Tensions over Taiwan spiking ahead of possible Pelosi visit, China stepped up its military rhetoric

Notes/Observations

- Geo-political tensions across the Pacific are commanding risk aversion flows as US House Speaker Pelosi visits Taiwan. Multiple unofficial sources suggest she will land around 10:20ET in Taiwan and meet the Taiwan President tomorrow. China Foreign Min reiterated China will take resolute measures if the trip goes ahead. Markets are concerned with a military escalation and/or further trade tariffs between the two nations.

- Economic data has been light, with only UK nationwide house price index coming in at a slight miss but still 11.0% YoY.

- Central Banks continue to tighten after Australia's RBA raised Cash Rate by 50bps to 1.85% as expected. Significant rate decisions expected from India's RBI and UK's BOE on Thursday, both expected to raise by 50bps.

- Asia closed flat to lower with Hang Seng underperforming at -2.5%. EU indices are -0.7% to +0.2% with bond yields lower. US futures are red. Safe haven: Gold +0.2%, DXY +0.1%; Commodity: Brent -0.7%, WTI -0.6%, Copper -1.2%; Speculative: BTC -2.0%, ETH -6.1%.

Looking ahead, US pre-market earnings expected from: Caterpillar, Eaton, Expeditors, Henry Schein, Huntsman, Illinois Tool Works, JetBlue, KBR, Marriott, Marathon, Raiffeisen, Sealed Air, S&P Global, Molson Coors Beverage and WEC Energy.

Asia

- Reserve Bank of Australia (RBA) raised the Cash Rate Target by 50bps to 1.85% (as expected). Committed to doing what was necessary to ensure inflation returned to target over time. To take further steps to normalize monetary conditions over months ahead but not on a pre-set path. Size and timing of future rate increases to be guided by data.

- South Korea July CPI M/M: 0.5% v 0.4%e; Y/Y: 6.3% v 6.3%e.

- Bank of Korea (BOK) reiterated view that inflation to continue >6.0% for a while, uncertainty on CPI path was high.

- Japan Fin Min Suzuki: Will continue to take necessary steps on covid and economy. Recent yen currency moves were rapid. Desirable for FX to move in line with economic fundamentals.

Taiwan

- US House Speaker Pelosi said to be planning to meet Taiwan’s president on Wednesday (Aug 3rd).

- China said to conduct military drills in the South China Sea. Several Chinese warplanes have recently flown close to the median line of the sensitive Taiwan Strait on Tuesday morning, Several Chinese warships have stayed close since Monday.

- China to ban food imports from >100 companies in Taiwan (**Note: Move by China is seen as a retaliation for potential visit of US House Speaker Nancy Pelosi’s to Taiwan).

Energy

- Saudis said to push OPEC+ to increase oil production on Wednesday (Aug 3rd).

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 -0.63% at 434.70, FTSE +0.12% at 7,422.51, DAX -0.65% at 13,392.54, CAC-40 -0.48% at 6,405.79, IBEX-35 +0.10% at 8,093.24, FTSE MIB -0.66% at 22,282.00, SMI -0.67% at 11,071.18, S&P 500 Futures -0.64%].

Market Focal Points/Key Themes: European indices open lower across the board and stayed broadly in the red as the session wore on; general risk-off attitude being attributed to geopolitical concerns of several fronts; better performing sectors include energy and utilities; sectors among those leading to the downside are consumer discretionary and financials; Ibex supported following better than expected employment figures from Spain; Bunzl acquires Containit; Rio Tinto completes sale of Cortez Gold Royalty; earnings expected during the upcoming US session include Dupont, Caterpillar, Uber and Paypal.

Equities

- Energy: BP [BP.UK] +4% (earnings; buyback; dividend increase), Siemens Gamesa [SGRE.ES] -0.5% (earnings).

- Financials: Raiffeisen Bank [RBI.AT] +7.5% (earnings), Generali [G.IT] -1.5% (earnings).

- Healthcare: AlzeCure Pharma [ALZCUR.SE] +10% (Alzheimer's drug trial results).

- Industrials: Maersk [MAERSKB.DK] +1% (raises outlook again; prelim results).

- Telecom: Bouygues SA [EN.FR] +1% (earnings).

Speakers

- Moody's: EU stagflation risks rising in the wake of Russia-Ukraine conflict.

- Philippines Central Bank (BSP) Gov Medalla stated that inflation might have peaked in July. Reiterated stance that the Aug rate hike could be either 25bps or 50bps.

- India Fin Min Sitharaman stated that FX intervention was not intended to fix the value of the INR currency (Rupee); wanted to assure there was no collapse of the currency.

- Bank of Korea (BOK) July Minutes:One member noted that stabilizing inflation was most important. One member noted that additional rate hikes were needed. One member added that a decision on further tightening to depend on pace of growth and change in inflation trend. One member noted that preparation was needed in case of big decline in house prices.

- China Foreign Ministry Spokesperson Hua Chunying stated that China to take resolute measures if Pelosi trip went ahead. Pelosi visit to Taiwan would be a 'dangerous gamble'. Taiwan faces 'disastrous consequences' of US action.

