• Asia-Pac stocks were mostly positive in what was a modest improvement from the subdued performance on Wall Street
• Most major US indices posted marginal losses, although the Nasdaq 100 bucked the trend amid resilience in tech
• Fed Vice Chair Clarida agreed with the FOMC minutes that there will be a time at upcoming meetings where the Fed could start to discuss tapering
• The DXY remains firmly below 90.00, EUR/USD trades above 1.2250 and GBP/USD above 1.4150. NZD outperforms
• RBNZ stood pat on the OCR and LSAP as expected, but provided rate forecasts which suggested a 25bps hike in September 2022
• Looking ahead, highlights include DoEs, Fed's Quarles, supply from Italy, Germany and the US

CORONAVIRUS UPDATE

Tokyo is considering seeking an extension to the state of emergency, while other reports noted that Tokyo Olympics partner, Asahi Shimbun, called for the cancellation of the Olympics in an editorial. (Newswires/NHK)

Australia's Victoria state government reported that there were 10 new local cases yesterday and press reports noted concerns of a snap lockdown after a COVID-positive person was confirmed to have attended a match at the Melbourne Cricket Ground. (Newswires/The Australian)

ASIA

Asia-Pac stocks were mostly positive in what was a modest improvement from the subdued performance on Wall Street where most major indices posted marginal losses following mixed data releases, although the Nasdaq 100 bucked the trend amid resilience in tech and as softer yields helped stem downside in duration sensitive stocks. ASX 200 (Unch.) was kept afloat for most of the session amid notable strength in tech and outperformance in gold miners after the precious metal reclaimed the USD 1900/oz level. Furthermore, the top-weighted financials were also higher as shares in big-4 leader CBA briefly topped AUD 100 for the first time, although gains in the broader marker were limited amid snap lockdown concerns in Victoria state which reported 10 new locally transmitted cases and after a COVID-positive person was confirmed to have attended a match at the Melbourne Cricket Ground. Nikkei 225 (+0.3%) traded positively amid reports that Japan's government is considering another cash handout program of up to JPY 100k for households in need, but with upside restricted amid expectations of state of emergency extensions and further calls for the cancellation of the Olympics, this time coming from an editorial by Asahi Shimbun press, which is an official partner of the Tokyo Olympics. Hang Seng (+0.6%) and Shanghai Comp. (+0.3%) held on to the spoils from the prior day’s outperformance where northbound flows into the Chinese mainland through the stock connect reached record levels. Focus was also on Xiaomi after it received the final US District Court ruling which removed its designation as a Communist Chinese Military Company and lifted all restrictions on the Co.'s shares, although this failed to boost its share price with participants awaiting its earnings results. Finally, 10yr JGBs were rangebound with upside restricted amid the mild positive risk tone and with the BoJ only in the market for treasury bills, while New Zealand 10yr yields gained around 8bps following the RBNZ rate hike projections.

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 6.4099 vs exp. 6.4139 (prev. 6.4283)

Xiaomi (1810 HK) received the final US District Court ruling which removes the Department of Defense designation regarding the Co. being a Communist Chinese Military Company. (Newswires)

BoJ's board member Suzuki said Japan's economy is picking up as a trend and is expected to recover, but the level of activity will remain low for the time being and noted uncertainty on the vaccine rollout which could weigh on economic activity. Furthermore, Suzuki stated the BoJ is ready to extend pandemic-relief measures beyond the current deadline and take additional easing steps if required, while he added that fewer market players anticipate the BoJ to reduce rates further which could be due to the impact on financial intermediation. (Newswires)

Japanese ruling party official Yamamoto said Japan is likely to proceed with Olympics as scheduled without spectators and that holding Olympics is good for the economy, while he added that the government should compile an extra budget valued at JPY 26tln around October or November. Furthermore, Yamamoto said the BoJ must seek to weaken JPY further by boosting asset purchases and that it is making a mistake by stealth tapering of purchases as deflation remains a risk. (Newswires)

