Moody's cuts China sovereign rating for the first time since 1989

US Session Highlights

- (US) Fed’s Kashkari (dove, voter): it's hard to believe there would be a spike in inflation; hard to see 3% growth in US given demographics

- (US) MAY PRELIMINARY MARKIT MANUFACTURING PMI: 52.5 V 53.0E

- (US) APR NEW HOME SALES: 569K V 610KE

- (US) MAY RICHMOND FED MANUFACTURING INDEX: +1 V 15E (lowest since Sep 2016); new orders 0 v 23 prior

- Investors digested Trump's budget plan, which calls for large cuts to Medicaid and social services, with major indices making small gains for the day. Markets were unperturbed after weak US data and a heinous terrorist attack in the UK overnight. Fixed income fell out of favor again, as investors regained interest in risk; 10-year Notes yield rising 3bps on the day. In the S&P, Financials was the best performing sector, up 0.8%, with Consumer Discretionary the only losing sector, down 0.4%

US markets on close: Dow +0.2%, S&P500 +0.2%, Nasdaq +0.1%

- Best Sector in S&P500: Financials

- Worst Sector in S&P500: Consumer Discretionary

- Biggest gainers: A +4.6%; ADM +3.7%; NUE +3.3%

- Biggest losers: AZO -11.8%; ALXN -9.3%; BRO -6.2%

- At the close: VIX 10.7 (-0.2pts); Treasuries: 2-yr 1.32% (+4bps), 10-yr 2.28% (+3bps), 30-yr 2.95% (+3bps)

US movers afterhours

- TCS: Reports Q4 $0.17 v $0.10e, R$221M v $214Me; Guides initial FY17 $0.25-0.35* v $0.25e, R$830-850M v $837Me, SSS down low single digits; +40.9% afterhours

- TLYS: Reports Q1 -$0.01 v -$0.10e, R$120.9M v $114Me; Guides Q2 $0.07 to $0.03 v $0.02e; SSS "flat to up low single digits"; +16.6% afterhours

- INTU: Reports Q3 $3.90 v $3.87e, R$2.54B v $2.50Be; Guides Q3 $0.16-0.18 v $0.15e, R$795-815M v $772Me; +9.1% afterhours

- BG: Issues statement: Not in talks on combination with Glencore; -3.4% afterhours

- STNG: To merge with Navig8 Product Tankers Inc., will pay $42.2M cash consideration; -4.8% afterhours

- ANW: Reports Q1 $0.03 v $0.36e, R$1.5B v $1.16Be; EBITDA $27.1M v $21.9M y/y; -18.1% afterhours

Key economic data

- (NZ) NEW ZEALAND APR TRADE BALANCE (NZD): 578M V 267ME (2nd straight trade surplus); 12-MONTH YTD: -3.48B V -3.8BE

- (AU) AUSTRALIA Q1 CONSTRUCTION WORK DONE Q/Q: -0.7% V -0.5%E

- (AU) AUSTRALIA APR SKILLED VACANCIES M/M: +0.1% V -0.6% PRIOR

Asia Session Notable Observations, Speakers and Press

- Asian indices traded mixed in the wake of 4th consecutive session of gains on Wall St, where rising Treasury yields helped Financials lead the broader index despite confirmation that the overnight explosion in Manchester was in fact a terror act. Mainland China is underperforming following a surprise sovereign rate cut by Moody's - the first since 1989. The rating agency noted that "China's financial strength will erode over the coming years, with economy-wide debt continuing to rise as potential growth slows", though the "stable outlook reflects our assessment that, at the A1 rating level, risks are balanced." Moody's also forecast leverage across the China economy to increase in coming years and reform to slow, as sustained policy stimulus will lead to higher debt. China Finance Ministry responded that the assessment overestimated economic difficulties and underestimates ability to deepen supply side reform, maintaining that debt levels will be reasonable and govt reform will help curb local debt risks.

