• Asian equity markets were mostly subdued as tailwinds from the modest gains in the US were offset by virus concerns and lingering China-related frictions
• FOMC minutes noted that the Fed has not yet seen the standard of 'substantial further progress' as having been met yet
• Minutes also noted that data was providing a less clear signal about underlying momentum
• The ECB is set to allow for some overshoot of its new inflation goal which is expected to be set at 2%
• DXY heads into the European session steady around 92.70, EUR/USD and GBP/USD trade sub-1.18 and 1.38 respectively
• Looking ahead, highlights include ECB Minutes, Strategy Review Announcement & Lagarde Press Conference, US IJC, DoEs

FOMC MINUTES

The Fed's June meeting minutes were being eyed for clues on the timeline and sequencing of asset purchase tapering. The Fed said that its standard of "substantial further progress" was generally seen as not having yet been met, although participants expect economic progress to continue. Various participants expected that the conditions for tapering asset purchases was likely to be met somewhat earlier than they had anticipated at previous meetings in light of incoming data, but some participants saw the incoming data as providing a less clear signal about the underlying economic momentum, and judged that the Committee would have more information in coming months to make a better assessment. Several of these participants also emphasised that the Fed should be patient in assessing progress toward its goals as well as announcing any changes to its plans for asset purchases. The minutes revealed that participants generally judged that it was important to be well positioned to reduce the pace of asset purchases in response to unexpected economic developments, if necessary, including faster-than-anticipated progress toward the Committee's goals, or on the other side, the emergence of risks that could impede the attainment of the Committee's goals.

CORONAVIRUS UPDATE

US President Biden's administration will not act to remove travel restrictions with any countries pending further discussions, according to a White House official. (Newswires)

UK Transport Secretary Shapps is set to announce that quarantine for double-jabbed Brits returning from amber nations will end as soon as July 19th but travellers will need to take a PCR test on day two of their return. (Telegraph)

Japan confirmed that it recommends declaring a state of emergency for Tokyo and Economic Minister Nishimura said that they are seeking a state of emergency during July 12th-August 22nd, while other reports noted that spectators will be banned from Olympic events in Tokyo to stem the spread of the virus. (Newswires/Asahi)

Sinovac’s (SVA) CoronaVac vaccine was found to be 66% effective in preventing COVID-19 vs 92.6% efficacy for the Pfizer vaccine, according to a study in Chile. (NEJM)

ASIA

Asian equity markets were mostly subdued as tailwinds from the modest gains in the US following the slightly dovish perceived FOMC Minutes, were offset by the virus concerns which threatens additional restrictions for the region and amid lingering China-related frictions. ASX 200 (+0.1%) was just about kept afloat by resilience in cyclicals but with upside capped after a fresh YTD high in COVID-19 infections for New South Wales and after Beijing warned that smearing China will backfire on trade partners. Nikkei 225 (-0.7%) was subdued by the recent currency strength and with Japanese Bank Lending at its slowest pace of growth in more than eight years. In addition, the latest securities flows data showed foreign investors more than doubled their net selling of Japanese stocks last week and virus concerns persisted with the government considering re-imposing a state of emergency in Tokyo. KOSPI (-0.7%) failed to maintain its initial gains after South Korea extended social distancing rules in greater Seoul for an additional week and warned of stricter measures if cases don’t decline, while the latest number of daily infections printed a new domestic record high. Hang Seng (-1.8%) and Shanghai Comp. (-0.6%) were pressured amid ongoing tensions as the US State Department called out China again for its atrocities in Xinjiang and with the House Foreign Affairs Committee said to be looking at legislation to respond to China's crackdown on Didi which was removed from WeChat and Alipay apps for new users. China was also reportedly considering closing the loophole used by tech giants for US IPOs and FTSE Russell announced it will remove more Chinese stocks from indices following user feedback regarding the updated US Executive Order. However, some losses in the mainland were stemmed on future easing speculation after China's Cabinet said it is to use RRR cuts in a timely manner to support the real economy but will not resort to flood-like stimulus and press reports also suggested China may reduce its RRR in September to support the economy. Finally, 10yr JGBs were higher as they took impetus from global peers and with the risk averse tone spurring haven demand although retraced some of the gains following a soft 5yr JGB auction, while bonds in China were lifted which dragged the Chinese 10yr yield to its lowest since August 2020 amid speculation of a RRR cut later this year.

