• Asian indices are subdued following on from the US’ imposition of sanctions on Iran
• DXY continued its recent downtrend and slipped below 96.00, leading USD/JPY beneath 107.00
• US placed strong sanctions on Iran, including the Supreme Leader; Iran’s Foreign Ministry Spokesman states that the sanctions mean the diplomatic channel is closed forever
• US Official states that the Trump-Xi meeting is likely the 2nd day of G20, but this is yet to be confirmed
• Looking ahead, highlights include US Richmond Fed, RBA’s Bullock, ECB’s de Guindos, Coeure, Fed’s Williams, Bostic, Powell, Barkin, Bullard, supply from UK, US and Germany, earnings from Fedex and Micron

ASIA-PAC

Asian equity markets followed suit to the lacklustre performance among global peers as geopolitical concerns remained in the limelight after the US announced fresh sanctions on Iran. ASX 200 (-0.2%) and Nikkei 225 (-0.8%)were subdued although losses in Australia were stemmed by strength in the miners amid continued gains across the metals complex, while Tokyo sentiment was clouded by a stronger currency. Hang Seng (-1.3%) and Shanghai Comp. (-1.8%) underperformed overnight after the PBoC continued to refrain from liquidity operations and due to ongoing trade uncertainty heading into the G20, while banks were among the worst hit in a continued fallout from the Baoshang Bank failure and Citic Securities also suggested domestic liquidity conditions could be volatile next month if PBoC citing increased corporate cash demand for tax payments. Finally, 10yr JGBs were slightly higher as they benefitted from the cautious sentiment and following similar gains in T-notes but with upside limited after a mixed 20yr JGB auction in which the b/c substantially retreated from the prior month’s record high.

PBoC skipped open market operations and were net neutral on the day. (Newswires) PBoC set CNY mid-point at 6.8580 (Prev. 6.8503)

US senior administration official says President Trump will likely meet Chinese President Xi on Saturday at the G20 but still needs to be confirmed, while the suggested it is an opportunity to see where China is on the trade dispute and that President Trump is happy with any outcome. (Newswires)

China Mofcom stated that Vice Premier Liu He conducted a phone call with USTR Lighthizer in which they exchanged views, while it added that China and US trade teams have agreed to keep communication. (Newswires)

China Global Times Editor highlighted challenges of US-China relations ahead of the G20 in which he suggested that the current atmosphere between China and the US is not good and he has learned China's stance now is that it is holding constructive and positive attitude towards upcoming China-US summit but is also fully preparing for its failure and an escalating trade war. (Twitter)

BoJ Minutes from April 24th-25th meeting stated it will take time to reach 2% target and that it is appropriate to persistently continue with easing. Minutes also reiterated that financial conditions in Japan remain highly accommodative and that Japan’s economy had been on a moderate expanding trend although exports have shown weakness recently. Most members shared view that medium to long-term inflation expectations were likely to gradually converge to 2%, although one member said the BoJ should flexibly and decisively conduct additional easing if inflation momentum was lost, while another member said it was necessary to strengthen monetary easing at this point to achieve the price target as soon as possible.  (Newswires)

UK/EU

UK PM candidate Boris Johnson said he will ensure a plan to deliver Brexit by end of October and pledged to leave EU on Oct. 31st. Johnson stated that the UK needs to prepare for Brexit under WTO rules even though he does not believe we will end up there, while he also thinks he can get a no-deal Brexit through parliament and that there should be creative ambiguity over how and when the EU divorce bill gets paid. (BBC) Separate reports suggest that Former Conservative Chancellor Clarke would be willing to bring down a Boris Johnson-led government in order to avert a no deal Brexit. (Telegraph) Ireland is facing demand by other EU countries to set out detailed plans how it will manage a no-deal Brexit amid increasing fears it may be unavoidable. (Telegraph)

FX

DXY continued its recent downtrend and slipped below 96.00 amid mounting Fed rate cut bets which benefitted its major counterparts with EUR/USD now at the 1.1400 handle, while GBP/USD returned to near 1.2750 although further upside was restricted by nearby resistance levels and amid ongoing Brexit-related uncertainty. Elsewhere, the predominantly risk-averse tone spurred flows into safe-haven JPY which pressured USD/JPY to sub-107.00, while antipodeans also took advantage of the USD-woes in early trade with NZD/USD the outperformer after better than expected trade data, although this eventually dragged AUD/NZD below 1.0500 and forced AUD/USD to give back its gains.

