• European indices remain subdued [Euro Stoxx 50 -0.1%] but have grinded higher after a downbeat Asia-Pac lead as China issued a White Paper blaming the US for the deterioration in trade talks
• In FX, the DXY remains below the 98.0 handle and relatively unchanged for the session ahead of key risk events throughout the week
• Looking ahead, highlights include US mfg PMIs, ISM mfg PMI, Fed’s Quarles, Barkin and Bullard

ASIA-PAC

Asian equity markets traded negatively with risk appetite subdued as the US faces a 2-front trade war against China and Mexico, although stronger than expected Caixin PMI data helped limit losses in China. Nonetheless, a risk averse tone was seen from the reopen after China released a white paper that blamed the US for the setback of trade talks which pressured US equity futures to extend on the losses from Wall St’s worst May performance since 2010. ASX 200 (-1.2%) and Nikkei 225 (-0.9%) declined with the energy sector the underperformer in Australia after the recent oil slump, while safe-haven currency flows weighed on Tokyo stocks and with weakness in SoftBank exacerbated on reports of funding difficulties for its next USD 100bln tech fund. Hang Seng (U/C) and Shanghai Comp. (-0.3%) were initially higher after the PBoC maintained net liquidity through CNY 80bln of reverse repos and after Chinese Caixin Manufacturing topped estimates, although the gains were short-lived as trade concerns remained heavily in focus with China playing the blame game, while it is also set to draft its own blacklist of 'unreliable' entities and probe FedEx over possible infringement of Huawei’s legal rights regarding rerouted packages. Finally, 10yr JGBs were steady with only marginal gains seen despite the widespread risk aversion and the BoJ presence in the market for JPY 800bln in up to 5yr JGBs.

China State Council Information Office released a white paper which formalized its position on trade negotiationsand stated that the US government bears the responsibility for setback in trade talks, while it also noted that China does not want a trade war but is not afraid of one either. However, China also suggested negotiations remain a priority and State Councillor/Defence Minister Wei Fenghe said both sides should follow the consensus by the 2 heads of state and promote a relationship involving coordination, cooperation and stability, while a researcher at the state-backed think tank China Center for International Economic Exchanges suggested China “is expressing its wish to work together”. (Newswires/WSJ)

PBoC injected CNY 80bln via 7-day reverse repo for a net neutral position on the day. (Newswires) PBoC set CNY mid-point at 6.8896 (Prev. 6.8992)

Chinese Caixin Manufacturing PMI (May) 50.2 vs. Exp. 50.0 (Prev. 50.2). (Newswires)

UK officials alleged that a security test on Huawei 5G equipment was rigged by China to make it look safer. (Telegraph)

US

China have issued a warning against academics and students studying in the US, according to State Media; as suggested by Hu Xijin of the Chinese Global Times. (Newswires/Twitter)

US President Trump tweeted that Mexico is sending a big delegation to talk about the border and suggested that the problem is that they’ve been “talking” for 25 years and we want action not talk. President Trump also suggested they could solve the border crisis in one day if they so desired but added that our companies and jobs are coming back to the USA. (Twitter) Furthermore, Trump has confirmed that the US will end preferential trade status for India this week. (BBC)

US President Trump said White House Economic Adviser Hassett will be leaving shortly and that a replacement will be announced when he returns to the US. (Twitter)

Fed's Daly (Non-Voter, Dove) maintained forecast for economic growth at 2% and said trade discussions are creating uncertainty in the economy, while she added her stance is to be patient and wait what the details of the trade discussions are. (Newswires)

UK/EU

UK Markit/CIPS Manufacturing PMI (May) 49.4 vs. Exp. 52 (Prev. 53.1)

- New orders and employment both decline

- Stockpiling activity halts following Brexit date delay

Germany’s SPD party leader and ruling coalition partner Andrea Nahles resigned; German Chancellor Merkel says her coalition government will continue despite the setback. (BBC/Newswires) Subsequently, Germany's SPD propose Schwesig, Dreyer and Schaeffler-Guembel head the SPd temporarily after Nahles stepped down, as according to sources. (Newswires)

Italian PM Conte will today launch an ultimatum to the coalition parties to speed up government action or face his resignation, adding that he does not intend to undertake an EU disciplinary procedure. (La Repubblica)

EU Markit Manufacturing Final PMI (May) 47.7 vs. Exp. 47.7 (Prev. 47.7)

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

Major European indices began the week lower in continuation from the Asia-Pac session which was weighed on by China releasing a white-paper blaming the US for the set back in trade talks and are to draft a ‘black-list’ of unreliable entities. Throughout the mornings trade bourses have been grinding higher but are still in negative territory [Euro Stoxx 50 -0.1%]; sectors are mixed on the day with some moderate outperformance seen in Utilities, which Nomura Quants note is not sufficient to trigger an excessive volatility shock as the sell-off in cyclicals in minimal compared with prior selloffs. Notable movers this morning include Infineon (-6.4%) who are near the bottom of the Stoxx 600 after it was reported that they are to acquire Cypress Semiconductors for an enterprise value of EUR 8bln; Co’s boards have already consented to this acquisition. Elsewhere, airline names are somewhat subdued after reports that the global airline industry is to record its lowest profit in five-years, particularly easyJet (-2.1%) which is also weighed on following reports that the Co. are this week to drop out of the FTSE 100 (-0.4%). At the other end of the Stoxx, and topping the DAX are Wirecard (+2.3%) following the CEO stating they expect an outstanding H1.