PBoC injected CNY 10bln via 7-day reverse repos with rate at 2.20% for a net neutral daily position. (Newswires) PBoC set USD/CNY mid-point at 6.4705 vs exp. 6.4695 (prev. 6.4762)

PBoC's Fan said they are going to take further antitrust actions in the payment sector and that cryptocurrency has become a speculative financial tool with private cryptocurrencies threatening finance stability, while Fan added that they are concerned about stable coins threat to the global monetary and payment systems. (Newswires)

FTSE Russell said it will remove more Chinese stocks from indices following user feedback regarding updated US executive order. (Newswires)

US House Vice Chair of Foreign Affairs Committee Malinowski stated that they are looking at legislation to respond to China's crackdown on Didi (DIDI)

UK/EU

UK is to probe the the takeover of the country's largest silicon wafer producer by a Chinese-backed firm due to national security. (FT)

UK and EU are working on plans which would enable closer antitrust enforcement through the sharing of information, additionally, working towards a formal early warning system around potential regulator intervention, according to sources. (FT)

ECB is to announce results of its Strategy Review at 12:00BST/07:00EDT on Thursday and President Lagarde plans a press conference at 13:30BST/08:30EDT. Other reports noted that the ECB is to allow for some overshoot of new inflation goal and is said to agree to set its new inflation goal at 2%. (Newswires/FT)

Bank of France raised its Q2 GDP forecast to +1.0% from +0.5% and said the economy is operating at 98% of pre-crisis levels in June and July, up from 96% in May. (Newswires)

UK RICS Housing Survey (Jun) 83 vs. Exp. 77.0 (Prev. 83.0, Rev. 82). (Newswires)

FX

In FX markets, the DXY remained near multi-month highs above 92.70 with the subdued risk tone in Asia keeping the haven afloat despite the recent FOMC Minutes which were viewed as slightly dovish as although participants expected conditions for reducing the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings, the Committee’s standard of “substantial further progress” was generally seen as not having yet been met. Some participants also saw incoming data as providing a less clear signal about the underlying economic momentum, while several of these emphasized the Committee should be patient in assessing progress toward its goals and in announcing changes to asset purchases. Conversely, there were later comments from Fed's Bostic that they are getting closer to a time when tapering would be appropriate, and that staff are analysing what tapering should look like. EUR/USD was subdued after it retreated back below the 1.1800 handle with focus now turning to the ECB’s Strategic Review announcement in which it is said to allow for some overshoot to the new inflation goal which they agreed to set at 2% vs current medium-term target of below, but close to 2%. GBP/USD was choppy and declined beneath 1.3800 again amid the firm greenback and as newsflow from the UK remained relatively light with domestic attention focused on sporting events after England reached the final of a major international football tournament for the first time since 1966. USD/JPY and JPY-crosses were subdued whereby the former tested 110.50 to the downside due to the downbeat risk mood and alongside the continued pressure in oil prices, weighed on commodity-linked currencies (AUD, NZD and CAD), while there were also comments from RBA Governor Lowe who reiterated the step-down in bond buying does not represent a withdrawal of stimulus but also noted that the modest scaling back on bond buying reflects economic progress.

