• US President Biden reached a budget agreement in principle with House Speaker McCarthy to raise the debt limit by 19 months until 1st January 2025
• In FX, DXY initially softened overnight alongside a downtick in US yields but then recovered against its major peers and as the CNY continued to depreciate; US equity futures saw mild gains
• In geopolitics, Russia launched a large drone attack on Kyiv over the weekend, while it was recently reported two residential buildings in Russian capital Moscow were hit by drones, according to RIA
• Turkish President Erdogan won the election runoff on Sunday - Turkish Lira hit a fresh record low against the Dollar; elsewhere Spanish PM Sanchez called a snap general election
• Looking ahead, highlights include, Swiss KOF, Spanish Flash HICP, EZ Economic Sentiment & Consumer Confidence (Final), Speeches from Fed’s Barkin & ECB’s Centeno, Supply from Italy

US TRADE

EQUITIES

• US stock markets were closed for Memorial Day.

US DEBT CEILING

• US President Biden reached a budget agreement in principle with House Speaker McCarthy to raise the debt limit by 19 months until 1st January 2025. President Biden stated that the agreement represents a compromise and he strongly urged for both chambers of Congress to pass the US debt agreement right away, while he is confident a debt ceiling deal will get to his desk and responded “none” when asked if there are sticking points in a deal, according to Reuters.
• US House Speaker McCarthy said the agreement has historic reductions in spending and there are no new taxes or programs in the deal, while he expects Congress to vote on the deal on Wednesday and said more than 95% of House Republicans are very excited about the debt ceiling deal, according to Reuters.
• US Democrats and Republicans are confident they can pass the deal to avert a US default, according to FT. It was also reported that the US House Rules Committee will meet on Tuesday to discuss the debt ceiling bill, according to Reuters.
• US GOP Rep. Good said he is hearing that the deal is for a USD 4tln increase in the debt limit and US GOP Rep. Roy separately commented that they are going to try to stop the debt ceiling deal in the House, while Democrat Rep. Himes said small scope of debt ceiling bill will win support from Democrats.

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NOTABLE HEADLINES

• Fed’s Goolsbee (voter) said even the anticipation of problems with the debt ceiling has consequences in financial markets and said that rates are already showing fear and uncertainty. Goolsbee added the Fed is improving on the inflation goal but has not succeeded and he thinks they can get inflation down without a recession, while Goolsbee also commented that he tries not to prejudge on rate decisions and they will get a lot of data between now and the June FOMC, according to CBS.

APAC TRADE

EQUITIES

• APAC stocks traded mixed with price action mostly rangebound following the holiday closures in the US and the UK where cash markets have yet to react to the tentative debt ceiling agreement.
• ASX 200 was lacklustre amid losses in real estate and financials, while weak Building Approvals added to the glum mood.
• Nikkei 225 was choppy but remained above the 31,000 level after BoJ Governor Ueda reiterated a dovish message.
• Hang Seng and Shanghai Comp. were pressured as the Hang Seng China Enterprises Index entered bear market territory which added to the jitters from the already cautious mood heading into tomorrow’s PMI data.
• US equity futures were kept afloat but with trade uneventful following the holiday lull.
• European equity futures are indicative of a marginally higher open with the Euro Stoxx 50 +0.1% after the cash market closed down 0.4% yesterday.

FX

• DXY initially softened overnight alongside a downtick in US yields but then recovered against its major peers and as the CNY continued to depreciate. Meanwhile, Barclays, Citi and Credit Agricole month-end rebalancing estimates showed roughly balanced USD flows across the board against G10 FX although Citi’s model also pointed to EUR buying and JPY selling versus the greenback.
• EUR/USD gave back its early gains to test support at the 1.0700 level, while newsflow from the bloc was light although Spanish PM Sanchez called a snap general election for July 23rd after his Socialist party suffered a defeat in local and regional elections.
• GBP/USD was indecisive owing to the dollar swings and after the recent holiday closures on both sides of the pond.
• USD/JPY weakened in early trade to test a floor at the 140.00 level where support held and the dollar rebounded.
• Antipodeans were choppy alongside the mixed risk appetite and with AUD pressure as USD/CNH breached 7.1000.
• PBoC set USD/CNY mid-point at 7.0818 vs exp. 7.0821 (prev. 7.0575)
• Turkish President Erdogan won the election runoff on Sunday with 52.1% of votes vs Kilicdaroglu at 47.9% of votes. Erdogan said they were given the responsibility to rule for the next 5 years, while Kilicdaroglu said he will continue with his struggle and that it was the most unfair election in years.
• Riksbank’s Jansson said the SEK could be a serious problem and should not continue to weaken on a trend basis, while he added they are a long way from a currency intervention which in his view would be a last resort. Jansson stated that he doesn’t like currency intervention as a plan in the current monetary policy regime and it would have to be an exceptional situation, as well as noted there is a question on how effective a currency intervention would be. Furthermore, he said their main tools are the interest rate and the asset portfolio, while he is ready to raise rates as much as needed to deal with inflation, according to Reuters.

FIXED INCOME

• 10yr UST futures were higher as yields retreated at the resumption of treasuries cash trade and after prices fully rebounded on Monday from the initial reaction to the debt ceiling deal.
• Bund futures extended on the prior day’s highs after rallying to above the 134.00 level.
• 10yr JGB futures were kept afloat but with upside capped after a relatively in-line 2yr auction.

