• Asian equity markets rallied across the board as the region followed suit from the heightened global risk appetite
• Former UK Foreign Minister Boris Johnson remained in the lead after the second round of the Conservative leadership vote
• DXY was steady and remained near this month’s highs after the recent Draghi-induced selling in EUR/USD
• US President Trump replied "let's see what he does" when asked whether he wants to demote Fed Chair Powell
• Looking ahead, highlights include UK and Canadian CPI, US DoEs, FOMC rate decision and Fed Chair Powell press conference, NZ GDP, BoJ’s Kuroda, ECB’s Lautenschlager, Coeure, Draghi, Germany 2046 Bund

ASIA-PAC

Asian equity markets rallied across the board as the region followed suit from the heightened global risk appetite due to a double dosage of optimism from ECB President Draghi’s hints of potential easing and after US President Trump confirmed a meeting with his Chinese counterpart at the G20. ASX 200 (+1.0%) and Nikkei 225 (+1.7%) were higher with Australia led by energy names after a surge in oil prices and with outperformance also seen in the trade sensitive industries such as tech, materials and miners, while the Japanese benchmark gapped above the 21K level fuelled by favourable currency flows and strength in commodity-related sectors. Hang Seng (+2.4%) andShanghai Comp. (+1.5%) were buoyed after US President Trump announced the resumption of US-China trade talks and that he will be conducting an extended meeting with Chinese President Xi at the G20 following “a very good” telephone conversation between the 2 leaders, while the PBoC were also supportive with the announcement of liquidity injections through reverse repos and its medium-term lending facility. Finally, 10yr JGBs were higher after the dovish comments from ECB’s Draghi added to the declining global yields narrative which saw a drop in 10yr JGB yields to their lowest since August 2016, while the BoJ also kick starts its 2-day policy meeting where they are expected to maintain current policy settings and reaffirm guidance of keeping rates at very low interest rate levels for an extended period of time at least through around Spring 2020.

PBoC injected CNY 40bln via 14-day reverse repos and CNY 240bln through 1yr Medium-term Lending Facility. (Newswires) PBoC set CNY mid-point at 6.8893 (Prev. 6.8942)

US President Trump said US and China want to discuss the future and repeated that he has a very good relationship with China’s President. Trump also commented that negotiating teams will start talks today and reiterated the US will have a fair deal with China or no deal at all.(Newswires)

USTR Lighthizer reaffirmed no decision has yet been made on implementing the next round of tariffs on Chinese goods, while he suggested that dialogue has proven to be unsuccessful in achieving trade reform with China and that he is unsure if tariffs alone will stop China cheating but it is the best instrument available. (Newswires) 

UK/EU

Former UK Foreign Minister Boris Johnson remained in the lead after the second round of the Conservative leadership vote with 126 votes vs. Jeremy Hunt at 46 votes, Michael Gove at 41 votes, Rory Stewartat 37 votes and Sajid Javid at 33 votes, Dominic Raab was eliminated with 30 votes. (Newswires)

Boris Johnson and Rory Stewart became the key players in the race for No 10 last night after emerging as the winners from the MPs' vote and a heated live television debate. (Telegraph)

UK Labour party leader Corbyn will reportedly back a move for Labour to support a 2nd referendum in all circumstances. (Times)

ECB policymakers are divided on the next policy step with a rate cut, guidance change and more QE all in play, according to sources. (Newswires)

FX

DXY was steady and remained near this month’s highs after the recent Draghi-induced selling in EUR/USD and amid US-China trade hopes. As such, EUR/USD languished below the 1.1200 handle. GBP/USD was little changed overnight although recently found reprieve from support near 1.2500 and JPY-crosses were kept afloat by the risk appetite. Antipodeans also held on to the prior day’s gains due to their high-beta statuses and amid upside in commodities, but with further advances during Asia hours restricted ahead of today’s FOMC and amid more dovish calls on the RBA with AMP forecasting unemployment to increase to 5.5% and the Cash Rate to be lowered 3 more times to 0.50% by February 2020. Meanwhile, TRY weakened around 1% in late trade with the currency spooked by news that US President Trump is considering sanctions on Turkey for purchasing Russian S-400 missile systems.

COMMODITIES 

Commodities were mostly supported overnight with WTI crude futures back above the USD 54.00/bbl level amid ECB stimulus hopes and US-China trade optimism, while a slightly narrower than expected draw in headline API stockpiles did little to dent oil prices. Elsewhere, there is still a lack of unison in terms of the next producer meeting as OPEC+ members were initially said to discuss July 10th-12th as the dates for the anticipated meeting, although sources later suggested July 1st-2nd could be proposed. Gold prices were flat overnight ahead of today’s FOMC and as the greenback held firm, while copper remained near this month’s highs due to the risk appetite which also spurred a 5% rally in Dalian iron ore futures at the open.

API Crude inventories -0.81mln vs. Exp. -1.1mln (Prev. +4.9mln).(Newswires)

OPEC is said to propose holding meeting on July 1st-2nd, according to sources. (Newswires)

Reports note a rocket hit a foreign oil company headquarters in Basra, Iraq. However, officials later stated that Iraq's southern oil operations and exports were not impacted by the rocket incident. (Newswires)

GEOPOLITICS

US Secretary of State Pompeo said the US will maintain the pressure campaign on Iran but also stated that the US has been engaged in many messages with Iran and does not want a war. In related news, US Special Envoy for Iran Hook plans to travel to Paris next week for talks on Iran with British, French and German officials, while there were separate comments Iran’s Revolutionary Guard Head Salami that ballistic missiles are capable of hitting carriers in the sea with great precision. (Newswires)

US President Trump is considering sanctions on Turkey for purchasing Russian S-400s. (Newswires)

US

The curve bull-flattened at settlement, with yields falling across the curve. The complex took influence from the Bund in the European morning after a dovish set of comments from ECB chief Draghi (more stimulus could be on the way unless the data improves), which eventually led to Bund yields hitting fresh record lows, before paring back as risk sentiment improved as Trump signalled progress was being made with China on trade ahead of the G20 meeting. Treasuries, however, remained bid, and 10-year yields fell to a whisker of the psychological 2.00% mark. 3m/10yr inversion deepened by around 6bps on the day, while major curve spreads were narrower by around 1-2bps at settlement. US T-note futures (M9) settled 5+ higher at 127-04+.

US President Trump was said to have asked White House lawyers on options for removing Fed Chair Powell in February, although they determined that a removal would be highly questionable. In related news, US President Trump replied "let's see what he does" when asked whether he wants to demote Fed Chair Powell, while US NEC Director Kudlow commented the White House is not considering demoting Fed Chair Powell and is not taking any action to change Powell's status. (Newswires)

US Senators from both parties reached an agreement for about USD 4.5bln to address the surge in border migrants. (Newswires)

US President Trump announced that US Acting Defence Secretary Shanahan chose to withdraw from his position. He will be replaced by Army Secretary Mark Esper. (BBC)