• European Indices  [Euro Stoxx 600 +0.2%] are firmer as risk sentiment remains positive after the US agreed to advert tariffs on Mexico
• In FX, the USD outperforms its G10 counterparts with antipodeans lagging on mixed China trade, while GBP declines with UK GDP
• Looking ahead highlights include; Canadian Housing Starts & Building Permits, US Jolts, BoE’s 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 (+2.2%) and Shanghai Comp. (+0.9%) 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)

BoJ Governor Kuroda says the BoJ still has room for big stimulus and reaffirms commitment to use all policy options if risks materialize; and that the BoJ can deliver further monetary stimulus if necessary and will ease further if momentum towards its 2% inflation target is lost. (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%)

US

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)

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. (Newswires)

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)

UK GDP Estimate MM (Apr) -0.4% vs. Exp. -0.10% (Prev. -0.10%)

- UK GDP Estimate YY (Apr) 1.3% vs. Exp. 1.70% (Prev. 1.90%)

- UK GDP Est 3M/3M (Apr) 0.3% vs. Exp. 0.40% (Prev. 0.50%)

- UK Manufacturing Output MM (Apr) -3.9% vs. Exp. -1.0% (Prev. 0.9%)

- UK Construction O/P Vol MM (Apr) -0.4% vs. Exp. 0.5% (Prev. -1.9%)

- UK Industrial Output MM (Apr) -2.7% vs. Exp. -0.7% (Prev. 0.7%)

- UK Goods Trade Balance Non-EU (Apr) -4.595B GB vs. Exp. -4.476B GB (Prev. -4.361B GB, Rev. -6.217B GB)

- ONS note that the GDP fall is mainly due to ‘dramatic fall’ in car production due to planned shutdowns and amidst Brexit uncertainty. UK motor production -24% MM, the biggest monthly decrease since record began in January 1995; the broader transport equipment category showed the biggest fall since 1974.

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)

Italian Deputy PM Di Maio states that he expects PM Conte and Deputy Salvini to agree on a minimum salary, tax cuts and fight to privileges at a meeting on Monday. (Newswires)

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)

Iran has not seen practical tangible measures from the EU thus far to salvage the Nuclear Deal, according to Iranian Foreign Minister spokesman. (Newswires)

EQUITIES

European equities are marginally higher [Stoxx 600 +0.2%] following on from a positive Asia-Pac handover, with sentiment underpinned by the US-Mexico trade agreement, albeit with the positive momentum fading as Washington’s trade spat with China remains a grey cloud over the market. UK’s FTSE 100 (+0.5%) marginally outperforms its peers as exporters in the index benefit from a weaker domestic currency, whilst German, Swiss, Austrian and Norwegian cash markets are closed due to Whit Monday. Sectors largely reflect a “risk-on” mood as defensive sectors such as Utilities, Healthcare and Consumer Staples lag their peers. In terms of individual movers, BAE Systems (+1.2%) shares are supported in light of a mammoth merger between US listed Raytheon (RTN) and United Technologies (UTX), which some say point to renewed demand in the sector; the merger of equals will result in the new Co. having a annual revenue of around USD 74bln. Elsewhere, Fiat Chrysler (+2.2%) shares spiked higher amid reports of potential renewed talks with Renault (+2.1%), with the former also potentially buoyed by the US-Mexico trade agreement as it is one of 8 automakers with plants in the South American country. Finally, Thomas Cook (+14.5%) shares were bolstered by acquisition chatter as Forsun (18% shareholder) is reportedly planning a potential offer for Co’s tour arm which generates sales of GBP 7.4bln.

FX

USD - The Greenback has extended its recovery from Friday’s lows, albeit in part due to renewed weakness in rival currencies and despite outperformance in certain EMs on fundamental and technical factors. The DXY just topped out a fraction below 97.000 having declined to sub-96.500 in wake of a weak BLS report that raised already lofty market expectations for Fed easing, with the focus now switching to upcoming CPI data to add more justification for the FOMC to deliver a cut.

GBP - Not the biggest G10 loser, but Sterling has been one of the weakest majors in early EU trade on the back of monthly GDP for April showing a faster than forecast contraction in the UK economy as ip, manufacturing and construction output all slumped more than anticipated. The ONS assigned much of the blame to planned shutdowns and Brexit uncertainty that led to a record decline in car production, while transport equipment tanked the most since 1974. Cable duly retreated through 1.2700 in response and Eur/Gbp breached 0.8900 to post 5 month+ peaks.

NZD/AUD - The main victims of a slump in Chinese imports, but somewhat perversely it is the Kiwi that is feeling the brunt of the data that exacerbates US-China trade tensions rather than the Aussie and perhaps due to Australia’s national holiday. Nzd/Usd is hovering just above 0.6600 vs Aud/Usd holding around last Friday’s low and several key technical support levels either side of 0.6950, like 10 and 21 DMA convergence circa 0.6955 and a Fib at 0.6945, while the Aud/Nzd cross is hugging the upper end of a 1.0525-00 range.

