• Asian equity markets were mostly negative, US equity futures extended on the losses seen during the prior session
• Russia's envoy to JCPOA talks said important news is likely to be released by this Wednesday, although he later backtracked
• In FX, the DXY remains sub-90.00, EUR/USD holds on to 1.22 status and GBP/USD met resistance at 1.42
• Biden administration was said to be encouraged by the bipartisan infrastructure meeting
• Looking ahead, highlights include UK inflation, EZ final CPI, Canadian CPI, FOMC Minutes, ECB’s Panetta, Rehn, Lane, Fed’s Bullard, Bostic, supply from Germany, UK and US
• Earnings from Telecom Italia, Severn Trent, Lowe's, Target, Cisco, L Brands, Analog Devices

CORONAVIRUS UPDATE

Oxford University/AstraZeneca (AZN LN) COVID-19 was found to work well as a third booster shot, according to a study which showed a third dose increased antibodies to the coronavirus's spike protein. (FT)

China's leading immunologist Shao Yiming reportedly sees herd immunity for COVID-19 by year-end and stated that daily vaccinations could potentially reach 20mln if needed. (Global Times)

UK plans for easing social distancing rules are said to be in disarray due to increases in the Indian COVID-19 variant, while there are concerns pubs and restaurants may still face restrictions including a 'one metre plus' rule in July. (Telegraph)

ASIA

Asian equity markets were mostly negative and US equity futures also extended on the losses seen during the prior session where energy led the declines as oil prices wobbled on reports of progress being made in the Iranian nuclear deal talks and housing names suffered following disappointing Housing Starts and Building Permits data. ASX 200 (-2.0%) underperformed after softer Consumer Confidence data and amid weakness in the commodity-related sectors with notable losses in the energy names after expectations of returning Iranian supply were stoked by comments from the Russian envoy to JCPOA talks who suggested important news is likely to be released this Wednesday and that negotiations have had major progress. However, it was then speculated that the announcement could be an extension of the temporary IAEA nuclear activity monitoring deal which is set to expire on Friday rather than a full return to the JCPOA, while the envoy also clarified that he didn’t say there was a breakthrough at the Vienna talks and noted that significant progress has been achieved but unresolved issues still remain with negotiators needing more time to finalise an agreement. Nikkei 225 (-1.7%) was also subdued and retreated beneath the 28k level with exporter sentiment in Tokyo not helped by a choppy currency and the ongoing COVID-19 state of emergency, while news of Japan boosting its support for domestic production of advanced semiconductors and batteries did little to spur risk appetite. Shanghai Comp. (-0.5%) conformed to the downbeat tone amid the absence of Hong Kong participants as the city, along with South Korea, observed the Buddha’s Birthday holiday. Nonetheless, the losses in the mainland were moderate compared with regional peers after US President Biden’s administration delayed the revamp of former US President Trump's blacklist for China investments which gave investors an additional 2 weeks to buy or sell securities in companies tied to the Chinese military with the deadline to complete transactions pushed backed to June 11th. Finally, 10yr JGBs were flat with prices kept afloat by the weakness in stocks but with upside also capped after the recent choppy performance in T-notes and following lacklustre results at the 5yr JGB auction which showed a slump in the b/c from previous despite relatively inline accepted prices.

PBoC injected CNY 10bln via 7-day reverse repos with the rate at 2.20% for a net neutral daily position. (Newswires) PBoC set USD/CNY mid-point at 6.4255 vs exp. 6.4269 (prev. 6.4357)

US President Biden’s administration delayed the revamp of former US President Trump's blacklist for China investments in which it gave investors two more weeks to buy or sell securities in companies tied to the Chinese military with the deadline to complete transactions pushed backed to 09:30EDT on June 11th from May 27th, while the US Treasury stated that it was issuing a licence to authorise these transactions. (Newswires)

US House Speaker Pelosi proposed a diplomatic boycott of the 2022 Winter Olympics in China. (Newswires)

China will provide financial assistance to upgrade an airstrip in the South Pacific island nation of Kiribati at a site once used during wartime by the US. However, reports added that the airstrip will be used solely for civilian purposes and the project carries no military aspects. (Nikkei)

European Parliament is expected to pass a motion on Thursday that is pushing for a freeze of the China investment agreement, according to reports in Politico citing a draft. (Politico)

