Rates: US Treasuries start week on weak footing
Higher oil prices and strong US eco data took the edge over weakness on EM FX & stock markets yesterday, sending core bonds lower as US investors returned from the long weekend. The magnitude of the (US) moves suggests that more could be at play. Will negative bond sentiment survive today if risk sentiment sours further?
Currencies: dollar profits only modestly as global uncertainty persists
Yesterday, the dollar succeeded modest intraday gains as EM markets’ stress persisted. However, the performance of the US currency was far from impressive. Today, EM tensions and US trade policy will remain the dominant factors global (FX) trading. Will the dollar keep the benefit of the doubt?
The Sunrise Headlines
- US stock markets opened with losses on Tuesday but could partly recover through the day. Asian markets opened similarly this morning with all major indices in red and China underperforming the bunch.
- After the money laundering scandal with Danske Bank yesterday, EU regulators have warned in a confidential paper that the bloc’s controls on money laundering has serious weaknesses and shortcomings.
- Japan’s PM Abe has set out a plan to reform social security to face growing challenges of an ageing population. He proposes to raise Japan’s retirement age beyond 65 and allow people to defer their pension beyond 70.
- The Nikkei Japan PMI Services rose to 51.5 in August, the highest level in 4 months, from 51.3 in July. The PMI for Manufacturing rose from 51.8 to 52.0, but analysts warn for risks of trade war to Japan’s export-oriented economy.
- Australia’s economy grew at its fastest pace in six years, with 0.9% GDP growth in the second quarter, bringing the GDP year-on-year to 3.4%. A fast growth of population fuelled demand for homes and infrastructure.
- China’s August Caixin services PMI declined from 52.8 in July to 51.5 in August, as new businesses picked up only moderately. The PMI Composite declined as well, from 52.3 to 52.0 this month, indicating economic growth is cooling down.
- Today’s eco calendar contains August services PMI’s in EMU (final) and UK. EMU retail sales (MoM/YoY) are released as well. ECB chief economist Peter Praet speaks in Vienna. Fed Bullard and Kashkari are scheduled to speak as well
Currencies: Dollar Profits Only Modestly As Global Uncertainty Persists
Only modest USD gains despite global uncertainty
On Tuesday, the dollar initially rebounded. European equities reversed a constructive open and turned in risk-off mode. Investors were cautious as uncertainty on the US trade policy persisted and as several emerging markets stayed under pressure. The dollar played its safe haven role. EUR/USD dropped to the 1.1530 area. However, the US dollar couldn’t keep its intraday gain despite a strong manufacturing ISM and rising US yields. US stocks reversing most intraday losses maybe capped further USD gains. EUR/USD closed the session at 1.1582 (from 1.161). USD/JPY finished at 111.41 (from 111.07). This morning, most Asian markets remain in risk-off modus, with the likes of Indonesia hit the hardest. Still, the USD performance is far from impressive. EUR/USD is trading in the high 1.15 area. Australia Q2 GDP printed strong at 0.9% Q/Q and 3.4% Y/Y. The Aussie dollar (AUD/USD 71.90) regained slightly ground after testing the lowest level since May 2016. Today, the eco calendar is thin with only the final EMU services PMI and the US trade balance on the agenda. The debate on global/US trade policy and EM tensions probably remain the dominant factors for USD trading. In theory, this context looks USD supportive. Yesterday, the US currency recorded some intraday gains, but the performance was far from impressive. We maintain the working hypothesis that EUR/USD 1.1791/1.1850 resistance will be tough for EUR/USD short-term and keep a cautious USD positive bias. However, recent price action suggests fortunes for the dollar might change if global uncertainty (trade & EM) were to ease.
Yesterday, sterling avoided further losses after Monday’s decline. Eco data were again soft (BRC sales and the construction PMI). However, the data had little impact on sterling. EUR/GBP lost a few ticks in line with the intraday EUR/USD decline. BoE’s Carney in a hearing before parliament indicated he is prepared to stay longer at the BoE to support a smooth brexit. Today, the UK services/ composite PMI’s will be released. The manufacturing and construction measure earlier this week suggest downside risks. We stay cautious on sterling as long as the brexit chaos persists. The 0.91 area is the next point of reference if sentiment on sterling deteriorates further. EUR/GBP 0.9306 is key. A break would suggested real brexit panic
USD (Trade-weighted DXY) gains remain modest despite global uncertainty
