• Asian equity markets traded mixed as the region observed caution despite the rebound on Wall St.
• PBoC weakened the CNY reference rate to within a whisker of the 7.0000 ‘line in the sand’ level
• NZD/USD tumbled after the RBNZ announced a deeper than expected OCR cut of 50bps with Governor Orr refusing to rule out further action
• Looking ahead, highlights include German Industrial Output, Chinese FX Reserves, Canadian Ivey PMI, RBI Rate Decision, Fed’s Evans, RBA’s Bullock, supply from Germany and the US
• Earnings: CVS, Fox, Munich RE, Wirecard, UniCredit, Glencore, Legal & General

ASIA-PAC

Asian equity markets traded mixed as the region observed caution despite the gains on Wall St. where stocks rebounded from their worst performance of 2019. ASX 200 (+0.7%) was initially indecisive as early gains were nearly wiped out by weakness in energy following a 2% drop in oil and with financials subdued after its largest lender CBA reported a decline in FY profits. However, Australia stocks were then boosted in late trade alongside outperformance in NZX 50 (+1.7%) after the RBNZ over-delivered with a surprise 50bps cut, while Nikkei 225 (-0.4%) was pressured as exporters digested a firmer currency and earnings updates. Hang Seng (-0.4%) and Shanghai Comp. (Unch.) were lacklustre as trade concerns lingered and after the PBoC weakened the CNY reference rate to within a whisker of the 7.0000 ‘line in the sand’ level, although losses in the mainland were contained amid reports that China is to revise quota rules for farm product import tariffs in which it will remove soybean oil, rapeseed oil and palm oil import quotas. Finally, 10yr JGBs were underpinned as cautiousness spurred safe-haven demand and with global yields declining amid what some view as an ongoing race to the bottom among some of the world’s major central banks.

PBoC skipped open market operations. (Newswires)

PBoC sets CNY mid-point at 6.9996 (Prev. 6.9683)

China state banks were said to be active in the onshore forwards markets in which they conducted significant amounts of buy-sell swaps which helps lower supply of USD which the market can access to short-sell CNY, according to sources. (Newswires)

China is to revise quota rules for farm product import tariffs in which China MOFCOM confirmed it is to remove soybean oil, rapeseed oil and palm oil import quotas. (Newswires)

China Global Times Editor tweeted China has no motive to hurt US farmers and that it is the current US administration that is hurting them. The editor also stated that whether or not there will be negotiations, China will not yield to the US’s hegemony and that China is prepared for new US tariffs, while he added that Kudlow’s earlier comments were soft and are tailor made for US stock markets as their lies become bubbles flooding US stock markets. (Twitter)

BoJ Summary of Opinions from July 29th-30th meeting stated that although it will take time to reach price goal, it is necessary to persistently continue with the current powerful monetary easing as the momentum toward 2% inflation is maintained. BoJ also noted that if overseas economies deteriorate further and this has a negative impact on Japan's economic activity and prices, the Bank should respond swiftly while a monetary and fiscal policy mix is being pursued, but noted that it is necessary to consider the pros and cons of various easing measures. (Newswires)

UK/EU

Remain MPs are plotting to drag the Queen into a political crisis by demanding that she remove PM Johnson if he refuses to step down in the event he loses a confidence vote in Parliament. (Telegraph) Furthermore, The Times reports that Nicola Sturgeon, the Scottish first minister and SNP leader, opened the door to a “progressive alliance” with Labour if the two parties were able to form a majority after a general election and Labour would not stand in the way of a second referendum on Scottish Independence. (Times)

UK PM Johnson and Japanese PM Abe have underlined their commitment to free trade and pursuing an ambitious trade deal, while UK PM Johnson was clear on the importance of Japanese investment in the UK and need for a smooth Brexit transition for companies no matter the circumstances, according to a UK statement. (Newswires)

Irish Finance Minister Donohoe said he and UK Chancellor Javid had a productive meeting in which Javid reaffirmed the position of PM Johnson on the Withdrawal Agreement, while he added that most of the discussions were about avoiding a hard border in Northern Ireland. (Newswires)

