US-China trade tensions simmer

Asia market update: Mid-East holding pattern; Hawkish Fed's Daly; US-CN trade tensions simmer; More tech weakness; AI jail breaks & price increases; US July NFP tomorrow.

General trend and developments

Middle East

-A deal to reopen the Strait of Hormuz reportedly still close but facing friction. While the US and Iran-Oman negotiators are nearing an agreement on shipping corridors, public posturing and logistics disputes on both sides continue to complicate any agreement. Iran pushed back on Trump and Bessent’s comments yesterday of “very soon” and “may have deal tomorrow“. Oil hovers at week's lows;

-Reports of a Chinese tanker exiting the Suez after offloading Saudi Arabian oil at Ain Sukhna, Egypt; A route that Saudi Aramco earlier this week said that oil exports to Asia take 20–25 days longer via the Suez Canal.

Central banks

-An unusually hawkish US Fed’s Daly warned that the Fed should be prepared to act if inflation situation gets out of hand and that by the time inflation anchor drifts, (it is) really hard to get back.

-The Reserve Bank of India (RBI) unanimously kept its benchmark repo rate unchanged at 5.25% for the fourth consecutive meeting and maintained a neutral policy stance, citing global economic uncertainties. The Indian Rupee, which had been trading at two-week highs following its record low ~97 back in July, relinquished some gains to settle ~95/USD.

US-China trade

-China-US tit-for-tat trade tensions continued to simmer with US officials said to have discussed at least 15% tariffs on polysilicon, with offsets for domestic manufacturers. China's Embassy retorted that the US has seriously impeded trade exchanges while China's Commerce Ministry will strengthen drone exports controls to the US. Separately the Pentagon said to be drafting a new US nuclear strategy that emphasizes the possible use of shorter-range tactical weapons in case of a regional war with China or Russia.

Continued tech stock weakness

-SpaceX lost another whopping -13.6% in regular trading the day after its first earnings release, trading <$110 again.

-Flash & SSD memory-maker SanDisk fell -5% in the regular session and a further -8% A/H, as yet again a tech company punished for beating EPS and Rev estimates but only guiding inline.

-Similar story for hard-drive maker Western Digital, -5% in regular trading followed by -12% A/H. Once again the company's largely inline forecasts saw heavy investor selling.

-WDC’s weakness infected 20-year NAND flash memory partner Kioxia in Tokyo today, -8%. Chip-related Tokyo Electron -5.3% and Softbank -4.5% pre-earnings after today’s closed and its UAE data center announcement (see “AI” below).

-Kospi in Korea again volatile, underperforming Asia -4.4% and again having trading halted, dragged down by major components, Samsung -6%, Hynix -10% (with Hynix said to have been impacted by a 'flash crash' during Korea's Nextrade second exchange pre-market period).

AI developments

-Further signs of Chinese AI model makers pivoting toward monetization and sustainable commercialization after period of undercutting competitors: DeepSeek plans a near-term, significant increase in its overall API service pricing (rates and timing TBA. Co to also V4-Flash model at $0.14 per million input tokens and $0.28 per million output tokens to expand production access. Comes on top of its earlier move away from purely flat, ultra-low pricing by introducing a 2x peak-hour surcharge window. (Note; GLM5.2 model maker Zhipu AI already raised its API pricing twice in early 2026.

DeepSeek itself already moved away from purely flat, ultra-low pricing by introducing a 2x peak-hour surcharge window.

-“Stargate UAE” Data Center announced by SoftBank and US firms for a 200MW AI data center in the UAE requiring a ¥2.00T investment (~$13B, no doubt more circular funding as part of the original $500B Stargate project announced in early 2025.

-More circular funding highlighted by Microsoft disclosing in a press release that approximately 70% of its AI sales are driven by OpenAI.

-Meta debuted Muse Code 1.1, an initial AI coding agent designed to directly compete with OpenAI and Anthropic. But within hours the model breached an unnamed company's infrastructure and autonomously altered its internal systems.

-OpenAI’s own known agent breaches worsened as the company stated its own AI agents breached internal systems prior to the much-publicized Hugging Face breach.

Other news

- Japanese yield curve fell for a third day following extensive gains last week, on softer oil and US Treasuries coming off their recent highs. Fin Min Katayama reiterated Japan will not rely on new debt issuance to fill tax revenue shortages, while office vacancies in Tokyo kept hitting multi-year lows, now 2%, leaving Covid-era office surpluses well behind.

- Japan's 30-year JGB auction saw weak demand, with the tail for August ballooning out to 21 bps and a drop in the bid-to-cover ratio to 3.86x (although still above the 12-month average).

- Meanwhile Fitch expects the BOJ to wait until October and then to raise rates faster than markets anticipate, adding that any perception that the BOJ is falling behind is likely to trigger renewed Yen weakness.

- US equity FUTs -0.1% to +0.2% during Asia trading.

Looking ahead (Asian-weighted focus, using Asian time-zone)

-Thu Aug 6th: EU Jun Retail Sales.

