Sunrise Market Commentary
- Rates: Markets pleased with Macron-Le Pen run off
Risk sentiment is positive overnight after the French election outcome. The Bund opens weaker, putting the German 10-yr yield more comfortably in the 0.2%-0.5% sideways range. French OAT’s are expected to outperform. We have a negative bias for the US Note future as well as President Trump promised to unveil his tax cut plan this week. - Currencies: EUR/USD and USD/JPY show relief-rebound after French election
Overnight, the euro showed the expected Pavlov reaction as the first round of the French election turned out market friendly. The yen decline as safe haven positions were reduced. USD/JPY returned north of 110. The risk-on reaction might still continue early today, but we doubt that the election outcome will mark the start of a sustained euro rally.
The Sunrise Headlines
- US equities ended close to unchanged on Friday. Overnight, Asian risk sentiment is positive following the French election outcome. Chinese stocks underperform though as the regulator ordered insurers to focus on risk.
- Emmanuel Macron will go head-to-head against Marine Le Pen in the run-off election to become France’s next president. Opinion polls suggest that Macron would beat the stridently anti-EU Le Pen by a wide margin.
- US President Trump says businesses and individuals will receive a "massive tax cut" under a tax reform package he plans to unveil on ‘Wednesday or shortly thereafter’.
- Italy’s credit rating was cut closer to junk territory on Friday by Fitch, who cited ‘weak economic growth’ and the country’s ‘persistent track record of fiscal slippage’. Fitch reduced the rating to ‘BBB’ (stable) from ‘BBB+’.
- The IMF had a sobering message for Greece: Even if the country secures debt relief from its European creditors-a question that is by no means assured with bailout talks still deadlocked-the nation still needs even more painful economic overhauls than currently planned.
- European officials have revived their push for a European Monetary Fund to tackle future crises in the eurozone in place of the IMF, which has yet to say whether it will join the latest Greek bailout.
- Today’s eco calendar contains German IFO business confidence. The Belgian debt agency conducts its monthly OLO auction and Fed governor Kashkari is scheduled to speak
Currencies: EUR/USD And USD/JPY Show Relief-Rebound After French Election
Can euro sustain initial post-election gain?
On Friday, Thursday’s pro-Europe/France repositioning didn’t continue. EUR/USD and USD/JPY held tight ranges respectively in the 1.07 and the 109 area. Investors kept a wait-and-see modus going into the first round of the French elections. The EMU PMI was strong, but ignored.
Overnight, the outcome of the first round of the French election avoided the negative scenario of a runoff in the second round between Marine Le Pen and Jean-Luc Mélenchon. Macron is largely expected to win the second round against Marine Le Pen. This scenario is market friendly. Early in Asia, the result triggered the expected Pavlov reaction with equities, core bond yields and the euro jumping higher. The safe haven yen was sold. However, except for Japan, most regional equities already lost most gains. Chinese equities even show substantial losses on regulator intentions to curb leveraged trading. EUR/USD jumped north of 1.09, but returned part of the initial gain and is currently trading in the 1.0860 area. A similar reaction was visible in USD/JPY (currently trading just north of 110) and EUR/JPY (119.55 area).
Today, eco calendar is thin. The German April IFO business sentiment is the most important release. The market expects a stabilization of the headline figure (112.4). The decline in the German PMI last week (56.3 from 57.1) suggests some risks for a downward surprise. However, we still expect the index to stay at an elevated level. However, the focus FX trading will likely be on the fall-out from the First round of the French presidential election. Overnight, EUR/USD jumped temporary north of the 1.0875/1.0906 recent range top but no sustained break occurred yet. A euro positive momentum at the start of the European session is likely. However, we doubt that this will be the start of a protracted/sustained euro rebound. Key question is whether the European interest rate market already considers the removal of the French political tail risk a good enough reason for the ECB come closer to policy normalisation. At this week’s ECB meeting, we don’t expect a real positive change in the ECB’s assessment. On the US side of the equation, interest rates also discount a mediocre scenario on the US economy and on the potential of the Trump administration to deliver fiscal reforms. So, there is also room for a rebound in US yields . A slightly narrowing of the interest rate differential between the US and Europe is possible short-term, but we don’t expect the move to go really far. In this context won’t expect EUR/USD to break the 1.10 barrier in a sustained way.
For USD/JPY (and EUR/JPY) the day-to-day momentum will probably be constructive as both cross rates will get support from a risk-on context and from higher core bond yields.
From a technical point of view, USD/JPY broke below the 110 key support. We downgraded our USD/JPY assessment to bearish. Next key support (62% retracement) comes in at 107.18. Today’s rebound confirms that a bottoming out process might be in store. However, the pair needs to regain the 112.20 level (neckline ST double bottom) to really improve the technical picture of this cross rate. EUR/USD extensively tested the topside of the MT range (1.0874/1.0906 area) late March, but the test was rejected and EUR/USD returned lower in the 1.0875/1.05 range. The move met support in the 1.06 area and the pair again tested the range top after the French election this morning. We look out how this test turns out, but we are not convinced on a sustained break higher. If EUR/USD would regain the 1.10 barrier next resistance comes in in the 1.1145/1.13 area (US pre/post-election swings).
EUR/USD: testing the 1.0906 range top
EUR/GBP
EUR/GBP returns to the 0.85 area
On Friday, the UK March retail sales declined more than expected, but the damage for sterling was limited. Cable was well bid going into the publication of the report (intraday top of 1.2835) but returned to the big figure after the release. So, for now, soft UK data still have only a modest impact on sterling. Later sterling also ignored hawkish comments from BoE ‘s Saunders. EUR/GBP closed the session at 0.8378 . Cable finished the week at 1.2817.
This morning, the sterling price action was also dominated by the global reaction after the French election. Euro strength prevailed. EUR/GBP jumped to the 0.85 area. Cable lost slightly ground as the dollar gains more from the risk-on repositioning than sterling. Later today, the CBI trends orders will be published. A modest softening from 15 to 12 is expected. Of late, sterling didn’t react to much to eco data. The euro reaction to the French elections will remain the main driver for sterling trading. As we don’t expect a protracted rebound of EUR/USD, further EUR/GBP gains are also not evident short-term. We had a neutral short-term bias on EUR/GBP. Early last week, EUR/GBP dropped below the bottom of the EUR/GBP 0.84 support, improving the sterling picture. The pair came within reach of the key 0.8305 support (Dec low), but. no real test occurred. After this morning’s rebound, the range bottom looks better protected. Longer term, Brexit-complications remain a potential negative for sterling. Of late, this was not the focus of sterling trading. Nevertheless on technical considerations we are inclined to reconsider a cautious EUR/GBP buy-on-dips approach.
EUR/GBP: jumps on French election. 0.83 range bottom looks safe for now