Japan will expand support for domestic production of advanced semiconductors and batteries, while the cabinet is reportedly to approve the growth strategy as early as next month and is to encourage facility expansion, as well as invite US manufacturers to set up operations to bolster supply chains. (Nikkei)

UK/EU

UK PM Johnson is supporting tariff free trade with Australia and is said to be prepared to offer tariff free access to Australia regarding food which has raised concern among UK farmers of the potential impact. (Newswires/Times)

UK PM Johnson reportedly announced GBP 830mln of urban renewal projects in towns and cities outside of London as part of his pledge to 'level up' the UK economy. (Newswires)

UK negotiator Frost said there is a significant difference in positions regarding Northern Ireland which would make reaching an agreement with the EU difficult although he said that they will keep trying. (Newswires)

FX

In FX markets, the DXY languished heading into the looming FOMC Minutes and following its retreat beneath the 90.00 level with the weakness attributed to softer yields, gains in its transatlantic counterparts and weak data in which Housing Starts and Building Permits both missed expectations. Furthermore, there were recent comments from Fed's Quarles who stated that a strong economic recovery is underway but is not yet complete, while attention was also on the infrastructure talks between Senate Republicans and administration officials although the GOP failed to provide a new proposal with the sides said to not be ready for making offers and are still at the talking stage. EUR/USD held on to the prior day’s gains at the 1.2200 handle after benefitting from the USD woes and with the latest rhetoric from ECB officials not providing much to shift the dial as President Lagarde stated they will stand by their commitment to protect the economy, while ECB's Stournaras noted there is no inflation danger for the Eurozone in the medium-term but added there will likely be a decoupling of Eurozone interest rates from US rates. GBP/USD consolidated after another brief attempt to reclaim the 1.4200 level where it failed to break through the resistance although downside was also limited. USD/JPY and JPY-crosses traded choppy in which the former oscillated around 109.00, while antipodeans were subdued due to their high-beta statuses, recent pullback in most commodities and mixed data from Australia which showed a decline in Westpac Consumer Confidence Index and although Q1 wage growth was firmer than expected at 1.5% vs exp. 1.4%, this remained far from the 3% level where the RBA touted wage growth would need to be sustainably above to achieve its inflation goal.

• Australian Westpac Consumer Confidence Index (May) 113.1 (Prev. 118.8)
• Australian Wage Price Index QQ (Q1) 0.6% vs. Exp. 0.5% (Prev. 0.6%)
• Australian Wage Price Index YY (Q1) 1.5% vs. Exp. 1.4% (Prev. 1.4%)

COMMODITIES

WTI crude futures extended beneath the USD 65.00/bbl level following the prior day's losses which were triggered by comments from Russia's envoy to JCPOA talks who said important news is likely to be released by this Wednesday and that negotiations have made major progress, although he later backtracked by clarifying that he didn’t say there was a breakthrough and noted unresolved issues remain with more time needed for a deal. In addition, the subdued risk appetite added to the headwind for commodities, while the latest private sector inventory report also failed to spur prices despite showing a smaller than expected build for crude and larger than anticipated draw in gasoline stockpiles. Gold was steady as the precious metal was kept afloat heading to the FOMC Minutes amid the recent USD woes and copper prices were pressured alongside the risk aversion and amid plans for Glencore to restart its Mutanda mine next year. There were also reports of tougher restrictions for steelmakers in China where the top steel producing hub of Tangshan ordered all units of steel mills with pollution problems to shut production.

US Private Energy Inventories (w/e May 14th): Crude +0.62mln (exp. +1.6mln), Cushing +0.05mln, Gasoline -2.84mln (exp. -0.9mln), Distillate -2.58mln (exp. -0.4mln). (Newswires)

Colonial Pipeline stated that it continues to deliver refined products as nominated by its shippers and that previously reported communication issues were not related to the ransomware or any type of reinfection, while sources separately stated that the Colonial Pipeline's shipment scheduling system was back online following an outage earlier on. (Newswires)

Motiva Port Arthur, Texas Refinery (636K bpd) reported it has experienced an unexpected shutdown of two process units due to a heavy storm, while it was separately reported that Exxon Baton Rouge, Louisiana refinery (502.5k bpd) shut its crude unit for planned work, according to sources. (Newswires)

US President Biden's administration will waive sanctions on the corporate entity and CEO overseeing the construction of Russia’s Nord Stream 2 pipeline into Germany, according to reports citing sources. (Axios)

