• European equities are mostly lower [Eurostoxx 50 -0.2%] as Fed fuelled momentum wanes
• New York Fed stated that the comments made by Fed's Williams were academic, based on research and not about potential policy actions at the upcoming FOMC meeting
• Italy underperforms on domestic political angst, FTSE MIB and BTPs lower
• Looking ahead, highlights include, Canadian Retail Sales, University of Michigan Sentiment (Prelim), Baker Hughes Rig Count, Fed’s Bullard and Rosengren, BoJ Governor Kuroda
• Earnings: American Express, Schlumberger, State Street

ASIA-PAC

Asian equity markets were positive across the board as the region took its cue from the late gains in US following dovish comments from Fed's Williams who suggested it is better to take preventative measures on rates and that the long-run neutral rate for US interest rates is 0.5%, although the New York Fed later clarified the rhetoric was academic and not about potential policy action this month. Nonetheless, ASX 200 (+0.8%) was led higher by strength in the mining sector especially gold-related stocks after the precious metal surged to a fresh 6-year high on the Fed comments and with NAB front running the gains for financials after it appointed RBS head McEwan as its next CEO. Nikkei 225 (+2.0%) outperformed as exporters cheered currency outflows, while Hang Seng (+1.1%) and Shanghai Comp. (+0.8%) conformed to optimism after US-China trade negotiators resumed discussions via telephone and with the PBoC’s liquidity efforts resulting to a net weekly liquidity injection of CNY 460bln. Finally, 10yr JGBs gained as they tracked the upside in T-notes amid the dovish Fed bets, but with upside limited by the lack of safe-haven demand and slightly softer demand in the enhanced-liquidity auction for 2yr-20yr JGBs.

PBoC injected CNY 100bln via 7-day reverse repos; injects net CNY 460bln for the week vs. Prev. CNY 220bln drain. (Newswires) PBoC set CNY mid-point at 6.8635 (Prev. 6.8761)

USTR Lighthizer and Treasury Secretary Mnuchin discussed trade over the phone with Chinese officials as expected. (Newswires)

Japanese National CPI (Jun) Y/Y 0.7% vs. Exp. 0.7% (Prev. 0.7%). (Newswires) Japanese National CPI Ex. Fresh Food (Jun) Y/Y 0.6% vs. Exp. 0.6% (Prev. 0.8%) Japanese National CPI Ex. Fresh Food & Energy (Jun) Y/Y 0.5% vs. Exp. 0.5% (Prev. 0.5%)

US

New York Fed stated that the comments made by Fed's Williams were academic, based on research and was not about potential policy actions at the upcoming FOMC meeting. (Newswires) REMINDER: Fed's Williams (Voter, Hawkish) said it is better to take preventative measures on rates than to wait for a disaster to unfold and that the long-run neutral rate for US interest rates is 0.5%.

Fed's Bullard (dove, voter) would listen to arguments for a larger rate cut, but thinks 25bps is appropriate; doesn't think the situation calls for a larger cut, WSJ reports. (WSJ)

GEOPOLITICS

Foreign Minister Zarif later stated that Iran has no information regarding losing a drone. (Newswires/WSJ/Twitter) 

Iran Foreign Minister Zarif reportedly met with UN Secretary General Guterres in New York and discussed seizure of Iranian tanker by the British Navy, while there were separate reports that Zarif warned about mounting tensions and that we cannot “discount” possibility of war but also stated nobody wants a war. (Newswires/The National Interest)

UK/EU

Italian League Official said its is hard to continue governing with the 5 Star Movement. Italian Deputy PM Salvini confirmed he will be meeting coalition partner Di Maio; adds the problem is not Deputy PM Di Maio, but other opposition coming from many 5 Star lawmakers. (Newswires)

UK Justice Secretary Gauke is set to step down soon after PM May completes last PM Questions on Wednesday, while Chancellor Hammond and International Development Secretary Stewart are also mulling quitting before Johnson becomes next PM. (Times)

EQUITIES

European equities have given up earlier gains and now trade mostly lower [Eurostoxx 50 -0.2%] as the initial upside momentum seen in Asia and on Wall St. following the dovish comments from Fed voter Williams somewhat waned. The New York Fed downplayed the comments as being more academic than potential near-term policy action. It’s also worth noting that the initial support for equities also came amid comments from Fed’s Vice Chair Clarida who acknowledged the increased global uncertainties and soft US inflation, which somewhat revived market pricing for a 50bps manoeuvre at the July 31st meeting. Italy’s FTSE MIB (-1.2%) lags amid reports of a possible coalition crisis as ties between the League and 5SM sour, whilst speculation about the possibility of early Italian elections in Autumn did the rounds in Italian press on Friday. Sectors are mostly higher with some underperformance in defensive sector, albeit the Consumer Staples is buoyed by AB InBev (+4.3%) as shares surged amid the sale of its of its Australian unit to Japan’s Asahi for USD 11.3bln in a bid to nurse part of its debt. Furthermore, reports stated that the Co. is also mulling the sale of its South Korean and Central American units. On the flip side, shares in Publicis (-8.4%) declined due to a cut in its FY 19 organic growth guidance, as such WPP (-3.0%) fell in sympathy.