COMMODITIES

• Crude futures were choppy with price action at the whim of an indecisive dollar and China-related headwinds.
• OPEC Secretary General Al Ghais said OPEC will welcome back Iran’s full return to the market when sanctions are lifted and commented that all OPEC decisions are made in order to have a good balance between global oil demand and supply, according to Shana.
• Iranian President Raisi told OPEC Secretary General that he hopes oil producers can calm down the market and called for unity among its members, according to Reuters.
• Spot gold failed to sustain its initial mild advances as the greenback eventually recovered.
• Copper futures swung between gains and losses owing to the cautious mood across risk assets.
• Indonesia is putting a nickel product export tax on hold, according to a government official.

CRYPTO

• Bitcoin was marginally higher and partially resumed last weekend's upward momentum.

NOTABLE ASIA-PAC HEADLINES

• China rejected the US request for a meeting between US Defence Secretary Austin and his Chinese counterpart, while the Pentagon said in a statement that China’s decision is concerning.
• US Deputy Trade Representative Bianchi said the US review of Section 301 tariffs on Chinese goods is being conducted from an analytical perspective and the outcome will not be linked to any breakthrough in US-China trade relations, while she added that the USTR is consulting with other US agencies on which tariffs make strategic sense and it is important for US and Chinese officials to continue talking on trade after the recent meetings.
• China's Commerce Minister said during talks with Japan's Economy and Trade Minister that Japan should correct its wrongdoing of imposing chip export controls and China is willing to work with Japan to promote cooperation in key economic and trade areas.
• BoJ Governor Ueda said they haven't achieved sustainable 2% inflation and it is important to nurture green shoots in wage growth. Ueda reiterated that inflation is to slow greatly around the middle of FY23 and is likely to bounce back thereafter on wage growth and other factors but there is uncertainty on that outlook, while he added they will patiently maintain easy policy as there is still some distance to sustainably hit the 2% target and the BoJ will continue with its bond-buying operation.

DATA RECAP

• Japanese Unemployment Rate (Apr) 2.6% vs. Exp. 2.7% (Prev. 2.8%)
• Australian Building Approvals (Apr) -8.1% vs. Exp. 2.0% (Prev. -0.1%)

GEOPOLITICS

• Russia launched a massive drone attack on Kyiv over the weekend which was the largest kamikaze drone attack since the start of the invasion, while Ukraine’s air defence systems shot down 58 drones, according to FT. There were also reports of explosions on Monday and Kyiv's military administration said more than 40 air targets moving towards Kyiv were destroyed including drones and missiles, while Russia launched another offensive against Kyiv on Tuesday.
• Two residential buildings were hit by drones in Moscow with one person injured, according to RIA. It was also reported that Moscow's Mayor stated that the drone attack caused minor damage to several buildings and no serious injuries, according to Reuters. Furthermore, several drones were shot down on approach to Moscow, according to Russian agencies citing the regional Governor.
• Russia’s Belgorod regional Governor said several settlements were shelled by Ukrainian forces and two industrial facilities were attacked in the town of Shebekino which wounded four employees, according to Reuters.
• Russia’s interior ministry put US Senator Graham on its wanted list after his comments last week in which he stated that “Russians are dying” and later said that US military aid to Ukraine is “the best money we ever spent”, according to The Hill.
• Ukrainian presidential aide said a post-war settlement must involve a demilitarised zone of 100km-120km in Russian regions bordering Ukraine and should probably initially have an international control contingent, according to Reuters.
• China’s Special Envoy for Eurasian Affairs Li Hui said China has always adhered to an objective and fair position, as well as actively persuaded peace and promoted talks regarding the Ukraine crisis. Li added that China will strengthen exchanges and dialogue with all parties including Russia and will make concrete efforts for a political solution, according to the Chinese Foreign Ministry cited by Reuters.
• Russian Foreign Minister Lavrov said less than 3% of grain exported within the Black Sea grain initiative reached the poorest countries and part of the deal applying to Russia was not being fulfilled at all, while he added if nothing will change, the deal will no longer be operational, according to Reuters.
• North Korea notified Japan of a plan to launch a satellite between May 31st and June 11th, according to a government official. Japan's Defence Minister ordered preparations for the destruction of any North Korean missile confirmed to land in Japanese territory, while PM Kishida said any missile launch by North Korea, even if called a satellite, is a serious violation of UN Security Council resolution.
• US said any North Korean launch using ballistic missile technology would violate UN resolutions and the US urged North Korea to refrain from further ‘unlawful activity’, according to Reuters.
• Iran said that 14 members of a “terrorist team” linked to Israel were arrested in north-western Iran, according to Tasnim.

EU/UK

• UK Health Secretary Barclay said the government will not negotiate on the amount of pay with the nurses’ union RCN as the threat of more strikes looms, according to Reuters.
• Spanish PM Sanchez called a snap general election for July 23rd after his Socialist party suffered a resounding defeat in local and regional elections on Sunday, according to FT.

DATA RECAP

• UK BRC Retail Shop Price Index YY (May) 9.0% (Prev. 8.8%)