FX

DXY - Overall little changed on the day thus far, following on from a relatively subdued session overnight as the index remains sub-98.00 ahead of this week’s key risk events which includes US ISM manufacturing PMI, ECB’s monetary policy meeting and US jobs data. The index remains near the middle of the intraday 97.57-80 range with gains capped by bleeding US yields.

EUR/GBP - Hardly fazed on manufacturing PMI day in which the EZ number was unrevised (as expected) whilst UK’s manufacturing sector slipped into contraction, with new orders and employment both declining whilst stockpiling paused following the Brexit delay. Sterling remains dedicated to Brexit related development as new members line up for the Tory leadership, with the latest from Environmental Sectary Gove, a front runner, reportedly considering a further extension beyond October 31st, whilst leading candidate Johnson said that if he is elected, the UK will leave the bloc with or without a deal on Brexit day. EUR/USD remains within a relatively tight 1.1157-90 range with clean air to the upside until the 1.1200 handle. Beyond that, the pair’s 50 DMA resides around 1.1208 with resistance seen at 1.1264 (May high). Meanwhile, Cable hovers around the 1.2650 mark with little seen to the upside by way of near-term tech levels. 

CHF/JPY - Both firmer on the day, albeit the Yen to a lesser extent, in a continuation of the Trump triggered risk-off mood around the market. USD/JPY fell to whisker away from the 108.00 level (low 108.08) whilst its Franc counterpart slipped further below parity vs. the Greenback. Deutsche Bank recommends “good news rallies should be sold as trade tensions may get relief rallies” as the JPY-crosses “should remain under pressure”. It’s worth keeping in mind USD/JPY sees almost 1bln in option expiries at 108.00-15 ahead of supports at 107.77 and 107.27 (Jan 10 low and 61.8% Fib respectively) whilst USD/CHF sees its 200 DMA at 0.9959 (having already tested the level) ahead of its 200 WMA at 0.9847.

AUD/NZD - Marginally firmer in the aftermath of optimistic China Caixin manufacturing data which provided the antipodeans with some relief following last week’s losses. AUD/USD hovers around the 0.6950 mark (high 0.6960, low 0.6928) despite a looming RBA rate cut, with participants on the look-out for guidance into the aggressiveness of the much-anticipated easing cycle. Meanwhile, its antipodean counterpart seems to be benefiting more as the AUD/NZD cross breached its 200 DMA (1.0624) as it tests the 1.0600 level ahead of its 50 DMA (1.0571)

FIXED INCOME

Fixed income yields have kicked off the day in the red, with slipping yields spurred on by trade once again as the Chinese contingent released their formalized position on trade negotiations, not unsurprisingly blaming the US for the setback. This has seen core EU and UK 10yr debt futures trade with gains of over 20 ticks each. Bunds saw little inspiration from the unrevised manufacturing PMIs in Germany and the EZ, but 10yr Gilt futures surged past their daily peaks to set a new liffe high of 130.04 after UK Manufacturing PMI slipped into contractionary territory as a result of halted stockpiling activity after the Brexit delay.

Moving stateside, futures are higher across the curve with the longer end outperforming and some bull steepening noted. This comes as the aforementioned trade tensions, alongside comments from Fed’s Daly stating that tariffs have contributed to inflation, have driven demand for debt. 10yr yields thus have slipped to their lowest point since 2017 at 2.08%, and 2 year yields are set for their biggest 2 day fall since the crisis, with 23bps already shed. Traders will now be looking forward to the US manufacturing PMI print ahead of potential comments from Fed’s Quarles, Bullard and Barkin.

COMMODITIES

WTI and Brent futures are recovering off Asia-Pac lows with the former back above the 53.00/bbl handle and climbing towards the next round figure, whilst the latter is attempting to turn positive on the day having already dipped below the 61.00/bbl figure overnight. The weekend saw the release of Russian May crude production which stood at an 11-month low at 11.11mln BPD, down from last month’s 11.24mln BPD, although this was mainly due closures from the Druzbha pipeline due to oil contamination. Elsewhere, Saudi reported a M/M decline in oil output to 9.65mln BPD from the prior 10.05mln BPD, whilst the Kingdom’s energy minister stated that Saudi is committed to do whatever is required to stabilise the oil market. GS takes into account the supply/demand side concerns and net-net expects prices to remain volatile in the coming months, albeit around current levels. Turning to OPEC, the bank sees higher production from Saudi, Russia, UAE and Kuwait to offset Iranian and Venezuelan shortfalls. Thus, GS expects backwardation to persist in the coming months, whilst also revising lower its Q2 Brent forecast to 65.50/bbl from 72.50/bbl, also citing spare capacity created by a new Permian pipeline. Elsewhere, gold (+0.7%) benefits from its safe haven characteristics and extends gains above its 1300/oz level whilst copper prices are seeing some reprieve following last week’s slump as the red metal was underpinned by optimistic Caixin manufacturing data from China.

Goldman Sachs suggest that oil prices may recover from here due to a tight EU crude market, sudden moves lower, OPEC's reluctance to increase supply and above consensus growth forecasts, However, increasingly uncertain macro outlook, rising production an OPEC spare capacity suggests prices at likely to remain around current levels with high volatility. (Newswires)

Saudi Energy Minister Al Falih states that Saudi Arabia are committed to do whatever is required to stabilise oil markets, adds that he is confident based on discussion with several oil producers that we will do what is required to keep market stability after June, by drawing inventories down from their current elevated levels. (Newswires)

Russian Deputy Energy Minister expects steps to resolve the contaminated oil situation to be carried out as planned. (Newswires)

Norwegian Oil Industry says that a strike would reduce output by 440k BPD. (Newswires)