UK/EU

UK Chancellor Sunak is to lay out plans in the next fortnight to block companies from listing on the London Stock Exchange (LSEG LN) on national security grounds amid "dirty money" concerns, according to reports in FT citing the Treasury. (FT)

ECB Chief Economist Lane commented on the strategy review, which he said will be completed in H2 2021 and that discussions have begun, while he added that the ECB is still listening and that topics must be debated thoroughly. (Newswires)

European governments are reportedly growing increasingly confident regarding a G7 tax accord, although other reports noted that Ireland has significant reservations concerning US President Biden's global corporate tax plan. (Twitter/AFP) Irish Finance Minister Donohoe says they have significant reservations regarding a global minimum tax rate and predict their corporate tax rate will remain at 12.5% for many years. (Sky News)

EU Commission is reportedly expected to demand that Facebook (FB), Google (GOOG) and Twitter (TWTR) adjust their algorithms to stop the spread of disinformation online, according to sources citing proposals due today. (Politico)

FX

In FX markets, the greenback remained despondent and firmly beneath the 90.00 level after the recent softening of yields. There was plenty of Fed rhetoric again although this failed to spur the currency despite comments from Fed Vice Chair Clarida who agreed with the FOMC minutes that there will be a time at upcoming meetings where the Fed could start to discuss tapering and that it depends on the data flow, while Fed's Daly stated that the Fed is “talking about talking about tapering” but added that policy is in “a very good place". EUR/USD consolidated around the 1.2250 level with the single currency choppy in the aftermath of the recent firmer than expected German IFO data, as participants also digested the dovish tone yesterday from ECB's Villeroy. GBP/USD spent most of the session stuck around 1.4150 as it took a breather from the prior day’s whipsawing and losses vs. EUR, while JPY-crosses were underpinned by their base currencies and improved risk tone. Antipodeans outperformed with NZD/USD leading the advances after the RBNZ policy announcement in which the central bank maintained the OCR at 0.25%, as well as kept the LSAP and Funding for Lending Programme unchanged, as expected, but provided rate forecasts which suggested a 25bps hike in September 2022 and increase to 1.75% by June 2024. This lifted AUD/USD in sympathy which up into that point had been lacklustre, despite firmer than expected Construction Work Done, while CNY appreciated beyond 6.4000 against USD after the PBoC set the reference rate at its strongest since June 2018 and China Securities Journal also noted that analysts expect CNY to further strengthen citing USD weakness, as well as China's trade surplus and economic recovery.

RBNZ maintained policy settings as expected with the OCR kept at 0.25% and both LSAP and Funding for Lending Programme were also left unchanged, although it provided rate forecasts which pointed to a 25bps hike in September 2022 and to 1.75% by June 2024. RBNZ stated that it will maintain stimulatory monetary settings until it is confident inflation and employment targets are achieved, while it added that domestic economic activity has returned to near pre-pandemic levels and that the medium-term outlook is similar to scenario presented in February, but they remain cautious due to ongoing virus-related restrictions to activity. In terms of forecasts, the RBNZ sees the OCR at 0.25% in September 2021, 0.31% in June 2022, 0.49% in September 2022 and 1.78% in June 2024, while Governor Orr stated at the press conference that he feels comfortable using the OCR projection as a guidance but noted that the projection will only occur if the economy pans out as expected and Deputy Governor Hawkesby also suggested the important message is that OCR is not forward guidance. (Newswires)

• New Zealand Trade Balance (Apr) 388M (Prev. 33.0M, Rev. 39M)
• New Zealand Exports (Apr) 5.37B (Prev. 5.68B, Rev. 5.69B)
• New Zealand Imports (Apr) 4.98B (Prev. 5.65B, Rev. 5.66B)
• Australian Construction Work Done (Q1) 2.4% vs. Exp. 2.2% (Prev. -0.9%)
• Australian Westpac Leading Index (Apr) M/M 0.2% (Prev. 0.4%, Rev. 0.5%)

SNB's Jordan said negative rates are still essential and there is no reason to change monetary policy. Furthermore, he expects Swiss inflation to stay moderate and is cautiously optimistic for the Swiss economy, while he reiterated that the Franc remains very strong. (Newswires)

