Global equities were under pressure after China called off planned trade talks with U.S., increasing the risk of further escalation in the trade war between the world's largest economies. U.S. tariffs on $200 billion in China goods took effect at midnight. China's counter tariffs on $60 billion of U.S. goods also came into effect Monday morning.
President Trump's veiled threat to OPEC calling for an increase in global crude supply was met with a tepid response over the weekend. The Saudi oil minister said that the market was adequately supplied.
The U.S. dollar continues to find support on pullbacks, while treasuries trade under pressure along with Euro sovereign bonds.
Topping investors' agenda this week is the FOMC meeting along with the Fed's updated forecasts and the chair's quarterly press conference. The market is looking for a third 25 bps rate hike and is pricing in another one for December. Investors await Fed Chair Jerome Powell's views on trade and tariffs.
Elsewhere, the Reserve Bank of New Zealand (RBNZ) will meet on Wednesday — no rate hike is expected. The U.K. will post its final estimate of Q2 GDP and the Eurozone will release its September flash harmonized index of consumer prices on Friday. Also on Friday, Canada will release its monthly GDP data for July.
1. Global Stocks See Red
Asian volumes were light and liquidity posed a concern as markets in China, Japan, South Korea and Taiwan were closed for holidays. Both Hong Kong and South Korea will be closed on Tuesday.
Japan's Minister of the Economy Toshimisti Motegi and U.S. Trade Representative Robert Lighthizer are expected to hold trade talks on Monday in New York. Japan is said to considering a bilateral trade agreement with the U.S.
Down under, Australian stocks edged lower as lower commodities prices hit materials stocks while financials slipped on new revelations of wrongdoing in the sector. The S&P/ASX 200 index fell 0.1 percent at the close of trade. The benchmark rose 0.4 percent on Friday.
In Hong Kong, stocks plummeted after the U.S. imposed fresh tariffs on an additional $200 billion of Chinese imports and as Beijing cancelled planned talks between the two sides. The Hang Seng Index fell 1.62 percent.
In Europe, regional bourses opened in the red and continue to trade lower. Market risk sentiment continues to be impacted over trade concerns.
2. OPEC, Russia Reject U.S.' Call For Output Boost
On Sunday, OPEC and Russia ruled out any immediate, additional increase in crude output, effectively rejecting Trump's calls for action to cool the market.
Also, according to OPEC's projections, a strong rise in non-OPEC production could exceed global demand growth, which could eventually put pressure on prices.
Brent crude futures were at $79.74 per barrel, up by 1.2 percent. U.S. West Texas Intermediate (WTI) crude futures have rallied 1.1 percent to $71.52 a barrel.
The market remains concerned about U.S. inventory levels. U.S. commercial crude oil inventories (EIA) are at their lowest level in three years, and while output remains around the record of 11 million bpd, recent subdued U.S. drilling activity points towards a slowdown.
Gold prices have edged a tad lower this morning as the dollar holds firm on news that China has cancelled trade talks with the U.S. Spot gold was down 0.1 percent at $1,198.36, after declining as much as 1.3 percent on Friday.
3. Hong Kong Interbank Rates Jump To 10-Year Highs
Some of the short-term rates banks in Hong Kong charge each other leapt to their highest levels in roughly a decade, in the first trading session after a sudden surge in the tightly controlled HKD.
The overnight HK interbank offered rate jumped to 3.85 percent, it's highest since 2007. One-month Hibor rose less sharply, but still reached nearly 2.17 percent. On Friday, the HKD unexpectedly surged 0.42 percent, its biggest gain since 2003.
Note: The currency, which is pegged in a range of $7.75 to $7.85 to the U.S. dollar, was little changed at $7.8113.
Elsewhere, Italian government bond yields were backing up again, reflecting some unease among investors given this week's deadline for the government to present its budget targets.
Two-year Italian bond yields were at 0.81 percent, while the 10-year yields were at 2.87 percent. The gap over benchmark German Bunds yields has widened from Friday's close to around 241 bps.
4. Dollar Hold Firms, But G7 Finds Some Support
GBP/USD remains handcuffed to Brexit rhetoric. Sterling began Monday's session on the front foot, reclaiming the psychological £1.31 handle after comments from the U.K.'s Brexit Minister Dominic Raab indicated that he is confident that progress will be made. There are also whispers that Prime Minister Theresa May has started contingency planning for possible snap election in November — however, Raab reiterated that "no election is planned."
The EUR is again wading towards the key €1.18 handle. Consensus does not expect this week's data or monetary policy decisions to mount a serious challenge to the currency's recent rally. The FOMC meeting is due on Wednesday, but a 25 bps increase to the 2.25 percent interest rate is largely priced into EUR/USD.
5. German Business Sentiment Slipped In September
Ifo data Monday morning showed that German business sentiment slipped has slipped in September following a sharp rise in August, as companies lowered their business outlooks.
The Ifo Business Climate Index decreased to 103.7 from an upwardly revised 103.9 in August, but still beat forecasts. The street had been looking for a decline to 103.2.
"Despite growing uncertainty, the German economy remains robust," said Ifo President Clemens Fuest.
In manufacturing, managers were less content with the current situation in September compared with the month before. Business expectations, however, hit their highest level since February.
"Manufacturers plan to ramp up production in the months ahead," according to the Ifo Institute.
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