Rates: Finally upward surprise from EMU PMIs?
The German and US 10-yr yields ran into resistance last Friday, causing short covering ahead of the weekend. Attention turns to Europe today with December PMIs. We see upside risks, mainly coming from Germany. Bunds can underperform US Treasuries in such scenario.
Currencies: No clear EUR/USD reaction on trade deal. Will EMU data support euro?
On Friday, EUR/USD failed to extend early strength recorded after the UK election outcome. The US announcing a trade deal failed to inspire a clear directional EUR/USD trend. The pair probably needs better EMU data to continue recent (gradual) rebound. Sterling met some buy-the-rumour, sell-the-fact selling on Friday, but remains strong
The Sunrise Headlines
- US equities struggled to hold prior gains and ended basically flat (up to 0.20%) over the weekend as weak US retail sales cast a shadow over US-China trade optimism. Asian equities are trading mixed. Australia outperforms (+1.6%).
- The US and China reached a phase one trade accord. USTR Lighthizer stressed the deal covers more than agriculture, saying it has real enforcement mechanisms and provisions that address currency and financial services.
- China threatened to retaliate Germany if the latter excludes Huawei from its 5G wireless equipment market. The comment comes amid growing resistance from Berlin against “untrustworthy” 5G vendors, indirectly targeting Chinese firms.
- Chinese industrial (6.2%, consensus at 5% Y/Y) and retail (8%, consensus at 7.6% Y/Y) data beat expectations in November. Government support propping up demand on the heels of easing trade hostilities uphold the Chinese economy.
- The Jibun bank’s manufacturing flash PMI (48.8 from 48.9) indicates an extending fall in Japan’s factory activity in December. A protracted decline in output and new orders threaten to tip the economy into contraction in Q4.
- Australia downgraded its economic outlook as weak household spending, stagnant wage growth and geopolitical tensions undermine(d) the economy. The downgrade hits the government’s finances for the coming years.
- Today, investors will keep an eye on US/UK/EMU (preliminary) PMIs today looking for signs of improvement. The ECB’s Lane and Guindos are due to speak. The BoE publishes its Financial Stability Report and annual stress test results.
Currencies: No Clear EUR/USD Reaction On Trade Deal. Will EMU Data Support Euro?
EUR/USD trading mixed on trade deal
Global (FX) markets on Friday tried to assess the impact of the UK Tory victory and of the first phase US-China trade deal. Brexit uncertainty probably moving to the background of the EMU (& UK) political agenda, at least temporarily, initially propelled EUR/USD to the high 1.11 area. The impact of the trade deal was less obvious. Markets still had to guess on the details and President Trump created some doubts on how far the deal was really finalized. USD/JPY eased intraday to close at 109.38. EUR/USD also reversed an earlier gain to close at 1.1121. Mediocre US November retail sales had only limited impact on the dollar.
Asian equities took a cautious start this morning. However, solid China retail sales and production data (slightly) supported sentiment. Still the yuan didn’t make further progress (USD/CNY near 7). USD/JPY is holding a tight range near 109.40. EUR/USD gains a few ticks (1.1135/40). The Aussie dollar returned small opening gains after the government cut the country’s growth outlook which also leads to a smaller budget surplus. AUD/USD eases to the 0.6870 area. Today, the EMU/German PMIs are expected to confirm a gradual bottoming/improvement in activity. The expectation is legitimate and could support EMU yields and the euro. However, EUR/USD remains vulnerable if data were to disappoint. The US Empire manufacturing survey and PMIs are also expected to signal gradual eco rebound. This time, EMU data maybe have some more potential to move EUR/USD. Also look out whether/to what extent equities continue to profit from the reduced unvent risk. For now, this didn’t hurt the dollar too much.
Last week, the Fed signalling to stay accommodative for long and the UK election outcome preparing for a Brexit ‘solution’, propelled EUR/USD close to the 1.12 barrier, but the gain evaporated later. The technical picture improved modestly as the pair held north of previous 1.11 resistance. 1.1199/1.1250 is the next resistance. Some further EUR/USD gain is possible, but EMU news is needed to continue this trend.
On Friday, EUR/GBP dropped temporarily below 0.83 on the Tory victory. Later, sterling met some modest buy-the-rumour, sell-the-fact reaction. The government intends to approve the Brexit deal soon. Today’s PMIs are also interesting. We also keep an eye on the fiscal intentions of the UK government. The BoE might turn a bit more cautious on a rate cut. This context might remain sterling constructive short-term.
EUR/USD traders don’t know what conclusion to draw from trade deal