-Fri Aug 7th: JP Jun Household Spending, PH Q2 GDP, CN July Trade Balance (Fri night, US July Nonfarm Payrolls & Unemployment Rate).

Holidays in Asia this week

-No holidays in Asia this week.

Headlines/economic data

Australia/New Zealand

-(AU) ASX 200 opens flat at 9,229.

-(AU) Australia Jun Trade Balance (A$): +1.9B v -1.1Be.

-(AU) Australia buying AIM-260 joint advanced tactical missile; Financial terms unspecified [thus far].

-(AU) It is too soon to rule out further RBA rate hike; cites analyst – US financial press.

-(NZ) New Zealand PM Luxon to call for referendum on MMP voting system, if his National Party maintains power in Oct, 2026 election - NZ press.

China/Hong Kong

-(CN) Shanghai Composite opens -0.4% at 3,864; (HK) Hang Seng opens -1.0% at 25,667.

-(CN) China MOFCOM: To strengthen drone exports controls to US [EU market close].

-(CN) China's Embassy [responds to US plans on polysilicon tariffs]: US has seriously impeded trade exchanges.

-(CN) DEEPSEEK.IPO Plans to raise overall pricing for API services [prices, timing TBA] - US financial press.

-(CN) China tech equity rally is now dependent on corporate ‘fundamentals’ – China Securities Journal.

-(CN) China Gold Association: H1 gold production at 229.99Mts, -9% y/y; gold consumption: +1.2%.

-(CN) China: Notes beef imports from Argentina have now hit 50% of the quota.

-(CN) China PBOC sets the yuan mid-point at 6.7895 v 6.7889 prior.

-(CN) China PBOC Open Market Operation (OMO): Sells CNY1B in 7-day Reverse Repos; Net drains CNY270B v drains CNY202B prior.

Japan

-(JP) Nikkei 225 opens -0.6% at 65,900.

-(JP) Japan sells ¥600B VS. ¥600B indicated in 30-year JGB bonds; AVG yield: 3.9370% V 3.9930% prior, bid-to-cover: 3.86X V 4.55X prior.

-(JP) Fitch: Further Yen appreciation likely to require BOJ rate hikes.

-(JP) Japan Fin Min Katayama reiterated govt stance that would not rely on new debt issuance to fill tax revenue shortages. Stated that US Treasury Sec Bessent had trust in its policy stance and saw improvement in Japan's fiscal discipline [EU market close].

-(JP) Japan PM Takaichi: Return to 8% food sales tax after 2 years isn't a hike - Hiroshima, Japan.

-(JP) Softbank and US firms announce "Stargate UAE" 200MW AI data center with investment ~¥2.00T for UAE-based facility- Nikkei Asia.

-(JP) Japan July Tokyo Avg Office Vacancies: 1.95% v 2.0% prior [multi-year low].

-(JP) Japan releases weekly flows data [period ended July 31st]: Foreign buying of Japan equities: -¥392.5B v +¥912.4B prior; Japan buying of foreign bonds: +¥477.9B v -¥810.1B prior.

Korea

-(KR) Kospi opens -1.8% at 6,479.

-(KR) Korea Exchange activates sidecar following Kospi 200 FUTs falling by -5%, programme trading halted for five-minutes.

-(KR) South Korea Jun Current Account Balance: $49.7B v $38.6B prior.

-(KR) South Korea Fin Min: Possibility increased greatly for economic growth to rise to 3% level for first time in 5 years.

-(KR) South Korea's Industry Minister: US expected to announce outcome of oversupply investigation this month.

-(KR) Fitch: South Korea equities' volatility poses near-term credit risk.

-(KR) South Korea Minister: South Korea in race to keep chips edge as China presses.

Other Asia

-(IN) India central bank (RBI) leaves repurchase rate unchanged at 5.25%; as expected [EU market close].

-(IN) RBI Gov Malhotra: Trade uncertainty lingers due to US tariffs - post-rate decision comments [EU market close].

-(TW) Taiwan July Foreign Reserves: $594.3B v $597.2B prior [EU market close].

-(PH) Philippines Jun Unemployment Rate: 4.9% v 4.8% prior.

North America

-(US) July ISM Services Index: 54.1 V 54.5E [US market close].

-(US) Treasury quarterly refunding announcement: To sell $58b in 3-year notes; $42b in 10-year notes and $25b in 30-year bonds [US market close].

-(US) OPENAI.IPO Reportedly says its AI agents breached its own systems before Hugging Face - Axios.

-(US) META Muse Spark 1.1 model breached the systems of a company and made changes to its internal systems - The Information.

-(BR) Brazil central bank (BCB) cuts selic target rate by 25bps to 14.00%; as expected.

-(US) July final S&P services PMI: 54.6 V 53.6E (Confirms 4th month of expansion) [US market close].

-(US) July monthly adp employment change: +44K V +65KE [US market close].

-(US) DOE CRUDE: +2.5M V -1.5ME; GASOLINE: -1.6M V -1.5ME; DISTILLATE: -3.5M V 0ME [US market close].

