• Asian equity markets struggled to sustain the impetus from the rebound on Wall St where stocks were underpinned by hopes of a pick-up in economic activity
• US President Trump alleged the incompetence of China was behind the “mass worldwide killing” and that China’s disinformation and propaganda attack on the US and Europe was a “disgrace”
• US Senate passed a bill aimed at increasing oversight of Chinese companies which could require Chinese firms to de-list from US exchanges
• The temperamental tone helped the DXY recover from a 3-day consecutive losing streak and extend the rebound from support at the 99.00 level
• The Fed’s meeting minutes from the April confab came in largely as expected, with policymakers pledging to act as appropriate to support the recovery
• Looking ahead, highlights include EZ, UK, US PMIs, CBRT and SARB rate decisions, US Initial Jobless Claims, Existing Home Sales, ECB's Panetta, Fed's Williams, Clarida, Powell, supply from Spain, UK and US

FOMC MINUTES

FOMC Minutes stated that all members agreed the Fed remained committed to using full range of tools to support the economy and that the coronavirus pandemic would weigh significantly on the economy, employment and inflation for the near term, as well as poses considerable downside risks to the outlook in the medium term. Minutes noted that System Open Market Account manager suggested that repo operation be made a backstop by raising the min-rate as conditions have improved in the funding markets and FOMC saw no risk that the EFFR would move below the target range when an IOER hike was raised. A few participants suggested the balance sheet could be used to reinforce forward guidance regarding the path of the federal funds rate through purchases of Treasury securities on a scale necessary to keep yields at short- to medium-term maturities capped at specified levels for a period of time.

FOMC Minutes stated that some commented the Committee could make its forward guidance for the path for the federal funds rate more explicit. For example, the Committee could adopt outcome-based forward guidance that would specify macroeconomic outcomes—such as a certain level of the unemployment rate or of the inflation rate—that must be achieved before it would consider raising the target rate. Furthermore, respondents to Desk surveys attached almost no probability to the FOMC implementing negative policy rates.

Several also said the FOMC may need to provide further clarity regarding its intentions for asset purchases as uncertainty about the evolution of the purchases could increase over time. A number of participants emphasized that regulators should encourage banks to prepare for possible downside scenarios by further limiting payouts to shareholders, thereby preserving loss-absorbing capital.

CORONAVIRUS UPDATE

US COVID-19 cases rose 1.6% to 1,528,235 and the death toll rose 1.5% to 91,664 (Prev. +1.0%), while AFP noted there were 1561 deaths in US from coronavirus in 24 hours citing the Johns Hopkins tracker. (Newswires/AFP) CDC’s Director Redfield remarks that the spread of COVID-19 in the southern hemisphere means it is likely to return in the US in autumn/winter, and therefore raises the potential for another lockdown period. (FT)

US VP Pence said the White House is mulling additional COVID-19 travel restrictions and is watching Latin American countries such as Brazil very closely. (Newswires)

US Senate Majority Leader McConnell said that expanded unemployment benefits will not be included in the next bill and that he is comfortable waiting to observe how prior approved coronavirus spending plays out before moving ahead with the next relief bilk. (Politico)

California will reportedly announce plans to reopen the entertainment industry next week, although LA County which is home to Hollywood faces weeks of delay, according to reports citing Governor Newsom. (AFP)

UK COVID-19 death toll rose to 35,704 (Prev. 35,341) which is an increase of 363 vs. Prev. 545. (Newswires)

ASIA

Asian equity markets struggled to sustain the impetus from the rebound on Wall St where stocks were underpinned by hopes of a pick-up in economic activity after all US states were said to have at least partially reopened and as the continued recovery in oil prices also supported the risk tone, with sentiment in Asia eventually clouded by ongoing US-China tensions. ASX 200 (-0.1%) was initially led higher by strength in energy names although the index later reversed the moves after its top weighted financials sector dipped into the red and amid the souring ties with China. Nikkei 225 (-0.1%) also failed to hold on to opening gains despite reports Japan is set to lift the emergency declarations in Osaka, Kyoto and Hyogo, but with Tokyo not included in the status lifting, while participants digested mixed trade data that showed Exports at a narrower than expected contraction, which was still the worst decline since 2009. Hang Seng (-0.1%) and Shanghai Comp. (+0.1%) were subdued as the war of words between US and China persisted with US President Trump alleging the incompetence of China was behind the mass worldwide killing and that China’s disinformation and propaganda attack on the US and Europe is a disgrace. Furthermore, the White House released a report blasting China for its actions ranging from predatory economic policies to human rights abuses, and the US Senate recently passed the bill aimed at increasing oversight of Chinese companies that could see them delisted from US exchanges. Finally, 10yr JGBs were higher as they tracked the upside seen in T-notes following the hostile US-China rhetoric and decent results at the new US 20-year auction which disproved the naysayers that had anticipated a lacklustre auction, while the BoJ presence in the market and mild deterioration in risk tone also added to the upside for JGBs.

