• Asian equity markets failed to fully sustain the positive handover from Wall St with regional bourses indecisive amid geopolitical tensions and COVID-19 fears
• Japanese trade data showed a larger than expected slump in Exports Y/Y, with Japan’s US-bound exports at the fastest pace of decline since March 2009
• The DXY held on to the prior day’s gains around the 97.00 level with EUR/USD below 1.1300 and GBP/USD briefly below 1.2550
• White House is in deep discussions on new stimulus worth at least USD 1trln with infrastructure likely part of the bill, according to FBN
• Looking ahead, highlights include UK CPI, EZ CPI (F), US building permits, housing starts, Canadian CPI, DoEs, NZ GDP, OPEC Monthly Oil Market Report, ECB's Mersch, de Guindos, Fed's Powell, Mester, supply from UK, Germany and the US

CORONAVIRUS UPDATE

US CDC COVID-19 cases rose by 18,577 (Prev. +21,957) and death toll rose by 494 (Prev. +373). (Newswires)

NY Governor Cuomo said NY reported the lowest number of COVID hospitalisations for another day which was the lowest since COVID-19 began. However, Texas COVID-19 cases rose by 2.9% vs. Prev. 7-day average of 2.2% in which newswires initially reported a 4% rise then corrected it, while the Nevada Governor stated the state is not ready for the next phase of reopening. (Newswires/ABC)

NIH's Fauci said a panel of US experts are reviewing whether to recommend dexamethasone, calling the Oxford trial results "positive" and "important". (FT) 

China's Global Times tweeted that a total of 1,255 flights in and out of Beijing were cancelled after the city increased its emergency response to level 2. (Twitter)

ASIA

Asian equity markets failed to fully sustain the positive handover from Wall St with regional bourses indecisive amid geopolitical tensions, COVID-19 fears and with early underperformance in Japan due to a firmer currency and weaker than expected trade data. ASX 200 (+0.5%) and Nikkei 225 (-0.4%) traded mixed as upside in consumer stocks and tech kept the Australian benchmark afloat, while sentiment among Tokyo exporters was subdued by a firmer currency and after the latest trade data showed a larger than expected slump in Exports Y/Y, with Japan’s US-bound exports at the fastest pace of decline since March 2009 and its trade surplus with the US at a record low. KOSPI (+0.1%) swung between gains and losses on increasing tensions in the Korean peninsula after North Korea demolished its inter-Korean liaison office in Kaesong yesterday and is reportedly to deploy the army to Kaesong and Mt. Kumgang. There were also criticism from North Korean leader Kim’s sister on South Korean President Moon which prompted a response from the Blue House that it will not tolerate North Korea's senseless remarks anymore and the Defense Ministry warned that North Korea will pay the price if it takes actual military action. Hang Seng (+0.1%) and Shanghai Comp. (-0.1%) conformed to the non-committal tone after another net liquidity drain by the PBoC and amid concerns regarding the outbreak in Beijing where the city government raised its COVID-19 emergency response to level II from level III and resulted to the cancellation of 1255 flights. In addition, deadly clashes between India and China at the Himalayan border where 20 Indian soldiers were killed also contributed to the ongoing geopolitical concerns. Finally, 10yr JGBs were slightly higher after having rebounded off support just below 152.00 although the underperformance of Japanese stocks and BoJ’s presence in the market only provided marginal gains for JGBs. 

PBoC skipped reverse repo operations for a net daily drain of CNY 60bln. (Newswires) PBoC set USD/CNY mid-point at 7.0873 vs. Exp. 7.0902 (Prev. 7.0755)

Japanese Trade Balance (JPY)(May) -833.4B vs. Exp. -560.0B (Prev. -931.9B). (Newswires) Japanese Exports (May) Y/Y -28.3% vs. Exp. -22.7% (Prev. -21.9%) Japanese Imports (May) Y/Y -26.2% vs. Exp. -12.9% (Prev. -7.1%)

UK/EU

UK Chancellor Sunak is reportedly preparing to break the Conservatives’ "Triple Lock" pledge which aims to protect the state pension against inflation, amid concerns it may become unaffordable due to fallout from the pandemic. (FT)

Australia is aiming for a trade deal with the UK by the end of 2020, one that would eliminate tariffs and quotas on goods, according to Australia's trade minister.  (FT)

The Times' Shadow MPC says the BoE should do the minimum required in terms of stimulus in order to keep its powder dry in case of a potential second spike in infections. (Times) 

German Chancellor Merkel does not expect an agreement at the EU Summit about the recovery fund and further EU finances but anticipates a decision on EU finances in July, according to two sources. (Newswires) Furthermore, European Council President Michel believes EU governments are far apart on a recovery plan, adding that a deal will take weeks. (Newswires)

FX

The DXY held on to the prior day’s gains around 97.00 with price action recently underpinned by solid US retail sales while there was also a slew of central bank commentary including Fed Chair Powell who stated they will slow the corporate bond buying program if market functioning continues to improve and Fed’s Kaplan noted the jury is out on negative rates and he is skeptical of yield curve control. As such, overnight trade in the greenback’s major counterparts was lacklustre with EUR/USD beneath the 1.1300 handle although has since found a platform at 1.1250, and GBP/USD briefly slipped through the prior day’s support of 1.2550 with the next key level to look out for would be the 100DMA at 1.2526. Elsewhere, USD/JPY was restricted by the uninspiring risk tone and antipodeans also traded lacklustre due to their high beta statuses and following a weaker reference rate setting by the PBoC.

