• Asian indices are higher as sentiment remains supported on US-Mexico tariff relief
• BoE’s Saunders says the BoE will likely need to return to a neutral stance sooner than expected and rates do not necessarily need to be on hold until Brexit uncertainty fades
• Looking ahead highlights include, UK Employment Data, US NFIB & PPI, ECB’s Nowotny & Rehn, BoE’s Vlieghe, Saunders, Broadbent & Tenreyro. Supply from the US

ASIA-PAC

Asian equity markets were higher across the board after a similar lead from US where sentiment was underpinned by the US-Mexico tariff relief which lifted the S&P 500 and DJIA to a 5-day and 6-day win streak respectively, although gains in the region were initially capped amid a lack of fresh catalysts. ASX 200 (+1.4%) and Nikkei 225 (+0.3%) traded positively with early outperformance in Australia as it played catch up on return from the extended weekend and with Vocus Group the largest gainer following a takeover offer from AGL Energy, while the Japanese benchmark was just about kept afloat by a weaker currency. Elsewhere, Hang Seng (+0.8%) and Shanghai Comp. (+1.9%) conformed to the upbeat tone despite another net liquidity drain by the PBoC and mixed comments by US President Trump who stated that a trade deal with China will work out because of tariffs but warned the next USD 300bln of tariffs will come into effect if Chinese President Xi does not come to the G20. Nonetheless, mainland China outperformed after China issued notice encouraging investment in local government special bonds issuance for project financing and amid reports that the PBoC may continue to support banks through various tools. Finally, 10yr JGBs were lower as yields tracked the rebound in their US counterparts and with demand for Japanese bonds also sapped by gains in stocks and after weaker demand in the enhanced liquidity auction for longer-dated bonds.

PBoC injected CNY 10bln via 7-day reverse repos for a daily net drain of CNY 50bln. (Newswires) PBoC set CNY mid-point at 6.8930 (Prev. 6.8925)

PBoC may continue to support banks through various tools including RRR, MLF and SLF, while there were separate reports that Chinese companies have been scaling back or halting investment in the US market. (China Securities Journal/SCMP) 

UK/EU

BoE's Saunders (Hawk) said the BoE will likely need to return to neutral policy stance sooner than the market expects and that the MPC doesn't necessarily need to keep rates unchanged until Brexit uncertainties are resolved. Saunders added that BoE's neutral rate is around 2% and suggested that they should not just look at Brexit uncertainty and instead should look at growth as well as assess whether or not it is above or below potential when setting interest rate. (Newswires) For reference, the next BoE rate decision is on June 20th.

UK right-wing Tory caucus held a non-binding vote to gauge support in which Boris Johnson received the most votes as the results from the 92 Group vote showed Johnson received 34 votes, Raab at 18 votes, Gove at 6 votes, McVey at 6 votes, Harper at 5 votes, Javid at 5 votes, Hunt at 2 votes and Leadsom at 2 votes. (Newswires)

EU Source indicates that the idea of Boris Johnson in the European Council is ‘likely abhorrent’ to some EU leaders, with the source also critical of Dominic Raab. (Guardian)

UK Tory MP Iain Duncan Smith said he has decided to vote for Boris Johnson in the leadership election and backs him to deliver Brexit. (Telegraph)

Italy PM Conte will meet with Deputy PMs Salvini and Di Maio in approaching days to complete action plan for entire legislature and want to avert EU disciplinary action against Italy, while they will meet with Finance Minister Tria on budget package. (Newswires) 

FX

In FX markets, the greenback consolidated following the prior day’s choppy price action and as its major counterparts traded mixed in which EUR/USD was kept steady near support at 1.1300 and as GBP/USD lacked vigour after its recent slip below the 1.2700 handle. In terms of the latest news from the UK leadership race, the right-wing 92 Group within the Conservatives held a non-binding vote to gauge support in which former Foreign Minister and hardcore Brexiteer Boris Johnson received the most votes, while former party leader Iain Duncan Smith also backed Boris Johnson to deliver the Brexit. Elsewhere, USD/JPY remained underpinned by risk sentiment and antipodeans were lacklustre in which NZD/USD gave up the 0.6600 handle and AUD/USD also failed to sustain the early upside which had been triggered by a surge in iron ore prices and strength in CNY in the wake of a firmer than expected PBoC fix. 

COMMODITIES

Commodities were mostly higher as the relief rally was sustained in which WTI crude futures pared some of the prior day’s losses after prices rebounded from support near the USD 53.00/bbl with focus now shifting to the latest inventory numbers beginning with the API report after-hours later. As a reminder, there were also recent comments from Russian Energy Minister Novak that suggested the scenario of oil prices falling to USD 30/bbl cannot be excluded should the output cut deal not be extended. Elsewhere, gold traded sideways as USD consolidated and due to a lack of safe-haven demand, while copper prices benefitted from the risk appetite and as Chinese commodities gained including Dalian iron ore futures which surged by around 3% shortly after the open on tightening supply concerns.

GEOPOLITCAL

North Korea state media called on the US to “withdraw its hostile policy” towards Pyongyang or agreements made at the Singapore summit 1 year ago may become “a blank sheet of paper". (Newswires)

Chinese press reports stated the US Air Force is preparing to run through aggressor drills to simulate combat with China's J-20 fighter jets, while it was also reported that China and Russia are expected to form an alliance to fend off the US. (SCMP)

The US government is reportedly considering further Iran sanctions which would focus on Iran's special trade and finance institute that works with Europe's Instex, while it was also reported that IAEA stated Iran has accelerated enrichment of uranium. (Newswires)

US

Yields were higher across the curve amid a more constructive risk tone after the US decided against implementing tariffs on Mexican imports. However, some attribute higher yields to positioning ahead of this week’s supply, with attention on whether foreign buyers are willing to scoop up Treasuries at the recently lower yields. Additionally, some will be mindful of the FOMC meeting next week, and for any nod to the recent dovish pricing of the FOMC rate trajectory (will the Fed shift from neutral to an easing bias?). There is also the CPI report on Wednesday, where a lower print might squash yields down towards the bottom of the recent ranges; conversely, CPI above expectations and a strong retail sales report (Friday) could provide a hurdle to the bullish thesis running in Treasuries. Monday also saw a large amount of corporate; IFR noted that high grade supply looked set to head towards USD 15bln or more on the day. At settlement, yields at the belly of the curve saw the most pronounced move, 10-year yield up just over 6bps, with the 2s/10s steepening c. 1.1bps. US T-note futures (M9) settled 14+ ticks lower at 126-14.

President Trump stated that the US has an agreement on something with Mexico that they will announce very soon and that he does not think Mexico will be denying for very long the undisclosed portion of the agreement. (Newswires/Twitter)