• Asian equity markets traded mostly lower with the region cautious amid dampened hopes for a more aggressive Fed rate cut and geopolitical concerns
• Fed officials reportedly could suggest potential for additional stimulus beyond July and signal a 25bp cut is likely at the July meeting
• IRGC said it seized a UK tanker which has been taken to a coastal area and turned over to the maritime authorities to carry out the necessary legal steps
• EU countries are reportedly secretly wooing PM candidate Boris Johnson and signalled an intention to work out a deal to avoid a no-deal disaster
• Looking ahead, highlights include US National Activity Index, BoJ’s Kuroda

ASIA-PAC

Asian equity markets traded mostly lower with the region cautious amid dampened hopes for a more aggressive Fed rate cut and geopolitical concerns after Iran seized 2 UK tankers. ASX 200 (-0.3%) and Nikkei 225 (-0.4%) were both subdued at the open although strength in commodity-related stocks briefly spurred a rebound in Australia, while the Japanese benchmark failed to take advantage of a weaker currency as participants reflected on the Upper House election results in which PM Abe’s ruling coalition won a majority of seats but failed to retain the supermajority needed to push ahead with revising the constitution. Elsewhere, Shanghai Comp. (-0.6%) and Hang Seng (-0.8%) declined despite continued liquidity efforts by the PBoC and more constructive language regarding US-China trade talks, with a rotation of funds seen into China’s new Nasdaq-style tech board known as the STAR Market which launched today and saw all of its 25 stocks surge by an average 126% in early trade and with some higher by more than 200%. Finally, 10yr JGBs were steady with only minimal support seen from the lacklustre tone in stocks and BoJ presence for JPY 1.265tln of JGBs mostly in 1yr-10yr maturities.

PBoC injected CNY 50bln via 7-day reverse repos. (Newswires) PBoC set CNY mid-point at 6.8759 (Prev. 6.8635)

US President Trump said US Treasury Secretary Mnuchin had very good talks with his Chinese counterpart and suggested we'll see what happens. In related news, China Global Times Editor tweeted the Chinese side sees a face-to-face meeting with the US as not far away and expects "actions" may happen soon which would be a sign of goodwill from both sides. (Newswires/Twitter)

Hong Kong Police fired tear gas and rubber bullets as protesters took to the streets for a 7th week, while there were reports of hundreds of armed pro-Beijing men attacking protesters, journalists and lawmakers. (Newswires)

Japan's ruling LDP-led coalition won a majority of the seats up for grabs in Sunday's upper house election in which they won 71 of the 124 seats up for contention, although failed to hold on to the two-thirds supermajority needed to move ahead with revising the constitution. (Newswires)

UK/EU

UK Chancellor Hammond will hand his resignation to Theresa May on Wednesday afternoon if, as expected, Mr Johnson is confirmed as Tory leader. (Telegraph)

EU countries are reportedly secretly wooing PM candidate Boris Johnson and signalled an intention to work out a deal to avoid a no-deal disaster. In related news, EU is to prepare an aid package for Ireland to soften no-deal Brexit. (Sunday Times/The Times) US President Trump said he spoke with UK PM candidate Johnson and looks forward to working with him and thinks he will work out Brexit, while there were also reports that Trump expressed concerns with France’s Macron regarding the proposed digital services tax. (Newswires)

UK Opposition Leader Corbyn’s popularity among Labour Party members has plummeted, with two fifths wanting him to stand down as leader before the next general election, polling for The Times has found. (Times)

Acting Spanish PM Sanchez will head to Parliament today to seek support in his attempt to form a government. (Newswires)

Fitch affirmed Germany at AAA; Outlook Stable. S&P affirmed Czech Republic at AA; Outlook Stable. (Newswires) 

FX

DXY remained firm and marginally extended on Friday’s rebound back above 97.00 as hopes for a 50bps Fed move faded with CME Fed Fund Futures pricing in just 22.5% chance for a 50bps cut next week. This followed reports that officials aren’t prepared for bolder action of a 50bps cut as recent economic developments have not suggested an imminent downturn, while Fed’s Bullard also reiterated his call for a 25bps cut and doesn't think the situation calls for a larger cut. As such, the greenback’s major counterparts were lacklustre with EUR/USDnear the bottom-end of the 1.1200 handle, while GBP/USD struggled to stay above 1.2500 ahead of tomorrow’s leadership announcement and amid concerns regarding front runner Boris Johnson’s “do or die” Brexit attitude, although there were also reports that EU countries are attempting to woo the hardliner and signalled an intention to work out a deal to avert a disaster. Elsewhere, USD/JPY and JPY-crosses were higher on a concerted attempt on the next round numbers to the upside despite the cautious risk tone, while antipodeans were constrained due to their high-beta properties. 

