• Asian indices were higher as the region took impetus from Wall St. posting its largest daily gain since early-January
• Italian Deputy PM’s Salvini and Di Maio have reached an agreement to work together
• In FX the DXY dropped towards the 97.0 level following Fed comments; to the benefit of most G10 counterparts
• Looking ahead, highlights include EZ & US Composite and Services PMI, UK Services PMI, US ADP, ISM Non-Manufacturing PMI, BoE’s Ramsden, Fed’s Clarida, Evans, Rosengren, Bostic

ASIA-PAC

Asian equity markets were higher as the region took impetus from the strength in the US where sentiment was buoyed after comments from Fed Chair Powell spurred hopes of a rate cut. This saw Wall St notch its biggest gain since early-January with the Nasdaq the frontrunner as tech outperformed, while all sectors in the S&P 500 closed in the green and the DJIA rallied by over 500 points. ASX 200 (+0.5%) gained in which tech led the upside and with risk appetite supported by the recent rate cut by the RBA, as well its openness to further reductions. Nikkei 225 (+1.8%) surged as Japanese exporters cheered a weaker currency and with SoftBank shares boosted as it expects to book a profit of around JPY 1.2tln on the partial sale of its Alibaba stake. Hang Seng (+0.6%) and Shanghai Comp. (+0.6%) conformed to the positive global risk tone but with gains capped by disappointing Chinese Caixin PMI data and a substantial liquidity drain of CNY 210bln by the PBoC, while trade concerns lingered after China issued a warning against travelling to the US and held a meeting on rare earths where experts recommended greater controls on exports of the metals. Finally, 10yr JGBs were higher with prices underpinned on the back of Fed Chair Powell’s dovishness and as Japanese 10yr yields slipped to their lowest in around 3 years.

PBoC injected CNY 60bln via 7-day reverse repos for a net daily drain of CNY 210bln. (Newswires) PBoC set CNY mid-point at 6.8903 (Prev. 6.8822)

Chinese Caixin Services PMI (May) 52.7 vs. Exp. 54.3 (Prev. 54.5); 3-month low. (Newswires) Chinese Caixin Composite PMI (May) 51.5 (Prev. 52.7)

Chinese President Xi said China's economy is improving and that China has ample room to use policies to deal with risks. Xi also commented that China's economy will have enough factors of support to maintain stable, health and sustainable development, while he added that domestic consumption remained the main driver of growth. (Newswires)

US Treasury Secretary Mnuchin will meet with PBoC Governor Yi Gang at the G20 Finance meeting in Japan, while there were separate reports that G20 finance ministers will tell G20 this week that resolving global trade tensions has become the highest priority and that any further global economic slowdown will call for coordinated response. (Newswires)

US Commerce Department made recommendations to boost production of domestic critical minerals and other measures such as low rates, loan guarantees, tax credits and capital gains tax exemptions. The report also recommended expanding cooperation with Canada, Australia, EU, Japan and South Korea on critical minerals exploration, processing and recycling. (Newswires)

China Global Times Editor said Beijing is willing to negotiate but is now convinced fair talks are impossible without a fight and that China realised they were naive before in believing that the trade talks could yield results. (Twitter)

Ford’s China JV was fined CNY 162.8mln by Chinese regulators for violating anti-monopoly law. (Newswires)

Canada Agriculture Ministry has been informed that China Customs agency will be raising inspections on Canadian meat imports and that China said the extra checks are being taken because of African swine fever and smuggling worries. In other news, China’s Embassy in Canada said PM Trudeau's comments on Chinese human rights represent a flagrant interference in China's internal affairs and China has made stern representations to Canada following Trudeau's criticism of Beijing's human rights record. (Newswires)

World Bank lowered global growth forecast for this year to 2.6% from 2.9%. (Newswires)

UK/EU

Former UK Foreign Secretary Boris Johnson warned Conservative MPs that a Brexit delay means defeat and that the Conservative Party faces “extinction” if Britain is not out of the EU by October 31st. (Telegraph)