JPY/CHF/EUR - The US-Mexican trade accord has seen the Yen and Franc lose safe-haven appeal and retreat vs the Buck to 108.50+ and 0.9900+ respectively, but Usd/Jpy faces some upside hurdles in the form of 1.1 bn option expiries at the 109.00 strike and then trend-line resistance at 109.15, while Usd/Chf and Eur/Chf (latter pivoting 1.1200) will be conscious that Thursday’s SNB quarterly policy review is looming. Elsewhere, Eur/Usd is testing 1.1300 and bids below the big figure after a brief and minor breach of Fib/30 DMA support at 1.1293 amidst more bleak Italian data that was only partly attributed to calendar distortions due to a national holiday, per ISTAT. Note also, decent expiry interest at 1.1300 in 1.1 bn.

CAD - The Loonie remains relatively bid after Canada’s healthy jobs release in contrast to the US and with some extra encouragement via contagion from the aforementioned US-Mexican agreement that bodes well for USMCA prospects. Usd/Cad off lows but still well under 1.3300 in a 1.3278-25 band and near multi-month lows ahead of Canadian housing starts and building permits.

EM - As noted above, several regional currencies outpacing the Dollar and none more so than the Peso in relief that Mexico will avoid US tariffs – Usd/Mxn sub-19.2000 and down through 19.1400 at one stage. Meanwhile, the Rand and Lira are also doing well, albeit in corrective moves after hefty losses of late on a steep deceleration in SA GDP/SARB mandate uncertainty, and ongoing US-Turkey strains, as attention turns to the upcoming CBRT policy meeting. Usd/Zar has reversed from 15.0000+ to around 14.8500 and Usd/Try down towards 5.8000, but conversely Usd/Cnh remains close to recent 6.9600+ peaks on the drop in Chinese imports.

FX Expiries of note:

- EUR/USD: 1.1300 (1.1BLN), 1.1310 (200M)

- AUD/USD: 0.6950-60 (362M), 0.7000 (820M), 0.7025-30 (330M), 0.7060 (883M)

- USD/JPY: 107.00 (3.4BLN), 108.00-20 (1.3BLN), 108.75-85 (600M), 109.00 (1.1BLN)

FIXED INCOME

Gilts have rebounded from deeper 130.13 Liffe lows in wake of the broad UK data misses (trade aside) that hardly support any change in the current BoE stance as opposed to inferences from Haldane that a pre-emptive hike might be prudent. However, the 10 year benchmark remains ¼ point+ below parity having just held above last Friday’s 131.09 session base and as Bunds extend their losses to over ½ point at 171.13 amidst a broad downturn in Eurozone bonds including BTPs in wake of weak industrial output. Similarly, US Treasuries remain close to overnight session lows and the curve has steepened further in wake of the US-Mexican breakthrough.

COMMODITIES

Commodities are mixed as the energy complex continues to consolidate following its recent sell-off, with the benchmarks somewhat underpinned by the risk appetite around the market after US President Trump called off tariffs on Mexico which were due to be imposed today. WTI and Brent futures currently hover just above USD 54.00/bbl (ahead of its 200 DMA at 52.60) and USD 63.00/bbl respectively. Turning to OPEC, Saudi’s Energy Minister echoed some comments from the back-end of last week in which he stated that Russian is the only country still undecided on an OPEC+ deal extension, and subsequently, Russia’s Finance Minister noted that Brent prices could potentially fall to USD 40/bbl if the deal is not extended. Elsewhere, amid the possible ramifications of the US-Sino trade war on the global economy, Barclays revised its 2019 oil demand forecast lower by 300K BPD to 1.3mln BPD (in-line with IEA’s 2019 forecast of 1.3mln BPD and marginally higher compared to OPEC’s forecast of around 1.21mln). In terms of precious metals, a firmer risk tone and a stronger Greenback have shaved off some gains in gold (-1.0%) and silver (-1.5%), whilst copper(+0.7%) prices benefit from the risk appetite after Washington struck a deal with Mexico. Finally, iron ore futures are marginally firmer as a firmer Buck caps gains in the base metal, despite China’s iron ore imports rebounding from an 18-month-low last month, against the backdrop of tight supply amidst the recent production disruptions including Vale’s shipment cuts and China’s smog alerts.

Russian Energy Minister Novak says the scenario of oil prices falling to USD 30/bbl is not excluded in the event of no extension to the global oil deal. Separately, Russian Deputy Energy Minister Sorokin states that we do not target an oil price, we target oil market balance, Russian intends to return to 100% compliance with the global cut deal in June, and that in general the OPEC+ charter has been agreed which is to focus on co-operating in general, without any specific numbers. (Newswires)

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

Barclays has downgraded 2019 global oil demand forecast to 1.3mln BPD (Prev. 1.6mln BPD), citing weaker activity in most major economies. (Newswires)