Sunrise Market Commentary
- Rates: Risk sentiment remains key, positive for core bonds?
Risk sentiment will be key for trading with markets watching the latest developments in the Trump affaire. The US stock market correction probably has further to go. Risk aversion could support core bonds short term. The US Note future broke above 125-26+ resistance, suggesting return action to the contract high (126-20). 2.16% is key support for the 10-yr yield. - Currencies: USD Trump sell-off to slow?
Yesterday, the dollar was hit hard as the sell-off of risky assets weighed. Today, sentiment on risk remains the key driver for USD trading. If the equity sell-off slows, the dollar might enter calmer waters, at least temporary. Sterling traders will keep a close eye at the UK retail sales. Euro strength propelled EUR/GBP to the 0.86 big figure.
The Sunrise Headlines
- US stocks suffered their worst day in 8 months (-2%) after political turmoil shook investors, with some fearing President Trump’s ability to push through his pro-growth policies has been side-lined by the deepening political controversy. Losses in Asia are more contained overnight with Japan underperforming.
- Former FBI Director Robert Mueller III was appointed as special counsel to oversee the federal investigation into Russia’s alleged interference in the 2016 US presidential election.
- Japan has recorded its longest run of sustained economic growth since 2006 in a sign of its robust progress under Abenomics. Growth for Q1 2017 came in at an annualised 2.2%, marking 5 quarters of continuous output growth.
- Growth in China’s new home prices slowed further in April when compared to a year prior, particularly among top-tier cities, but data also show price rises ramped up in month-on-month terms to the fastest pace since October.
- A Harris Interactive poll found Macron’s Republic on the Move party, together with allies, is set to win the largest share of the vote in the first round. 32% of 4,600 registered voters questioned planned to vote for Macron’s party, it said.
- Australia’s jobless rate fell to its lowest in four months in April, but the number of people with full-time work declined – a mixed report that augurs poorly for a much-needed revival in wage growth and inflation.
- Today’s eco calendar contains UK retail sales, US jobless claims and Philly Fed Business Outlook. ECB Draghi, Weidmann, Mersch, Lautenschlager, Nowotny and Fed Mester are scheduled to speak. Spain and France tap the market.
Currencies: USD Trump Sell-Off To Slow?
Turmp-driven USD decline to slow?
On Wednesday, the dollar sold off after articles, based on internal FBI memo of former director Comey, accused Donald Trump to influence and possible obstruct an FBI investigation against his former security adviser. The dollar initially still held near Asian lows, but the sell-off accelerated during the US session with US equities falling off a cliff. USD/JPY lost more than two big figures to close the session at 110.83. The decline of the dollar against the euro was more modest as EUR/JPY selling weighed. Still EUR/USD set a new recovery top and closed session at 1.1159.
Overnight, Asian equity losses are more modest than in the US. Japanese indices are losing about 1.5% as yen strength bites. USD/JPY touched a correction low near 110.55 and trades currently in the 111.20 area. It looks that the acute sell-off phase is easing. Japanese Q1 growth was marginally strong than expected (2.2% Q/Qa), but had limited impact on yen trading. EUR/USD shows a similar picture. The pair touched a minor top around 1.1172 and trades in the 1.1150 area. The Australian April labour market report was better than expected. The Aussie dollar rebounds further off the recent lows. AUD/USD trades around 0.7460
Today, the eco calendar only contains the US initial jobless claims and the May Philly Fed business outlook. For the Philly Fed, a slight decline to 18.5 from 22 is expected. A negative surprise might have more impact than a positive one, as it might raise further doubts on the strength of the US economy. Various ECB members will speak including Draghi. However, it is not clear whether they will elaborate on market sensitive issues. The risk-off sentiment might make them reluctant to address the issue of policy normalization. So, global risk sentiment will dominate USD trading.
We think that US equities entered a short-term sell-on-upticks environment and that US (10-year) yields might revisit the recent lows. This scenario suggests that the dollar might remain in the defensive. That said, we consider yesterday’s USD correction as aggressive. So, if the equity and core yields decline slows, the dollar decline might do so too. Yesterday’s price action indicates that the outright riskoff is extremely negative for USD/JPY. The impact on EUR/USD is more modest. Even more, a protracted risk-off correction might raise questions on the ECB’s intention to start policy normalization in the near future. So, the upside of EUR/USD might become more difficult, even if sentiment on risk remains negative due to US political uncertainty
Technical picture.
The USD/JPY rebound ran into resistance last week. Till Tuesday, it was no more than a correction, but yesterday’s sell-off and the re-break below the previous top at 112.20 aborted the uptrend and made the short-term picture negative. Return action lower in the 108.13/114.37 range is likely.
Last week, it looked that EUR/USD could revisit the 1.0821/1.0778 support (gap). However, Friday’s US data and political uncertainty finally propelled EUR/USD north the 1.1023 range top, improving the technical picture. The correction top at 1.1366 is the next resistance. We think that USD sentiment will have to be extremely negative to clear this hurdle short-term. Further ST EUR/USD gains might become tougher.
EUR/USD: euro breaks topside of the ST range as US political uncertainty weighs on the dollar
EUR/GBP
EUR/GBP tests 0.86 big figure
The April UK labour market report was solid, but wage growth was again the missing link. Real wage growth even became negative due to rising inflation. Sterling’s reaction was limited. Chance are low that the BoE will raise its policy rate any time soon as long as low wage growth is at risk to further slow UK spending/growth. EUR/GBP touched an intraday top of 0.8615 early in Europe and settled in the upper half of the 0.85 big figure for most of the day, supported by the ongoing bid in EUR/USD. The pair close the session at 0.8604. USD weakness kept cable near the recent top, but a real test of 1.30 didn’t occur.
Today, the April UK retail sales will be published. Sales are expected to rebound (1.1% M/M and 2.1% Q/Q) after a sharp decline in March. Technical factors might have been in play. The odds are for a good report, but for sterling there is still an asymmetrical risk. After recent indications that higher prices are weighing on spending, a negative figure will probably have more impact than a positive surprise. The price action in the euro and the dollar will also remain important. Of late, the positive sterling sentiment eased and euro strength prevailed in EUR/GBP trading.. The pair developed a bottoming out pattern with 0.84/0.8330 as a solid bottom. The breach of 0.8509/31 (previous ST tops) improved the technical picture. For now, we don’t row against the EUR/GBP uptrend even as the euro rebound might slow short-term. Longer term, Brexit remains potentially negative for sterling.
EUR/GBP: jumps north of ST range top
