- Rates: Tentative trade truce & Brexit progress weigh on bonds
Core bonds sold off last Friday as trade and Brexit negotiations made some progress. The Fed announced a more permanent fix for strains on US money markets. Most US markets are closed for Columbus Day today. Sentiment might be less ebullient as EU officials tempered progress made with time running out ahead of this week’s key EU Summit. - Currencies: EUR/USD shows only limit follow-through gains beyond 1.10
The risk rebound last week supported USD/JPY and EUR/USD. EUR/USD regained the 1.10 barrier. However, the positive impact of the US-China deal on global (and EMU growth) will probably remain limited. The EUR/USD rebound might slow. Last week’s sterling rally also meets resistance as there is still a lot of Brexit work to do ahead of this week’s EU Summit
The Sunrise Headlines
- WS closed the week in green (+1.09%) as easing Sino-US trade tensions and a thaw in the Brexit deadlock have sparked renewed optimism. Asian markets pushed higher, with China outperforming (+1.37%).
- US and China agreed to a partial deal as Washington announced the suspension of a tariff hike, due to start next week, on Chinese imports in exchange for some concessions from the Asian nation, primarily on agricultural purchases.
- Brexit-deal optimism fades this morning after EU’s chief Brexit negotiator Barnier told diplomats that Boris Johnson’s Brexit plan isn’t good enough to be the basis of a deal as the proposals were too complex and lacked detail.
- The Fed will start buying $60 billion per month in Treasury bills at least into the second quarter of 2020 to ensure “ample reserves” in the banking system, but stressed the new program does not mark a change in monetary policy.
- China’s imports and exports shrank more than expected in September, leaving a trade surplus of $39.65 billion (consensus at $34.75 billion) as existing US tariffs and the ongoing slowdown in global trade continue to drag on demand.
- Hungarian PM Orban’s Fidesz’ candidate lost a Budapest mayoral election against the joint opposition contender. In Poland, early results suggest that the ruling and conservative Law & Justice party has retained its majority.
- Today’s economic calendar is centred around the eurozone’s the industrial production numbers for August. BoE’s deputy governor Cunliffe is scheduled to speak on UK monetary policy. In the US, markets are closed for Columbus Day.
Currencies: EUR/USD Shows Only Limit Follow-Through Gains Beyond 1.10
EUR/USD: few follow-through gains beyond 1.10
Friday’s positive expectations on a US-China trade truce supported a continuation of the risk rebound. The move was mainly visible in equities and in core yields. Initially, EUR/USD, USDJPY and EUR/JPY joined the risk rally, but the move slowed later as a limited agreement was revealed. Especially EUR/USD reversed part of its earlier gains. The US-German interest rate differential also rewidened. EUR/USD finished at 1.1042 (1.1005 on Thursday). USD/JPY closed at 108.29 (from 107.98).
Overnight, Asian equities mostly show gains of 1%+ as investors try to make their view on the LT impact of the ‘trade agreement’. The yuan strengthens (USD/CNY 7.0550) even as China September import and export data disappointed. USD/JPY (108.30/35 area) maintains most of its recent gains. EUR/USD 1.1030) shows no clear trend. Japanese markets are closed.
Today, EMU August production is expected to rebound (0.3% M/M), but won’t change expectations on sluggish growth. Most US markets are closed in observance of the Columbus Day holiday. Investors obviously aren’t convinced that the US-China deal will remove uncertainty on global growth. So, the risk rebound might soon peter out. Amongst others, the focus will turn to the earnings season, Brexit and new incoming data.
Last week’s risk rebound helped EUR/USD to regain the 1.10 area.
However, the break didn’t trigger meaningful follow-through gains. An easing in the trade tensions might provide some comfort for the export-reliant EMU economy, but growth prospects will probably remain mediocre, at best. At the same time, it might also reduce the chance for further aggressive Fed easing. We look out whether EUR/USD can hold north of the 1.10 area. If so, it could signal a more neutral ST bias. However, we’re not convinced this will be the start of a protracted EUR/USD up-leg. 1.1110 is the next reference on the charts.
Sterling rallied further on Friday as markets saw the positive tone of Thursday’s meeting between UK PM Johnson and Irish PM Varadkar as raising the chance for a deal. EUR/GBP dropped to the 0.87 area. During the weekend, practical stumbling blocks regarding trade flows and on the Irish boarder resurfaced. Parties involved admit that still quite some work has to be done in the run-up to the EU summit. A final solution, if any, probably will only be reached last minute. In this context, further sterling gains might become more difficult.
EUR/USD: tries to sustain above key trendline
