Rates: Italy eyes 15y syndicated bond sale
Risk sentiment is positive at the onset of trading following Chinese fiscal/monetary stimulus headlines. The Italian syndicated 15y bond sale will be closely watched and is a good proxy for sentiment. We expect good demand, lifting (risk) spirits further even if some investors probably stay side-lined ahead of tonight’s Brexit vote.
Currencies: sterling rebounds going into key Brexit vote
The dollar is losing a few ticks as sentiment on risk improves this morning. The enfolding debate on fiscal easing in Germany might become a euro positive over time. Sterling rebounds even as UK PM May is expected to be defeated in Parliament on her Brexit. Markets anticipate a delay of Brexit, but a less sterling friendly outcome is also possible
The Sunrise Headlines
- US stock markets have taken a step back yesterday as all indices noted losses between 0.25% and 1.0%. Asian equities edge higher this morning. Chinese indices slightly outperform on new fiscal/monetary stimulus headlines.
- China announced new supportive measures to help stabilize its slowing economy. It will cut taxes “on a larger scale”, especially for small businesses and the manufacturing sector, and confirmed more supportive measures for 2019.
- UK PM May is planning for a second vote on her Brexit deal as German Chancellor Angela Merkel suggested the EU could grant extra concessions if MP’s vote May’s current deal down tonight, as widely expected.
- Annegret Kramp-Karrenbauer, who succeeded Merkel as new leader of Germany’s Christian Democrats, called for tax cuts as Germany faces an economic slowdown after nine straight years of growth.
- Fed Vice Chairman Clarida reiterated the softer normalization approach of the US central bank. He left the possibility open to raise interest rates in 2019 fewer than the two times projected by the bank’s dot plot after the Dec. meeting.
- US Secretary of State Pompeo and a senior North Korean official are said to meet later this week The pair would discuss and finalize the details of a second summit between US President Trump and North Korean leader Kim Jong Un.
- Today’s economic calendar shows the Empire Manufacturing Business Survey (Jan) and producer inflation data (Dec). The UK Parliament votes on PM May’s Brexit proposal. Italy probably holds a 15y syndicated bond sale
Currencies: Sterling Rebounds Going Into Key Brexit Vote
USD slide to resume?
The dollar traded in consolidation modus yesterday. Global sentiment was risk-off as investors digested disappointing China and EMU data. Core yields initially declined and US/German interest rate differentials widened. However, the dollar failed to profit and the risk-off trade eased later. Ongoing uncertainty on the US shutdown maybe capped further USD gains, too. EUR/USD ended the day unchanged at 1.1469. USD/JPY closed at 108.16 (from 108.48). Investors see the glass again half full rather than half empty this morning. The rebound is supported by comments from Chinese policy makers as they indicate more monetary and fiscal easing to support the economy. Asian equities are showing solid gains with China and Korea outperforming. The yen weakens (USD/JPY in the 108.60 area). The dollar is ceding ground against most other majors. AUD/USD rebounded north of 0.72. EUR/USD is changing hands near 1.1475/80. The yuan is holding near it short-term peak (USD/CNY 6.75). Later today, EMU data are again second tier, but the evolving debate on fiscal easing in Germany is interesting. The jury is still out, but the issue is a potential euro supportive over time. In the US, December headline PPI is expected unchanged at 2.5%. The impact on the dollar will probably be limited as CPI is already available. On Friday and yesterday the USD decline halted, but the USD comeback was far from impressive. If risk sentiment improves again, the dollar decline (ex USD/JPY) might resume. Political event risk is an ambiguous factor for EUR/USD. Brexit chaos might weigh on the euro. The shutdown is a potential USD negative. We maintain the view that any USD rebound might be modest unless risk sentiment deteriorates sharply. The downside in EUR/USD looks rather well protected. EUR/USD 1.1621 (mid-Oct top) remains the next topside reference.
Last-minute efforts of UK PM May yesterday to convince MP’s to support her Brexit deal have apparently failed. Even so, sterling extended its recent rebound. At least part of the market sees a growing chance of the March 29 UK exit from the EU being delayed. This is causing a scaling back of sterling shorts. A big defeat of PM May in the vote might lead to general elections and might lead to a prolonged period of uncertainty. However, more sterling friendly outcomes ( new referendum, EU concessions, …) are also possible. For now, we avoid the binary sterling risk.
EUR/USD: dollar shows no clea trend. USD decline might resume if risk sentiment improves again.
