• Asian equity markets traded mixed as China concerns counterbalanced the momentum from a firm Wall St handover
• US Secretary of State Pompeo said he has certified to Congress that Hong Kong is no longer autonomous from China
• US President Trump administration is reportedly considering suspending Hong Kong's preferential US tariff rate for exports to US
• Huawei CFO lost the double criminality aspect of the US extradition case in Canadian court and the Canadian judge is mulling whether to proceed with extradition
• DXY briefly extended its retreat below the 99.00 level, EUR/USD remains above 1.1000, GBP/USD remains sub-1.2300
• NIH's Fauci said that testing is improving and hopes to start phase 3 coronavirus trial by July
• Looking ahead, highlights include regional & national German CPIs, EZ consumer confidence (F), US durable goods, US GDP (2nd), IJC, PCE Prices, DoEs, BoE's Saunders, Fed's Williams, supply from the UK & US

CORONAVIRUS UPDATE

US CDC reported total cases of coronavirus rose to 1,678,843mln from 1,662,414 and the death toll rose to 99,031 from 98,261, while AFP tweeted that US coronavirus death toll topped 100,000 citing the Johns Hopkins tracker. (Newswires/AFP/Twitter)

NIH's Fauci said it is safe for states to reopen as long as they do it carefully, while he added testing is improving and hopes to start phase 3 coronavirus trial by July. (Newswires)

German Foreign Minister Maas said they will lift the travel warning for EU countries from June 15th and will later decide how to deal with travel warnings for other countries including Turkey. (Newswires)

ASIA

Asian equity markets traded mixed as China concerns counterbalanced the momentum from a firm Wall St handover where ongoing reopening efforts and a continued resurgence of cyclicals underpinned the major US indices. ASX 200 (+1.4%) was higher with the top weighted financials sector leading the broad gains in the index although energy lagged following a pullback in oil prices which was exacerbated by bearish inventory data, while Nikkei 225 (+1.5%) benefitted from favourable currency moves and the KOSPI (+0.4%) failed to stay afloat despite the BoK delivering a widely expected 25bps rate cut to bring the 7-Day Repo Rate to 0.50%. Elsewhere, Hang Seng (-2.1%) and Shanghai Comp. (-0.4%) were choppy with mainland China initially supported after another firm liquidity effort by the PBoC which injected CNY 240bln through 7-Day Reverse Repos. However, the gains were short-lived and Hong Kong markets underperformed due to the ongoing US-China tensions with Trump administration said to be considering suspending Hong Kong's preferential tariff rate for exports to US which means they could face the same tariffs US had imposed on mainland China. Furthermore, Global Times suggested the nuclear option of dumping USD-denominated assets was among the tools for China to exert financial pain on the US and China’s Embassy in US stated that Beijing will take all necessary counter measures for meddling, while the US House passage of the sanctions bill for Uighur human rights abuses and Huawei’s CFO losing a key battle in the extradition case, all added to the ongoing toxic relationship between the world’s top economic powerhouses. Finally, 10yr JGBs were flat amid similar uneventful after-hours trade in T-notes and indecisiveness in stocks, as well as mixed results at today’s 2yr JGB auction.

PBoC injected CNY 240bln via 7-Day Reverse Repos and maintained the reverse repo rate at 2.20%. (Newswire) PBoC set USD/CNY mid-point at 7.1277 vs. Exp. 7.1400-7.1450 (Prev. 7.1092)

US Secretary of State Pompeo said he has certified to Congress that Hong Kong is no longer autonomous from China and does not continue to warrant treatment under US laws in the same manner as US laws were applied to Hong Kong before July 1997. (Newswires)

US President Trump administration is reportedly considering suspending Hong Kong's preferential US tariff rate for exports to US in response to China's planned security law, according to sources. Furthermore, the report noted that this preferential tariff rate suspension could put the same tariffs on Hong Kong which the US has already imposed on mainland China.  (Newswires)