FX

DXY - The Buck continues to see-saw through US data points, survey findings and the final pre-FOMC commentary from Fed officials ahead of the black-out period that begins at COB today. On that note, Williams and Clarida provided ‘guidance’ and despite denials or clarification of the former rate expectations have shifted again, with the probability of a 25 bp or 50 bp ease now much closer to even vs circa 75%/25% after Thursday’s upbeat Philly Fed survey. In response, the Greenback weakened vs all major rivals and the index hit a 96.750 low before tentatively regaining 97.000 status and holding above support, as Usd/G10 pairs pare back or rebound from late yesterday/overnight extremes. Note, remarks from renowned dove Bullard are not really impacting as he repeats his preference for smaller policy adjustment, though would countenance arguments in favour of ½ point.

JPY - Having benefited most from the aforementioned Dollar retreat, and with added safe-haven premium gleaned via another US-Iran dispute (former claims that a drone was downed and latter denies any damage), the Yen is now ‘underperforming’. However, Usd/Jpy remains well below the 108.00 axis that has been constricting trade and with decent option expiries now capping the pair along with technical resistance (1.1 bn between 107.90-108.05, 55 DMA at 107.87 and daily chart level at 107.88).

EUR - The single currency is still flanked between 1.1200 and 1.1300 parameters with ECB policy stimulus weighing against Fed easing and only days separating the respective July policy meetings. Note also, Italian coalition Government conflicts are coming to a head and expiry interest may also be dragging Eur/Usd down given 1.2 bn rolling off from 1.1240-25 and 1.55 bn at 1.1210-00.

AUD/CHF/NZD/GBP/CAD - The Aussie ran up against some key chart hurdles ahead of 0.7100, like the 200 DMA (0.7090) after extending its rebound from just under 0.7000 with some encouragement from the US and China conducting trade dialogue over the phone. However, Aud/Usd is holding above 0.7050 where export bids are touted and if those are filled there are said to be more underlying buy orders between 0.7040-30 linked to 900 mn expiries residing from 0.7035 to 0.7025. Elsewhere, the Franc has faded into 0.9800 and Kiwi not far from 0.6800, while the Pound topped out around 1.2550 and the Loonie continues to pull-up on approaches to 1.3000, with Canadian retail sales data looming.

EM - Amidst widespread declines vs the Usd, Zar losses or rather retracement from post-SARB highs has been compounded by more SA political issues as current President Ramaphosa joins a former counterpart in the corruption dock. Rand currently closer to the base of 13.9410-8165 parameters.

FIXED INCOME

Gilts had another close look at the 131.50 level that broadly aligns with yesterday’s intraday best (131.52) and chart resistance in the form of last Thursday’s Liffe session high (131.51), but topped out at 131.49 before fading alongside Bunds and with US Treasuries succumbing to a bit more retracement from their post-Fed Williams and Clarida peaks. UK bonds also erred on the side of caution into the last of this week’s domestic data releases as the Government’s finances came under scrutiny just a day after a rather bleak OBR report on the outlook if Britain left the EU without a deal. In the event PSNB balances were worse than forecast and only partly compensated by revisions to the previous month.

COMMODITIES

WTI and Brent futures are consolidating following the recent decline which was exacerbated by refineries in the Gulf of Mexico restarting operations after the passing of storm Barry, with reports stating that only 19% of production is currently offline vs. 73% on Sunday. Upside in the complex is also supported by the rising geopolitical tensions after US President Trump stated that the US took defensive actions and downed an Iranian drone, a statement which was denied by Iranian officials. Furthermore, IRGC said that Iran will release images to disprove US’ claim. WTI and Brent futures currently reside just above 56/bbl and 63/bbl and with little by way of notable DMAs given the recent slump in prices. Elsewhere, precious metal prices have drifted lower after rallying on the dovish comments from Fed voters Williams and Clarida coupled with the aforementioned geopolitical developments, in which gold hit a fresh 6yr high and briefly breached 1450/oz to the upside. Meanwhile, copper prices are also supported by the overall risk appetite. Finally, ironore prices were mildly pressured as Iron ore exports from Australia’s port Hedland increased 6% M/M to a record high as miners increased shipments to meet targets.

IEA Director Birol said might revise 2019 global oil demand growth forecast to 1.1mln bpd from 1.3mln bpd, while he added they don’t expect a huge increase in oil prices as markets are awash with oil and demand is slowing. (Newswires)

BAML says Brent should continue to trade in the range of USD 60-67/bbl in H2 2019 due to "absence of binary risks" (Iran and trade wars)