Rates: Global 10-yr yields fall below key levels
Disastrous EMU PMI’s pushed the German 10-yr yield into negative territory for the first time since October 2016, while the US 10-yr yield broke through key support of 2.50%. Today’s German IFO Business sentiment will likely confirm Friday’s PMI’s. Risk off remains today’s sentiment, setting core bonds up for more gains.
Currencies: Poor EMU data and global risk-off are weighing on the euro
Fears on global growth dominated global (FX) trading on Friday. Poor EMU PMI’s pushed the euro off a cliff. However, US yield curve moves also suggests investor uncertainty on US growth. The euro remains vulnerable to negative news (e.g from today’s Ifo), but we don’t expect a break of the 1.12 area. Keep a close eye at the 124.30/123.40 EUR/JPY support area
The Sunrise Headlines
- US stocks slid on global growth concerns Friday undoing all post Fed gains. The Nasdaq underperformed (-2.50%). The equity selloff rolls into Asian markets, with Japan significantly lagging its peers (3%).
- Special counsel Robert Mueller found no evidence of president Trump colluding with Russia to win the 2016 election. Regarding the investigation on obstruction of justice, Attorney General Barr concluded that the evidence “is not sufficient”.
- Spain’s Socialist party increased their lead in the run-up to the April 28 elections, according to a freshly concluded poll. Sanchez’ party would still fall short of a majority however, as would a coalition of the three right-wing parties.
- China’s industry minister Miao said the direct government intervention in the industrial sector will gradually be reduced. His comments came days ahead of a new round of high-level trade talks starting in Beijing on Thursday.
- Chicago Fed Evans understands markets are nervous about the US10y and US3m curve inversion but added the US eco outlook is solid. Evans considers current interest rates neutral and expects no hike until the second half of 2020.
- Italy’s Five Star Movement remains the top-voted party in Basilicata’s local elections but its support slid considerably compared with last year. League surged but the vote won’t affect the stability of the government, PM Conte said.
- Economic data is scant at the start of this week. We watch for Germany’s IFO confidence. Fed’s Harker is scheduled to speak, marking the start of this week’s avalanche. UK parliament votes to take control of the agenda for one day.
Currencies: EMU Data And Global Risk-Off Are Weighing On The Euro
Growth fears weighing more on euro than on USD
Last week both the dollar and the euro faced headwinds as investors pondered mounting signs of a global growth slowdown. On Wednesday, the Fed cemented its await and see bias, taking time to assess incoming eco data and sending the dollar substantially lower. However, on Friday the euro also fell off a cliff. Awful EMU PMI’s confirmed the scenario of a regional and global slowdown. The euro was hammered but the EMU PMI’s also triggered a global risk-off repositioning. EUR/USD dropped and (more than) reversed the post-Fed rally. EUR/USD closed at 1.1302 (from 1.1374). The yen attracted safe haven flows. USD/JPY declined to close at 109.92. EUR/JPY finished at 124.24, testing a key support area.
This morning, Asian markets are also hit hard as fears on a growth persist. The Mueller report removing some uncertainty on the political fate of US President Trump and hope a further progress on the China US trade talks currently can’t alleviate fears on growth. Chicago Fed Evans wasn’t that negative on the US economy. Still, US yields stay close to last week’s low levels. The major currency cross rates consolidate Friday’s repositioning. The yen stays strong. USD/JPY hovers in in the 110 area. EUR/USD struggles not to fall back below the 1.13 handle.
Today, FX markets will focus on pointers for growth. In the US, the Chicago Fed activity index and Dallas Fed manufacturing activity will be published. However, the German IFO business climate will take centre stage. Will the negative PMI’s from Friday be confirmed? The reaction to IFO will probably be more muted than after Friday’s PMI’s. Markets are uncertain on global growth, but the euro is probably more vulnerable to more bad news compared to the dollar. We also keep a close eye at the EUR/JPY technical chart. The pair dropped below the 124.38 neckline and a sustained drop below 123.40 might have (profound) consequences for other euro cross rates. On Friday, the euro upside potential was blocked. EUR/USD remains in the 1.12/1.15 trading range. We still assume no outright break of this range but a downside test is becoming more likely, if EMU data disappoint or global risk sentiment deteriorates further.
The EUR/GBP declined in lockstep with the post PMI overall decline of the euro Friday. This weekend, headlines indicated that the political process of managing Brexit might be heading to an outright chaos. The political survival of PM May is also again at stake. Sterling is losing modest ground (EUR/GBP 0.8580 area). Last week’s EUR/GBP decline was euro weakness. We don’t see a reason for sterling outperformance if Brexit uncertainty persists.
EUR/USD: holding in the 1.12/1.16 range. As risk aversion and worries on global growth persist, EUR/USD risks have tilted to the downside
