Rates: US yield support holds amid sell-off on stock markets
US Treasuries ended near opening levels, finding a balance between technical considerations (key US yield support) and a tech-induced sell-off on US stock markets. Today’s eco calendar suggests more meaningless intraday gyrations on core bond markets, caused by the same drivers.
Currencies: US stays in the defensive as markets ponder Fed rate hike intentions
Yesterday, a risk-off sentiment and a poor US NAHB indicator weighed further on the dollar. Today’s eco calendar is thin. US housing data might have some more intraday impact than is usually the case. Sterling traders will look out for the BoE assessment/framework in different Brexit scenario’s as Carney and Co will defend policy before a Parliamentary committee
The Sunrise Headlines
- US equities opened yesterday’s session in deep red as all indices lost ground. Tech shares underperform (Nasdaq -3.03%) as Facebook, Apple and Amazon plunge. Asian stock markets continued the sell-off. China is underperforming.
- Rebels of UK PM May’s Tory party seemed to have failed to collect the necessary 48 votes to call for a no-confidence vote, keeping May in place (for now). Today, she will visit Brussels to discuss the direction of future trade
- After Spain stated that it seeks more assurance on Gibraltar before it could back the Brexit deal, France suggested separate EU statements who set out the EU’s red lines more clearly than in the current formal political declaration.
- Randal Quarles, a US Fed governor, will become the new chair of the Financial Stability Board for the first three years, followed by Klaas Knot, head of the Dutch Central Bank. Carney, BoE governor, steps down as FSB chair next month.
- US President Trump considers to restrain exports of advanced technologies, going from Artificial Intelligence to Robotics as they are essential to the national security of the US. Trump wants to protect American leadership in innovation.
- In the US, the NAHB Housing Market Index dropped to 60 in November, the lowest in more than two years and down from 68 in October and adding to signs of a slowdown in the US housing market. Markets expected a decrease to 67.
- Today’s economic calendar is thin with US housing market data and German PPI. BoE’s heavyweights Carney, Haldane and Saunders testify before UK parliament. ECB Weidmann,, Nowotny and Nouy speak
Currencies: US Stays In The Defensive As Markets Ponder Fed Rate Hike Intentions
Fed doubts continue to weigh on USD
Markets still tried to find out yesterday whether the Fed might slow the pace of rate hikes as the policy rate is coming closer to a neutral level. These doubts weighed on the dollar last week and persisted yesterday. The NAHB housing index tumbled from 68 to 60 (67 expected). Is this another indication of a loss of momentum? US yields and USD declined further after the release. A risk-off sentiment, reinforced by selling in the tech sector, supported core bonds. In the current environment, a decline in US yields and tighter interest rate differentials between the US and Germany/Japan are a USD negative. The dollar doesn’t profit from the risk-off context. EUR/USD jumped higher after the NAHB housing release and closed at 1.1454. USD/JPY finished at 112.55. This morning, Asian equities join the decline from the US yesterday. The dollar remains in the defensive (DXY near 96.20; EUR/USD near 1.1450; USD/JPY 112.50). Later today, US housing starts and permits might get some more attention than is usually the case after yesterday’s NAHB release. Another negative surprise might reinforce market uncertainty on the room for further Fed rate hikes and weigh on the dollar. We had a neutral bias on EUR/USD of late.The USD clearly lost momentum as investors doubt whether the US economy remains strong enough to support 3 additional Fed rate hikes next year. We assume it’s too early for a sustained market repositioning away from the USD. US data remain solid, interest rate differentials remain wide and the news from Europe remains mixed at best. We keep the working hypothesis that EUR/USD 1.15/1.1621 resistance won’t give away anytime soon. That said some USD warning signs are starting to kick in.
Yesterday, sterling remained in the defensive, but selling was less aggressive than at the end of last week. For now, UK PM May survived the storm and it looks that rebels in her party are not able to trigger a formal leadership vote right now. A difficult road is still ahead for May’s Brexit plan, but for now, there is no further escalation. Today, the CBI order data will be published. Several BoE MPC members including BoE’s Carney will defend the inflation report before Parliament. Politicians will ask the BoE to clarify its reaction function in case of different Brexit scenarios. We have the impression that the BoE is inclined to guide rates higher in several different scenarios. However, it is far from sure this will help sterling short-term. We stay cautious on sterling going into the Parliamentary vote expected early December
USD (trade-weighted): dollar rally running into resistance