COMMODITIES

Commodities were mixed with WTI crude futures higher overnight and back above the USD 56.00/bbl level as prices were lifted by the geopolitical risk premium following the Iran seizure of a British tanker in the Strait of Hormuz, while a decline in the latest US Baker Hughes rig numbers and production outages at Libya’s El Sharara oil field added to the bullish factors for crude. Elsewhere, gold was subdued near Friday’s lows amid a firm greenback due to reduced hopes for more aggressive action at next week’s FOMC and copper also languished overnight as price action reflected the broad cautious risk tone.

Baker Hughes (July 19th): Oil rigs -5 at 779, Gas rigs +2 at 174, Total rigs -4 at 954. (Newswires)

Libya’s NOC confirmed 290k bpd output at Sharara had been offline since Friday. (Newswires)

GEOPOLITICS

IRGC said it seized a UK tanker which has been taken to a coastal area and turned over to the maritime authorities to carry out the necessary legal steps, while Iran later confirmed the seizure of a second UK tanker which was let off with a warning about violating maritime regulations. (Newswires)

UK called an emergency committee meeting in response to the vessels seizure and ministers are planning to place sanctions on Iran. In related news, the White House stated the NSC will continue to work with its allies and partners to defend against Iran’s "malign behaviour", while the US also confirmed it will deploy forces to Saudi Arabia and increase maritime surveillance in the Arabian Gulf. (Newswires)

US President Trump reportedly told Senator Rand Paul he would like to be involved in Iran talks, after Senator Rand Paul was said to have met with Iranian Foreign Minister Zarif to discuss the potential prospects for talks between US and Iran. In related news, US Secretary of State Pompeo said President Trump is prepared to conduct talks with Iran without preconditions and that we need the Iranians to come to the table for negotiations. (Newswires)

Iranian lawmakers filed a motion asking govt to impose toll on ships passing through Strait of Hormuz. (Newswires)

Trump administration invited Republican Senators to a meeting to discuss the potential sanctions on Turkey. (WaPo)

US

The T-plex got off on the backfoot into Friday’s European session as the market pared back the dovish reaction from Fed’s Williams on Thursday. Although support was provided on the back of some disappointing German PPI data, where the Bund strength spread into wider government bonds. A mixed July (prelim.) University of Michigan survey didn’t cause a stir. Later in the US session, there was some further selling as Fed’s Bullard affirmed his preference to a 25bps rate cut at the July meeting, which was then echoed by Fed sources claiming that the general sentiment among Fed members was also for a 25bps cut. However, news of British shipping vessels being seized in the Persian Gulf saw bidding into the settlement, at which, the curve had flattened, seeing the 2s10s narrowing by approximately 3.5bps. US T-note futures (U9) settled 3+ ticks lower at 127-17.

Fed officials reportedly could suggest potential for additional stimulus beyond July and signal a 25bp cut is likely at the July meeting. Furthermore, the article states officials aren’t prepared for bolder action by making a half-point cut as recent economic developments have not pointed to an imminent downturn. (WSJ)

Fed's Bullard (Voter, Dove) reiterated call for a 25bps cut at the July meeting and said a 25bps cut would give the Fed the option for a cut later in the year. Bullard also noted it would be difficult for the Fed not to ease at this point and would have to follow through on rate cuts to ratify earlier policy signals, while he sees no reason to revisit decision on timing of balance sheet runoff and would like to see a new repo facility made available but added the Fed is not at that point just yet. Furthermore, Bullard said he would listen to arguments for a larger rate cut but thinks 25bps is appropriate and doesn't think the situation calls for a larger cut. (Newswires/WSJ)

US President Trump administration and lawmakers are said to be approaching a deal regarding budget caps and debt ceiling while they await President Trump's approval. (Newswires)