Separately, 3 MP’s (Rishi Sunak, Robert Jenrick & Oliver Dowden) who are seen as rising stars in the Tory party have given their support to Boris Johnson’s PM bid; meaning Johnson has 40 public endorsements compared with Environment Secretary Gove’s 26. (Times)

US President Trump backtracked regarding the NHS being part of a future US-UK trade deal and stated that he doesn’t see it being on the table as the health service was something that would not be consider part of trade, which was in contrast to a prior suggestion of including the NHS in trade discussions. (Guardian)

Italy Deputy PMs Di Maio and Salvini reached an agreement to work together and Di Maio said he intends to govern for four more years and that Italy needs stability. (Newswires)

FX

DXY weakened towards 97.00 following percieved dovish comments by Fed Chair Powell. This lifted the greenback’s major counterparts with EUR/USD mildly supported by optimism after the Italian political situation stabilised in which its Deputy PMs reached an agreement to work together, and with GBP/USD back at the 1.2700 handle. The heightened risk appetite lifted JPY-crosses although USD/JPY failed to benefit due to the USD weakness and languished around the 108.00 level. Elsewhere, antipodeans remained firm due to their high-beta statuses with NZD/USD underpinned after RBNZ Assistant Governor Hawkesby said the bank’s central view is for interest rates to remain broadly around current levels for the foreseeable future and after mixed Australian GDP data for Q1 failed to dent AUD/USD which tested the 0.7000 level to the upside.

Australian Real GDP (Q1) Q/Q 0.4% vs. Exp. 0.5% (Prev. 0.2%). (Newswires) Australian Real GDP (Q1) Y/Y 1.8% vs. Exp. 1.8% (Prev. 2.3%)

RBNZ Assistant Governor Hawkesby said RBNZ central view is for interest rates to remain broadly around current levels for the foreseeable future and that the bank needs to be prepared to adapt to changing conditions to meet its objectives. (Newswires)

COMMODITIES

Commodities were mixed with overnight trade relatively quiet across commodities amid several closures including the Asia periphery and across the Middle East for holidays. Nonetheless, oil prices were subdued in which WTIcrude futures languished near the USD 53.00/bbl level following a surprise build in headline API crude stockpiles and with the components also bearish. Elsewhere, gold flatlined near 3-month highs as the softer greenback provided a platform, while copper was steady as the prior day’s momentum stalled amid ongoing trade uncertainty.

API Crude Inventories 3.55mln vs. Exp. -0.8mln (Prev. -5.27mln) barrels. (Newswires)

US

Yields started off the session higher, though the bear-flattening gave way to bear-steepening as markets digested a heavy slate of Fedspeak. Voter Evans got us underway, hinting that there could be rate cuts as part of the Fed’s reaction function to trade wars, a sentiment underscored by Chair Powell later, and Vice Chair Clarida after that. The rise in short-end yields was supported by no mention of rate cuts from Powell, some analysts reasoned, while the longer-end’s rise in yields was taking its cue from stocks rallying. In terms of Fed pricing, The probability that rates would remain at 2.25-2.50% by year-end actually rose a touch (to 6% from 2%), according to CME Fedwatch; however, pricing for a June rate cut increased by around 7.5ppts (to 27.5%), and pricing for a July rate cut rose from 53.1% to 66.5%. US T-note future (M9) settled 9+ lower at 126-19.

US President Trump stated that US Senate Minority leader Schumer gave Mexico bad advice in his suggestion that the tariffs on Mexico is a bluff, while Trump added it is 'no bluff!'. Elsewhere, US Senate Majority leader McConnell said there is "not much support" from Republicans for tariffs on Mexico and hopes they can be avoided via talks with the Mexican delegation, while a US administration official said US-Mexico talks will be held at the White House today around 1500EDT or 1600EDT. (Newswires)

Fed's Clarida (Voter, Neutral) said Fed would put in appropriate policy if growth is slower than the Fed expects but also commented that the US economy is in a good place. Clarida also doesn't see tariffs as inflationary and rather a one-off price increase with the effects small so far. (Newswires)

Fed's Kaplan (Non-Voter, Dove) said he wants to see if trade tensions ease before considering a rate cut and suggested that it pays to be patient and vigilant right now. (Newswires)