Rates: Falling oil prices pushed core bonds higher
Core bonds gained ground on Friday as tumbling oil prices weighed on investor sentiment. EMU PMI’s disappointed, giving German Bunds some extra tailwind. We expect a more neutral day for bonds today with an improvement in sentiment. Markets expect a decline of German IFO expectations to its 2018 low and ECB’s Draghi addresses European Parliament.
Currencies: euro to bottom as sentiment on risk shows tentative signs of improving?
The euro suffered on Friday from a poor EMU PMI and a fragile risk sentiment. This morning, sentiment on risk improves in Asia. FX traders will keep an eye the German IFO business confidence and a testimony of ECB’s Draghi before Parliament. We don’t expect his message to be that negative for the euro.
The Sunrise Headlines
- US equity markets ended in red on Friday. The Dow Jones underperformed, having recorded a -0.73% loss. Asian stocks are trading mixed. China switched gains for losses. Hong Kong and Korea outperform.
- Italy’s Deputy PM Salvini left the door open for altering the Italian budget proposal, suggesting it could well be 2.2% or 2.6% as long as it is a budget that stimulates the country’s economy to grow.
- Czech PM Babis survived a no-confidence vote on Friday. The opposition had called for such a vote because of alleged fraud with an EU project subsidy. Babis had 92 MP votes against him, while 101 are needed to oust the government.
- The Japanese manufacturing PMI slipped to a two-year low in November as the indicator fell from 52.9 to 51.8. Manufacturers reported a weaker demand – the first time since September 2016 – and saw new orders decrease.
- Brexit entered a new phase as EU-leaders officially signed off the deal on Sunday. Focus now shifts to British politics with the agreement coming into force only after it has been ratified by the British (and European) Parliament(s).
- The UN Security Council will hold an emergency meeting today after Russian warships opened fire on Ukrainian vessels in Russian claimed waters of the Black Sea. In response, Ukraine will ask parliament to approve a 60-day state of war.
- Today’s economic calendar provides markets with the US Chicago Fed (Oct) and Dallas Fed (Nov) sentiment indicators. The IFO-business indicator is due in Germany. ECB’s Nowotny, Coeuré, Praet and Draghi are scheduled to speak
Currencies: Euro To Bottom As Sentiment On Risk Shows Tentative Signs Of Improving?
Euro to bottom as global sentiment improves?
Euro weakness prevailed on Friday as the Nov. EMU PMI’s declined again faster than expected. Of late, markets questioned whether recent volatility would make the Fed more cautious to hike rates further next year. However, EMU data also raise questions whether the ECB will be able to raise rates. Sentiment on risk remained fragile and supported the dollar. Even the oil-price decline maybe was slightly USD supportive as it might ease US inflationary pressures. EUR/USD declined for most of the day and finished at 1.1337. USD/JPY closed the session little changed at 112.96. This morning, risk sentiment improves. The oil price decline is positive for several countries in Asia. The (trade-weighted) dollar is little changed (96.90 area). EUR/USD (1.1350) shows tentative signs of bottoming. The yen weakness (risk-on). USD/JPY is trading in the 113.20 area. FX-traders will keep a close eye at the German IFO business confidence today, in the wake of the poor PMI’s. ECB’s Praet will speak and ECB’s Draghi will testify before the European Parliament. We expect Draghi to mainly keep the assessment from the October meeting and ‘downplay’ recent signs of a slowdown. A constructive risk sentiment and modest optimism for Draghi might help a bottoming of the euro in daily perspective. Later this week, (FX) markets will closely monitor a speech of Fed’s Powell (Wednesday). At the end of the week, US president Trump and Chinese are expected to meet at the G20 meeting, discussing the US-China trade relations. Last week we had a neutral bias on EUR/USD. The pair is holding a sideways range between 1.1216 and 1.1621. In a short-term perspective, a further EUR/USD decline/rise of the dollar might be less evident. EUR/USD might regain some ground if sentiment or risk improves. Some progress in the US-China trade talks might be a euro positive, too. So, EUR/USD might drift a bit back north. However, for now we expect the 1.1621 resistance to hold.
The EU and the UK reached a Brexit divorce deal yesterday and agreed on a text on their formal relationship. Last week, sterling gained a few ticks in the run-up to the Sunday’s summit. Markets will now look how UK PM May will broker the deal in London to get Parliamentary approval. EUR/GBP will probably remain in a some kind of erratic trading patter near current levels as long as uncertainty remains as high as it is right now. The count-down to the Parliamentary vote, probably in about two weeks time, has started
EUR/USD: euro to bottom as sentiment on risk shows tentative sign of improving?
