• US equity futures were hit overnight after the PBoC set their reference rate for the CNY at its weakest level in over a year
• European equities have been dealt a blow in recent trade by comments from Trump that the US is ready to impose tariffs on all USD 505bln of Chinese import goods
• DAX dealt a further blow by comments from Germany's Chancellor Merkel that if need be, the EU is working on counter-measures but this is by far the worst solution
• Looking ahead, highlights include Canadian CPI & retail sales, Baker Hughes, Fed’s Bullard, BoE’s Tenreyro and ECB’s Coeure

ASIA

Asian equity markets traded choppy with sentiment spooked overnight amid a China currency sell-off after the PBoC set the reference rate to its weakest in over a year. This weighed on US equity futures with selling exacerbated after the Emini S&P and DJIA broke below 2800 and 25000 respectively, while Nikkei 225 (-0.3%) wiped out initial gains in the panic. Elsewhere, Shanghai Comp. (+2.0%) and Hang Seng (+0.8%) were also initially downbeat as the currency-related concerns overshadowed the PBoC’s recent efforts including this week’s CNY 540bln net liquidity injection. However, Chinese stocks were recovered from intraday lows as and moved back into the black amid rumours surrounding modifications on New Asset Management Rules. ASX 200 (+0.3%) remained stable throughout the session. Finally, 10yr JGBs were higher with prices supported amid losses in Japanese stocks and the brief market panic, although gains were capped heading into an enhanced liquidity auction for 2yr, 5yr, 10yr & 20yr JGBs which proved to be uneventful.

PBoC skipped open market operations for a net weekly injection of CNY 540bln vs. last week's CNY 90bln net drain. (Newswires)

PBoC set CNY mid-point at 6.7671 (Prev. 6.7066)

Japanese National CPI (Jun) Y/Y 0.7% vs. Exp. 0.8% (Prev. 0.7%). (Newswires)

Japanese National CPI Ex. Fresh Food (Jun) Y/Y 0.8% vs. Exp. 0.8% (Prev. 0.7%)

Japanese National CPI Ex. Fresh Food & Energy (Jun) Y/Y 0.2% vs. Exp. 0.4% (Prev. 0.3%)

EU/UK/US

US President Trump says China never had anyone to talk to in the US. He adds US is ready to impose tariffs on all USD 505bln of Chinese import goods. (CNBC)

Germany's Chancellor Merkel says if need be, the EU is working on counter-measures but this is by far the worst solution, adds EU's Juncker is to go to the US with an auto tariff deal. (Newswires)

BoE's Tenreyro states "In May and June I thought it was prudent to wait a bit to confirm that the soft patch was due to the weather, and not a sign of something more fundamental going on with demand"

- "The PMIs [activity surveys] on output were positive and confirm in some sense the assessment that we had in our central forecast that the soft patch was snow-related."

- The Evening Standard article reads "Her tone suggests she might be ready to join the hawks and raise rates for only the second time in 11 years in a fortnight’s" but Tenreyro refused to respond to that statement

Repubblica reported tensions in the Italian administration with Deputy PM's Salvini and Di Maio clashing with Finance Minister which subsequently triggered speculation over his resignation; this was later denied by Italian Deputy PM Maio. (Newswires)

Italy's Borghi of the Budget Committee says "sooner or later Italy will leave the Euro". (Newswires)

GEOPOLITICAL

US President Trump said he is much tougher on Russia than past Presidents and that getting along with Russia is positive, while he added he will be Putin's worst enemy if relationship doesn't work out. (Newswires)

US Director of National Intelligence said it is possible for North Korea to denuclearize within a year but added that it is unlikely to happen. (Newswires)

EQUITIES

European equities began the session relatively mixed (Eurostoxx 50 +0.6%) with significant underperformance in the Italian FTSE MIB amid political jitters. This comes after the Italian newspaper Repubblica reported tensions in the Italian administration with Deputy PM's Salvini and Di Maio clashing with Finance Minister Tria (later denied), while Corriere reported hard-line Eurosceptic comments from Italy’s Budget Committee head. In stock specific news, Anglo-Dutch giant Unilever (+1.3%) completed the first EUR 3bln tranche of EUR 6bln buyback program, while the second tranche starts as of today. European equities have been dealt a blow in recent trade by comments from Trump that the US is ready to impose tariffs on all USD 505bln of Chinese goods with the DAX (-0.9%) underperforming amid declines in auto names following the recent comments from Merkel.

FIXED INCOME

As usual, the reversal has arguably been swifter than the rise for Bunds and Gilts that have both retreated into negative territory and new lows, at 162.95 and 124.01 respectively (-13/-7 ticks vs +31/+19 ticks at one stage). UK debt may have acknowledged larger than expected PSNB shortfalls, but in truth the about turn occurred well before that amidst a recovery in BTPs on more reports from Italy and some conflicting views about what prompted the initial sell-off (could be a rift between Tria and Di Miao rather than Borghi being convinced about Italexit at some stage, but even the former subsequently denied). 10 year EU benchmarks now just below parity, while US Treasuries remain marginally softer near overnight session troughs and the curve a tad steeper into a sparse schedule to end the week.

FX

DXY - Back on the 95.000 handle, just, after the US President turned his attention away from international trade and other issues to the Usd and Fed, lamenting the strength of the former and the hawkishness of the latter. However, the Greenback and index indirectly, are still looking at other factors for direction, and in particular moves in the YUAN that was fixed considerably higher on shore by the PBoC today (circa 4.7600 vs the Usd) and pushed both the Cny and Cnh above 6.8000 before a bounce amidst intervention speculation and reports about local banks selling at 6.8100.

NZD/AUD/CAD - Not quite heroes from zeroes, but the antipodean Dollars and Loonie have benefited the most from relative silence on the global trade war front (for now at least) and the partial Renminbi revival (as the closest proxies in the reverse situation). The Kiwi has rebounded from close to 0.6700 and above 0.6750, the Aud held just above key chart support (0.7311-27 area that covers the 2018 base and a 61.8% Fib) to stand around 0.7370, but a hefty 1.25 bn option expiry at the 0.7400 strike may cap further upside and the Cad has returned to 1.3250 vs lows yesterday near 1.3300. For the Loonie, Canadian CPI and/or retail sales are likely to provide the main independent drivers ahead of the weekend, though oil prices are still factoring to a degree (higher again today).

EUR/JPY/CHF/GBP - All marginally firmer vs the Greenback and off psychological/round number levels or fresh ytd lows on the aforementioned Usd fade, with the single currency straddling 1.1650, Jpy pivoting 112.50 having bounced off its 200HMA around 112.25-30, Franc at the upper end of a tight range either side of parity and Cable regaining 1.3000+ status.

COMMODITIES

Commodities are mostly in the green on the day with WTI (+0.6%) and Brent (+0.7%) just off highs (at around USD 70.14/bbl and USD 73.36/bbl respectively), albeit both benchmarks are on track to set their third week of losses amid oversupply concerns fused with US-Sino trade tensions. To recap, this week’s API and DoE inventories both printed a surprise build in stockpiles, whilst speculation amounts over the potential for an economic slowdown caused by trade tensions which could lower demand in the future. Traders will be looking out for the Baker Hughes rig count later today.

Elsewhere, gold trades relatively flat as the USD eases off highs. London copper rose as much as 1% as the red metal pulls away from one-year lows.

Russian Oil Minister Novak says can return to oil cuts after 2018 if needed; adding the new OPEC Russia Organisation may start on January 1st 2019. (Newswires)