• European equities opened on a firmer footing and extended gains; US equity futures also see broad-based gains but to a lesser extent
• In FX, the DXY remained subdued beneath 90.00, EUR/USD reclaimed 1.22 and GBP/USD reached its highest level since early 2018 before losing 1.4200 status
• US President Biden will meet with Sen. Capito on Wednesday; Senate Republicans have downplayed chances of an infrastructure deal this week
• The RBA maintained rates as expected, reiterated its guidance that suggests conditions will not be met for a rate hike until 2024 at the earliest
• OPEC+ is not expected to discuss output beyond July and wants to wait and see what happens with Iran, according to sources
• Looking ahead, highlights include US Final Manufacturing PMI, US ISM Manufacturing PMI, Fed’s Quarles, Brainard, BoE’s Bailey and JMMC/OPEC+ meetings

NOTABLE NEWS FROM MEMORIAL DAY HOLIDAY

Key GOP Senators in infrastructure discussions with the White House suggested over the weekend that they were still looking for a deal, according to reports in Axios. In relevant news, there were also comments from US Transport Secretary Buttigieg that infrastructure talks cannot continue forever and called for clear direction by next week. (Newswires/Axios)

China's Politburo held a meeting on major policy measures regarding the ageing population, Xinhua reports; One couple can have three children (previously two). (Newswires)

• Chinese NBS Manufacturing PMI (May) 51.0 vs. Exp. 51.1 (Prev. 51.1)
• Chinese Non-Manufacturing PMI (May) 55.2 vs. Exp. 55.1 (Prev. 54.9)

OECD raises global 2021 GDP growth forecast to 5.8% (prev. vie 5.6%); 2022 upgraded to 4.4% (prev. view) 4.0%. (OECD)

UK Chancellor Sunak said there is a deal to be made regarding global corporate tax and urged the US to get it done next week at the G7, while he noted that negotiations regarding a G7 agreement on tax are going well. (Newswires)

Russia is to deploy around 20 new military formations and unit around western borders by year-end, according to the defence minister; deployments are in response to moves by NATO. Russia said that its agenda and US' agenda are not the same for a summit between the two presidents, Ifax reported; US is not showing readiness to discuss all issues at the summit. Russia said it will issue signals in the coming days that will be unpleasant for the US, via Ria. (Newswires)

An informed source in the Iran’s Ministry of Petroleum said "The Ministry has prepared the document for the increase of our oil production to the level of 6.5 million bpd. Iran can easily raise its production to this level" according to journalist Zandi. (twitter)

CORONAVIRUS UPDATE

German Chancellor Merkel suggested that they do not need to maintain lockdown restrictions which are set to finish at end-June but noted that they can reactivate them if mutations should develop again and warned that the coronavirus is still with us even if incidence is declining. (Newswires)

German Health Minister says RKI has downgraded its evaluation of the German COVID situation to "high" from "very high"; adding that there are grounds for optimism; need over 80% vaccine rate to remove curbs. (Newswires)

Turkey President Erdogan announced a further relaxing of COVID-19 restrictions with weekend curfews partially lifted and measures were also eased for restaurants and cafes. Elsewhere, Russia extended its flights ban to Turkey until June 21st but resumed limited flights to other destinations including UK, Austria, Hungary and Croatia. (Newswires)

CENTRAL BANKS

Fed's Bullard (2022 voter) notes that the US labour market remains tight - data shows NFP is still 8mln jobs short of pre-pandemic levels; he was starting to advocate for the central bank to look at the unemployment to job opening ratio. Bullard said it seems like we are getting close to the juncture where you can start talking about changing monetary policy parameters. (FT)

ECB's Knot says that there is no need to believe that increasing inflation rates would be irreversible. (Newswires)

BoE's Ramsden says the BoE will ‘guard against’ risk of sustained price pressure from rapid COVID recovery and is carefully monitoring Britain’s booming housing market. There is a risk that demand gets ahead of supply and that will lead to a more generalised pick-up in inflationary pressure. Ramsden added that it would be something "we are absolutely going to guard against" and the BoE could push the bank rate up from its historically low level of 0.1%. (Guardian)