Currencies/Fixed income

- Risk aversion sentiment was evident during the EU session as a potential impending visit to Taiwan by US House Speaker Nancy Pelosi prompted some safe-haven flows.

- USD/JPY lower to test just above 131.00 area. JPY currency getting a boost on safe-haven flows as US-China tensions over Taiwan and deepening worries about a global economic slowdown boosted the appeal of safe-haven assets. Yen registering a fifth consecutive session of gains.

- AUD currency was softer after RBA noted that it would further tighten but rates were not on a pre-set path.

Economic data

- (UK) July Nationwide House Price Index M/M: 0.1% v 0.2%e; Y/Y: 11.0% v 11.4%e.

- (AU) Australia July Commodity Index: 151.3 v 163.9 prior.

- (ES) Spain July Net Unemployment Change: +3.2K v -42.4K prior.

- (CH) Swiss Q3 SECO Consumer Confidence: -41.7 v -32.0e.

- (CH) Swiss July PMI Manufacturing: 58.0 v 56.2e (24th month of expansion).

- (CH) Swiss weekly Total Sight Deposits (CHF): 747.1B v 746.6B prior; Domestic Sight Deposits: 635.3B v 637.0B prior.

- (BR) Brazil July FIPE CPI (Sao Paulo) M/M: 0.2% v 0.2%e.

- (HK) Hong Kong Jun Retail Sales Value Y/Y: -1.2% v 0.0%e; Retail Sales Volume Y/Y: -4.1% v -0.4%e.

Fixed income issuance

- (ID) Indonesia sold total IDR19.1T vs. IDR15.0T target in bills and bonds.

- (UK) DMO sold £2.75B in 1.00% Jan 2032 Gilts; Avg Yield: 1.782% v 2.145% prior; bid-to-cover: 2.38x v 2.45x prior; Tail: 0.4bps v 0.2bps prior.

Looking ahead

- 05:25 (EU) Daily ECB Liquidity Stats.

- 05:30 (HU) Hungary Debt Agency (AKK) to sell 3-Month Bills.

- 05:30 (BE) Belgium Debt Agency (BDA) to sell 3-month bills.

- 05:30 (EU) ECB allotment in 7-Day Main Refinancing Tender (MRO).

- 05:30 (ZA) South Africa to sell combined ZAR3.9B in 2031, 2035 and 2040 bonds.

- 06:30 (EU) ESM to sell €1.1B in 3-month Bills.

- 06:45 (US) Daily Libor Fixing.

- 07:00 (MX) Mexico Jun Leading Indicators M/M: No est v -0.23 prior.

- 08:00 (BR) Brazil Jun Industrial Production M/M: -0.3%e v +0.3% prior; Y/Y: -0.2%e v +0.5% prior.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:55 (US) Weekly Redbook LFL Sales data.

- 09:00 (SG) Singapore July Purchasing Managers Index (PMI): 50.1e v 50.3 prior; Electronics Sector Index: No est v 50.8 prior.

- 09:00 (EU) Weekly ECB Forex Reserves.

- 09:00 (EU) ECB weekly QE bond buying update.

- 09:30 (CA) Canada July Manufacturing PMI: No est v 54.6 prior.

- 10:00 (US) Jun JOLTS Job Openings: 11.000Me v 11.254M prior.

- 10:00 (US) Fed’s Evans.

- 10:30 (CA) Canada to sell 3-month, 6-month and 12-month bills.

- 11:00 (DK) Denmark July Foreign Reserves (DKK): No est v 533.8B prior.

- 11:00 (CO) Colombia Jun Exports: $5.6Be v $4.6B prior.

- 16:30 (US) Weekly API Oil Inventories.

- 17:00 (KR) South Korea July Foreign Reserves: No est v $438.3B prior.

- 18:00 (CO) Colombia Central Bank July Minutes.

-18:45 (NZ) New Zealand Q2 Unemployment Rate: 3.1%e v 3.2% prior.

-18:45 (NZ) New Zealand Q2 Employment Change Q/Q: 0.4%e v 0.1% prior; Y/Y: 2.3%e v 2.9% prior.

- 18:45 (US) Fed’s Bullard.

- 19:00 (AU) Australia July Final PMI Services: No est v 50.4 prelim; PMI Composite: No est v 50.6 prelim.

- 20:30 (JP) Japan July Final PMI Services: No est v 51.2 prelim; PMI Composite: No est v 50.6 prelim.

- 20:30 (HK) Hong Kong July PMI (Whole Economy): No est v 52.4 prior.

- 20:30 (SG) Singapore July PMI (Whole economy): No est v 57.5 prior.

- 21:00 (NZ) New Zealand July ANZ Commodity Price M/M: No est v -0.4% prior.

- 21:10 (JP) BOJ bond buying operation for 1-3-year, 3-5-year and 10-25-year.

- 21:30 (AU) Australia Q2 Retail Sales (Ex-Inflation) Q/Q: 1.2%e v 1.2% prior.

- 21:45 (CN) China July Caixin PMI Services: 54.0e v 54.5 prior; PMI Composite: No est v 55.3 prior.

- 22:35 (CN) China to sell 1-year Upsized Bond.