• Asian equity markets were positive across the board as the region took its cue from the late gains in US following dovish comments from Fed's Williams
• However, these were later clarified as academic comments and not about potential policy action this month
• The US shot down an Iranian drone which was said to have approached to within a threatening distance of the USS Boxer
• Looking ahead, highlights include UK PSNB, Canadian Retail Sales, University of Michigan Sentiment (Prelim), Baker Hughes Rig Count, Fed’s Bullard and Rosengren, BoJ Governor Kuroda
• Earnings: American Express, Schlumberger, BlackRock, State Street

ASIA-PAC

Asian equity markets were positive across the board as the region took its cue from the late gains in US following dovish comments from Fed's Williams who suggested it is better to take preventative measures on rates and that the long-run neutral rate for US interest rates is 0.5%, although the New York Fed later clarified the rhetoric was academic and not about potential policy action this month. Nonetheless, ASX 200 (+0.8%) was led higher by strength in the mining sector especially gold-related stocks after the precious metal surged to a fresh 6-year high on the Fed comments and with NAB front running the gains for financials after it appointed RBS head McEwan as its next CEO. Nikkei 225 (+2.0%) outperformed as exporters cheered currency outflows, while Hang Seng (+1.2%) and Shanghai Comp. (+1.0%) conformed to optimism after US-China trade negotiators resumed discussions via telephone and with the PBoC’s liquidity efforts resulting to a net weekly liquidity injection of CNY 460bln. Finally, 10yr JGBs gained as they tracked the upside in T-notes amid the dovish Fed bets, but with upside limited by the lack of safe-haven demand and slightly softer demand in the enhanced-liquidity auction for 2yr-20yr JGBs.

PBoC injected CNY 100bln via 7-day reverse repos; injects net CNY 460bln for the week vs. Prev. CNY 220bln drain. (Newswires) PBoC set CNY mid-point at 6.8635 (Prev. 6.8761)

USTR Lighthizer and Treasury Secretary Mnuchin discussed trade over the phone with Chinese officials as expected. (Newswires)

Japanese National CPI (Jun) Y/Y 0.7% vs. Exp. 0.7% (Prev. 0.7%). (Newswires) Japanese National CPI Ex. Fresh Food (Jun) Y/Y 0.6% vs. Exp. 0.6% (Prev. 0.8%) Japanese National CPI Ex. Fresh Food & Energy (Jun) Y/Y 0.5% vs. Exp. 0.5% (Prev. 0.5%)

UK/EU

UK Justice Secretary Gauke is set to step down soon after PM May completes last PM Questions on Wednesday, while Chancellor Hammond and International Development Secretary Stewart are also mulling quitting before Johnson becomes next PM. (Times)

Potential candidates are said to be discouraged from entering in the contention for the BoE Governor role due to Brexit turmoil. (Newswires)

EC President Von Der Leyen stated that both EU 27 & UK have an interest in an ordered exit and therefore a good start to future relationships, while she answered there is flexibility in the European budgetary rules which can be used to stimulate growth through investment in response when asked about Italy’s deficit. (Newswires) 

FX

DXY weakened below 97.00 on the dovish rhetoric from Fed’s Williams which was followed by comments from Vice Chair Clarida that uncertainties have increased and inflation has been soft, while Clarida also suggested not to wait until the data turns decisively. These boosted hopes for a larger cut this month in which CME Fed Fund Futures briefly priced in a probability of over 70% for a 50bps cut vs. 34% the prior day, although this has since slipped back to around 44% after the New York Fed downplayed the comments by Williams. As such, EUR/USD slightly pulled back overnight but still holds on to most the gains in the aftermath of the dovish Fed speak, while GBP/USD remained near the prior day’s highs around 1.2550 helped by the recent strong Retail Sales data and Parliamentary voting. Elsewhere, the heightened risk appetite spurred outflows from safe-haven JPY which underpinned JPY-crosses, although USD/JPY was subdued by base currency effects, while antipodeans benefitted from the broad USDweakness, as well as gains in commodities and due to their high beta properties.