RBA Governor Lowe reiterated that the step-down in bond buying does not represent a withdrawal of stimulus and the condition for a rate hike depends on inflation outcomes not the date, while he expects it will take until 2024 for inflation to be sustainably within 2%-3% target. Lowe also stated that QE will likely be needed in future cycles but added there are limits and that central banks cannot keep purchasing assets. Furthermore, he stated that they are not considering negative rates and that they will not hike rates to choke off housing price increases, while he also noted that modest scaling back on bond buying reflects economic progress. (Newswires)

Brazilian President Bolsonaro said he may not accept the 2022 election result if the current voting system is maintained. (Newswires)

COMMODITIES

Commodities were lacklustre overnight with WTI crude futures despondent after another aggressive move lower whereby prices briefly dipped beneath the 72.00/bbl level after yesterday's reports that the UAE was mulling unilateral action to lift oil output which some desks noted increases the risk of a collapse ongoing output agreement. Furthermore, OPEC+ talks remain in limbo with Saudi Arabia's Oil Minister with Saudi conceding that next OPEC+ meeting will unlikely take place before August, while a bullish private sector inventory did little to spur prices despite headline crude stockpiles printing around double the anticipated draw. Gold was marginally pressured by a steadfast greenback which saw the precious metal retreat beneath the psychological USD 1800/oz level and copper was also constrained by the broad risk aversion but with downside stemmed by support near USD 4.30/lb and amid speculation of a RRR cut later in the year.

US Private Energy Inventory Data (bbls): Crude -8.0mln (exp. -4.0mln), Cushing +0.2mln, Gasoline -2.7mln (exp. -2.2mln), Distillates +1.1mln (exp. +0.2mln). (Newswires)

Saudi Arabia's Oil Minister has reportedly conceded that the next OPEC+ meeting could take place no sooner than August, as an ongoing clash with the UAE stalls the group's output policy past July. (Argus)

EIA STEO cut world oil demand forecast for 2021 by 80k BPD and now sees +5.33mln BPD Y/Y, while 2022 world oil demand growth was raised by 80k BPD which is now seen at +3.72mln BPD Y/Y. (Newswires)

GEOPOLITICAL

US State Department has every expectation that there will be a seventh round of nuclear talks with Iran. (Newswires)

Saudi Deputy Defense Minister said he had a fantastic discussion with US Secretary of State Blinken on a strategic US-Saudi partnership and reviewed the latest regional developments, as well as explored ways to bolster ties between the two countries. (Twitter)

US

The Treasury curve bull-flattened again on Wednesday as the latest oil tumble, COVID woes, and short unwinds continue. By settlement, 2s -0.6bps at 0.216%, 5s -2.7bps at 0.782%, 10s -5bps at 1.320%, 30s -6.5bps at 1.938%; TYU1 volumes were above recent averages again, but less than Tuesday. 5yr TIPS -5.9bps at -1.697%, 10yr TIPS -8bps at -0.972%, 30yr TIPS -7.6bps at -0.277%. SOFR and EFFR both unchanged at 5bps and 10bps, respectively. Yields meandered, with T-Notes (U1) trading around 133-13, until the UAE-induced leg lower in oil prices saw bonds catch another strong bid, seeing 10yr notes yield a new low of 1.296%, the lowest since mid-February, and just one day after we broke beneath 1.40% - T-Notes printed daily highs of 132-22+. Yields then pared modestly into the FOMC Minutes, which didn't provide too much new to the Fed discourse, and thus, had a muted market reaction. Reasoning recent moves, desks are continuing to cite the familiar myriad of reasons for the bond bid: spreading Delta variant; oil tumbling; limited fiscal stimulus as infrastructure fizzles, debt ceiling approaching, slightly tepid labour market recovery, and favourable seasonals. What's more, a lack of Treasury offerings this week has taken out any Dealer hedging that would normally swallow up some of this bullish flow - Thursday will see next week's 3s, 10s, and 30s offerings announced, with the auctions heading to the forefront of attention into the weekend. T-note (U1) futures settled 10+ ticks higher at 133-17+.

Fed's Bostic (2021, 2024) suggested they are getting closer to a time when tapering would be appropriate and noted that a premature rate hike would weigh on the economy but moving late could destabilize the economy and financial system, while he added that staff are analysing what tapering should look like. (Newswires)

White House officials said the administration is working with Senate Democrats to have the bipartisan infrastructure bill ready for floor consideration as soon as in two weeks. (Politico)

USTR Tai discussed potential mutual benefits of aligning US/Mexican policies on gasoline and ethanol blends with Mexican trade officials. (Newswires)