Sunrise Market Commentary
- Rates: US protectionism spoils risk sentiment
US protectionism caused a sell-off on stock markets from which core bonds profited via safe haven flows. Last month, the same news triggered weakness in core bonds on fears of retaliation from China via lower Treasury purchases. For now, we think of it as a healthy correction. The German 10-yr yield tests important support at 0.62% - Currencies: Trade war fears block USD rebound, for now
The dollar rebound was blocked by a less hawkish comments of Fed’s Powell and, even more, by US president Trump’s announcement of import tariffs on an steel and aluminum. US trade policy and EMU politics will be the main drivers for USD trading today. Sterling traders will closely monitor whether PM May can ease EU/UK tensions with her Brexit speech.
The Sunrise Headlines
- Stock markets in Asia extended WS’s rout (-1.5%), as investors were spooked by the specter of a global trade war after President Trump announced the US would impose hefty tariffs on steel (25%) and aluminium (10%) imports.
- Japan’s jobless rate fell to an almost 25-yr low in January (2.4%), while the job-to-applicant ratio remained at a 44-yr high (1.59). Tokyo CPI ex-fresh food rose faster than forecast in February (0.9% Y/Y).
- President Trump is likely to nominate Columbia University economist Clarida to become Fed vice chair, according to the WSJ. He is a Republican economist whom colleagues describe as more of a pragmatist than an ideologue.
- NY Fed governor Dudley said that 4 rate hikes this year would still be gradual. Fed chair Powell sounded somewhat less hawkish on his 2nd day of testimony before US Congress, adding that the US economy is not at risk of overheating.
- Catalonia’s former leader Puigdemont pulled back from a bid for a second term in office, dealing a blow to the Spanish northeastern region’s secessionist movement. However, it might open the regional political deadlock.
- ECB policymakers are likely to discuss a small tweak in their communication stance at their March 8 meeting but no major policy shift is expected, three sources with direct knowledge of the discussion said.
- Today’s eco calendar is uneventful apart from the UK with PM May’s Brexit speech and the construction PMI
Currencies: Trade War Fears Block USD Rebound, For Now
Trump’s tariff plans block USD rebound
The dollar first gained modest further ground yesterday; a continuation of the post-Powell rebound. The 2-yr US/German yield differential grew to 280 bps, the highest since 1997! US data (claims and ISM) were strong. PCE deflators printed as expected (0.4% M/M and 1.7% Y/Y). EUR/USD set a minor low below 1.2165. However, in yesterday’s Q&A, Powell was less hawkish than on Tuesday (no overheating of the economy). Later, the dollar was hammered as US president Trump announced tough import tariffs on steel and aluminum. US equities, US yields and the dollar nosedived. EUR/USD closed at 1.2267. USD/JPY finished at 106.24.
Trump’s action on import tariffs dominates the overnight price action. Most Asian equity indices are trading in negative territory. Japan underperforms (losses of up to 2.0%). Losses in China stay modest. The Japanese jobless rate declined sharply to 2.4% and Tokyo inflation was a touch higher than expected. BoJ’s Kuroda sees a chance of hitting 2% inflation in FY 2019. At that time he will consider the timing of the exit. This is sure something to keep an eye on! USD/JPY dropped below 106. EUR/USD trades in the 1.2270 area.
The focus for (FX) trading will be on the US import tariffs and its consequences for global trade, and on European politics (Italian election and SPD approval of new government). A reaction of trading partners to the US tariffs might sent shivers through markets, but we don’t expect this theme to become a lasting negative for markets or the dollar. EMU politics was seldom a big issue for global (FX) trading. Some euro caution ahead of the weekend is possible, but nothing more than that. Yesterday’s rejected test of the EUR/USD 1.2165 area is slightly disappointing for USD bulls ST. However, the battle might not be over yet. If the dust on the tariffs issue settles, a retest remains possible.
Today, all eyes in the UK and EU are on PM May’s speech. She brings her view on the partnership with the EU. She might advocate a trade deal deeper than anywhere else in the world. However, the EU probably will consider this cherrypicking. We doubt the speech will bring a breakthrough. Sterling already lost some ground on Brexit-uncertainty this week. EUR/GBP again nears the 0.8930 area. A break would again bring the 0.9033 range top on the radar. We expect no break.
EUR/USD: test of 1.2165 rejected as Trump announces import tariffs on steel and aluminum