FX

DXY was slightly softer and briefly nudged below 97.50, although its major counterparts were also lacklustre in which EUR/USD just about held on to a 1.1200 handle and with GBP/USD rangebound above 1.2150 amid a lack of ground-breaking Brexit developments. USD/JPY tested the 106.00 level to the downside and JPY-crosses were lower as the cautious risk tone spurred safe-haven flows, while CNH was pressured after the PBoC set the reference rate slightly weaker than expected at 6.9996 vs. Exp. 6.9994 and just shy of the psychologically important 7.0000 level. Antipodeans were the biggest movers as NZD/USD tumbled after the RBNZ announced a deeper than expected OCR cut of 50bps to 1.00% as it sought to ensure reaching its inflation and employment objectives, with further pressure seen in the press conference after Governor Orr stated today's action does not rule out any future action and brushed upon the notion of negative rates, while AUD/USD trickled below 0.6700 in sympathy.

RBNZ cut the Official Cash Rate by 50bps to 1.00% which was deeper than the Exp. 25bps cut. RBNZ said the OCR cut was necessary to support employment and inflation policy remit, while it added the cut demonstrates commitment to meeting the inflation target and that the committee agreed larger initial stimulus would best ensure reaching inflation and employment objectives. Members also noted that estimates of neutral level of rates have continued to fall and that balance of risks to reaching their objectives are tilted to the downside. Furthermore, RBNZ Governor Orr said at the press conference that today's action does not rule out any future action and that it is easily within the realms of possibility we may have to use negative interest rates but added that today's cut reduces the risk of using negative rates. (Newswires)

COMMODITIES

Commodities were mixed amid the cautious risk tone with WTI crude futures flat below the USD 54.00/bbl level and near its lowest since mid-June after the prior day’s 2% drop amid weaker global oil demand growth forecasts, while a slightly wider than expected draw in API crude oil inventories did little to prop up prices. Elsewhere, gold prices benefitted from a softer greenback and increased demand for safe-havens due to the lacklustre risk appetite, which also kept copper contained.  

API Crude Inventories -3.4mln vs. Exp. -2.8mln (Prev. -6.0mln). (Newswires)

EIA Monthly report cuts 2019 world oil demand growth forecast by 70k BPD to 1.0mln BPD Y/Y increase but raised 2020 world oil demand growth by 30k bpd to 1.43mln BPD Y/Y increase, while it sees US crude output to rise by 1.28mln BPD to 12.27mln in 2019 (Prev. 1.4mln bpd increase) and to increase 990k BPD to 13.26mln BPD in 2020 (Prev. 900k BPD increase). (Newswires)

GEOPOLITICS

North Korea stated it launched a new type of tactical guided missile and its leader Kim said military actions send a warning to US and South Korea regarding military drills. (KCNA) 

US

Treasury yields rose slightly on Tuesday, but could not pare back Monday’s gains; the curve was bear-flattening in early trade, and continued to do so through the session, but yields are mixed at settlement (2s yields +2.8bps, 5s +1bps, 10s +0.3bps, 30s -3.1bps). Net/net, however, the bias was towards flattening, with major spreads coming in modestly. The Treasury sold 3-year debt at the lowest yield at auction since 2017, at 1.562%, stopping through by 0.1bps. Cover was a touch softer than recent averages however. Participation metrics were in line with recent averages; dealers took 34.01% (vs. 6-auction average 36.9%), directs took 19.3% (vs. 6-auction average 16.3%), indirects took 46.66% (vs. 6-auction average 46.8%). The auction was generally considered solid, showing demand remains in the front-end of the curve. US T-note futures (U9) settled 2+ ticks lower at 129-24+.

Fed’s Bullard (Dove, Voter) said he would like to ease policy more to raise inflation and inflation expectations as well as steepen the yield curves but added that we will have to see how data appears before deciding whether it is appropriate to cut rates in September. Furthermore, Bullard said he does not see conditions that would warrant a 50bps cut all at once and that it is not clear if Fed wants to ‘pile on’ more monetary accommodation, while he also stated further action may be ‘desirable’ and the economy is adjusting to Fed’s shift from raising to cutting rates.