COMMODITIES

Commodities traded higher as prices gained on the back of a softer USD and heightened risk appetite, which provided WTI crude futures with some much-needed respite from this week’s declines after a brief slip to below the USD 55.00/bbl. WTI has since reclaimed the USD 56.00/bbl and is up around 1.5% for the session with prices also underpinned by geopolitical tensions after reports the US shot down an Iranian drone which was said to have approached to within a threatening distance of the USS Boxer, while Iran’s Foreign Minister also suggested that the possibility of a war cannot be discounted although added that nobody would want that to occur. Elsewhere, gold prices rallied to fresh 6-year highs above the USD 1450/oz level in the aftermath of the dovish rhetoric from Fed’s Williams but then slightly pulled back after the New York Fed pushed back against these comments, and copper outperformed as it reflected that rally across stocks.

IEA Director Birol said might revise 2019 global oil demand growth forecast to 1.1mln bpd from 1.3mln bpd, while he added they don’t expect a huge increase in oil prices as markets are awash with oil and demand is slowing. (Newswires)

US Gulf of Mexico crude oil production remains cut by approximately 19% due to storm Barry. (Newswires)

GEOPOLITICS

US President Trump said the US took defensive action against an Iranian drone and destroyed it and the Pentagon also announced the US took defensive action after the Iranian drone came within a "threatening" distance of the USS Boxer, although Iran Foreign Minister Zarif later stated that Iran has no information regarding losing a drone. (Newswires/WSJ/Twitter)

US Treasury added five people and seven entities to the sanctions lists for dealing with Iran and nuclear non-proliferation issues. The reports added that the aim is to thwart a global network of procurement for Iran's nuclear enrichment programme and that the targets of the sanctions are in Belgium, Iran, and China. (Newswires)

Pentagon official said US is not forming a military coalition against Iran and wants multinational maritime push to shine a light on Gulf to deter attacks. The official also commented the US has received signs of interest to escort ships through the Strait of Hormuz but added that multinational maritime initiative won't materialise overnight and may take months. (Newswires)

Iran’s Rouhani said in a phone call with French President Macron that Iran is determined to leave all doors open to save the nuclear deal, while there were separate reports that Iran made a 'substantial' nuclear offer in return for US lifting sanctions which would allow enhanced and permanent nuclear inspections although it was also said to likely to be a non-starter. (The Guardian)

Iran Foreign Minister Zarif reportedly met with UN Secretary General Guterres in New York and discussed seizure of Iranian tanker by the British Navy, while there were separate reports that Zarif warned about mounting tensions and that we cannot “discount” possibility of war but also stated nobody wants a war. (Newswires/The National Interest)

There were initial reports that US President Trump said he is not looking at sanctions on Turkey at the minute in relation to the purchases of the Russian air defence system, although reports later stated that President Trump said we are looking at Turkey sanctions but have not yet made a decision. (Newswires)

US

Treasuries reversed earlier losses in a late session rally, induced by dovish Fed speak and geopolitics. The T-plex had been gradually drifting lower throughout the Asian and European session before more selling was initiated after a strong Philly Fed index, assisted by a 13k+ block sale in the TYU9. However, the selling bottomed out going into the European equity close and losses began gradually paring back. A mixed 10-year TIPS auction didn’t buck the trend, tailing 1.8bps with a 2.45x B/C (prev. 2.99x), but had a decent takedown with indirects taking 64.3%. The tailwinds accelerated just prior to settlement as Fed’s Williams (voter) announced the need to provide accommodation, not leaving any uncertainty. At settlement the curve had bull flattened, with the 2s10s widening over 3bps. US T-note futures (U9) settled 9 ticks higher at 127-20+.

Fed's Williams (Voter, Hawkish) said it is better to take preventative measures on rates than to wait for a disaster to unfold and that the long-run neutral rate for US interest rates is 0.5%. Williams also commented that standard inflation targeting approach may anchor inflation expectations too low, while he suggested that policy makers must move more quickly to vaccinate the economy and add monetary stimulus when rates are close to zero. However, New York Fed later stated that the comments made by Fed's Williams were academic, based on research and was not about potential policy actions at the upcoming FOMC meeting. (Newswires)

Fed's Clarida (Voter, Neutral) said US economy is in a good place but uncertainties have increased and inflation has been coming in soft, while he suggested you don't want to wait until the data turns decisively. Clarida also stated that the Fed will act as appropriate to keep the economy going and that there is a limit to how far US rates can diverge from global rates. (Fox Business News)