• Stocks in Europe have continued drifting lower; US equity futures are also lower across the board with the NQ lagging
• German bund yield topped -10bps in early trade whilst US 10yr cash yield remains above 1.65%
• There has been progress in JCPOA talks but the sides have not yet achieved a breakthrough, according to European sources
• In FX, the DXY rebounded but remains sub-90.00, EUR/USD holds on to 1.22 status and GBP/USD hovers around 1.4150
• US Republican Senator Wicker and Senator Capito see progress on the infrastructure proposition, but there is a way to go
• Looking ahead, highlights include Canadian CPI, FOMC Minutes, ECB’s Lane, Fed’s Bullard, Bostic, supply from US
• Earnings from Telecom Italia, 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 (-1.9%) 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 (-1.3%) 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)

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)

US

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)

UK/EU

ECB's de Guindos said present levels of yields are favourable. Volatility in the crypto space is not posing a risk to overall financial stability. (Newswires) Note: its unclear the exact level of yields that de Guindos was referring to and whether or not it encompassed today's price action (German 10yr yield rising above -10bps), De Guindos is also due on CNBC at 12:30BST/07:30EDT today

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)

• UK CPI YY* (Apr) 1.5% vs. Exp. 1.4% (Prev. 0.7%)
• UK Core CPI YY* (Apr) 1.3% vs. Exp. 1.3% (Prev. 1.1%)
• EU HICP Final YY (Apr) 1.6% vs. Exp. 1.6% (Prev. 1.6%)

GEOPOLITICAL

Iranian JCPOA talks will be taking a short break after today, this is not a negative sign. There has however been no breakthrough on core sanction issues and nuclear issues (key for a deal); "Next stop likely IAEA-Iran extension", WSJ's Norman tweets. There was speculation that the Iran-related announcement poised for later today will be related to the IAEA/Iran agreement extension. (Twitter) There has been progress in JCPOA talks but the sides have not yet achieved a breakthrough, according to European sources cited by Al Arabiya. (Newswires)

Russia offers to mediate dialogue between Israel and Palestine, according to Al Arabiya citing Russia's Kremlin. (Twitter)

Russian Deputy Foreign Minister says that if the US waived sanctions on companies overseeing Nord Stream 2, this would help normalise ties between Russia and the US, according to Interfax

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)

EQUITIES

Stocks in Europe have continued drifting lower since the cash open (Euro Stoxx 50 -1.5%) in what has thus far been a continuation of the price action seen across equity futures overnight, and as APAC also traded with losses. The soured risk tone comes amid elevated yields, with the German 10yr topping -10bps for the first time in two years and its US counterpart steady above 1.65% ahead of FOMC Minutes. This sentiment has also reverberated into the US, with equity futures lower across the board and the NQ underperforming its peers, alluding to focus on the yield narrative. Back to Europe, broad-based losses are seen across the majors, but the periphery fares slightly better as the FTSE MIB (-1.0%) and the IBEX 35 (-0.5%) are somewhat cushioned by their significant exposure to the banking sector against the backdrop of higher yields. As such, banks reside as a top performer among European sectors that are in the red across the board. Meanwhile, some of the more defensive sectors have also made their way to the top of the pile since the cash open - with Food & Beverages, Health Care, Telecoms and Personal Household goods among the better performers. The other end of the spectrum is largely comprised of cyclical sectors, with Basic Resources, Travel, Oil & Gas, Autos and Tech among the straddlers. Individual movers are relatively scarce today, given the overarching macro theme and the simmering down of earnings. In terms of commentary on European equities, analysts at Barclays believe that the rally has faltered, although EPS upgrades and robust Q1 results point to equities having cheapened. The bank acknowledges that rising inflation expectations and policy jitters are taking their told on valuations, but “So long as EPS momentum is positive, equities can withstand higher rates, although future risk-adjusted returns may be lower”, the bank says as it forecasts above-trend GDP and EPS growth to persist in 2022.

FX

USD - The Greenback appears to have repelled the latest bout of selling pressure and clawed back some losses vs most major and EM rivals with the aid of a firmer rebound in US Treasury yields and curve re-steepening ahead of Usd 27 bn 20 year note supply. However, the concession for issuance has been more pronounced in EGBs, and the DXY has fallen into a lower range having edged a smidge closer to nearest support ahead of 89.500, at 89.686 before regaining composure to register an 89.959 recovery high thus far. Hence, the Dollar could well require more impetus and incentive to mount a meaningful rebound, like strong data in the ilk of last Wednesday’s inflation metrics, or severe risk aversion amidst the debt rout as today’s agenda is bare aside from further Fed commentary and the official account of April’s FOMC policy meeting.

