Rates: Haemorrhage on bond markets
US Treasuries were hit by a quadruple whammy yesterday. More extremely strong US eco data turned out to be the straw that broke the camel’s back. Add higher oil prices, technical yield breaks at the long end of the US yield curve and a hawkish Fed governor Powell and you have a recipe for disaster for core bonds. We expect the repositioning to continue.
Currencies: Dollar jumps on strong US data, higher US yields and hawkish Powell
Yesterday morning, it looked that the euro would get some respite as tension on Italy eased a bit. However, at the end of the day, dollar strength was the name of the game. Strong US eco data and Fed’s Powell signaling more policy tightening pushed EUR/USD below 1.15 support. The dollar is again in the drivers’ seat.
The Sunrise Headlines
- US equity markets gained on Wednesday with all major indices closing in green, despite losing ground in final trading hours on higher yields. Asian markets and US equity futures trade in negative territory this morning.
- US Treasuries fell hard after strong US eco data and Fed chairman Powell saying he was “very happy” with the “remarkably positive” US economy. Mid-and long-term US yields broke through important resistance levels.
- Ireland has expressed its support for UK PM May’s plan for an all-UK customs union with the EU, to avoid a hard border in Ireland in case of no deal. Although Barnier already rejected, the Irish support is boosting hope.
- Russia and Saudi Arabia struck a private deal in September to raise oil output to cool down rising price and informed the US about it. The deal underlines how both countries are deciding oil output bilaterally, instead of consulting OPEC.
- US Secretary of State Mike Pompeo is optimistic that his meeting in North-Korea this weekend would bring progress toward a new and second summit between US President Trump and his North Korean counterpart Kim Jong Un.
- US Senate Majority Leader McConell has set up a procedural vote on Brett Kavanaugh’s Supreme Court nomination. If this procedural vote succeeds, Kavanaugh could be confirmed as Supreme Court judge this weekend.
- Today’s eco calendar is poorly filled. In the US we have Initial Jobless Claims. For the EMU we have no eco data, but ECB’s Nowotny, Hansson and Nouy speak. Spain and France tap the bond market
Currencies: Dollar Jumps On Strong US Data, Higher US Yields And Hawkish Powell
US data, US yields and Powell propel the dollar.
Yesterday, EUR/USD showed some interesting intraday swings. The pair spiked early in the session driven by an Italian “concession” to limit the budget deficit (2% in 2021), but the move couldn’t be sustained even as there was no additional negative news on Italy. During the day, the dollar gained momentum. The ADP labour report was strong. The US non-manufacturing ISM reached a cycle high and oil prices started a new up-leg after the US inventory data. US yields jumped above key technical levels, supporting the dollar. Last but not least, in a speech late in the day, Fed’s Powell confirmed its optimistic view on the economy and said that policy rate could go past neutral. The Powell comments pushed EUR/USD beyond the 1.15 support, closing at 1.1478. USD/JPY finally cleared the 114 mark to close the day at 114.53. Overnight, most Asian equity markets are hurt by the rise in (US) yields and by the stronger dollar, with Japan and Australia the exception to the rule. Several EM currencies remain under pressure. EUR/USD hovers in the 1.1470 area. USD/JPY maintains yesterday’s gain, but a potential risk-off context hampers a further decline of the yen. Today, the eco calendar only contains second tier eco data including the US jobless claims. Markets will ponder the meaning of the overnight movements and look forward to tomorrow’s US payrolls report. Yesterday, it looked that easing tensions on Italy might give the euro some breathing space. However, at the end of the day, dollar strength was the name of the game. The EUR/USD breaking below 1.15 opens the way to the 1.13 area (2018 low). If the rise in yields would trigger a risk-off move, it will probably also favour the dollar over the euro. We also keep an eye at the impact of higher yields on intra-EMU spreads! A widening could complicate the picture for European markets. So, for now there is no reason to try to catch the falling EUR/USD knife.
Yesterday, the focus for sterling trading was on PM’ May’s speech at the Conservative Party meeting May focused on ‘domestic’ issues. Her ‘analysis’ on Brexit remained at a general level but implicitly, she maintained the Chequers approach. EUR/GBP decline below the 0.89 level, but we assume it was mainly EUR/USD driven. Today, there are few UK data. Markets will look for signs of progress in the negotiations as the political noise of the Conservative party meeting is behind us. We keep a neutral bias on sterling in a day-to-day perspective.
EUR/USD: dollar jumps higher on strong US eco data and as Powell signals further tightening
