• Asian indices are firmer with sentiment bolstered by the US and Mexico reaching an agreement to avoid tariffs
• Sources indicate that ECB policymakers are said to be open to lowering rates if growth weakens
• In FX, the USD has benefited as tariffs were avoided with MXN outperforming; GBP is subdued as the Tory leadership contest begins
• Looking ahead highlights include; UK GDP, Services, Industrial & Manufacturing Output, Canadian Housing Starts & Building Permits, US Jolts, ECB’s Stournaras, BoE’s Haldane & Saunders

ASIA-PAC

Asian equity markets began the week higher with sentiment underpinned after US and Mexico reached an agreement to avert tariffs which were set to kick in today, while the region also took impetus from the last Friday’s gains on Wall St. where disappointing Non-Farm Payrolls data spurred Fed rate cut hopes. Nikkei 225 (+1.2%) was lifted by favourable currency flows and following an upward revision to Q1 GDP, with automakers also underpinned by the tariff-related relief as well as news Fiat and Renault Chairmen discussed reviving their merger plan. Elsewhere, Australia remains closed for holiday, while Hang Seng (+2.1%) and Shanghai Comp. (+1.0%) were positive but with initial weakness seen in the mainland following a net liquidity drain by the PBoC and mixed Chinese Trade data in which Trade Balance and Exports topped estimates although a contraction in Imports highlighted subdued domestic demand. Finally, 10yr JGBs were initially pressured on safe-haven outflows but then staged an aggressive comeback as the declining yield narrative persisted and with the BoJ also in the market for JPY 775bln of JGBs.

PBoC injected CNY 30bln via 7-day reverse repos for a net daily drain of CNY 50bln. (Newswires) PBoC set CNY mid-point at 6.8925 (Prev. 6.8945)

Chinese Trade Balance (CNY)(May) 279.1B vs. Exp. 136.0B (Prev. 93.57B). (Newswires) Chinese Exports (CNY)(May) Y/Y 7.7% vs. Exp. 4.7% (Prev. 3.1%) Chinese Imports (CNY)(May) Y/Y -2.5% vs. Exp. 5.8% (Prev. 10.3%)

China is to implement export controls on sensitive sectors to prevent and resolve national security risks, while there were also reports that Chinese authorities reportedly warned several tech companies not to reduce exposure to China more than what was necessary due to trade restrictions or there would be consequences. (Newswires)

G20 Finance Ministers and Central Bank Chiefs joint communique stated they pledge to use all the policies they can to protect global growth from disruptions due to trade and other tensions, while it added that risks from trade and geopolitical tensions are "intensifying". (Newswires)

Japanese GDP (Q1 F) Q/Q 0.6% vs. Exp. 0.5% (Prev. 0.5%). (Newswires) Japanese GDP (Q1 F) Y/Y 2.2% vs. Exp. 2.1% (Prev. 2.1%)

GEOPOLITICAL

Hong Kong’s Leader Lam has stated she will not abandon plans to allow extradition to China, in-spite of the mass protests; stating that the law is necessary and safeguards to human rights are in place. (BBC/Guardian)

UK/EU

BoE’s Haldane suggested that acting early with a rate hike would ensure against the need for larger hikes in the future and suggested the time is approaching for when a small increase in rates would be prudent. (Newswires)

UK Foreign Secretary Hunt said German Chancellor Merkel is willing to renegotiate the Brexit deal with a new UK PM. In other news, UK Work and Pensions Minister Rudd said she is backing Foreign Minister Hunt for Tory leadership. (Newswires/Telegraph)

Conservative leadership candidate Michael Gove was fighting last night to save his campaign to become prime minister as he faced calls of hypocrisy over his use of cocaine before he entered politics. (Times)

Former UK Foreign Minister Boris Johnson plans to reduce income tax for 3mln by increasing the 40p rate threshold to GBP 80K from GBP 50K, while he also commented that Britain should be reducing corporation tax and other business taxes. In addition, Boris Johnson has also pledged to withhold the Brexit bill payment until the EU gives the UK better exit terms. (Telegraph)

French President Macron has warned Boris Johnson that Britain's economy will be downgraded and plunged into turmoil if the UK withholds the GBP 39bln Brexit divorce payment from Brussels. (Telegraph)

EU is to warn businesses not to expect any help regarding a no-deal Brexit and urges them to prepare for the UK to crash out of the EU on October 31st. (FT)

ECB policymakers are said to be open to lowering rates if growth weakens according to sources which noted that the case for more QE is less clear, while there were separate comments from ECB's Weidmann that the German economy could decline slightly. (Newswires)

FX

In FX markets, the breakthrough by US and Mexico to avert tariffs helped the DXY recoup some of Friday’s losses in which a miss in headline NFP jobs data and weaker than expected earnings growth saw the probabilities of July cut by the Fed increase to just under 90% from around 70% the prior day. The greenback’s NAFTA counterparts were also underpinned from the agreement with MXN the outperformer after having strengthened by nearly 2%. EUR/USDpulled back with ECB policymakers said to be open to lowering rates if growth weakens and GBP/USD was mired by political uncertainty as the Tory leadership race begins to heat up with front-runner Boris Johnson promising to raise the Higher income tax rate threshold, as well as withhold paying the divorce bill until the EU offers better Brexit terms. Elsewhere, USD/JPY benefitted from the risk appetite and USD-recovery, while antipodeans were softer with AUD/USD back below the 0.7000 handle amid the absence of Australia, disappointing Chinese Imports data and as CNY traded at its weakest since November last year.

COMMODITIES

Commodities were mixed with WTI crude futures underpinned by the risk appetite after US and Mexico reached an agreement to avert tariffs, with a decline in the Baker Hughes rig count and recent announcement of fresh sanctions on Iran’s petrochemical sector adding to the bullish pressure on oil. Elsewhere, gold declined nearly 1% overnight with the precious metal weighed on by safe-haven outflows and a recovery in USD, while copper benefitted from the positive risk tone but with gains capped after the mixed Chinese trade data.

Baker Hughes Rig Count: oil rigs -11 to 789, gas rigs +2 to 186 and total rigs -9 at 975. (Newswires)

Iran Oil Minister said the country does not have plans to leave OPEC. (Newswires)

US

A disappointing NFP report saw the curve bull-steepen in an immediate response, as traders raised bets that the Fed will cut rates either in response to weakness in some gauges of economic activity, or in an “insurance” manner to extend the recovery. The probability of a June rate cut was up to around 22.5%, July rose to just under 90% (from around 70% on Thursday). Trump’s jawboning efforts resulted in some selling action in the afternoon, however, at settlement, major curve spreads were modestly narrower (2s30s was around 1bps lower, having been at 9bps wides after the payrolls data). US T-note futures (U9) settled 9 ticks higher at 127-07.

US President Trump announced that the US reached an agreement with Mexico and that tariffs are indefinitely suspended, while Mexico agreed to take strong measures to stem the tide of immigration. Furthermore, Mexico has agreed to immediately begin buying large quantities of agricultural products from US farmers. (Newswires)

US Treasury Secretary Mnuchin stated that he believes Mexico will meet their commitments and that US President Trump retains the ability to impose new tariffs if commitments are not made. (Newswires)