• Asian equity markets were mostly lower as the region took its cue from the underwhelming performance on Wall St where focus was on the FOMC
• Most major US indices finished negative with energy and financials resuming their underperformance, although tech continued to buck the trend
• The Fed stood pat on rates as expected, set monthly UST purchases at USD 80bln and MBS at USD 40bln respectively, did not introduce YCC or forward guidance
• The USD saw a choppy reaction to the FOMC with the initial move in the DXY being to the downside before later being fuelled by a safe-haven bid.
• Texas reported 2504 new positive coronavirus cases which was the largest increase since the outbreak began
• SCMP article suggested that nuclear arms control could be the next battleground in US-China rivalry after Beijing rejected an invitation to join treaty talks
• Looking ahead, highlights include Swedish CPI, US Initial Jobless Claims, PPI, EuroGroup Meeting, supply from Italy, UK & US

FOMC

FOMC left FFR unchanged at 0.00%-0.25% as expected. Fed set monthly UST purchases at USD 80bln and MBS at USD 40bln with the schedule to be revisited on 25th June, while it did not introduce YCC or forward guidance.

Fed reiterated its pledge to use full range of tools to support the US economy and that it expects to maintain the current FFR until it is confident the US economy has weathered the recent events. Fed also repeated that the COVID-19 crisis will weigh heavily on economic activity, employment and inflation in the near term and poses considerable risks over the medium-term, while the dot plot showed no negative rates with the Committee expecting rates to stay at current levels through its forecast horizon and economic growth is forecast to contract by 6.5% this year before rebounding 5% next year.

Fed Chair Powell stated that in recent weeks some indicators suggested stabilization in some sectors of the US economy and that preserving flow of credit is essential to setting stage for US recovery, while he added the Fed will continue to use its powers "forcefully, proactively and aggressively”. Furthermore. Powell added that the Fed discussed forward guidance and asset purchases at its meeting, while they also reviewed YCC and stated its effectiveness is still an "open question".

Fed Chair Powell noted during the Q&A that the Fed has to be humble about its ability to move inflation up and May NFP was a great surprise, but it is still a long road ahead and his assessment is a significant chunk of people will remain unemployed for some time in which it could be years until they can find jobs again. Powell also stated that he is not even thinking about raising rates, while he suggested purchases are supporting accommodative financial conditions and they are in the "final run up" to launching Main Street Lending Facility.

CORONAVIRUS UPDATE

US COVID-19 Cases +17,376 (Prev. +17,598) at 1,973,797; death toll +1,208 (Prev +550) at 112,133. In related news, AFP later tweeted US topped 2mln coronavirus cases citing the Johns Hopkins tracker and Texas reported 2504 new positive coronavirus cases which was the largest increase since the outbreak began. (Newswires)

Johnson & Johnson (JNJ) Chief Science Officer said the Co. has moved more quickly than expected on COVID vaccine candidate which has allowed us to accelerate timeline for human trials. (Newswires)

UK COVID-19 case count rose by 1003 vs. Prev. 1387 increase and the death toll rose to 41,128 (Prev. 40,883) which is an increase of 245 vs. Prev. 286 increase. UK PM Johnson said we can proceed to move to further adjustments to the lockdown in England, although suggested they are not looking to ease the lockdown further until 4th July at the earliest and stated that the R rate is still 0.7-0.9. In related news, UK PM Johnson plans to scrap two-metre social distancing rule by September so schools can fully reopen in the new school year. (Newswires/Telegraph)

ASIA

Asian equity markets were mostly lower as the region took its cue from the underwhelming performance on Wall St where the spotlight was on the FOMC which maintained rates as expected and projected no change in rates through to 2022, while members forecast a 6.5% contraction in the economy this year and Fed Chair Powell also struck a cautious tone during the press conference. This resulted to a choppy reaction in US stocks and most major indices finished negative with energy and financials resuming their underperformance, although tech continued to buck the trend to lift the Nasdaq to its first ever close above the 10k landmark. ASX 200 (-2.8%) and Nikkei 225 (-2.3%) were lower as Australia’s financials and energy sectors mirrored the hefty losses seen in their counterparts stateside, while sentiment in Japan was pressured by a firmer currency and further deterioration of large business surveys in which the BSI Large Manufacturing Index slumped to -52.3 from -17.2. Hang Seng (-1.1%) and Shanghai Comp. (+0.2%) were mixed following another drab PBoC liquidity effort and with participants mulling mixed Chinese financing data, with focus also on IPO developments after NetEase shares surged around 10% at the open on its Hong Kong debut. 10yr JGBs edged higher and broke above the 152.00 level amid gains in T-notes and weakness in stocks, while the results of the enhanced liquidity auction in the long- to super-long end were mixed but attracted a slightly higher b/c.