BoC Governor Macklem said jobs growth is likely to accelerate as economies reopen but some lost jobs will not return, while he added monetary policy will continue to be grounded in our inflation-targeting framework and that they acknowledge the consumer price index isn’t currently giving an accurate picture of inflation for many Canadians. (Newswires)

COMMODITIES

Commodities were uneventful overnight although WTI crude futures retreated further away from the USD 38.00/bbl level with prices subdued by the uninspired risk tone and following bearish private inventory report which showed a surprise build in headline crude stockpiles, while focus for the complex turns to the looming DoE inventories, OPEC Monthly Oil Report and JMMC meeting. Elsewhere, gold was restricted by a firmer greenback, as well as the flimsy risk appetite which also ensured lacklustre price action for copper.  

US Private Inventory Crude Stocks +3.9mln vs. Exp. -0.2mln (Prev. +5.7mln). (Newswires)

GEOPOLITICS

North Korea is to deploy the army to Kaesong and Mt. Kumgang after it rejected South Korea’s requested to send an envoy to North Korea, while North Korean leader Kim's sister Kim Yo Jong condemned a speech made by South Korean President Moon. This prompted a response from the South Korea Presidential Office which stated it will not tolerate North Korea's senseless remarks anymore and that North Korea should bear all consequences from remarks and actions. South Korea also asked North Korea to be more polite and stated that recent comments on President Moon were rude, while the Defense Ministry warned North Korea will pay the price if it takes actual military action. (Newswires)

US Secretary of State Pompeo tweeted that the IAEA confirmed Iran is denying access to 2 of its past nuclear sites and that this obstruction is deeply concerning and unacceptable, while he added the international community must demand Iran cooperate fully and immediately. (Twitter)

Turkey launched a new anti-terror operation against PKK/YPG terrorists in northern Iraq, according to reports citing the Turkish Defence Ministry. (Twitter)

US

The Treasury curve bear steepened as equity bulls were envigored overnight and into Tuesday following on from momentum on Monday. By settlement, 2s +1bps at 20bps, 5s +2bps at 35bps, 10s +5bps at 75bps and 30s +8bps at 153bps. Yields were dancing in sync with equity futures, reaching their hights around the US cash equity open. The strong US retail sales and NAHB Housing Index figures saw the 10-year again briefly break back above its post-COVID range-top around 78bps (it has been to as high as 95bps last week). However, as concerns over COVID-19 resurgence were amplified by a slew of negative updates after the data slate cleared, the 10-year yield reverted back into its range, to which it remains. Looking ahead, the Treasury will sell USD 17bln in its second 20-year auction on Wednesday, while participants will see US building permits/housing starts for May; Fed Chair Powell will also speak in Congress again. US T-note futures (U0) settled 9+ ticks lower at 138-14.

Fed Chair Powell (neutral) said the Fed is probably some years away from halting asset purchases and is very open to adapting the main street lending programme, while he reiterated the Fed median forecast for GDP growth this year largely did not factor in the possibility of a second COVID-19 wave. (Newswires)

Fed Vice Chair Clarida (voter, neutral) said he sees growth resuming in Q3 and that COVID-19 is a disinflationary shock not inflationary, while he stated inflation expectations risk falling below 2% goal and places a high priority on inflation goal not just employment goal. Furthermore, he added that more fiscal and monetary support may be called for. (Newswires)

Fed's Harker (voter, neutral) said growth seen next year may not be enough to return the economy to levels seen at the beginning of this year but 2021 will be a growth year with GDP and employment picking up although some jobs lost might never return. (Newswires)

Fed's Kaplan (voter, dove) said the economy probably bottomed out in May and that we're going to grow pretty strongly from here but added there are both upside and downside risks to the recovery. Fed's Kaplan also commented the Fed’s toolbox is not dry at all and there is plenty of dry powder if required, while he added the jury is out on negative rates and he is skeptical of yield curve control. (Newswires)

White House is in deep discussions on new stimulus worth at least USD 1trln with infrastructure likely part of the bill, while other measures include state aid, liability protection, unemployment extension and "return to work incentives", according to FBN. (Twitter)