- China CDS rose about 3bps in the wake of the downgrade and AUD/USD fell some 40pips below 0.7450, though the spillover was contained to only marginal declines in US equity futures and a slight ripple in the risk-gauge USD/JPY pair. FX majors were otherwise fairly rangebound going into tomorrow's FOMC policy meeting minutes where investors will look for more clues about the Fed's intended policy mix, including anticipated balance sheet reduction later this year.

- In other notable economic data, New Zealand Apr trade balance registered its 2nd straight month of surplus, with Exports volume at a 2-year high of 4.75B v 4.4Be. Shipments to China also rose over 20% y/y, helping NZD/USD to session highs above 0.7020. Modest upward momentum in NZD was helped by earlier release of Fonterra milk price forecast hike speculated to result in sooner RBNZ tightening than currently expected.

China

- (CN) China will further open its economy to foreign investors, through measures such as allowing investment in more industries, such as services - Chine media

- (CN) China margin trading is at a 3-month low and 60% lower than the peak 2 years ago - Chinese press

- (CN) MSCI notes there are still over 100 stocks suspended in China

Japan

- (JP) BOJ Gov Kuroda: Many people agree the natural interest rate has fallen in recent years, leading to unconventional monetary policy - press

- (JP) Japan PM Abe planning to hold talks with US Pres Trump at upcoming G7 summit - press

- (JP) Japan Upper House approves government’s two nominees for BoJ board; Vote to move to lower house

Australia/New Zealand

- (NZ) Fonterra Raises 2016/17 farmgate milk price to NZ$6.15/kg; Affirms FY17 EPS NZ$0.45-0.55

- (NZ) Fonterra's increase of price forecasts today may lead RBNZ to hike rates sooner than expected - NZ Press

Korea

- (KR) According to one survey, analysts are unanimous in expectation for Bank of Korea (BOK) to hold rates unchanged this month - Korean press

- (KR) South Korea govt to submit extra budget to Parliament in June - Korean press

Asian Equity Indices/Futures (00:30ET)

- Nikkei +0.5%, Hang Seng -0.2%, Shanghai Composite -0.4%, ASX200 -0.1%, Kospi +0.2%

- Equity Futures: S&P500 -0.1%; Nasdaq -0.1%, Dax -0.1%, FTSE100 -0.2%

FX ranges/Commodities/Fixed Income (00:30ET)

- EUR 1.1175-1.1190; JPY 111.75-112.00; AUD 0.7440-0.7480; NZD 0.6990-0.7020

- June Gold -0.3% at 1,252/oz; July Crude Oil flat at $51.47/brl; July Copper -1.2% at $2.57/lb

- SPDR Gold Trust ETF daily holdings fall 5.0 tonnes to at 847.5 tonnes; lowest since Apr 12th

- (US) Weekly API Oil Inventories: Crude: -1.5M v +0.9M prior

- (CN) Dalian iron ore down over 5% in early trade

- (CN) PBOC to inject combined CNY90B v CNY140B prior

- (CN) PBOC SETS YUAN MID POINT AT 6.8758 V 6.8661 PRIOR; 1st weaker fix in 3 sessions

- (AU) Australia MoF (AOFM) sells A$800M v A$800M indicated in 2.75% 2027 bonds; avg yield 2.545% v 2.515% prior; bid-to-cover 3.04x v 3.24x prior

Asia equities notable movers

Australia

- Iluka (ILU) +6.1%; Increases Zircon Reference price

- Worleyparsons (WOR) +3.6%; investor day comments

- Programmed Maintenance Services (PRG) +2.3%; Reports FY17

Japan

- Toshiba (6502) +8.0%; Western Digital said to have proposed ¥2T offer for chip unit as part of partnership with INCJ and DBJ

- Nippon Express (9062) +1.6%; Working with Amazon to launch a logistics service allowing small and mid-size businesses to send exports to the US - Nikkei

- Park 24 (4666) -2.4%; May report H1 op profit ¥9B, -10% y/y (prior forecast +1% y/y) - Nikkei

Hong Kong

- Worldgate Global Logistics (8292) +4.0%; Share buyback

- Sustainable Forest Holding (0732) +3.2%; Guides Q1

- Hilong Holding (1623) -4.5%; Pakistan contract