SNB Vice Chairman Zurbruegg said he welcomes the recent weakening of CHF but added that the currency remains highly valued, while he added that the current expansionary monetary policy is still appropriate. (Newswires)

RBA kept the Cash Rate Target and 3yr Yield Target unchanged at 0.10%, while it also maintained parameters of the QE program, as expected. RBA reiterated the Board will not increase the Cash Rate until actual inflation is sustainably within 2%-3% target range and it is committed to maintaining highly supportive monetary conditions to support a return to full employment and for inflation to be consistent with the target, although it noted that the labour market is unlikely to be tight enough to spur materially higher wage growth until 2024 at the earliest. RBA also stated that Australia's economic recovery is stronger than previously expected which is likely to continue but noted that an important ongoing source of uncertainty is the possibility of significant outbreaks of the virus, while it will decide in July whether to retain the April 2024 bond for the 3yr yield target or switch to next maturity and will also consider future bond purchases.

ASIA

Asian equity markets traded mixed after lacking firm direction in the absence of a lead from the US owing to the Memorial Day holiday and amid tentativeness ahead of this week’s key events culminating with Friday’s US jobs numbers. ASX 200 (-0.3%) was lower as losses in healthcare and the top-weighted financial industry led the declines seen across most sectors and with risk appetite also subdued by prospects of an extension to the Victoria state lockdown. Furthermore, a slew of data releases failed to inspire as Building Approvals, Net Exports Contribution to GDP and Company Q1 Profits were all in contraction territory, despite mostly beating expectations. Nikkei 225 (-0.2%) failed to hold on to opening gains and retreated below the 29k level alongside currency-related pressure, although the KOSPI outperformed after trade data remained solid including a 45.6% jump in Exports. Hang Seng (+1.1%) and Shanghai Comp. (+0.3%) conformed to the mixed picture with the Hong Kong benchmark kept afloat by strength in tech as e-commerce platforms began the 618 Mid-Year shopping extravaganza with early record sales. However, the mainland continued to suffer from a firmer currency despite the PBoC’s attempt to curb the one-way bets on the CNY through an increase in the FX reserve requirement ratio, while marginally better than expected Chinese Caixin Manufacturing PMI data and the recent announcement to allow couples to have three children did little to help the broader market although provided some tailwinds for baby-related stocks. Finally, 10yr JGBs were flat with price action subdued after the BoJ maintained the amount and pace of its intended JGB purchases for June and with the central bank only in the market today for treasury bills.

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 6.3572 vs exp. 6.3556 (prev. 6.3682)

• Chinese Caixin Manufacturing PMI (May) 52.0 vs. Exp. 51.9 (Prev. 51.9)

Japanese Finance Minister Aso said difference of opinions regarding global taxation has narrowed and that he is arranging to conduct a bilateral meeting with US Treasury Secretary Yellen, while he added that the UK has not yet clarified the official agenda for the G7. (Newswires)

US

US President Biden will meet with Sen. Capito on Wednesday according to sources; Senate Republicans have privately warned that there is "not going to be any deal” this week (on infrastructure) barring some dramatic last-minute turnaround. (Punchbowl)

UK/EU

French Minister of State for European Affairs Beaune said the EU plans to launch the first COVID-19 recovery plan bond issue with an initial amount of EUR 10bln and that more than EUR 100bln will be injected into the EU economy from this year. (Newswires)

• EU Markit Manufacturing Final PMI (May) 63.1 vs. Exp. 62.8 (Prev. 62.8)
• UK Markit/CIPS Manufacturing PMI Final (May) 65.6 vs. Exp. 66.1 (Prev. 66.1)

GEOPOLITICAL

IAEA report stated that Iran failed to explain traces of processed uranium discovered at undeclared sites and that it continues to breach many limits set by its nuclear agreement, while it added that the IAEA has not been able to verify Iran’s enriched uranium stock. (Newswires)

