• WTI and Brent futures extend on gains as tensions rise in the Strait of Hormuz
• Major European indices are relatively flat [Eurostoxx 50 +0.1%], energy sector outperforms on price action in crude markets
• DXY has consolidated recovery gains above the 97.000 handle, NZD, CAD and AUD outperform
• 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 concernsafter Iran seized 2 UK tankers. ASX 200 (-0.1%) and Nikkei 225 (-0.2%) 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. (-1.3%) and Hang Seng (-1.5%) 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)

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. In related news, China is reportedly mulling a plan to boost US soybean purchases, according to sources. (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)

US

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)

Iran said it has dismantled CIA ring and arrested 17 people with some sentenced to death. Iranian State Media says those suspected of spying for the CIA were arrested during the Iranian calendar year which ended in March 2019. (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's NIESR sees 2019 GDP growth at +1.2% and 2020 at +1.1% assuming a no-deal Brexit is avoided. (Newswires)

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

EQUITIES

Major European indices are relatively flat [Eurostoxx 50 +0.1%], albeit near highs of the day following on from a cautious Asia-Pac trade. Sectors are mixed with outperformance seen in the energy sector amid the price action in the complex. In terms of individual movers, Philips (+4.0%) shares rose on the back of optimistic earnings whilst Julius Baer (+2.7%) shares are supported by an 8% in assets under management.

FX

DXY - The index has consolidated recovery gains above the 97.000 handle within a relatively tight 97.126-247 range following the final official Fed rhetoric ahead of the pre-FOMC backout period from Bullard who reiterated his preference for a 25 bp cut instead of anything larger. Meanwhile, WSJ sources chimed in with similar ‘guidance’ as recent economic developments do not suggest an imminent downturn that would warrant bolder action, although more easy could be flagged after July, and current market pricing reflects the latest commentary with less than 20% chance of a 50 bp ease.

NZD/CAD/AUD - The non-US Dollars are outperforming or at least holding up better than G10 peers, with the Kiwi leading the way on favourable cross-winds as Aud/Nzd retreats through 1.0400 and Nzd/Usd holds nearer last week’s peaks than Aud/Usd between 0.6782-58 and 0.7047-32 respective bands. From a fundamental perspective, the Aussie may glean fresh direction from RBA Assistant Governor Kent later, while the Loonie will be watching Canadian wholesale trade alongside crude prices that are currently supportive and nudging Usd/Cad down through 1.3050 within 1.3068-41 parameters.

GBP/JPY/CHF/EUR - All on the backfoot vs the Greenback, and the Pound in particular awaiting the Tory leadership result that is widely expected to see Brexit hard-liner Boris Johnson appointed as new PM and fresh Cabinet faces before the whole process of negotiating with the EU really starts again. Cable is back below 1.2500 and from a chart standpoint looking more bearish as it slips beneath last Friday’s 1.2476 base. Next up would be July 18’s 1.2429 session low, but Sterling is keeping its head just above 0.9000 vs the Euro that is only just maintaining 1.1200+ status vs the Buck ahead of preliminary PMIs on Wednesday and the ECB on Thursday. Note, the probability of a 10 bp reduction in the depo rate is 50%, while some are also looking for the QE taps to be reopened, albeit not this month. Elsewhere, the Franc is hovering just below 0.9800 and 1.0100 vs the single currency, wary that any ECB stimulus or more pronounced safe-haven gains will be countered by the SNB in some shape or form. Similarly, with this month’s BoJ policy meeting looming on the eve of the FOMC the Yen is erring towards the side of caution closer to 108.00 compared to recent highs and unlikely at this stage to arouse decent option interest sitting from 107.50 to 107.35 in 2.3 bn).

EM - The Lira has Central Bank action to look forward to as well, but US sanctions may be back on the radar to undermine sentiment given reports that President Trump is scheduling a meeting with Republican Senators to discuss options. Meanwhile, the consensus range is suitably wide for the CBRT as estimates cover a whopping 100-500 bp easing, and Usd/Try is near the top of a 5.6925-6490 at present.

FIXED INCOME

It’s been measured and slow, but steadfast all the same, as Bunds and Gilts continue to claw back losses from the depths of mid-month retracement lows. In fact, it would be fair to say that the latest leg has been impressive given moves in US Treasuries that lag, with the 10 year EU debt futures up to 173.68 and 131.75 vs 171.25 and 130.14 on July 12. Indeed, the benchmarks are now only a fraction off resistance at 173.70 and 131.83 that stand in the way of big figures, with Independence Day contract peaks not far if those psychological levels are breached (174.05 and 132.45). ECB and Brexit could be the major factors, while USTs are tempering Fed expectations towards 25 bp and the curve may be flattening to make room for supply ahead of 2, 5 and 7 year auctions.

COMMODITIES

WTI and Brent futures are on the rise as sentiment in the complex is underpinned amid late-Friday reports that the IRGC seized a UK tanker in the Strait of Hormuz due to an alleged violation of maritime law. Meanwhile, UK Chancellor Hammond noted that the UK has been working closely with US and EU partners regarding a response to Iran’s actions. Energy markets are particularly sensitive to developments in the Strait of Hormuz, given that a fifth of the world’s oil exports passes through the corridor everyday whilst  geopolitical tensions intensifies in the area. WTI and Brent futures have tested 57/bbl and 64/bbl to the upside as a result, albeit failed to convincingly breach the levels. Also of note; on Friday Libya’s NOC announced a force majeure at its El-Sharara (300k BPD) oilfield, although this has now been lifted, according to a statement. Elsewhere, spot gold remains within a narrow range amid an uneventful USD and heading into a key meeting for the ECB, in which markets are pricing in a 50% chance of a 10bps cut to its Deposit rate. Meanwhile, copper prices are marginally softer amid the overall cautious risk tone whilst Dalian iron ore prices declined as port inventory across China rose to over 1-month highs.

Force majeure has been lifted on Libya’s El-Sharara oil field (~300k BPD). (Newswires)

GEOPOLITICS 

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

Turkey's Foreign Ministers says that there is uncertainty surrounding US sanction regarding the S-400 deal, adds that US President Trump does not want to impose them, does not expect the US to impose CAATSA sanctions over S-400 deal. (Newswires)