MNI ASIA OPEN - Underwhelming Tariff Talk

NEWS:

ECB (MNI): Flexible ECB Bond Buys Risk Breaking German Law

Germany's constitutional court may rule against any attempt by the European Central Bank to use proceeds from maturing German bonds bought under its Pandemic Emergency Purchase Programme to buy debt of fiscally weaker countries, advisor to the German finance minister and former chair of the Council of Economic Experts Lars Feld told MNI.

US/CHINA (Politico): President Joe Biden could lift tariffs on just $10 billion worth of Chinese goods under a plan being discussed within the administration, while opening a new exclusion process for firms to win additional relief. That would cover only a small fraction of the duties that his predecessor imposed on approximately $370 billion worth of imports from China.

UK (MNI): Economic Outlook Worse, Stability Risks Rise - BOE
The Bank of England's Financial Stability Report saw deterioration in the domestic and global economic outlook, with downside stability risks rising. Stressed commodity markets, tightening financial conditions and the vulnerabilities of the property market with interest rates rising were all risks put in the spotlight in the report. Nevertheless, UK banks were deemed to be resilient to the increasing stresses.

UK (BBG): Johnson Hit by Key Resignations That Put Premiership in Danger

Two of the most senior members of Boris Johnson’s government quit in quick succession, putting the UK prime minister in grave political danger after months of scandals eroded his authority. Chancellor of the Exchequer Rishi Sunak said in his resignation letter on Tuesday that “we cannot continue like this,” while Health Secretary Sajid Javid told Johnson he’s lost confidence in him. Separately to the Bloomberg article, betting markets have put the probability of Johnson ceasing to be PM in 2022 at between 85-90%.

DATA:

MNI: US MAY FACTORY ORDERS +1.6%; EX-TRANSPORT NEW ORDERS +1.7%
US MAY DURABLE ORDERS +0.8%
US MAY NONDEFENSE CAP GOODS ORDERS EX AIRCRAFT +0.6%

MNI: CANADIAN MAY BUILDING PERMITS +2.3% MOM

US TSYS: 2s5s Inverts For the First Time Since Feb’20

• Risk-off sentiment has dominated FI markets today, with the US coming back from holiday and driving a substantial rally before a partial reversal of the move later on as Treasuries belatedly followed a bounce in equities (S&P 500 close to Friday’s high, Nasdaq touches high since Jun 28).
• Headlines indicate that China tariff discussions could disappoint, removing only $10B worth of the duties imposed by Trump on approximately $370B worth of imports from China.
• With the front end lagging the rally further along the curve (2Y -2bps vs 5Y, 10Y and 30Y -6-7bps), the curve has flipped back into inversion in the case of 2s10s (last mid June) and for the first time for 2s5s since Feb-2020.
• Having initially been driven by a sizeable decline in real yields, falling commodity prices have since seen a greater pivot towards breakevens leading yields lower, with the 5Y breakeven sliding 9bps to 2.55% which aside from Friday’s fleeting low of 2.52% is the lowest since Oct 1 and more firmly at pre-taper levels.
• TYU2 has pulled back from session highs of 120-07 having briefly cleared resistance at Friday's high of 120-04, potentially opening key resistance at 120-19+ (May 26 high) as the bull cycle remains in play.
• With a heavy docket tomorrow, the FOMC minutes and ISM services in particular come into focus with the heightened sensitivity to slowing growth.

FOREX: Dollar Surges on Risk-Off Backdrop

• The greenback made light work of resistance on the way higher Tuesday, rallying against all others to top the G10 pile. The risk-off backdrop pushing the USD Index well clear of the 106.00 handle for the first time since 2002, mirroring the sizeable drop in European and US equities.
• Recession fears and diverging policy outlooks remain responsible, with the continued creep higher in energy prices (not helped by outages in Norwegian gas fields) across Europe prompting serious concerns over the feasibility of the ECB's tightening plans for H2. Markets expressed this view by sending EUR/USD below 1.03 - a move that's prompted a number of sell-side outfits to consider the prospect of parity in the pair in the coming months.
• EUR/USD remains inside the bear channel drawn off the February highs, with initial support crossing at 1.0233, the 1.382 projection of Feb 10 - Mar 7 - 31 price swing.
• Commodity-tied currencies suffered markedly, with CAD and NOK among the session's worst performers (USD/NOK rose as much as 2.5% ahead of the close) as WTI and Brent stalled, dropping as much as 9% on the day as abject growth fears rippled through the market.
• The ISM services index is the calendar highlight Wednesday, with markets remaining on watch for any signals ahead of the Friday nonfarm payrolls release. The data follows the final reading of June services PMI, which is expected unrevised. German factory orders, Eurozone retail sales and the Fed minutes are also on the docket.