PBoC skipped open market operations and were net neutral on the day. (Newswires) PBoC set USD/CNY mid-point at 7.0868 vs. Exp. 7.0924 (Prev. 7.0956)

US President Trump tweeted criticism on China in which he suggested it is trying desperately to deflect the pain and carnage the country spread throughout the world, while he added disinformation and propaganda attack on the US and Europe is a disgrace and that it all comes from the top. Furthermore, he added they could have easily stopped the plague but they didn’t and that China is on a massive disinformation campaign because they are desperate to have Biden win the presidential race so they can continue to rip-off US as they have done for decades until he (President Trump) came along. (Newswires)

White House released a report which blasted China for predatory economic policies, military build-up, disinformation campaigns and human rights abuses. (Washington Post)

US Senate passes the bill aimed at increasing oversight of Chinese companies which could require Chinese firms to de-list from US exchanges and requires companies to certify no government control. (Newswires)

US regulators are open to changes to shut a potential loophole in regulations aimed at curbing global chip sales to Huawei according to sources, while it was also reported that US Democrat Rep. Sherman introduced a House bill to increase oversight of Chinese companies. (Newswires)

China Foreign Ministry’s Hong Kong Office said US actions on Hong Kong is a blatant interference on China's internal affairs, while it added that Secretary of State Pompeo's actions on Hong Kong cannot scare the Chinese people and China will unswervingly safeguard its sovereignty. (Newswires)

Diplomatic backchannels between US and China are said to have dried up and some also suggest behind the scenes meetings and messages between their officials have ground to a halt. (SCMP)

China urged US to cut official ties with Taiwan and to stop upgrading substantive relations, interfering in China's internal affairs and to stop undermining peace and stability across the Taiwan Strait, as well as US-China relations. (Global Times)

Japanese Trade Balance (JPY)(Apr) -930.4B vs. Exp. -560.0B (Prev. 5.4B). (Newswires) Japanese Exports (Apr) Y/Y -21.9% vs. Exp. -22.7% (Prev. -11.7%) Japanese Imports (Apr) Y/Y -7.2% vs. Exp. -12.9% (Prev. -5.0%)

UK/EU

BoE Governor Bailey acknowledged he has changed his position on negative rates a bit, while he added that there are good reasons to think pass through would be different which might be weaker and that there are mixed reviews on negative rates. (Newswires)

FX

The temperamental tone helped the DXY recover from a 3-day consecutive loss and extend the rebound from support at the 99.00 level. The recent FOMC minutes did little to spur price action as it noted policymakers remained committed to using full range of tools to support the economy and that rates will be left at low levels until they are convinced that the recovery is on track, with participants also looking out for more comments from Fed Chair Powell later today. The resurgence in the greenback forced EUR/USD to give back some of this week’s gains, resulting in the single currency retreating further away from resistance at 1.1000. GBP/USD tested 1.2200 to the downside after a breakdown of support circa 1.2225 and not helped by comments from BoE Governor Bailey who did not rule out negative rates on principle and acknowledged he has changed his position on negative rates a bit. Elsewhere, USD/JPY and JPY-crosses were mixed amid the overnight indecision, while antipodeans pared recent gains with AUD/USD retreating below the 0.6600 handle due to the soured mood and with RBA Governor Lowe commenting that the future remains unusually uncertain and that they are prepared to scale up bond purchases again if necessary but also noted limitations of monetary policy and dismissed the likelihood of negative rates.

RBA Governor Lowe said the future remains unusually uncertain in which one uncertainty is the pace of which restrictions are eased and another source is the level of confidence people have about their future, while he added the RBA remain prepared to scale up bond purchases again if necessary but noted there is a limit to what can be achieved with monetary policy. Furthermore, RBA Governor Lowe added there is no change to thinking on negative rates which are still extraordinarily unlikely and that the costs of negative rates exceed the benefits. (Newswires)

China Global Times stated China has the power to hurt the Australian economy but won't fire the first shot, while it hopes Australia can release more goodwill and take more measures to repair its relationship with its largest trading partner China. (Twitter)

COMMODITIES

Commodities were mixed with in which WTI crude futures extended on gains and approached closer towards the USD 34.00/bbl level on continued momentum from the global oil market rebalancing as economies reopen and following the surprise draw in headline DoE crude inventories. Conversely, gold prices were on the backfoot after meeting resistance around the USD 1750/oz level and as the greenback recovers from a 3-day losing streak, while copper was kept range bound amid the indecisive overnight risk tone.

China is expected to raise crude output by around 2% Y/Y for 2020, according to CNPC Research. (Newswires)

GEOPOLITICS

US President Trump and French President Macron discussed concerns about the deterioration of foreign interference in Libya and have agreed on an urgent need for de-escalation. (Newswires)

US

Treasury yields fell across the curve by between 1-3bps and major curve spreads are mixed at settlement. As US players arrived, the curve was bear-steepening moderately, perhaps due to corporate supply and pre-20-year auction hedging, with the complex content to look through moves in equity markets. However, buying action was seen in wake of reports that the Senate had passed a bill that aimed at increasing oversight of Chinese companies, which could require Chinese firms listed in the US to de-list from US exchanges, and required companies to certify no government control. The story, while not a law yet, reinforces the tensions between US/China. The new 20-year auction was decent, although tailed 0.7bps, though there is no recent auction history to compare the metrics. Last week, analysts had modelled a high yield of 1.26bps, and the stop-out level was 4bps richer than that. Cover was decent at 2.53x when compared to similar auctions, while indirect participation was also encouraging (as seen in the recent 10s and 30s auction), suggesting that there is still foreign demand for USTs even at these low yields. T-note (M0) futures settled 7 ticks higher at 139-02+.