- Rates: US 10-yr yield retakes 2.92% resistance
US stock markets extended their rally, pulling core bonds lower during US dealings. The US 10-yr yield regained 2.92% resistance, suggesting a return towards 3% and more going into next week’s FOMC meeting. Today’s US non-manufacturing ISM is expected to confirm the improvement in US eco data in Q2. - Currencies: Euro short-squeeze slows
The euro initially regained further ground yesterday as the ‘post-Italy’ short squeeze continued. However the dollar restored the balance later in the session. Today’s eco data might be marginally USD supportive. We expect the US dollar to remain rather well protected going into next week’s Fed meeting.
The Sunrise Headlines
- In the US, the markets continued their positive trend, with the Nasdaq Composite (+0,7%) ending at a record closing high. Asian stock markets opened mixed with China slightly outperforming the rest.
- Theresa May has abandoned her intentions to present European leaders with a blueprint of the Brexit at the EU-UK summit later this month. This new delay for presenting a detailed plan is again confirming UK’s discord on Brexit.
- Italy’s new populist government has criticized the ECB for scaling back its proportion of Italian sovereign bonds it bought last month. The ECB insists that the reduced Italian share was not influenced by the political turmoil last month.
- Investment banks raised their forecasts for oil prices for the 8th month in a row with concerns of geopolitical risks in Iran and Venezuela escalating. Brent is now expected to average over $70 a barrel this year.
- Japanese household spending unexpectedly decreased in April (-1,3% Y/Y) which increases the possibility of a recession if domestic demand indicators don’t improve before end of June. Chinese PMI’s were stable, as expected.
- Spain’s forced out Popular party threatened to use its majority in the Senate to disrupt the new government’s budget. The PP initially supported the budget but says that their priorities have changed.
- On today’s economic calendar the ISM Non-Manf Composite (May) is released in the US, the Market/CIPS UK Services PMI (May) in the UK and Retail Sales MoM/YoY in Europe.
Currencies: Euro Short-Squeeze Slows
EUR/USD short-squeeze eases
Yesterday, a further easing in intra-EMU spreads supported the squeeze of euro shorts set up during the Italian crisis. Friday’s payrolls supported expecations on three additional Fed rate hikes, but initially it didn’t help the dollar. EUR/USD filled offers near 1.1745. Later, EUR/USD reversed part of the earlier gains and closed the session at 1.1699 (from 1.1659). The gain of USD/JPY was initially negligible, but an overall better bid for the dollar and good US equity gains pushed the pair to close the day at 109.82 (from 109.54). Even so, geopolitical unceainty remains a potential negative for this cross rate.
Asian equities are trading mixed. The risk rally (easing tenions on Italy, good payrolls) slows. The trade-weighted USD stabilizes. EUR/USD fell back below 1.17. The Reserve Bank of Austrlia left its policy unchanged (1.50%). Any tightening is some time away and will be very gradual. The Aussie dollar rebounded over the previous days, but the neutral RBA assessment provides little imputs for an acceleration of the AUD rally.
Today, the eco calendar contains EMU retail sales and the final services PMI. In the US the non-Manufacturing ISM will be published. Of late US, survey evidence remained strong and this might still be the case for the non-Man ISM. European data were less buoyant, but the negative news should be discounted. We expect today’s data to be neutral, maybe slightly USD supportive. Headlines on global trade remain a wildcard. Last week, EUR/USD bottomed as tensions on Italy eased. We have the impression that the positive euro repositioning is slowing. A flaring up in trade tensions might weigh a bit more on the euro than on the dollar. At the same time, Friday’s strong US data should prevent a big USD setback ahead of next week’s Fed meeting. EUR/USD rebounded off the 1.1510 area, but didn’t regain any important level. We’re not convinced of a lasting euro rebound yet. 1.1830 is the first resistance ahead of the 1.1996/1.20 area which we consider not easy to break.
Yesterday, sterling reversed most of Friday’s gains against the euro. Yesterday evening, BoE’s Silvana Tenreyro indicated that the BoE could delay a rate hike and hit the inflation target over time. Overnight, there are also headlines that the UK won’t present a Brexit plan before the June EU summit. THe May services PMI is expected marginally stronger at 53.0. If so, the report won’t support be a big help for sterling. We don’t see a strong case for further sustained sterling gains. Sideways trading in the 0.87/0.88 area might be on the cards.
EUR/USD: post-Italy euro short-squeeze slows
