Rates: Risk sentiment will set the tone in absence of US investors
US markets are closed for Labour Day, suggesting low volume trading especially given the thin calendar. Development in emerging markets could set the tone for risk sentiment today. Italian BTP’s could undo some of last week’s losses as rating agency Fitch didn’t pull the trigger on the BBB rating (yet).
Currencies: Dollar gains a few ticks as trade uncertainty persists
The dollar regained some ground on Friday after president Trump again made aggressive comments on the trade relations between the US and its trading partners including China, the EU and Canada. Trade remains a key issue for FX trading in the first half of the week. Last week’s short-squeeze in sterling looks like easing
The Sunrise Headlines
- US stock markets closed Friday’s session with small gains, with the exception of the Dow (-0.09%). Today, US markets are closed (Labour Day). Asian markets opened in red this morning with China underperforming.
- The US and Canada failed to reach an agreement on Friday for Canada to re-join Nafta. Negotiators announced a five-day break in negotiations. President Trump repeated that there is no political necessity to keep Canada in the deal.
- EU’s top brexit negotiator Barnier said he strongly opposes key parts of May’s proposals for a future trade deal. He added that 80% of negotiations are done and a solution for the Irish border is the key remaining element.
- Brazil’s electoral court decided that the imprisoned Lula da Silva is banned from running for President in October. The ex-president and country’s most popular politician was sentenced to 12 years in prison for corruption in April.
- Rating agency Fitch has changed Italy’s credit outlook from stable to negative, but kept its long-term credit rating at BBB. The agency said the fiscal plans of the new government risk a degree of fiscal loosening.
- US President Trump has announced he will skip two major summits in Asia in November. The move raises concerns about the US reliability as a counterweight to China in Asia Pacific.
- Today’s eco calendar is skinny, with US markets closed (Labour Day). In the UK and EMU, the August manufacturing PMI’s will be published
Currencies: Dollar Gains A Few Ticks As Trade Uncertainty Persists
Dollar succeeds cautious risk-off rebound
On Friday, global (FX) markets tried to assess the consequences of the latest harsh trade comments from US president Trump against the EU and China. Initially, EUR/USD held up well, but finally returned south, amongst other on a softer than expected EMU CPI (2.0% Y/Y). The pair even dropped temporarily below the 1.16 mark as European investors were cautious going into the weekend. EUR/USD closed the session at 1.1602. Gains of the yen were very modest. USD/JPY closed the session little changed at 111.03. A late session comeback of US equities reversed earlier yen gains. This morning, a broad riskoff sentiment reigns on most Asian equity markets. Uncertainty on EM/on several EM currencies persists. The dollar remains in the driver’s seat on FX markets. The trade-weighted USD (DXY) regained the 95 mark. EUR/USD hovers in the low 1.16 area. USD/JPY is losing a few ticks (110.5 area). Later day, US markets are closed in observance of the Labour Day holiday. In EMU, the final manufacturing PMI is expected to confirm a modest further slide to 54.6. Investors will continue to keep a close eye at all kinds of comments for president Trump and other US policy makers on the US global trade policy (Canada, China tariffs, EU). The risk of a further escalation in the China-US trade conflict will probably cause equity investors outside the US to hold a cautious approach. This might be slightly USD supportive. The USD reversed an early August rebound in the second half of the month, but the USD decline slowed last week. The EUR/USD rebound was blocked in the low 1.17 area. Eco fundamentals and uncertainty on trade are in theory USD supportive. Of late, the USD performance was not impressive. Even so, we assume that a EUR/USD break beyond 1.1791/1.1850 might be difficult as long as trade tensions persist. We start the week we a cautious negative bias on EUR/USD.
Last week, sterling enjoyed a technical short squeeze after a protracted slide. Question is whether there is much further upside for sterling if there is no real progress in the brexit negotations. Comments this weekend at least suggest that there remains a lot of discord on Brexit both within the UK and between the EU and the UK. EUR/GBP already returned to the high 0.89 area this morning. We still assume a that break of EUR/GBP below 0.8850 is difficult unless there is real progress on Brexit. The GBP rebound/short-squeeze maybe has run its course.
USD (trade-weighted-DXY): dollar succeeds cautious rebound as uncertainty on trade persists