Brazil's Economic Minister Guedes said we are looking at negative income tax and at a package of measures to address high unemployment. (Newswires)

COMMODITIES

WTI crude futures were choppy in which prices oscillated around the USD 66.00/bbl level with price action in the energy complex indecisive after the latest private sector inventory data was somewhat inconclusive despite all components of the release at a drawdown with the declines in headline crude and distillate narrower than expected, while gasoline and distillate showed wider draws than forecast. Desks also noted that the June-July WTI time-spread was at its strongest level since May last year, which suggested tight inventories and that traders were bracing for a possible supply crunch heading into summer. Elsewhere, gold prices extended on gains above the USD 1900/oz level as it benefitted from a weaker greenback and softer yields, while copper prices marginally gained amid the mild improvement in risk appetite.

US Private Energy Inventory Data (bbls): Crude -0.44mln (exp. -1.1mln), Cushing -1.15mln (exp. -1.4mln), Gasoline -1.99mln (exp. -0.6mln), Distillate -5.14mln (exp. -1.9mln). (Newswires)

Motiva Port Arthur, Texas refinery (636k BPD) has reportedly restarted its large crude unit, according to sources. (Newswires)

Shanghai Futures Exchange Chairman said crude oil options will be listed June 21st which will be open to international traders. (Newswires)

Remote operations union at BHP (BHP AT) Spence and Escondida copper mines in Chile have rejected the labour contract offer. (Newswires)

GEOPOLITICAL

US Secretary of State Blinken said the US still does not know whether Iran is willing and able to make a decision to come back into full compliance with the nuclear deal. (Newswires)

IAEA Head says Iran is enriching uranium at purity levels which ‘only countries making bombs are reaching’, adding the situation is concerning. (FT)

WH Press Secretary said US President Biden and Russian President Putin will discuss strategic stability, Ukraine and Belarus at their meeting. Furthermore, the White House said it does not believe Russia played a role in the Belarus incident, while it was separately reported that the UK blocked Belarusian airlines from entering its airspace. (Newswires)

US President Biden said Nord Stream 2 is continuing as it is almost finished and that sanctions now would be counterproductive, while he added that US sanctions against Belarus are in play although he won't speculate further about them. (Newswires)

US Secretary of State Blinken tweeted that he was very pleased to meet with Palestinian civilian society leaders and that they discussed the path forward and US commitment to working with regional leaders and the civil society to advance the freedom, security and prosperity of Palestinians. (Twitter)

US

Treasuries had a persistent bid, with the belly leading as a successful 2yr auction set a strong tone for the 5s and 7s, while Clarida's taper comments failed to offset the bid into month-end. By settlement, 2s -0.8bps at 0.145%, 3s -1.6bps at 0.306%, 5s -3.3bps at 0.774%, 7s -4.2bps at 1.222%, 10s -4.6bps at 1.562%, 20s -4.7bps at 2.163%, 30s -4.3bps at 2.258%. 5yr TIPS -6.6bps at -1.868%, 10yr TIPS -3.8bps at -0.891%, 30yr TIPS -4.3bps at -0.051%. SOFR and EFFR unchanged at 1bp and 6bps. Bonds had been bid modestly out of the APAC session into Europe, with a solid German Ifo survey failing to buck the trend. Rather, fresh comments from Chinese Premier Li regarding the government's attempts to stamp out commodity price rallies saw metals hit, reducing the inflation risk premium in bonds. There was further strength for sovereigns heading into the NY cash equity open, coming amid a deterioration of the risk tone, and a bid on the back of ECB's Villeroy pushing back against hawkish/taper sentiment saw spillover strength across the pond from EGBs - German 10yr Bund yields now sit lower than -17bps, after rising to -7.4bps last week. Some participants had flagged dovish comments from Fed's Evans for some of the strength at the time, although note they were largely reiterations. Yields moved rather sideways, at highs, into the 2-year auction. Fed Vice Chair Clarida said this afternoon that he agreed with the April FOMC Minutes statement about the potential for taper discussion in upcoming meetings. It was interesting that there was only a few ticks lower move in T-Notes, but that soon pared, with the market continuing to squeeze shorts with month-end buying in the frame - it appears the market is largely desensitized to "taper" mentioning among Fed officials at this stage, perhaps now looking for more substantive evidence, rather than hints from officials that are contingent on data outcomes still to be decided. Anyway, a solid 2yr auction - stopping through 0.7bps with broad participation - emboldened bullish sentiment ahead of 5s and 7s auctions, seeing yields extend lows into the futures settlement with desks noting the continued stopping out of shorts. Furthermore, a chunky corporate supply pipeline yesterday, including a USD 7bln M&A bond from AstraZeneca, failed to halt the persistent Treasury bid. T-note (M1) futures settled 11 ticks higher at 132-31; T-note (U1) futures settled 11 ticks higher at 132-02+.