US House passed bill calling for sanctions on Chinese officials related to the crackdown on Uighur minorities as expected with the final vote count at 413-1, which sends the bill to US President Trump for signing. (Newswires)

China Embassy in US reiterated Hong Kong affairs are internal, while it added that US Security legislation is very narrow and China will take all necessary counter measures for meddling. Furthermore, it stated that China legislature will vote on security bill today and the law would allow China to establish security bases in Hong Kong to provide stability as per the Basic Law approved between China and Hong Kong. (Newswires)

Huawei CFO lost the double criminality aspect of the US extradition case in Canadian court and the Canadian judge is mulling whether to proceed with extradition. Huawei later stated it is disappointed by the Canadian Court ruling against CFO Meng Wanzhou's bid to avoid extradition but expects the judicial system in Canada will ultimately prove innocence. The Chinese Embassy also said it is strongly dissatisfied and firmly opposes the Canadian court's decision on the Huawei CFO, while it added that Canada is an accomplice to the US efforts to harm Huawei and Chinese tech, as well as urged for the immediate release of the CFO. (Newswires)

BoK cut the 7-Day Repo Rate by 25bps to 0.50% as expected, while BoK Governor Lee said the rate decision was unanimous and they will deploy policy tools other than interest rates where appropriate. Furthermore, BoK revised 2020 GDP growth forecast to -0.2% from +2.1% and sees 2021 GDP growth at +3.1%, while it added that growth slowed considerably, consumption remains sluggish and uncertainties to growth path are very high. (Newswires)

UK/EU

BoE Governor Bailey said it is important we consider negative rates but also their potential issues and that risks are undoubtedly to the downside for a longer and harder recovery, while he added that the pace at which activity recovers will be limited by continued caution among households and businesses. (Newswires)

UK PM Johnson said businesses could need support in the coming months to hire new workers and we want to have details in June or early July on restarting the economy. UK PM Johnson also stated that it is very likely we will need a bigger employment support programme, while he added that they want to keep taxes in the UK as low as we can and will have to wait to find out if the UK would raise taxes. (Newswires)

UK PM Johnson will reportedly meet with European leaders in Brussels next month for Brexit talks, while there were separate comments from French Foreign Minister Le Drian that Brexit talks are going badly and deep differences remain. (The Times/Newswires)

FX

In FX markets, the early constructive risk tone weighed on the DXY which briefly extended its retreat below the 99.00 level and with the increasing US-China tensions also doing no favours for both countries’ respective currencies which saw the CNH weaken to a fresh record low. EUR/USD was kept uplifted from the EUR 750bln economic recovery proposal which had boosted the single currency to above 1.1000. GBP/USD was less inspired due to Brexit  pessimism from both sides of the Channel after UK Brexit Negotiator Frost stated the mandate in key areas is not likely to reach an agreement and the French Foreign Minister suggested discussions are going badly with deep differences remaining. Elsewhere, USD/JPY and JPY-crosses have largely reflected the indecisive risk appetite in stocks, while antipodean currencies were initially steady as their exposure to China and recent CNY weakness is offset by their high beta statuses and after RBA Governor Lowe continued to firmly dismiss negative rates, but then dipped in late trade as the risk tone began to sour.

RBA Governor Lowe said they will maintain expansionary settings until progress is being made towards employment and we are confident on inflation and said there will be a further decline in employment for May but jobs data was not as bad as previously thought. Lowe also stated that 25bps Cash Rate is effectively as low as it can go and that rates are to stay this low for some years and that they could purchase more government bonds if more QE is needed but does not currently see a need to do so, while he suggested that negative rates are extraordinary unlikely which come with a cost to the financial system and that he doesn't think negative rates will work. (Newswires)

