• ECB President Draghi said additional stimulus will be required if inflation aim is threatened, APP still has considerable headroom
• Stocks surge as Draghi strikes a dovish tone, albeit Financials underperform amid the prolongation of negative rates
• EUR slumped to the bottom of the G10 pile amid dovish Draghi comments, DXY is firmer above 97.50
• Looking ahead, highlights include US Building Permits, Housing Starts, APIs, Tory Leadership Vote, ECB’s Draghi, BoE’s Carney
•  

ASIA-PAC

Asian equity markets mostly saw cautious gains ahead of this week’s key risk events and following the marginal gains in the US where trade was otherwise uneventful aside from the strength in tech and telecoms. ASX 200 (+0.6%) and Nikkei 225 (-0.7%) were mixed with Australia led higher by tech and commodity related sectors, in which government plans to introduce a AUD 158bln income tax cut package, as well as anticipation for further RBA policy easing, added to the optimism. Tokyo sentiment was hampered by a firmer currency. Hang Seng (+1.0%) outperformed as business returned to normal following the recent protests and the Shanghai Comp. (+0.1%) was indecisive despite continued PBoC liquidity efforts, as trade uncertainty lingered after economic regulators refused to rule out using rare earths in the trade dispute and the Global Times Editor suggested the potential for a protracted trade war. Finally, 10yr JGBs initially traded steady amid the indecisiveness in the region but were later supported as sentiment in Japan further deteriorated and after the 5yr auction results showed a decline in yields and higher accepted prices from the prior month.

PBoC injected CNY 90bln via 14-day reverse repo for a daily net injection of CNY 80bln. (Newswires) PBoC set CNY mid-point at 6.8942 (Prev. 6.8940)

Chinese House Prices (May) Y/Y 10.7% (Prev. 10.7%). (Newswires)

China April UST holdings at USD 1.113trln (prev. USD 1.121trln in March); 2yr low. (Newswires)

Hong Kong Leader Lam says the government will definitely not resume the extradition bill if divisions cannot be resolved. (Newswires)

RBA minutes from the June 4th meeting stated the board agreed more likely than not that further policy easing would be appropriate, and the labour market would be particularly important on deciding further easing. The board also judged that the rate cut would help reduce spare capacity in the labour market, while it noted that factors limiting inflation and wage growth are likely to remain for some time. (Newswires)

ECB

ECB's Draghi said the ECB will use all the flexibility within our mandate to fulfill their mandate, and added that in the absence of improvement, such that the sustained return of inflation to the Bank's aim is threatened, additional stimulus will be required, APP still has considerable headroom. Draghi also noted that in the coming weeks, the Governing Council will deliberate how their instruments can be adapted commensurate to the severity of the risk to price stability and looking forward, the risk outlook remains tilted to the downside, and indicators for the coming quarters point to lingering softness. (Newswires)

UK/EU

UK Chancellor Hammond is said to be prepared to resign over PM May's legacy spending plans, although this was dismissed by Treasury sources. (Daily Mail/ITV)

Boris Johnson allies reportedly plan to rig the leadership contest by ‘lending’ votes to Jeremy Hunt so that he faces off against Hunt, who is seen to be struggling, and avoid Michael Gove. (The Sun)

Italian Economy Minister Tria expects Italy's budget deficit in 2019 to be between 2.1-2.2%, will try reach an agreement with the European Commission, confident that a positive outcome can be reached. (Newswires)

EU HICP Final YY (May) 1.2% vs. Exp. 1.2% (Prev. 1.2%). (Newswires) German ZEW Economic Sentiment (Jun) -21.1 vs. Exp. -5.9 (Prev. -2.1)

EQUITIES

European equities are higher across the board [Eurostoxx 50 +1.2%] as the region was bolstered by a dovish Draghi. The DAX (+1.2%) is now back above the 12k level after having visited a pre-Draghi low of 11,986, albeit gains are somewhat limited by a subdued IT sector, meanwhile, the FTSE 100 lags as the index fails to benefit from Draghi’s speech. In terms of sectors, financial names underperform amid the prolongation of negative rates. Defensive sectors are outperforming with healthcare and utilities the standout outperformers.  Movers to the downside today include chipmakers following a profit warning from Siltronic (-13.0%) , citing US-China trade issues. The downbeat market outlook spilled onto STMicroelectronics (-2.0%), ASML (-1.2%) and Infineon (-5.7%), albeit the latter is more influenced by the launch of a capital increase to fund the Cypress Semiconductor acquisition. Finally, Lufthansa shares rest near the foot of the Stoxx 600 following three separate broker downgrades.