Iranian government spokesperson said Vienna negotiations have not reached a dead end and we are discussing the main files now, via Al Jazeera. (Twitter)

German Chancellor Merkel stated that it is clear from the meeting between Russian President Putin and Belarusian President Lukashenko that they were struck by Europe’s fast response to the plane diversion, while Merkel added that they strongly condemn what Lukashenko is doing to his civil society and the opposition which will not pay off in the long run and that sanctions will be implemented in a very targeted manner now. (Newswires)

EQUITIES

Equities in Europe kicked off the session modestly in the green and thereafter extended gains (Euro Stoxx 50 +0.9%), with the Stoxx 600 notching another record high whilst the FTSE MIB revisits levels last seen in 2008. Overall, sentiment has been more constructive since APAC hours as UK and US players re-join trade following their respective domestic holidays, and with volumes looking less anaemic. US equity futures have also extended on modest broad-based gains, but upside is less pronounced vs peers across the pond as participants look ahead to a raft of Tier 1 data points this week kicking off with the ISM Manufacturing PMI later today – Note the Markit PMIs have widely been flagging inflationary pressures arising from supply chain complications and the rise in raw materials. The FTSE 100 (+1.2%) shrugged off yesterday’s lacklustre European performance as the rebound in base metals propels the miner-heavy index; meanwhile, the IBEX (-0.4%) lags amid losses in heavy-weight constituents. Sectors portray a more risk-on picture and pro-cyclical bias with the defensive peers towards the bottom of the pile. The Basic Resources sector outpaces its peers, closely followed by Autos and Oil & Gas. The Auto sector is buoyed by a string of constructive updates. Daimler (+2.7%) welcomes the settling of litigation with Nokia (+0.5%), whilst Volkswagen (+2.5%) cheers a potential battery unit IPO, and Stellantis (+1.6%) is bolstered by speculation that it may announce an entry into the EV battery market at an event on July 8th.

FX

AUD/GBP/NZD - The Aussie was elevated amidst a rise in iron ore prices and better than anticipated data, including building approvals, current account, net exports and gross company profits going into the RBA policy meeting, and only suffered a temporary setback on initial less hawkish than expected perceptions as all settings and guidance were left unchanged. However, its relatively rapid recovery owes more to the failings of the Buck as Aud/Usd rebounds firmly through 0.7750, but the Aud/Nzd cross remains anchored around 1.0650 in wake of last week’s recalibration to price in an earlier OCR hike by the RBNZ. Indeed, the Kiwi has also regained momentum vs its US peer to retest resistance and offers ahead of 0.7300 in advance of NZ Q1 terms of trade, while next up for the Aussie Q1 GDP. Elsewhere, the Pound also derived strength at the expense of its US counterpart, albeit with extra impetus from strong oil prices, Nationwide hpi and hawkish rhetoric via BoE’s Ramsden in the Guardian, though Cable came up against a barrier around 1.4250 and lost grip of the 1.4200 handle even before a downgrade to the final manufacturing PMI.

CAD/USD/NOK - Not a normal major grouping, but the Loonie and Norwegian Krona have the prop of crude in common, as WTI approaches Usd 68.50/brl and Brent touches Usd 71 awaiting JMMC/OPEC+ meetings from midday London time. Usd/Cad is straddling 1.2050 and Eur/Nok has retreated sharply from recent highs to probe 10.1000, but the Crown also taking advantage of the Euro’s fade more broadly. Meanwhile, Buck has bounced on the back of a corrective rebound in US Treasury yields ahead of the return of cash markets from Monday’s Memorial Day holiday, with the DXY just shy of a recovery high close to 90.000 within a 89.915-717 range and now looking towards the final Markit manufacturing PMI, ISM, Dallas Fed and Beige Book for some independent direction along with speeches from Fed’s Quarles and Brainard.

