University of Michigan Sentiment, Fed's Williams & Bostic

ASIA-PAC

Asian equity markets traded mixed heading into month-end with early pressure seen after US President Trump announced to place 5% tariffs on all goods from Mexico from June 10th, which will increase to as much as 25% by October 1st and remain there until Mexico addresses the illegal immigration inflows to the US through its territory. The announcement pressured US equity futures to give back the prior session’s gains in which the Emini S&P breached its 200DMA to the downside and the DJIA briefly slipped below the 25K level, with Wall St on track for its worst monthly performance YTD. ASX 200 (Unch.) was lower for most the session with tech and energy the underperformers although strength in gold and other mining names stemmed the downside in the index, while Nikkei 225 (-1.6%) suffered from currency flows and with automakers spooked by fears of a trigger-happy ‘Tariff Man’. Hang Seng (-0.8%) and Shanghai Comp. (-0.2%) were mixed as participants digested varied Chinese PMI data in which Manufacturing PMI fell short of estimates and slipped into contractionary territory but Non-Manufacturing PMI printed inline, and although the PBoC refrained from open market operations, its efforts this week resulted to a total net injection of CNY 430bln. Finally, 10yr JGBs followed suit to the upside in T-notes as Trump’s announcement spurred safe-haven demand, while the BoJ were also present in the market for JPY 680bln of JGBs in the belly to super long-end.

PBoC skipped open market operations for a net weekly injection of CNY 430bln vs. CNY 100bln net injection W/W. (Newswires) PBoC set CNY mid-point at 6.8992 (Prev. 6.8990)

PBoC Deputy Governor says to keep liquidity ample via various monetary tools and will maintain low RRR for smaller banks. (Newswires)

Chinese Manufacturing PMI (May) 49.4 vs. Exp. 49.9 (Prev. 50.1). (Newswires) Chinese Non-Manufacturing PMI (May) 54.3 vs. Exp. 54.3 (Prev. 54.3) Chinese Composite (May) 53.3 (Prev. 53.4)

China reportedly quietly adjusted tools for handling capital flows in which it increased the number of indicators and conditions for banks to consider to manage their risks. (Newswires)

China Global Times Editor tweets that based on what he knows "China will take major retaliative measures against the US placing Huawei and other Chinese companies on Entity List. Beijing will not wait passively and more countermeasures will follow" (Twitter) Subsequently, Chinese Commerce Ministry says that they are to draft a list of 'unreliable' entities, targeting foreign players that harm the interest of Chinese firms. Prior to this, Synopsys, the world’s largest supplier of chip design tools have stopped providing software updates to Huawei and have placed new intellectual property sales to Huawei on hold., as according to Nikkei citing sources. (Newswires)

Bank of Korea kept its benchmark rate unchanged at 1.75% as expected, while the decision was not unanimous as board member Cho dissented and called for a cut. Furthermore, the BoK said exports are to gradually recover and consumption will continue to grow but added that trade risks have increased which contributes to uncertainties for Korea. (Newswires)

US

US President Trump announced a 5% tariff on all goods coming from Mexico beginning June 10th until illegal immigrants coming through Mexico to the US stop. Trump added the US will begin raising tariffs on Mexico beyond 5% on July 1st and will continue until it reaches 25% on October 1st, where they will remain unless and until Mexico significantly stops illegal inflow of aliens through its territory. (Newswires/Twitter)

Mexico Deputy Foreign Minister Seade said the tariffs would be disastrous and that Mexico would respond strongly if tariffs are carried out. Seade also commented that this was an unexpected move by Trump and is very extreme, while he added that the normal route would be to mirror the tariffs although that would lead to a trade war. (Newswires)

USTR Lightizer told congress they are submitting a draft statement of administrative action to implement USMCA deal, while US House Speaker Pelosi commented that the decision to expedite USMCA process is not a positive step. (Newswires)

UK/EU

ECB's Visco says that Italy's increase in 2019 debt-to-GDP ratio could exceed the forecast Govt. budget due to lower than expected privatization proceeds; says it is counter-productive to raise public deficit and risks triggering a restrictive expansion