FX

EUR/AUD/NZD - The single currency has slumped to the bottom of the G10 pile and even below the Aussie that was hit overnight by RBA minutes flagging further easing on the basis that benign inflation and wage trends are likely to persist for even longer. In similar vein, ECB President Draghi used the stage at Sintra to deliver a much more dovish/downbeat assessment of price developments and all but signalled another tweak to official guidance at the next policy meeting, if not further stimulus. In short, he acknowledged the recent pronounced drop in inflation expectations and said the GC will look at measures to counter the severity of risks to price severity in coming weeks, and if the situation fails to improve more stimulus will be needed. Eur/Usd has reversed from circa 1.1240 to just over 1.1180 and through 2.1 bn option expiries between 1.1195-1.1205 that may yet influence direction into the NY cut, while Eur/Gbp has pulled back sharply from around 0.8975 to 0.8925. Back down under, Aud/Usd is hovering off 0.6832 lows and Aud/Nzd has reversed towards 1.0500 as the Kiwi keeps tabs on the 0.6500 handle vs its US counterpart ahead of the latest GDT auction and NZ Q1 current account data.

CAD/CHF/GBP - All weaker vs the Greenback and partly in sympathy with the Euro and Aussie, but the Loonie also had more negative Chinese-Canadian headlines to digest as Beijing suspended pork imports pending closer inspection of the product. Meanwhile, the Franc slipped through parity, but strengthened in Eur/Chf cross terms to 1.1175 at one stage and will do doubt arouse SNB attention given that the ECB seems to be on the brink of easing further (-10 bp now priced in for December). Elsewhere, Cable is now eyeing 1.2500 and very early January lows after breaching key support at 1.2560, with the next leg of the Tory leadership race looming before UK CPI, retail sales and the BoE unfolds tomorrow and Thursday.

JPY/NOK/SEK - The major outperformers, as the Yen regains a safe-haven bid to retest support ahead of 108.00, while the Scandi Crowns benefit from single currency weakness and ECB-Norges Bank/Riksbank policy divergence given a widely expected hike from the former on Thursday. Moreover, the Sek derived some traction from a cautiously upbeat Riksbank business survey and significantly improved 2019 budget surplus forecasts from the SNDO. Eur/Nok around 9.7780 vs 9.8170 at one stage and Eur/Sek holding within a 10.6484-6147 range.

EM - Although the Buck has rebounded firmly, if not quite uniformly as noted above (back over 97.500), the Lira has maintained recovery momentum with the aid of some rare constructive comments on the US-Turkey front and reports that talks about the S-400 deal will be held at NATO next week. Usd/Try trading near the base of a 5.8225-8777 band.

FIXED INCOME

Bunds, Gilts and US Treasuries have all rallied further to post fresh intraday peaks, at 172.52, 130.75 and 127-22+ respectively, with the former gleaning extra traction after breaching another chart resistance level at 172.42 along the way and also taking on board a rather worrying ZEW survey. Meanwhile, UK bonds have acknowledged a solid 10 year DMO sale and USTs are seeing more bull-flattening ahead of US housing data and FOMC day 1. Note, the corresponding cash yields are also crossing or approaching key lines, as Bunds edge below -30 bp, Gilts eye 80 bp and the 10 year Treasury inches towards 2%.

COMMODITIES

WTI and Brent futures are lower on the day with the former just above the USD 51.50/bbl level whilst the latter hovers around the USD 60.50/bbl mark. News-flow for the complex was largely surrounding OPEC this morning, with WSJ noting that Saudi intends to push for tighter compliance to OPEC production curbs. Sources also stated that the renewed pact would see the under-complying countries reducing crude supply by 300-400k BPD. In terms of a date, IFX reported that Moscow has reportedly agreed to consider an OPEC+ meeting on July 12th, postponed from the scheduled June 25/26. Looking ahead, traders will be keeping an eye on tonight API inventory release with the street looking for a draw of around 1.75mln barrels. Elsewhere, gold is hovering near intraday highs amid a bout of demand for the safe haven asset. Meanwhile, copper prices are supported despite the underlying risk off tone in the market as Glencore has shut down its Mufulira copper smelter at its Mopani copper mine in Zambia whilst Chile's Codelco said the Chuquicamata copper mine maintained output capacity at 50% due to the 4th full day of a union strike.

Chile's Codelco said the Chuquicamata copper mine maintained output capacity at 50% due to the 4th full day of a union strike. (Newswires)

GEOPOLITICS

US is preparing to send additional troops to the Middle East due to Iran threat according to officials. In related news, there were comments from Iran's ambassador to the UK who suggested Iran is unfortunately heading towards a confrontation. (Newswires)

US Acting Defence Secretary Shanahan and Turkish Defence Minister are to meet next week to discuss the S-400 issue at the NATO Ministerial next week