• Italy’s 5SM and League completed an accord on a coalition government with Conte now given the mandate to form a 5 Star/League coalition government
• Asian stocks traded cautiously after trade war concerns resurfaced following the US announcement to impose steel and aluminium tariffs on EU, Canada and Mexico
• Looking ahead, highlights include UK and Eurozone mfg PMIs, US NFP, ISM mfg, Baker Hughes and Fed’s Kashkari

TRADE

US metal tariff exemptions for EU, Canada and Mexico expired overnight which sees US’ closest allies to be subject to 25% tariffs on steel and 10% on aluminium heading into the US. Elsewhere, there were also comments from President Trump that the US will agree to a fair NAFTA deal or no deal at all. (Newswires)

Mexico’s Economy Minister Guajardo said it would be difficult to reach a NAFTA deal before the Mexican election following the US tariff decision but added that talks are still continuing. Guajardo also commented he does not expect a trade war after US tariffs on steel and aluminium and that tariffs affect USD 4bln of trade between Mexico and the US. (Newswires)

Canada PM Trudeau said they will establish proportional compensatory measures to US tariffs and stated he was told a five-year sunset clause was a pre-condition for a meeting with President Trump to finalise NAFTA, which he said Canada could not accept. (Newswires)

UK Trade Minister Fox said the UK is not ruling out counter measures after the US imposed steel and aluminium tariffs. (Newswires)

ASIA

Asian stocks traded cautiously after trade war concerns resurfaced following the US announcement to impose steel and aluminium tariffs on EU, Canada and Mexico, which in turn triggered threats of retaliation against the US. In addition, a slight miss on Chinese Caixin Manufacturing PMI data and looming US NFP jobs data have added to the tentative tone. ASX 200 (-0.4%) was led lower by financials with ANZ Bank pressured on cartel allegation charges related to a share sale in 2015 and as the energy sector also suffered from weakness in crude prices, while Nikkei 225 (+0.1%) shrugged off its opening losses on favourable currency moves. Hang Seng (-0.1%) and Shanghai Comp. (-0.5%) were indecisive and swung between gains and losses as participants digested a range of factors including weaker than expected Caixin Manufacturing PMI data and a firm net liquidity injection of CNY 410bln for the week, as well as the debut of China A-shares in the MSCI Emerging Market benchmark index. Finally, 10yr JGBs were lower after the BoJ reduced purchases of 5yr-10yr maturities in its Rinban announcement which saw a breakdown of near-term support at 150.94, while price action was also consistent with a recovery in Tokyo stocks and US yields.

Chinese Caixin Manufacturing PMI (May) 51.1 vs. Exp. 51.2 (Prev. 51.1). (Newswires)

PBoC injected CNY 40bln via 7-day reverse repos, CNY 10bln via 14-day reverse repos and CNY 30bln via 28-day reverse repos, for a net weekly injection of CNY 410bln vs. last week's CNY 30bln net drain. (Newswires)
PBoC set CNY mid-point at 6.4078 (Prev. 6.4144)

UK/EU

BoE’s Governor Carney said UK real wages have not risen in a decade and stated that focus on trade in goods is not the right one, when asked about the fresh US tariffs. (Newswires)
 

UK Brexit Secretary Davis is reported to be drawing up a new plan that would give Northern Ireland joint EU/UK status as well as border buffer zone. The province would operate a double hatted regime of European and British regulations simultaneously, so it can trade freely with both. Branded a ‘special economic zone’, it will be for local traders such as dairy farmers – who make up 90 per cent of the cross-border traffic – and share the same trade rules as south of the border. (The Sun)

A group of Labour supporters and trade unions are to launch a major campaign to shift the party’s position on Brexit. The organisers are to argue that a programme of economic reform would be hampered by a damaging exit from the EU, which may threaten jobs and investments. (The Guardian)

Italy’s 5SM and League completed an accord on a coalition government and Italy's President Mattarella later gave Conte the mandate to form a 5 Star/League coalition government, which Conte accepted and is to be sworn in on Friday. Italy's Conte said M5S leader Di Maio to be Labour and Industry Minister and Deputy PM, League leader Salvini is to be Interior Minister and Deputy PM, while Tria was nominated as Finance Minister and Milanesi as Foreign Minister. (Newswires)

FX

The USD saw marginal gains overnight in which the DXY reclaimed the 94.00 level amid higher yields overnight. This slightly pressured its major counterparts with GBP/USD extending on losses after initial recovery attempts were hampered by resistance at 1.3300, while losses in EUR/USD were limited following the progress in Italian politics with Conte set to be sworn in as PM under a M5S-League coalition government on Friday. Elsewhere, JPY was weaker across the board with USD/JPY reclaiming the 109.00 handle, while MXN and CAD were subdued following the US tariff announcement and with the latter also reeling from the recent Canadian GDP miss.

COMMODITIES

Commodities were uneventful overnight with WTI crude futures below the USD 67.00/bbl amid the risk averse tone across global markets and a slightly firmer greenback, while yesterday’s wider than expected DoE crude draw failed to provide any sustained support. Gold prices were also subdued with the precious metal stuck near the prior day’s lows as participants remained tentative ahead of the upcoming US jobs data, and copper also lacked impetus amid the indecision seen in Chinese markets.

US extended sanctions deadline on 3 firms linked to Deripaska including Rusal (486 HK) and EN+. (Newswires)

GEOPOLITICS

US President Trump said there is ‘a very good chance’ a denuclearization deal with North Korea will require more than one meeting and that it will cover missiles. Elsewhere, US Secretary of State Pompeo said he is confident things are proceeding in the correct direction and that they have made real progress in the past few days, while he believes North Korea is contemplating a fundamentally different track from the past. (Newswires)

North Korean leader Kim said their will for denuclearization of the peninsula is unchanged, consistent and fixed, while he hopes that North Korea and US ties will be solved step by step and added North Korea has agreed to a summit with Russia. (Newswires)

US

Treasury futures were mixed on Thursday, though the general bias was towards lower yields, supported by trade war fears after the US slapped tariffs on EU, Canada and Mexico. The complex saw a moderate sell off a bit later in the session after Italy agreed on a government deal but then paired back those losses as focus moved on Spain. Volume was thin in the front contract as open interest shifted into September contract. Most of the price action was concentrated in the belly and long ends of the curve, where yields were lower by c.1bps; 2s10s and 2s30s where narrower by c.3bps with the former at the flattest level in nearly 11 years. US 10yr T-Notes futures (Sep 2018) settled 45 ticks higher at 120-14.

Fed's Brainard (Voter, Dove) said gradual rate hikes appropriate but stated the Fed is alert to emerging market risks and ready to adjust policy as needed. Brainard also commented that above trend growth and stimulus calls for gradual hikes, while she added that global financial market stress and possible channels to US are important consideration for monetary policy. (Newswires)

Fed’s Mester (Voter, Hawk) suggested rates should be raised gradually and noted wages are rising which will be reflected in data soon. Furthermore, Mester does not see inflation spiking higher and noted Italy has not changed the view of economic fundamentals in the US. (Newswires)

Fed's Bullard (Non-Voter, Dove) reiterated that they are already at a neutral rate and that it is appropriate for Fed to hedge views on rate hikes, while he added that inflation would have to surprise to the upside for rate hikes. (Newswires)