Sunrise Market Commentary
- Rates: US reflationary spirits back alive
Surging US stock markets, hawkish comments by Fed Mester and a very robust Beige Book revived reflationary spirits and caused an underperformance of US Treasuries. The US 5-yr yield is near key resistance at 2.42% (2011 top). The Bund could continue to outperform as ECB members downplay speculation on communication changes at next week’s meeting. - Currencies: Dollar bottoms, but technical confirmation is still needed
The dollar finally rebounded yesterday. The US currency received additional interest rate support, as risk sentiment improved and as the Beige Book sounded positive on the economy. ECB governors continue to show their unease with the recent sharp euro rally. In this respect, we keep a close eye on comments from the ECB Coeure today.
The Sunrise Headlines
- US stock markets eked out impressive gains yesterday (+1%), lifted by Apple’s announcement to repatriate cash and invest in the US economy. Asian stock markets started well, but grind lower with Japan underperforming (-0.5%).
- White House Chief of Staff Kelly said that Republican leaders have the votes to avert a government shutdown and push through a stopgap measure until Feb 26.
- Australian employment jumped past expectations to match the longest run of monthly gains on record, yet unemployment still edged up as more people looked for work putting an unwelcome brake on wages and inflation.
- The White House has “zero anxiety” about the prospect of former senior adviser Steve Bannon testifying to the special counsel overseeing the Russia investigation, an administration official.
- Economic activity across the US expanded into 2018, with tight labor markets and modest wage and price growth, according to the Fed’s Beige Book.
- Apple has pledged to invest more than $30bn to expand its American operations in the wake of last month’s US tax cut, even as it makes an estimated $38bn one-off tax payment on the repatriation of its overseas profits.
- Today’s eco calendar heats up in the US with housing starts, building permits, Philly Fed Business outlook and weekly jobless claims.
Currencies: Dollar Bottoms, But Technical Confirmation Is Still Needed
Dollar looking for a bottom?
The EUR/USD rally was a bit exhausted yesterday after setting a new correction top in Asia. ECB members Constancio and Nowotny warned that a sudden rise of the euro complicates the ECB’s effort to bring inflation back to target. EUR/USD tested the 1.22 mark early in US trading. The 2-yr US/GE yield spread rose to a cycle top of over 2.60 %. EUR/USD closed the session at 1.2186. USD/JPY finished at 111.29.
Asian equities opened strong overnight, but struggle to maintain the early gains. The dollar is holding most of yesterday’s gains on higher US yields. The Japan 10-yr yield nears the 0.10% mark, blocking a further decline of the yen. USD/JPY holds in the low 111 area. The EUR/USD decline also slows. EUR/USD hovers near 1.22. The Aussie dollar fails to profit from strong November/December job growth. An overnight attempt to clear AUD/USD 0.80 failed.
US housing starts and permits are forecast to ease slightly. The Philly Fed business outlook is also expected slightly softer from 27.9 to 25.0. Activity data are not the focus of markets these days. So, any market reaction to these data will probably only be of intraday significance. Yesterday, the dollar finally rebounded. Equities, Fed comments and the Beige book were supportive, but there is no guarantee but there is no guarantee that this is enough to trigger a sustained bigger correction already at this stage. We keep a close eye at an appearance from ECB’s Coeure. Will he also warn on the impact of a too fast rise of the euro?
Global Picture: The dollar was in the defensive of late as markets prepare for a change in policy from central banks outside the US, especially from the ECB. This propelled EUR/USD despite a huge interest rate differential in favour of the dollar. Yesterday, the dollar decline finally showed tentative signs of bottoming, but the jury is still out. A return below previous resistance at 1.2092 is needed to call off the ST alert for the dollar. EUR/USD 1.2598 (62% Retracement) is next important resistance on the charts.
EUR/GBP lost substantial ground yesterday even as there were few UK eco data. The EUR/USD decline was an important factor. This morning, UK RICS house prices were better than expected. There are no other UK data today. The day-to-day momentum of sterling improves, but we hold the view that 0.8760/00 is a strong support area ST
EUR/USD rally slows, but technical confirmation still needed