-(US) Pentagon said to be drafting a new US nuclear strategy that emphasizes the possible use of shorter-range tactical weapons in case of a regional war with China or Russia [US market close].

-(US) Fed's Kashkari (voter, hawkish dissenter): Not calling for dramatic increase in rates; My goal is not to slow economy, my goal is to bring down inflation - CNBC [US market close].

-(US) Reportedly Abdul El-Sayed projected to win Democratic nomination for US Senate in Michigan – press [US market close].

-(US) Pres Trump: Canada has nasty leadership; Reiterates "I love tariffs"; Business is roaring back in the US - campaign event in Las Vegas, Nevada.

-(US) Fed's Daly (non-voter): Fed should be prepared to act if inflation situation gets out of hand - Keynote at ESRI Conference, Tokyo.

-(US) President Trump: US has large amounts of munitions being shipped to US - Truth Social Post.

-(US) Pres Trump said to have called Fed's Warsh 'repeatedly' since becoming Fed Chair - WSJ.

-(US) FDA: Total case count associated with Cyclospora multistate outbreak is now 6,358 illnesses reported from 15 states.

-(US) CDC: Reports 345 salmonella cases, including 36 hospitalizations.

-(US) US State Department approved military sale of 155mm high explosive [HE] M795 projectiles, related equipment to Norway for an estimated value of $270m - US financial press.

-(US) Situational Awareness makes ‘return’ to investing with $400M bet related to a private co. – US financial press.

-(CO) Colombia Central Bank July Minutes: Held rates to assess previous hikes; decision was not unanimous (4-3) with dissenters seeking a 50bps hike.

-(MX) Mexico CitiBanamex Survey of Economists.

Europe

-(EU) Euro Zone July Final Services PMI: 51.7 v 51.6 prelim (confirmed 1st expansion in 4 months); Composite PMI: 52.0v 51.9 prelim [EU market close].

-(EU) Euro Zone Jun PPI M/M: -0.3% v -0.3%e; Y/Y: 4.6% v 4.6% [EU market close].

-(UK) July Final Services PMI: 52.1 v 51.8 prelim (confirmed 1st expansion in 3 months); Composite PMI: 52.2 v 52.1 prelim [EU market close].

-(UK) UK ministers said to have decided to take advantage of fiscal rules that allow investments in infrastructure as ‘assets’ and are moving to provide an extra £9B to housing, Infrastructure and support for businesses. [EU market close].

-(UK) July Official Reserves Changes: -$0.3B v -$6.0B prior [EU market close].

-(UK) July New Car Registrations Y/Y: 11.7% v 11.4% prior [EU market close].

-(FR) France July Final Services PMI: 49.6 v 49.8 prelim (confirmed 6th month of contraction); Composite PMI: 49.4 v 49.6 prelim [EU market close].

-(FR) France Jun Industrial Production M/M: 0.1% v 0.3%e; Y/Y: -0.1% v +0.6%e [EU market close].

-(FR) France Jun Manufacturing Production M/M: -1.1% v -1.0% prior; Y/Y: -1.7% v 2.4% prior [EU market close].

-(IT) Italy July Services PMI: 52.5 v 51.0e (2nd month of expansion); Composite PMI: 52.5 v 51.5e [EU market close].

-(IT) Italy Econ Min Giorgetti stated that the got was seeking EU deficit leeway on energy and defense [EU market close].

-(DE) Germany July Final Services PMI: 49.8 v 49.6 prelim (confirmed 4th month of contraction); Composite PMI: 51.3 v 51.2 prelim [EU market close].

-(ES) Spain July Services PMI: 58.3 v 54.8e (3rd month of expansion); Composite PMI: 56.5 v 53.5e [EU market close].

-(RU) Russia reports strikes on 2 more ships near Odesa - IFX.

-(RU) Russia July Services PMI: 49.0 v 48.2 prior (5th month of contraction) [EU market close].

-(IS) Iceland wants fisheries control in 'any' EU membership deal - FT.

-(IE) Ireland July Services PMI: 55.2 v 54.2 prior (3rd month of expansion).

-(NL) Netherlands Jun Consumer Spending Y/Y: 1.7% v 2.2% prior.

Middle East

-(IR) Iran: There is no decision yet on second stage of US talks [US market close].

-(CN) China tanker exits Suez after offloading Saudi Arabian oil at Ain Sukhna, Egypt - (update).

-(IR) UKMTO received report of an incident 9NM Southeast of Oman; Crew reported safe [time not specified].

Levels as of 01:20 ET

Nikkei 225 -0.8%; ASX 200 +0.4%; Hang Seng -1.9%; Shanghai Composite -0.1%; Kospi -3.8%.

Equity S&P500 Futures +0.2%; Nasdaq100 -0.1%; DAX +0.2%; FTSE100 +0.1%.

EUR 1.1560-1.1545; JPY 157.78-157.56; AUD 0.7061-0.7043; NZD 0.5896-0.5875.

Gold +0.2% at $4,255/oz; BTC +0.9% at $64,961; WTI Crude Oil -0.6% at $74.77/bbl; Copper -0.6% at $6.7058/lbs.