- Rates: Italy raises the stake with the EU
Italy didn’t change its draft budget, raising the stake with the EU. The EC can now forward the issue to ECOFIN, possible resulting in starting up an excessive deficit procedure and ultimately leading to a penalty. We think this news is discounted in BTP prices. Fragile risk sentiment, lower oil prices and US CPI (downside risks) can keep core bonds underpinned today. - Currencies: Dollar rally taking a breather.
Yesterday, the dollar rally took breather even as sentiment on risk remained fragile and as oil declined further. Today, there are plenty of eco data and event risks. The dollar probably won’t get additional interest rate support. Even so, we expect then US currency to remain well supported. Sterling traders will keep a close eye at the next step in the Brexit saga
The Sunrise Headlines
- US stock markets couldn’t hold on to opening gains and closed yesterday’s session with marginal losses. Asian stock markets are mixed this morning with Chinese bourses underperforming.
- The UK and EU agreed on Britain’s terms for leaving the European Union. UK PM May is asking her cabinet today to back the draft withdrawal agreement. Conservative Eurosceptics already warned they would vote the deal down.
- Italy has ignored the European Commission and made no changes to its budget proposal for 2019, but recognised the budget violates EU rules. Italy is now eligible for a ‘excessive deficit procedure’, with possible fines of >=0.2% of GDP.
- Oil prices plummeted again yesterday as investors worry that a global economic slowdown would cut into demand and with possibly some technical factors in the option markets at play. Brent crude oil has steadies at $65/barrel.
- The US has put off the decision to label imported cars and car parts as a national security threat, after top officials expressed their concerns. The delay means there will be no new import tariffs, at least for now.
- Chinese Retail Sales unexpectedly fell back to 8.6% (YoY) in October, from 9.2% the month before, to the slowest pace since May. Industrial Production printed 5.9%, higher than the 5.8% in September.
- Today’s eco calendar contains consumer inflation data in the US and the UK,. Fed governor Quarles speaks. German Q3 GDP declined by 0.2% Q/Q, the first negative quarterly reading since Q1 2015
Currencies: Dollar Rally Taking A Breather
Dollar rally takes a breather
EUR/USD entered calmer waters yesterday after Monday’s break below the 1.13 bottom. There was no additional USD buying as US investors returned after Veterans’ day. The market focus was on a fragile/volatile equity sentiment and on a declining oil price. These are usually USD positives. At the same time, lower US yields tempered the case for further USD gains. The inverse link between the dollar and oil also didn’t work this time. Later in the session, growing signs of an imminent EU-UK Brexit deal supported European assets and the euro. To conclude, there was bit was too much noise/diffuse news for the USD to extend its rally. EUR/USD closed the session at 1.1290. USD/JPY showed no clear trend and finished the session at 113.81. The trade weighted dollar (DXY) closed the day at 97.30 (Monday’s peak was 97.50). This morning, Asian markets are trading mixed, with China still underperforming. Soft retail sales question the country’s intended shift to more domestic-driven growth. The dollar shows an indecisive trading pattern with EUR/USD hovering in the 1.13 area and USD/JPY holding just below the 114 pivot. Later today, there are all kinds of topics with market moving potential. EMU (exp 0.2% QoQ) and German (-0.2% QoQ!) Q3 growth are expected very soft. On the political side, Italy didn’t change its budget proposal, potentially leading to a next step in the confrontation with the EU. In the US, headline CPI is expected to rebound from 2.3% Y/Y to 2.5%. Given recent decline in the oil price, US yields and the dollar might remain rather immune for a modest rise in inflation. Brexit of course remains a wildcard for (European) markets. We assume that UK PM May will succeed to convince substantial part of her cabinet, but that doesn’t mean that the issue is solved. For today, we are rather neutral on EUR/USD. More erratic/nervous trading in the 1.11/1.15 trading band is expected. That said, risks probably remain for a downside test.
The UK price data will be published today. However, the mark focus will be on Brexit. PM will propose the EU-UK deal to her cabinet this afternoon. We assume that there is a chance that she will get enough backing to continue the process (EU summit later this month). However, even in this scenario, it will remain highly uncertain whether the deal will get Parliamentary approval. For now we assume that sterling can hold on to recent gain (EUR/GBP 0.87 area). However, given recent rally, market positioning has probably already become more neutral (less sterling short). So, any further sterling gains might be rather modest
EUR/USD: decline halted, at least temporarily