Italian Finance Minister Tria is reportedly to tell the EU that Italian debt is sustainable and manageable., (Repubblica)

German Saxony State CPI YY (May) 1.4% (Prev. 1.9%)

- German Saxony State CPI MM (May) 0.3% (Prev. 0.9%)

GEOPOLITICAL

US has delayed tougher sanctions on Iran's petrochemical sectors in an attempt to dial back tensions, according to WSJ citing sources. (WSJ)

EQUITIES

European Indices trade firmly in negative territory this morning [Euro Stoxx 50 -1.7%] as sentiment took a hit as US President Trump revisited his ‘Tariff Man’ persona by announcing the placement of 5% tariffs on all goods stemming from Mexico as of June 10th; which may increase by up to an additional 20% by October 1st. Currently eight automakers including Volkswagen (-3.6%) and Fiat Chrysler (-4.6%) operate plants in Mexico, as such the Stoxx 600 Auto Sector (-2.8%) is significantly lagging its peers with the Dax (-1.6%) the underperforming bourse due to automakers/parts having around a 14% weighting in the Dax. Auto names aside, other companies with exposure to Mexico have been significantly affected by President Trump’s announcement with the likes of Tenaris (-4.7%) afflicted due to the Co. operating one of the world’s largest manufacturing centres for steel tubes in Mexico. Elsewhere, Italian banks are at their lowest level since November 2016 due to the ongoing internal political tensions as well as the potential for Italy to face EU disciplinary procedures in the form of a EUR 3.5bln fine. Other notable movers this morning include Wirecard (-11.3%) who are lagging the Stoxx 600 after reports that several public prosecutors are said to see the Co. as the central payment processor for the fraudulent trading site Option888. Bucking the risk-off sentiment and at the other end of the Stoxx 600 are Whitbread (+1.9%) after the Co’s board decided that the second phase in their three phase capital programme is a GBP 2bln tender offer.

Of note for US equities Ford (F) and General Motors (GM) have auto plants in the US and the Co’s are currently down by around -3.35 and -5.1% respectively in the pre-market.

FX

DXY - The broad Dollar and Index are on the backfoot this morning with DXY now back below 98.000, albeit marginally. The Buck awaits key US data in the form of April PCE prices as traders look for any clues if the “dip in inflation was transitory” as the Fed stated at its most recent meeting. On a technical front, to the downside DXY sees its 50 DMA just under the 97.50 level at 97.47 ahead of clean air down to 97.00.

MXN, CAD - The clear underperformers today, more-so the Peso after President Trump dampened USMCA hopes by taking aim at Mexico. The Peso immediately saw downside and continued that trajectory throughout the session, with USD/MXN spiking higher from around 19.1500, through its 50 WMA (19.2766) and 200 DMA (19.3360) to a high of 19.7360. Meanwhile, from Canada’s side, the potential ramifications on the USMCA deal, coupled with lower energy prices sent USD/CAD higher to around 1.3550 from a low of around 1.3494 ahead of a barrage of Canadian data including Q1 GDP.

JPY, CHF - The Yen stands as the clear G10 outperformer this morning amid the overall risk aversion in the market with downside vs. the USD exacerbated as Trump spills his trade war into Mexico. USD/JPY cleanly broke below the 109.00 figure and continues to lose ground below the level, having traded within a wide 109.62-108.76 band, with buyers reported at 108.75 ahead of the Jan 28 low just above 108.50. Following the latest developments, Morgan Stanley believes that a breach below 109.00 support opens downside potential to 107.70. Meanwhile, the Swiss Franc also posts gains, albeit to a lesser extent, with traders speculating potential SNB intervention to keep the CHF strengthening further. USD/CHF currently rests just above the 1.0050 mark ahead of its 100 DMA at 1.0037.

