Rates: US stock market sell-off triggers even more bond gains
US equity markets lost more than 3% in US trading, causing a further bull flattening of the US yield curve with investors fretting about the remaining life span of the economic cycle. US markets are closed today in a day of national mourning. Risk sentiment, which improved overnight, will determine European action in absence of important eco data/events.
Currencies: Dollar trading mixed as US yields decline and global uncertainty
The flattening of the US yield curve intensified the risk-off trade yesterday. Initially, US weakness prevailed put finally a classical risk-off trade developed with USD/JPY, EUR/JPY and EUR/USD declining. The market repositioning might take breather today. The context is ambiguous for EUR/USD, but sustained EUR/USD gains will probably be difficult if global uncertainty persists.
The Sunrise Headlines
- US stock markets plunged yesterday with losses over 3% as bond markets suggest severe growth concerns. Asian equities open in red as well despite China officially echoing Trump’s optimism on the trade talks.
- China’s Ministry of Commerce is confident that a trade deal with the US will be reached within the 90 day deadline. It is China’s first response on Trump’s positive remarks after he and China’s president Xi Jinping met this weekend.
- UK PM May faced a new blow in Parliament yesterday. It can now potentially decide on UK’s ‘plan B’ if the current deal is rejected. Her government was also found in contempt of Parliament, as it failed to release its Brexit legal advice.
- Australia’s Q3 GDP disappointed with 0.3% (QoQ), coming from 0.9% in Q2 and less than the market expectation of 0.6%. GDP drops to 2.8% (YoY) coming from a downwardly revised 3.1% in Q2. The Aussie dollar lost ground on the news.
- China’s services sector rebounded in November with the Caixin Services PMI printing 53.8 against 50.8 in October. The Composite PMI also rose to 51.9, up from 50.5. Japanese PMI’s are stable after it rebounded in October.
- The Belgian government failed to agree on the UN Migration pact, but PM Michel will go to Marrakesh anyway. He now seeks support in Parliament instead. Majority party NV-A is said to pull the plug out of the government.
- Today’s economic calendar contains EMU (final) and UK services PMI’s & EMU retail sales. Several ECB members speak on banking supervision. US markets are closed in honour of former President George H.W. Bush
Currencies: Dollar Trading Mixed As US Yields Decline And Global Uncertainty
Dollar trading mixed as global uncertainty mounts
Worries on US/global growth dominated FX trading yesterday, even as there was little concrete news to ‘explain’ growing investor uncertainty. Investors also weren’t convinced that the truce in the US-China trade dispute will yield a positive outcome. The fattening US yield curve was seen as a harbinger of more difficult economic times ahead. Initially, USD weakness prevailed. Later an acceleration of US equity selling triggered a classic FX risk-off trade, with USD/JPY, EUR/USD and EUR/JPY all trending south. There were no (US) eco data to ‘support’ this risk-off trade. EUR/USD closed the session at 1.1343. USD/JPY finished the day at 112.77 (from 113.66). Overnight, sentiment in Asia remains risk-off, but losses are more modest compared to the 3%+ sell-off in the US. The China Caixin PMI’s unexpectedly rebounded, but it is far from sure they will be able to remove uncertainty in a sustainable way. Chinese officials held a constructive tone on US-trade relations after last weekend’s meeting. Australia Q3 growth unexpectedly eased to 0.3% Q/Q and 2.8% Y/Y (0.6% Q/Q expected). The release, in combination with the risk-off trade, broke recent AUD constructive momentum, pushing AUD/USD below the 0.73 handle. EUR/USD is holding a cautious negative bias (1.1320 area). USD/JPY regains a few ticks (113.05 area). US markets are closed today to honor President Bush. In EMU, the final PMI’s will be published. Global sentiment will remain the main driver. At least today, the flattening US yield curve won’t stoke further unrest. Still, the context of at the same time global uncertainty and declining US yields (and a flattening yield curve) is ambiguous for EUR/USD. The jury is still out, but it is not evident to see a sustained EUR/USD rebound in case of a profound global risk-off context. In a daily perspective we change our ST bias to neutral. We still assume the 1.12/1.15 trading range to hold. The day-to-day momentum looks slightly more USD constructive.
Sterling gained temporary ground yesterday on headlines that the UK could unilaterally revoke the exit of the EU. Later in the session, the government lost votes in Parliament forcing the government to publish a legal advice on Brexit. Parliament will also get more initiative in case of May’s deal being rejected next week. Chance of the Brexit dealing being approved are low, but at the same time, the Parliament’s actions might mitigate chance of a hard brexit. However, for now, political visibility remains too low to expect a positive/orderly outcome. We remain cautious on sterling long exposure
EUR/USD: combination of global uncertainty and lower US yields ambiguous sign for EUR/USD cross rate