China's top steel producing hub of Tangshan ordered all units of steel mills with pollution problems to shut production between May 18th-20th. (Newswires)

GEOPOLITICAL

Russia's envoy to JCPOA talks said important news is likely to be released by tomorrow and that negotiations have made major progress. However, the Russian envoy later tweeted that he didn’t say there was a breakthrough at the Vienna talks, while he noted that significant progress has been achieved but unresolved issues remain and negotiators need more time to finalise an agreement. (BBC/Twitter)

France proposed a resolution on Middle East violence to the UN Security Council calling for a ceasefire and which it plans to bring for a vote in the approaching days. (Axios)

US

T-Notes were modestly firmer amid the lacklustre risk tone while supply kept the bid capped. By settlement, 2s -0.2bps at 0.151%, 5s -1.0bps at 0.819%, 10s +0.2bps at 1.642%, 20s +0.5bps at 2.267%, 30s +0.9bps at 2.364%; TYM1 volumes were weaker than average. 5yr TIPS -3.1bps at -1.920%, 10yr TIPS -0.3bps at -0.910%, 30yr TIPS +1.3bps at -0.002%. SOFR and EFFR unchanged at 1bp and 6bps, respectively. Treasuries saw a slight bid on light volumes in APAC trade, while stock indices saw a relief rally, particularly Taiwan after recent COVID-induced selling. A disappointing Q1 Japanese GDP print (-5.1% vs exp. -4.5%) didn't temper the risk tone. European trade was more or less sideways, with no noticeable reaction amid German Schatz and UK belly supply. As US players arrived, Treasuries extended on gains, catching momentum on the back of disappointing April Housing Starts (1.569mln vs exp. 1.71mln) and Building Permits (1.76mln vs exp. 1.77mln), while strong Q1 Walmart (WMT) and Macy's (M) earnings and guidance failed to buoy the risk tone. A slew of corporate and SSA deals saw a flurry of rate-lock-related selling and swap paying according to one desk, seeing yields rise, which was reportedly accentuated by both algo sell programmes and real money accounts selling out the curve. It's also noteworthy that the cash curve was weakest at the 20yr tenor, giving concession into Wednesday's refunding auction, and coming as the 10s20s30s butterfly spread reaches its weakest levels on the back of a chunky O/C ratio (4.15x) in Monday's buyback after the Fed reduced its purchase allocation to the sector. Aside from the 20yr auction, participants will be closely following the FOMC minutes on Wednesday for any more details around a potential tapering path, as well as any colour around plans for tweaks to the administered rates (IOER/RRP). T-note (M1) futures settled 1+ ticks higher at 132-12+.

Fed's Quarles (voter) said that a strong economic recovery is underway, but is not yet complete, via a congressional testimony. (Newswires)

US President Biden expected the Republicans to make an infrastructure offer either yesterday or today, while reports later noted that the Biden administration was said to be encouraged by the bipartisan infrastructure meeting and told the GOP to follow up later this week. (Newswires)

US Republican Senator Wicker said he sees progression on the GOP infrastructure proposition and Republican Senator Capito says there is development on infrastructure but there is still a way to go. There were also reports citing comments from Republican Senator Blunt that explicit offers were not made at the follow up infrastructure meeting today between GOP Senators and top Biden administration officials, while Blunt added we're not at the offers stage and still at the talking stage. (Twitter/CNN)

US Senate Majority Leader Schumer suggested to "stay tuned" regarding money for the chip sector, while he later proposed an amendment to the Endless Frontiers Act and said that his amendment includes USD 52bln for chip manufacturing. (Newswires)

US, Mexican and Canadian Trade Ministers agreed to hold an in-person meeting on small- and medium-sized business issues and to explore new approaches to better engage underrepresented communities on trade issues, according to a joint statement. They affirmed a desire to champion trade policies that are secured by robust and enforceable labor laws, while they talked about shared responsibility to prohibit imports of goods made using forced labour and agreed that deputies will meet before year-end to assess USMCA progress. Furthermore, USTR senior official said they had engaging and cooperative talks on climate change and future cooperation but would like to see a little more progress on Mexico implementing USMCA express shipments provision and the USTR continued to make concerns known to Canada on dairy tariff-rate quotas whereby they will keep in touch regarding the issue. (Newswires)