Australian Capital Expenditure (Q1) -1.6% vs. Exp. -2.6% (Prev. -2.8%). (Newswires) Australian Private Capital Expenditure 2020-2021 (Estimate 2) 90.9B (Prev. 100.2B) Australian Private Capital Expenditure 2019-2020 (Estimate 6) 115.4B (Prev. 120.3B)

RBNZ Financial System Policy Head Fiennes said negative official cash rate would not pose major stability concerns, while Fiennes added that the RBNZ has scope to increase lending to banks if required and could tweak capital buffer transition period if required. (Newswires)

New Zealand ANZ Business Confidence (May) -41.8 (Prev. -66.6). (Newswires) New Zealand ANZ Activity Outlook (May) -38.7 (Prev. -55.1)

COMMODITIES

WTI crude futures continued to decline with selling pressure exacerbated after a bearish private inventory which showed a significant surprise build in headline crude stockpiles of 8.7mln bbls which dragged prices to below USD 32/bbl. Elsewhere, gold prices saw marginal gains after it recently bounced off support to reclaim the USD 1700/oz level with the precious metal also helped by recent USD weakness, while copper prices are rangebound after China-related concerns somewhat clouded the initial positive momentum in the region. 

US Private Inventory Crude Stocks +8.7mln vs. Exp. -1.9mln (Prev. -4.98mln). (Newswires)

Russian President Putin and Saudi Crown Prince spoke on the phone and agreed on further coordination on oil output cuts, according to the Kremlin. (Newswires)

GEOPOLITICS

US President Trump's Administration is to end Iran deal waivers on work involving the modification of Iran's heavy water reactor plant, while there were later comments from US Special Representative to Iran Hook that US policy gives Iran a choice which is negotiate with US or manage economic chaos. (Washington Post/Newswires)

North Korea described plans to put strategic armed forces on a high alert operation, which a senior researcher suggested means it would be able to immediately launch a nuclear attack anywhere in Northeast Asia. (Newswires) 

US

Treasuries pared some of Tuesday’s weakness as risk appetite came under pressure from amplified China/Hong Kong tensions, although supply likely provided some resistance. Overnight the TPLEX had been choppy, although as equities moved to the downside, the curve bull flattened and held onto its bid despite equities reversing their weakness into the afternoon. However, in the context of Tuesday’s chunky bear-steepening, perhaps participants were cautious to let rates back up any further, particularly with growing Fed talk of YCC. Meanwhile, supply continued on Wednesday as the Treasury sold its new 5-year Notes at the upsized USD 45bln amount, which did not go so smoothly, tailing the 0.321% WI by 1.2bps, while the 2.28x cover ratio was less than both the average and the prior, while dealers took a larger share than average versus the previous. Note, that due to the roll period, the September (Q) T-Note contract now has the largest open interest. T-note (M0) futures settled 5 ticks higher at 138-27.

Fed's Beige Book said economic activity declined in all districts, falling sharply in most, reflecting disruptions associated with the COVID-19 pandemic, while it stated that consumer spending fell further as mandated closures of retail establishments remained largely in place during most of the survey period and declines were especially severe in the leisure and hospitality sector with very little activity at travel and tourism businesses. Beige Book added that employment continued to decrease in all districts with steep losses in most districts as social distancing and business closures affected employment at many firms. Furthermore, it noted pricing pressures varied but were steady to down modestly on balance and weak demand weighed on selling prices. (Newswires)

Fed's Bullard (dove, non-voter) said he does not think this is the time to think about balance sheet reductions and will not be entertaining rate rises until the medium-term. Bullard also stated that YCC would not have much impact at this moment with long-term interest rates this low, while he favours forward guidance based on the state of the economy and not the calendar. (Newswires)

Boston Fed released loan participation forms for lenders interested in the main street lending program. (Newswires)

US President Trump tweets big tech is doing everything to censor in advance of the 2020 election and if that happens, we no longer have our freedom, while ha will never let it happen and suggested to stay tuned, There were also comments from the White House that President Trump will sign an executive order shortly regarding social media companies today. (Newswires)