EM - The EM space is weaker across the board amidst the Trump-sparked collapse in the Mexican Peso, albeit the TRY has shown some resilience as it consolidates following yesterday’s stellar performance. However, geopolitical risks for the Lira remain as the Turkish Foreign Ministry spokesperson has dismissed reports that the Russian S-400 delivery will be delayed, which comes after US pressured the country to dump the USD 2.5bln deal with Russia, which contradicted prior reports that the Russian system will be delivered ahead of scheduled. Either way, markets are looking at any potential US sanctions on Turkey if the delivery does go through, which Turkey noted was "a done deal"

AUD, NZD, EUR, GBP - All marginally firmer against the Greenback (ex-GBP), albeit more due to a pullback in the USD than individual factors. The Antipodeans were little fazed by the overnight miss in the Chinese NBS manufacturing PMI as currencies await the Caixin release next week alongside the RBA’s “live” rate decision and Aussie GDP. Elsewhere, the expectations for a post-Easter collapse sees the EUR largely shrugging off the downticks in German state inflation numbers, as markets gear up for the national release at 1300BST. EUR/USD resides closer to the top of today’s 1.1126-54 band with resistance reported at 1.1155 ahead of 1.1170. Meanwhile, the Pound has lost some ground in recent trade, particularly vs the EUR with some citing RHS demand and EUR/GBP bids at 0.8850 as factors.

Indian government are likely to announce a "big bang" economic reform package in the first 100 days of the new Modi government, according to a government think tank official. (Newswires)

Turkish Central Bank will continue to use all available instruments to effectively achieve price stability, and to support financial stability. (Newswires)

S&P upgraded Indonesia's sovereign rating to "BBB" from "BBB-"; outlook stable. (Newswires)

FIXED INCOME

Bund yields continued their regression and have once again set a new record low of -0.206%, whilst UK 10yr Gilt yields have followed suit and hit 2016 lows of 0.861% after more trade sabre rattling reverberated around markets, including a tariff double down comment from VP Pence and Hu Xijin suggesting China are to take “major” retaliative measures. This coupled with the contractionary Manufacturing PMI from China has seen the majority of fixed income futures and the risk-off mood pick up steam ahead of the release of German CPI, which based on the state releases thus far is likely to see a moderation on both a YY and MM basis. Italian debt is bucking the bucking the higher price trend, however, and underperform their counterparts (10yr -80 ticks) after comments suggested their Finance Minister is to tell the EU that all is well with Italian debt, despite suggestions it is unsustainable, with the domestic CPI print failing to offer support to the Italian economic woes.

Turning stateside, futures are higher across the curve, with the majority of the action in the longer end as the aforementioned Chinese tensions have been coupled with additional North American tension after the President announced a 5% tariff on Mexican goods as of June 10th until illegal immigrants coming through Mexico to the US stop. This has seen 10yr yields slip to sub-Sept. 2017 nadirs of 2.168%, with the August 2017 2.124% low eyed up next on the downside should more bearish impulses be struck by Bostic and Williams later in the day after the release of Core PCE. 

COMMODITIES

Commodities are mixed with the energy markets plumbing the depths as risk sentiment further deteriorates amid trade war escalations coupled with rising US crude production. WTI (-2.1%) straddles around the USD 55/bbl level, having already dipped below the figure whilst its Brent (-2.5%) counterpart follows the same trajectory as it hovers around USD 64.50/bbl. Furthermore, some geopolitical risk premium may have also unwound in the oils amid reports that US has delayed tougher sanctions Iran's petrochemical sectors in an attempt to dial back tensions. Elsewhere, gold (+0.6%) benefits from the risk aversion and the receding USD as it creeps closer to the USD 1300/oz level, whilst copper extends its decline below the USD 2.600/lb level amid the soured risk tone coupled with disappointing Chinese PMI data.

OPEC oil output in May declined 60K bpd from April to 30.17mln bpd which was the lowest since 2015, while compliance to supply cut deal was at 96% vs. Prev. 132% M/M, according to a Reuters survey.  (Newswires)

US Secretary of State Pompeo said attacks on oil tankers in the Gulf was an effort by Iranians to raise global crude prices, while the US Special Envoy for Iran Hook said any countries purchasing Iranian crude oil after expiration of waivers will be subject to sanctions. Subsequently, the Iranian Foreign Ministry has rejected the "baseless" accusations by Saudi Arabia that Iran attacked Saudi tankers and targeted pipelines, Iran added that Saudi has joined US and Israel to mobilise opinion against Tehran. (Newswires)