PBoC injected CNY 80bln via 7-day reverse repos for a net injection of CNY 10bln with rate kept at 2.20%. (Newswires) PBoC set USD/CNY mid-point at 7.0608 vs. Exp. 7.0684 (Prev. 7.0703)

US Vice President Pence said the US will continue to stand strong against China on trade and China will continue to buy goods from the US including agriculture goods. In related news, there were separate reports that noted China continues to purchase US soybeans despite toughening rhetoric with at least 10 cargoes purchased by state-run and private buyers so far this month. (Newswires)

SCMP article suggested that nuclear arms control could be the next battleground in US-China rivalry after Beijing rejected invitation to join treaty talks. China's Global Times tweeted the Chinese Embassy in UK said we all know which country frequently coerces others, interferes in internal affairs and subverts legitimate governments, which was in response to the “coercive bullying tactics” accusations made by US Secretary of State Pompeo. (SCMP/Twitter)

UK/EU

UK RICS Housing Survey (May) -32 vs. Exp. -24.0 (Prev. -21.0, Rev. -22). RICS said near-term sales expectations are now broadly neutral and the 12-month outlook improved. (Newswires)

ECB’s Lane says that the central bank is ready for anything to revive the economy. (Il Sole)

FX

The USD saw a choppy reaction to the FOMC with the initial move in the DXY being to the downside in which it briefly slipped below 96.00 and was not helped by Fed Chair Powell’s cautious tone at the presser, although it has since reclaimed that level with further upside later fuelled by a safe-haven bid. The greenback’s major counterparts were initially indecisive as EUR/USD treaded water before pulling away from 1.1400 and GDP/USD eventually gave up 1.2700 handle after PM Johnson confirmed outdoor attractions will reopen next Monday but suggested that further easing of lockdown restrictions won’t occur until July 4th at the earliest. Elsewhere, USD/JPY remained pressured beneath 107.00 and antipodeans also retraced recent gains with AUD/USD and NZD/USD slipping under the 0.7000 and 0.6500 handles respectively amid the subdued risk appetite and retreat in oil prices.

COMMODITIES

WTI crude futures was stopped short of the USD 40/bbl before retreating to closer towards the USD 38.00/bbl level with the pullback in oil triggered by the broad negative risk tone post-FOMC and after this week’s bearish inventory reports. Elsewhere, gold prices gained in the wake of the cautious Fed tone before retracing some of the moves overnight on the resurgence of the greenback but with downside in the precious metal’s limited by its safe-haven appeal, while copper trickled lower throughout the session amid the downbeat risk tone and Fed’s expectations for a 6.5% contraction in the US economy this year.  

GEOPOLITICS US President Trump discussed with Egyptian President El-Sisi ways to resume UN's Libya ceasefire talks and ways to achieve departure of all foreign forces from Libya, according to the White House. (Newswires)

South Korean Unification Ministry revoked 2 activist group licenses due to violations of rules by dropping anti-North Korean leaflets over North Korean cities, while it was also reported that North Korea has “iron will” to punish South Korea for anti-Pyongyang leaflets according to North Korea newspaper Rodong Sinmun. In separate news, North Korea stated that the US has no standing to comment on inter-Korean affairs and warned for US not to interfere if it wants smooth presidential elections. (Newswires/Yonhap)

US

Treasuries caught a strong bid on Wednesday due to weak risk appetite and accentuated by the FOMC, which saw yields move back into their recent ranges. A mixed risk tone overnight and into the US session saw cyclicals/value underperform, with bonds and similar defensives, such as NDX, outperform. A softer than expected CPI print supported the risk aversion too. Participants were jittery ahead of the FOMC meeting, with the consensus for a transition to “formal” QE (which included potential for both an increase or decrease in asset purchases), there had also been some left field calls for imminent YCC, with forward guidance. Upon the FOMC statement release, which kept Treasury purchases at USD 80bln per month, and essentially removed the hawkish risk that the Fed could cut purchases even further, yields fell further, taking the 10-year back below 75bps, the approximate resistance level to the multi-month trading range it had been in prior to last week’s rate back-up (post NFP high was 96bps). Furthermore, Powell noting YCC had been a talking point, although he did suggest the verdict is unclear currently, also would have supported the bid. Looking ahead, the Treasury will auction its 30-year bond on Thursday, following on from the less successful 10-year auction on Tuesday. After Powell finished his Q&A, 2s -3bps at 17bps, 5s -8bps at 32bps, 10s -9bps at 74bps and 30s -7bps at 151bps. US T-note futures (U0) settle 24+ ticks higher at 138-15+.

NEC Director Kudlow said the next COVID-19 relief bill is to have some kind of credit for workers returning to the job. (Newswires)