• Asian indices are mixed with sentiment subdued by the lack of Mexico tariff progress and as Chinese agencies are discussing opinions on countermeasures against the US
• In FX, the DXY is flat but at prior session highs with G10 peers subdued as a result
• Looking ahead highlights include; German Industrial Production, EZ GDP (Revised), US International Trade, Initial Jobless Claims, Labour Cost & Productivity, ECB Rate Decision & Staff Projections, BoE’s Carney, ECB’s Draghi, Fed’s Kaplan & Williams. Supply from Spain & France

ASIA-PAC

Asian equity markets trade somewhat mixed with the region cautious after hopes of an agreement to avert Trump tariffs on Mexico have so far failed to materialize, although officials will continue discussions on Thursday. Nonetheless, ASX 200 (+0.5%) and Nikkei 225 (+0.3%) remained afloat as Australia continued to ride the wave of the lower rate environment and amid broad gains across the sectors aside from mining names, while the Japanese benchmark was also higher but with gains capped amid an indecisive currency, as well as weakness in automakers including Nissan and Mitsubishi Motors after Fiat abruptly withdrew its merger proposal for Renault. Hang Seng (+0.1%) and Shanghai Comp. (-0.7%) were mixed ahead of their extended weekend with initial weakness seen as Chinese press continued to point the blame on the US for the breakdown of negotiations and with Chinese agencies said to be collecting opinions on further countermeasures against the US. However, some of the losses were later pared after the PBoC announced CNY 500bln in 1-year MLFs and reiterated to keep liquidity in the banking system ample. Finally, 10yr JGBs pulled back to below the 153.50 level amid mild gains in Japanese stocks and as yields recovered from multi-year lows, while the enhanced liquidity auction for longer-dated JGBs also showed slightly weaker demand.

PBoC injected CNY 10bln via 7-day reverse repos and announced a CNY 500bln 1-year MLF operation. (Newswires) PBoC set CNY mid-point at 6.8945 (Prev. 6.8903)

US President Trump said China wants to make a deal and that he has no doubt about it, while he added China's signals show it wants to make a deal and that it will probably happen at the right time. (Newswires)

US lawmakers reportedly offered legislation which would increase oversight on some Chinese companies. Elsewhere, there were also reports the US Defence Department held talks with Mkango Resources and other rare earth projects about supplies of critical minerals, while it is said to be working on connecting rare earth development projects with financiers. (Newswires)

Chinese Global Times Editor said more than one Chinese key department are collecting experts' opinion on further countermeasures against US suppression. (Twitter)

UK/EU

UK Trade Minister Fox said a trade deal is possible soon after Brexit although the ratification process will take some time. (Newswires)

FX

In FX markets, the DXY was flat near the prior day’s highs above the 97.00 level after stronger than expected ISM Non-Manufacturing PMI data inspired a turnaround during US hours, and as Fed’s Kaplan pushed back on rate cut bets in which he suggested a preference for patience and that it was too early to make judgments on rates. As such, the greenback’s major counterparts were subdued with EUR/USD and GBP/USD despondent after their recent failure to hold onto the 1.1300 and 1.2700 handles respectively, while price action in USD/JPY was contained by the indecisive risk tone and large option expiries totalling USD 7.1bln for today’s New York cut circa 108.00-108.50. Elsewhere, antipodeans traded lacklustre following mixed Aussie trade data and with ANZ Bank calling for 2 more RBA rate cuts this year in August and November, although the biggest mover overnight was MXN which weakened after Moody’s revised Mexico’s outlook to negative from stable and Fitch cut its rating by one notch to BBB. Losses were then exacerbated after officials failed to reach a deal on tariffs and immigration.

Australian Trade Balance (AUD)(Apr) 4871mln vs. Exp. 5100mln (Prev. 4949mln, Rev. 4887mln). (Newswires) Australian Exports (Apr) M/M 3% (Prev. -2.0%) Australian Imports (Apr) M/M 3% (Prev. -2.0%)

Moody's revised Mexico outlook to Negative from Stable and affirmed rating at A3, while Fitch downgraded Mexico rating to BBB from BBB+; outlook revised to Stable from Negative. (Newswires)

Japanese Finance Minister Aso will meet with US Treasury Secretary Mnuchin to discuss currency clause at the G20. (Newswires)

COMMODITIES

Commodities were mostly uneventful overnight to provide oil some respite from the prior day’s losses in which WTI briefly fell below USD 51.00/bbl after a surprise build in headline EIA crude inventory data and with the other components of the report also bearish. Elsewhere, gold prices stabilized after the recent pullback from 3-month highs with price action hampered as the greenback held firm, while copper languished amid underperformance in China ahead of the long weekend and as Dalian iron ore futures were pressured by anticipation of increased supply.

US refiners warned the Trump administration that tariffs on imports from Mexico could severely impact refiners and raise gasoline prices just as the US driving season kicks into high gear. (Newswires)

Former US Energy Secretary Moniz said there is sufficient capacity to compensate for a supply disruption in the order of 1mln bpd. (Twitter)

US

The Treasury curve steepened on Wednesday. After a grim ADP report, money markets priced 66% probability of three rate cuts in 2019, although this pricing was pared back after a solid non-manufacturing ISM report, which augurs well for the employment situation report due Friday. There were reports that accounts were buying the dip after dovish Brainard comments. Major curve spreads were wider at settlement, with the 2s30s spread at the highest level in over a year. US T-note futures (M9) settled 1+ ticks higher at 126-20+.

Fed’s Beige Book stated the US economic activity expanded at a modest pace from April through mid-May and was a slight improvement from prior period, while business contacts reported concerns about international trade tensions across sectors such as manufacturing and agriculture. Furthermore, US manufacturing reports were generally positive although some noted slowing activity, employment continued to increase nationwide and that prices rose at a modest pace. (Newswires)

US and Mexico officials failed to reach a deal on tariffs and immigration at Wednesday meeting. Furthermore, US President Trump stated progress is being made in talks with Mexico "but not nearly enough", while he added that talks will resume on Thursday and that 5% tariffs will begin on Monday if no deal is reached. (Newswires)

Mexico Foreign Minister Ebrard said they did not discuss tariffs during meeting on Wednesday and will seek common ground in Thursday’s talks. (Newswires)

Prior to the meeting, Mexican President AMLO was said to have received an official list of proposed retaliatory tariffs that could be imposed if the US follows through with its tariffs. In related news, reports noted that US talking points going into the tariff meetings were said included asylum cooperation, stopping trafficking networks, border enforcement and maintaining or increasing immigration detentions, while Mexico reportedly would make its own demands in talks with the US in which they will seek funds from US for development, demand that arms cease to criminal cartels and will not accept a "safe third country status" that forces asylum claimants to seek refuge in Mexico. (Newswires)