• Asian equities trade lower across the board as Italian political woes and trade concerns grip sentiment overnight
• Cottarelli and Mattarella failed to reach an agreement on forming a government but will continue talks. ANSA report that failure to reach a deal could see elections on July 29th
• Looking ahead, highlights include regional and national German CPIs, US ADP, GDP, Advance Good Trade Balance, BoC Rate Decision, APIs

ASIA

Asian stocks traded lower across the board on spill-over selling from Wall St, with global market sentiment daunted by political uncertainty in Europe and trade concerns after reports the US plans to proceed with tech tariffs and investment restrictions on China. ASX 200 (-0.6%) and Nikkei 225 (-1.6%) were both negative with declines led by financials following hefty losses in the sector stateside which dropped over 3% amid a slump in yields, although losses in Australia were stemmed by gains in defensive stocks. Elsewhere, Shanghai Comp. (-1.8%) and Hang Seng (-1.5%) underperformed on prospects of trade tariffs which outweighed another consecutive firm liquidity effort by the PBoC. Finally, 10yr JGBs traded higher and above the 151.00 level as yields tracked the downside in their US and most European counterparts, aside from Italian government bonds which tumbled on the political disarray and dampened rate hike probabilities for both the ECB and Fed.

China stated the US announcement of plans to proceed with tariffs is contrary to previous consensus and stated it is capable of protecting its own interests no matter what the US does. In related news, there were also reports that the US is said to plan imposing restrictions on some China visas. (Newswires)

PBoC injected CNY 110bln via 7-day reverse repos, CNY 60bln in 14-day reverse repos and CNY 100bln via 28-day reverse repos for a net daily injection of CNY 70bln. (Newswires)
PBoC set CNY mid-point at 6.4207 (Prev. 6.4021)
UK/EU

Italy PM designate Cottarelli left the meeting with Italian’s President Mattarella, where no outcome was reached on forming a government, but reports suggested he will try again today. ANSA then reported Cottarelli was considering giving up the mandate, allowing for a possible election on July 29th, but a source close to Mattarella later stated there was no mention of this and that he asked for more time to name a cabinet. Separately, a spokeswoman to EU’s Juncker said Juncker is convinced that “Italy’s fate does not lie in the hands of the financial markets”. (Newswires)

Italy’s Five Star leader Di Maio said the hypothesis of impeachment is no longer on the table and that he is ready to work with Italy’s President Mattarella, while Italy’s Democratic Party called for immediate dissolution of Parliament and snap election according to a lawmaker. (ANSA/Newswires)

ECB’s Lautenschlaeger (Hawk) said a first hike around middle of 2019 is not entirely out of the ballpark and thinks June may be the month to decide a gradual QE exit. (Newswires)

UK BRC Shop Price Index (May) Y/Y -1.1% (Prev. -1.0%). (Newswires)

FX

JPY held on to most its recent the gains amid the widespread risk averse tone with USD/JPY and JPY-crosses within ongoing downward channels which began last week, while the USD also remained firm on safe-haven bids and with EUR/USD stuck around 10-month lows near the 1.1500 level due to the ongoing European political uncertainty. Furthermore, the PBoC continued to weaken the fix and EM currencies extended on losses with PHP the notable underperformer as it neared a 12-year low against the greenback. Antipodeans also languished with AUD/USD below 0.7500 while NZD/USD struggled to reclaim the 0.6900 handle for most the session following disappointing Building Approvals data.

SNB’s Chairman Jordan said monetary policy of negative interest rates and FX intervention takes into account market fragility, while he also added that developments in recent days show the situation of the currency market does remain fragile. (Newswires)

Australian Building Approvals (Apr) M/M -5.0% vs. Exp. -3.0% (Prev. 2.6%, Rev. 3.5%). (Newswires)
Australian Building Approvals (Apr) Y/Y 1.9% vs. Exp. 4.1% (Prev. 14.5%, Rev. 15.6%)
New Zealand Building Permits (Apr) -3.7% (Prev. 14.7%, Rev. 13.0%)

COMMODITIES

Commodities were subdued during Asia hours with WTI crude futures flat after somewhat choppy trade and with resistance at the USD 67/bbl level, while focus for oil now shifts to the API inventory report after-market in US which is delayed due to the extended weekend. Gold also traded flat with safe-haven bids nullified by an unwavering greenback, while copper languished near this week’s lows on the broad-risk averse tone and underperformance in its largest consumer China.

CME raised Nymex crude oil maintenance margins to USD 2550 per contract from USD 2450 per contract for July. (Newswires)

Ecuador’s Oil Minister stated that OPEC should maintain output cuts at the June meeting, while he added that the latest price fall is a blip and suggests oil prices are not likely to vary strongly. (Newswires)

US could spare EN+ from sanctions if Deripaska reduces stake in the group. (Twitter)

GEOPOLITICS

White House Press Secretary Sanders said US President Trump thinks discussions with North Korea are proceeding well and added the White House prepared for summit to take place June 12th. (Newswires)

North Korea renewed its demand for US and South Korea to cancel military exercises in August, while there were also unconfirmed reports that North Korea was said to have conducted a torpedo test during talks with South Korea and US, although timing is uncertain. Furthermore, Axios noted a CIA assessment report which stated that North Korea will not denuclearize. (Newswires/Twitter/Axios)

North Korean Vice Chairman Kim Yong Chol is to meet with US Secretary of State Pompeo later this week. (Newswires)

Russian Foreign Minister Lavrov will visit North Korea soon, according to North Korean state media. (KCNA)

US

Treasury yields fell on political concerns in Italy/Spain, sending yields on 10-year Tsys back to 2.80%, and the long-end back beneath 3.00%. The 2s10s spread flattened to narrows last seen in 2007, while 2s5s fell 3bps; that said, there was some widening observed in 5s30s which, at settlement, was around 5bps wider. Given the political concerns in Europe, there was much focus on ECB rate pricing, and unsurprisingly, the buying of the curve pushed implied probabilities of rate hikes further out, with the first rate hike not fully priced until the latter part of next year. There was a similar reaction in Fed pricing, with the odds of a rate hike easing to around 75% (from around 97% at the beginning of May). US 10yr T-Notes futures settled 44 ticks higher at 121-07+.

Fed Discount Rate Minutes stated that 12 banks supported keeping discount rate steady ahead of the last Fed meeting. (Newswires)

Canadian PM Trudeau reiterated that he will only sign a NAFTA deal if it is good for Canada and that no NAFTA is better than a bad deal, while there were comments from Canada’s Foreign Minister Freeland who said they had a very productive meeting with US Trade Representative Lighthizer. (Newswires)