FOMC Discount Rate Minutes stated the directors of all twelve Federal Reserve Banks favoured maintaining the current primary credit rate at the existing level (0.25%) and that directors noted improved business and consumer activity across most sectors and districts, spurred by widening vaccine distribution, additional fiscal stimulus, and the easing of pandemic-containment measures in some regions. Furthermore, among other positive developments, several directors reported increases in consumer spending, continued high demand for residential real estate and mortgages, and strengthening in the manufacturing sector, while activity in the sectors most affected by the pandemic, such as leisure and hospitality, remained subdued, although some directors reported an uptick in activity and hiring in these sectors. (Newswires)

Fed Vice Chair Clarida (voter) said he agrees with the FOMC minutes that there will be a time at upcoming meetings where the Fed could start to discuss tapering and that it depends on data flow. Clarida stated the US outlook is "very very positive" and could hit 7%, while the most recent unemployment report highlighted near term uncertainty in the labour market although he believes the pace of the labour market improvement will pick up. Furthermore, he stated the CPI number for April was a very unpleasant surprise and that the baseline case remains for transitory inflation, as well as reiterated if upward pressure proves persistent, the Fed would act to bring it down. (Newswires)

Fed's Daly (2021, 2024 voter) responded it isn't about timing and that it's about what is driving inflation when asked about how long transitory means, while she noted that the Fed is talking about talking about tapering but added that policy is in a "very good place" and that they need to be patient. Daly also made familiar comments regarding the need to ride through economic data volatility and is firmly in the "transitory" camp regarding view on inflation as she sees no sign that long-term prices are rising in a way that's continuous. Furthermore, she added that substantial progress has not been made and is looking ahead to the fall to see the data come back and be steadier. (Newswires)

US Democratic Senator Sheldon Whitehouse said his recommendation to President Biden is that "it's time to move on" from bipartisan negotiations. (NBC)

US Republican Senator Capito said the GOP will be unveiling their infrastructure plan counter-offer on Thursday and Senator Wicker said the new plan will be in line with parameters Biden has suggested. Furthermore, Punchbowl's Sherman tweeted that Senator Wicker laid out the upcoming GOP infrastructure offer which he said will be close to USD 1tln and will be paid for by repurposed COVID money, while there was very little on user fees and no tax increases. (Newswires/Twitter)

US Republican Senator Romney and a small bipartisan group are prepping their own infrastructure proposal as talks stall between the White House and the Senate, although it was also reported that Romney said the group won't release a plan if they think it hinders Biden-Capito group talks. (Washington Post/Twitter)

USTR said it challenges Canada's dairy policies within USMCA rules including its set aside percentage of each dairy product tariff-rate quota for Canadian dairy processors and has requested a dispute settlement panel under USMCA trade agreement over Canada's allocation of dairy tariff-rate import quotas. Furthermore, it stated that Canadian dairy restrictions limit access for US dairy farmers to in-quota exports to Canada agreed under USMCA, while Canada responded that it is confident dairy policies are in compliance with USMCA rules and will 'vigorously' defend its position. (Newswires)