EUR/JPY/CHF - All off best levels vs the Dollar, as the Euro loses some traction from firm EGB yields irrespective of decent Eurozone manufacturing PMIs and data such as German jobs, Italian GDP, Eurozone inflation, and unemployment. Eur/Usd waned circa 1.2241 and hefty option interest at the 1.2275 strike (1.7 bn), while the Yen is pivoting 109.50 and Franc is hovering above 0.9000 in wake of an acceleration in Swiss retail sales, mixed GDP and a slight dip in the manufacturing PMI following latest comments from the SNB reiterating the need to keep monetary policy loose given the still highly valued Chf, albeit weaker recently.

SEK/EM/PM - The Sek is benefiting from a buoyant and bullish start to the new month in terms of risk sentiment rather than Riksbank remarks noting the chance that inflation will rise, but remain well in control as it eyes 10.1000 against the Eur, but the Try has not been able to sustain 8.5000+ levels vs the Usd following more official efforts to stem the tide via an extension to withholding tax support for bank deposits through this month and July, as Turkey’s manufacturing PMI turns from slender growth into contraction. Conversely, the Cnh and Cny remain underpinned after another positive PBoC midpoint fix, the Zar is holding up alongside Gold consolidating Usd 1900+/oz status with only minor detraction from an uptick in SA’s Q1 jobless rate and Eskom warning about potential power cuts throughout the week, and the Mxn is riding the crest of oil in contrast to the geopolitically hampered Rub.

FIXED INCOME

Core European bonds remain soft, but have pared a chunk of their losses as USTs play catch up to an extent awaiting the return of cash traders from their long holiday weekend and the initial repositioning for the start of June. Indeed, Bunds have bounced quite firmly from a deeper Eurex intraday low of 169.68 towards 170.00 and Gilts have actually clambered back over 127.00, albeit just vs 126.83 at the Liffe base, but the 10 year T-note is nearer the bottom of 131-28/20 overnight parameters and the curve is a tad steeper in the run up to the final Markit manufacturing PMI, ISM, Dallas Fed, Beige Book and more Fed rhetoric following Bullard (see 10.02BST post on the Headline Feed for details) via Quarles and Brainard.

COMMODITIES

WTI and Brent front month futures have been extending on APAC gains throughout the European morning, with the former printing north of USD 68/bbl (vs low 66.41/bbl) and the latter grinding higher to earlier test USD 71/bbl to the upside (vs low 69.29/bbl). The energy market is eyeing a few moving parts alongside the overall risk profile across the market. Firstly, JCPOA talks are taking longer than anticipated, with some officials noting a potential spill-over into a sixth round of negotiations. However, Iran has reassured that the deal is not dead and could be inked by mid-to-late June. Secondly, OPEC+ producers are poised to meet at 13:30BST after the JMMC at 12:00BST. Members are expected to maintain current quotas, but Iranian supply will reportedly be high on the agenda. Analysts and some energy officials have suggested that Iranian and OPEC+ supply can be absorbed by the market heading into a less COVID-restricted summer period, with the US driving season also looming – Click here for a full primer. Elsewhere, spot gold and silver have been moving at the whim of the Buck but retain USD 1,900/oz and USD 28/oz statuses respectively, ahead of a risk-packed week. Turning to base metals, LME copper kicked off the week on the front-foot amid the subdued Buck, the risk appetite across markets and supply woes emanating from mine strikes at BHP’s most extensive Chilean operations. Finally, Dalian iron ore futures rose over 4% overnight as China’s top steelmaking city of Tangshan announced the easing of restrictions – although this comes against the backdrop of China cracking down on rising commodity prices.

OPEC+ is not expected to discuss output beyond July and wants to wait and see what happens with Iran, according to sources. (Newswires)

OPEC output in May was said to increase by 280k bpd from the prior month to 25.52mln bpd, according to a Reuters survey which found that the biggest increase was from Saudi which raised output by 340k bpd and Iraq output rose by 70k bpd, while Iran and Nigeria's output declined for the month. (Newswires)