Rates: Fragile “recovery” on stock markets
Asian stock markets gain up to 1% despite a late downleg on Wall Street. Risk sentiment is improving following last week’s sudden correction, but the balance remains very fragile. Core bond’s performance was/is rather disappointing, suggesting the upside might be exhausted. The rising US budget deficit warrants a higher US credit risk premium going forward.
Currencies: Dollar to profit if global tensions were to ease?
Yesterday, the dollar lost slightly ground as sentiment on risk remained fragile. This morning, global equities are looking for a bottom after the recent correction and so does the dollar. Sentiment on the dollar might improve in a day-to-day perspective, but for now we don’t see a trigger to break out of the established ranges.
The Sunrise Headlines
- US equity markets lost ground again on Monday with tech shares underperforming. Asian markets opened this morning with gains, with China excluded. All Chinese equity indices are currently losing ground.
- Italy’s populist coalition government has approved the 2019 budget that will widen the budget deficit to 2.4% of GDP. It will lower the retirement age and introduce payments to poor Italians. The EU is reviewing it this week.
- The US budget deficit hits $779bn during US President Trump’s first full fiscal year, a 6-yr high. That’s $113bn higher than last year, reaching 3.9% of US GDP. The deficit is expected to swell further, passing $1tn by 2020.
- Boris Johnson, former UK foreign minister, warned for a Brexit in name only. He said the UK must be able to vary tariffs and strike trade deals after Brexit, otherwise it would “betray the British people”.
- German Chancellor Angela Merkel has vowed to restore trust in her government after her CDU’s sister party CSU tumbled down to its worst election result in almost 70 years.
- China’s CPI rose 2.5% in September from a year earlier, meeting market expectations and faster than the 2.3% inflation of August. The PPI rose 3.6%, higher than the 3.5% expectation but lower than the 4.1% in August.
- Today’s eco calendar contains the UK labour market report, US industrial production and German ZEW investor sentiment. SF Fed Daly speaks, Germany taps the bond market and more Q3 earnings will be released
Currencies: Dollar To Profit If Global Tensions Were To Ease?
Dollar apparently needs easing of tensions
On Monday, FX traders still had to navigate a series of uncertainties, both economic and political in nature. Even so, the moves in the major dollar cross rates were confined to established ranges. The focus stayed on the US-China trade tensions and on the rift between the US and Saudi-Arabia on the disappearance of journalist Kashoggi. The USD proved again vulnerable to these topics. On the eco side of the story, US retail sales weren’t really convincing. EUR/USD retested the 1.16 area and the trade-weighed dollar slipped to the 95 area. US equities held in negative territory for most of the session, but there was no obvious link with the dollar. EUR/USD finished the session at 1.1570 (from 1.1560). USD/JPY lost some further ground on global risk off to finish at 111.77. This morning, Asian equities mostly show modest gains with China underperforming. The jury is still out but rumours/headlines suggests that the US and Saudi Arabia are looking to avoid and escalation of the tensions. The dollar is trading marginally stronger. USD/CNY (6.9250 area) is holding near the recent top. EUR/USD trades around 1.1570. The kiwi dollar (NZD/USD) profits from higher than expected Q3 CPI data. Later today, ZEW economic confidence will be published in Germany. In the US, the production data and the NAHB housing indictor will be published. The data will probably only be of intraday significance for USD trading. Global sentiment will remain key for FX trading. Of late, we adopted a neutral bias on the dollar (EUR/USD). We still see no clear trigger for EUR/USD to break out of the 1.1432/1.1815 ST range. If geopolitical tensions were to ease and if equities would finally show some tentative signs of bottoming, higher US yields might also provide some support to the dollar in a day-to-day perspective.
Yesterday morning, sterling declined as EM-UK Brexit talks this weekend ended in a stalemate. However, the reaction was modest. EUR/USD settled in the low 0.88 area as FX traders awaited the next political developments. Today, UK labour data will be published. Wage data always have market moving potential. However, the focus remains on Brexit ahead of the EU Summit later this week. EU policy makers are likely to repeat that a deal is possible. However, of late, sterling traders reacted modestly to ‘brexit noise’. Sterling probably needs ‘hard news’/concrete steps for a real direactional move. Unless that happens, more technical driven wait-and-see action might be on the cards
USD (Trade-weighted- DXY): holwing within established range. Dollar to rebound of global sentiment improves?
