• Asian equity markets traded choppy with sentiment spooked overnight amid a China currency sell-off after the PBoC set the reference rate to its weakest level in over a year
• US President Trump said he is not happy about interest rates rising and that a strong USD puts the US at a disadvantage
• Looking ahead, highlights include Canadian CPI & retail sales, Baker Hughes, Fed’s Bullard, BoE’s Tenreyro and ECB’s Coeure

ASIA

Asian equity markets traded choppy with sentiment spooked overnight amid a China currency sell-off after the PBoC set the reference rate to its weakest in over a year. This weighed on US equity futures with selling exacerbated after the Emini S&P and DJIA broke below 2800 and 25000 respectively, while Nikkei 225 (-0.8%) aggressively wiped out initial gains in the panic. Elsewhere, Shanghai Comp. (-0.1%) and Hang Seng (-0.6%) were also downbeat as the currency-related concerns overshadowed the PBoC’s recent efforts including this week’s CNY 540bln net liquidity injection. However, Chinese stocks were recovered from intraday lows as markets began to calm down, while the ASX 200 (+0.3%) remained stable throughout the session with the index somewhat oblivious to the China-induced turbulence. Finally, 10yr JGBs were higher with prices supported amid losses in Japanese stocks and the brief market panic, although gains were capped heading into an enhanced liquidity auction for 2yr, 5yr, 10yr & 20yr JGBs which proved to be uneventful.

PBoC skipped open market operations for a net weekly injection of CNY 540bln vs. last week's CNY 90bln net drain. (Newswires)

PBoC set CNY mid-point at 6.7671 (Prev. 6.7066)

Japanese National CPI (Jun) Y/Y 0.7% vs. Exp. 0.8% (Prev. 0.7%). (Newswires)
Japanese National CPI Ex. Fresh Food (Jun) Y/Y 0.8% vs. Exp. 0.8% (Prev. 0.7%)

Japanese National CPI Ex. Fresh Food & Energy (Jun) Y/Y 0.2% vs. Exp. 0.4% (Prev. 0.3%)

UK

UK PM May is to tell the EU in a speech today that it is time to drop what she feels is their inflexible view on an Irish border solution and “evolve” their position to break the impasse in Brexit talks. (Guardian) Furthermore, May is to put the nation on a no-deal Brexit footing this summer as she prepares a series of public warnings about the impact of leaving the European Union without agreement. (Telegraph)

UK Brexit Secretary Raab faced ridicule on his debut trip to Brussels as Brexit Secretary as the EU flatly rejected PM May’s Chequers plan and mocked spelling errors in translations of the document. (Telegraph)

Brussels has instructed the UK to end a series of illegal tax breaks or face court action as the EU escalates its complaints against Britain's fiscal arrangements ahead of Brexit. (FT)

FX

In FX markets, focus centred on the Chinese currency which was heavily pressured after the PBoC devalued the mid-point for a 7th consecutive day and to its weakest since mid-July last year. This pushed USD/CNH higher by as much as 400 pips towards 6.8400, while CNY briefly weakened beyond 6.8000 which was touted as a key level and had in the past spurred China action, although both pairs have since pulled back from intraday highs on profit taking and amid intervention through state-owned banks. AUD was also pressured due to its China exposure but with downside stemmed after the Chinese currency moves later moderated, and other G10 currencies were relatively unchanged although mild flows were seen into safe-haven JPY amid the bout of turmoil. Elsewhere, RBI were also suspected in intervening to support the INR after it fell to a record low against the greenback, while the DXY was flat overnight but back above the 95.00 level after having recovered from Trump’s latest rant in which he stated he is not happy about interest rates rising and that a strong USD disadvantages the US.
 

COMMODITIES

Commodities were mixed with price action mostly range-bound as focus overnight centred on China’s currency weakness. As such, WTI crude futures have held on to the gains seen following yesterday’s statement from Saudi Arabia which expects a substantial oil stock draw during H2, although upside was capped by resistance at USD 70/bbl. Elsewhere, gold swung between gains and losses as Trump’s comments regarding a dislike for higher rates and disadvantages from a stronger USD initially weighed on the greenback and underpinned the precious metal, although the moves were later pared on further damage control efforts by the White House.

Norway oil rig workers' strike has ended, according to shipowner group. (Newswires)

GEOPOLITICAL

US President Trump said he is much tougher on Russia than past Presidents and that getting along with Russia is positive, while he added he will be Putin's worst enemy if relationship doesn't work out. (Newswires)

US Director of National Intelligence said it is possible for North Korea to denuclearize within a year but added that it is unlikely to happen. (Newswires)

US

Treasuries hit session highs after Trump expressed opposition over interest rate hikes, sending the 2s10s spread to 25.10bps, 3bps narrower at one point. The US also auctioned $13bln of 10-year TIPS in a fairly lacklustre auction, which saw a tail of 1.5bps; cover was softer too, and analysts said that the auction demonstrates that there weren’t any significant inflationary fears, else they may have been seen in the auction results. US 10YR T-notes futures (U8) settled 7+ ticks higher at 120-09+.

US President Trump said he is not happy about interest rates rising and that a strong USD puts the US at a disadvantage, while he also noted that China’s currency is 'dropping like a rock'. Trump added that rate hikes might put the US at a disadvantage since European and Japanese policy remains loose but emphasised that these were his own views. (CNBC)

White House spokesperson later said that US President Trump respects the independence of the Fed and that Trump is not interfering with Fed decisions, while the White House also noted that Trump’s views are well known and that those comments today are reiterations of long held positions. (Newswires)

Fitch said the US is on the strong side of AAA and that trade wars not expected to hit its rating. (Newswires)

Canada’s Deputy Ambassador to the US that their auto tariffs response will be ‘proportional’. (Newswires)