AUD/NZD - No surprise to see the high beta, activity and commodity based currencies bear the brunt of the Buck revival, while the Aussie also has a downturn in Westpac consumer sentiment to consider before the spotlight shifts to jobs on Thursday. Aud/Usd is now testing support around 0.7750 after fading just shy of 0.7800 and topping the round number yesterday, with Nzd/Usd hovering around 0.7200 compared to almost 0.7250 and a fraction over 0.7270 on Tuesday ahead of NZ budget balance and net debt forecasts.

CHF/CAD/JPY - All unwinding recent gains vs their US counterpart, as the Franc retreats through 0.9000 and Loonie backtracks towards 1.2100 following a test of the big figure below against the backdrop of recoiling crude prices and awaiting Canadian CPI to see whether expectations for a pronounced acceleration in headline y/y inflation pans out. Elsewhere, the Yen is back under 109.00, though contained within a narrow range and still in an upward trend while holding well off recent lows.

GBP/EUR - Relative G10 outperformers, or rather displaying a decent resilient streak in the face of the Dollar comeback, and yield differentials are playing a key role as noted above given the heavy declines in Eurozone bonds and Gilts before, but not necessarily for German and UK auctions. Sterling may have gleaned some traction from firmer than forecast inflation prints, on balance, but Cable is looking toppy circa 1.4200 in contrast to Eur/Usd and Eur/Gbp appearing more underpinned above 1.2200 and 0.8600 respectively.

SCANDI/EM - The Nok has been rocked by the aforementioned reversal in oil, naturally, with Bent now beneath Usd 68/brl from nearly Usd 70.25 only yesterday, and the repercussions are spreading to the Rub and Mxn of course. Meanwhile, the Zar has not been able to glean much traction from SA CPI data surpassing consensus in headline and core terms, as Gold sheds some of its heady advances at the hands of the Greenback and attention turns to the SARB tomorrow then S&P’s rating review the following day.

FIXED INCOME

Arguably, technical assistance kicked in before any before any supply considerations, although the DMO’s 15 year sale was covered just over 2.5 times and was much more sought after than Germany’s 10 year offering despite a similar yield back-up from prior auctions of the same bonds. Indeed, Bunds have pared more losses from their 168.29 Eurex low (-53 ticks on the day) to stand around 168.61, with the corresponding 10 year yield back down near -10 bp, while Gilts are ‘only’ 20 ticks or so off worst levels circa 127.33 (-16 ticks vs -37 ticks at one stage) and US Treasuries remain closer to overnight troughs than peaks amidst mild bear-steepening as 20 year supply looms. Also ahead, further CPI updates via Canada, Fed and ECB commentary plus FOMC minutes.

COMMODITIES

WTI and Brent July contracts remain suppressed amid the positive omens emanating from JCPOA talks and against the backdrop of a firmer Dollar and soured market sentiment. Elaborating on the former, there has been no breakthrough on core sanction issues and nuclear issues – which are the key pillars for this deal. Negotiations will be taking a short break after today. However, according to WSJ's Norman, this is not a negative sign, and the “next stop likely IAEA-Iran extension", speculated to be announced today (timing TBC). ING maintains its view that the market should be able to absorb both Iranian oil and OPEC+ supply. The Dutch bank expects the return of 3mln BPD of Iranian supply by Q4 2021, whilst the National Iranian Oil Co.’s most optimistic scenario points to pre-sanction production of almost 4mln BPD in as little as three months. The morning also saw commentary from Russian Deputy PM Novak, who suggested that global oil prices being broadly stable remarked that the market is balanced, and demand is slightly exceeding supply. Over in the West, the smaller-than-expected build in the Private inventory report last night was largely overlooked ahead of today's EIA numbers (crude forecast +1.62mln bbls) which are expected to be distorted by the Colonial Pipeline outage. As a reminder, a significant draw is expected in East Coast product stocks alongside builds in crude and products from US Gulf Coast and a decline in refining activity. WTI resides near USD 64.00/bbl (vs high 65.35/bbl) while its counterpart has dipped below USD 67.50/bbl (vs high 67.46/bbl). Elsewhere, spot gold and silver have been on a downward path as the earlier countering yield/Dollar dynamics shifted as the Buck saw a rebound, thus providing a bearish environment for precious metals in terms of higher yields and a firmer Dollar. Precious metals are also on the backfoot, with LME copper pulling back after topping USD 10,500/t yesterday, with some also attributing Glencore’s plans for a new copper mine next year as a near-term headwind.

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)

Russian Deputy PM Novak says global oil prices are broadly stable, which means the market is balanced with demand slightly exceeding supply. (Newswires)

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)