New Zealand Trade Balance (NZD)(May) M/M 264M vs. Exp. 250M (Prev. 422M, Rev. 383M). (Newswires) New Zealand Exports (NZD)(May) 5.81B vs. Exp. 5.61B (Prev. 5.55B, Rev. 5.50B) New Zealand Imports (NZD)(May) 5.54B vs. Exp. 5.40B (Prev. 5.11B, Rev. 5.12B) 

COMMODITIES

Commodities were mixed with WTI crude futures down nearly 1% amid the risk averse tone and amid a pullback from resistance at USD 58.00/bbl, while the latest OPEC+ commentary also did crude no favours as Russian Energy Minister Novak recently suggested it is still too early to say if the OPEC deal will be into H2. Gold prices extended on 6-year highs as it benefitted from the weaker USD and due to its safe-haven status. Copper was also kept afloat despite the downbeat sentiment as support held at USD 2.700/lb and amid gains in Chinese commodity prices in which Shanghai Rebar printed its highest since 2011.

GEOPOLITICS

US President Trump signed an executive order putting strong sanctions on Iran including the Supreme Leader in response to the recent drone attack, while he stated that the US does not want conflict with Iran and would love to reach a deal with Iran. In related news, US Treasury Secretary Mnuchin said increased sanctions on Iran were in the works prior to the recent attack and that the new sanctions will lock up billions more in Iranian assets. Mnuchin also commented that Iranian Foreign Minister Zarif will be hit with sanctions later this week and that 8 senior commanders of Iran's Revolutionary Guard Corp will also be hit with sanctions. (Newswires/Twitter)

Iran Foreign Ministry spokesman Mousavi said the latest US sanctions means closing channel of diplomacy forever. There were also reports that Iran will not accept dialogue with the US while it is under the threat of sanctions, while its ambassador to the UN said the atmosphere for dialogue with the US is not ready yet and that the new US sanctions show that the US has no respect for international law and order. (Newswires/Twitter)

US senior administration official said President Trump will meet Russia President Putin at the G20 and will discuss topics including Iran, Ukraine, Middle East, Syria and arms control issues, while the official added that Trump will not meet North Korea's Kim during his visit to Seoul. (Newswires)

North Korean newspaper stated the US should not misjudge the current situation and warned that Washington will face defeat and humiliation if it sticks to its old way of thinking, according to South Korea press reports. Elsewhere, US Defense Intelligence Agency chief said the intelligence community assesses that North Korea’s leader is not ready to denuclearize. (Yonhap/Newswires)

US

The T-Plex traded range bound earlier on before gaining traction going into the US session, seeing it comfortably in the green for settlement. Participants are likely to be cautious on the loading up of risk ahead of the G-20 summit and the geopolitical noise in the background. Analysts note the rally was assisted by thin volume, in addition to a chunky 28k+ TYU9 block purchase by a hedge fund as the European session came to a close, which was accompanied by a 4k+ block sale of ultra longs seeing the curve steepen. At settlement, the belly of the curve saw the most action (5-year yield down by c. 5.5bps); spreads were mixed, with the 2s/5s flattening by over 1bps, whilst the 5s/10s steepened by c. 0.5bps. US T-note futures (U9) settled 13+ ticks higher at 127-30.

US President Trump said Fed Chair Powell is "incorrect" that he is entitled to serving a four-year term that expires in 2022 and stated that he thinks he has the power to remove Powell if he wanted to but has no plans to do anything. (The Hill)

Fed’s Kaplan (non-voter, dove) said it is wise to take time to consider if there is a need to change rates and that he is concerned adding monetary stimulus will contribute to the build-up of excesses and imbalances. Kaplan also commented that current interest rates are in the neighbourhood of neutral and that it is too early to judge whether trade and global growth uncertainties will hurt the US, while he added that downside risks to the US economy have increased. (Newswires)