Rates: European stock markets lost key support
Risk sentiment will remain the key trading theme today, overshadowing US eco data. European equity markets lost key support last week, suggesting more downside. Core bonds profited only marginally from last week’s risk aversion though. Portuguese bonds could outperform after Moody’s reinstalled the investment grade rating.
Currencies: Dollar shows no clear trend even as risk sentiment remains fragile
The dollar wasn’t able to profit from last week a risk-off correction. The US currency again shows no clear trend this morning even as equity selling resumes in Asia. For now, we see no trigger for EUR/USD to break out of the 1.1432/1.1815 trading range. Sterling declines (moderately) as EU-UK negotiations this weekend didn’t yield any progress
The Sunrise Headlines
- US equity markets bounced back up on Friday, recovering some of its losses made earlier that week. Asian markets opened this week’s session in red, with Japan underperforming.
- Brexit negotiations are in deadlock. Brexit secretary Raab returned from Brussels yesterday after UK PM May sent him to make clear the UK cannot get on board with the current terms for Brexit.
- In Bavaria, one of Germany’s most populous states, the Christian Social Union (CSU), Merkel’s ally party, has lost major ground with only 37,4% of the votes (worst result since 1950). The leftist Green party becomes the 2nd largest party.
- Rating agency Moody’s has lifted Portugal’s sovereign credit rating back to investment-grade rating from Ba1 to Baa3 with its outlook “stable” from “positive”. Moody’s had rated the country as junk bond since 2011.
- Saudi Arabia has pushed back against US President Trump’s threat of “severe punishment”, saying it would retaliate with stronger actions. The US is accusing them of involvement in the disappearance of Washington Post writer Khashoggi.
- The European Union will commence the budget review of all members of the euro zone this week. Focus will of course be on Italy, with the Italian budget proposal possibly sent straight back, as it far exceeds the EU budget rules.
- Today’s eco calendar is very meagre in Europe. In the US, Retail Sales for September and the Empire Manufacturing index for October will be published. The release of Q3 earnings continues ,with the Bank of America today’s eye catcher.
Currencies: Dollar Shows No Clear Trend Even As Risk Sentiment Remains Fragile
USD facing mixed signals
On Friday, global (equity) markets entered calmer waters, but it didn’t provide a clear directional bias for global FX/ trading. The dollar recently failed to profit from market turmoil. The US dollar on Friday was still looking for a clear trend as sentiment improved, at least temporarily. USD/JPY hovered in a relatively tight 111.88/112.50 sideways range. EUR/USD tested the 1.16 area early in the session, but the US currency finally regained some traction as US equities rebounded and as Fed’s Evans reiterated that the Fed might have to raise the policy rate above the neutral rate as the economy continues to perform strongly. Even so, EUR/USD remained within in the established ranges. The pair finished the day at 1.1560 (from 1.1593). This morning, Asian equities fail to build on Friday’s rebound in the US, recording losses of 1%, or even slightly more. Comments from US policy makers this weekend suggest that trade relations between the US and China haven’t improved yet. The valuation of the yuan remains a source of dispute. Investors are pondering the potential impact of ongoing trade frictions on growth. For now, the impact on the USD is modest. USD/CNY trades little changed in the 6.92 area. The yen records modest gains. USD/JPY is testing the 112 big figure. EUR/USD is also little changed in the 1.1550 area. Today, US eco calendar contains the Empire manufacturing survey and retail sales. September sales are expected solid (0.6% M/M). Question is whether solid US eco data will help to restore confidence on US/global equity markets. At least for now sentiment looks still fragile. Of late, we left our ST USD positive bias and turned neutral on EUR/USD. The pair rebounded off the 1.1432 correction low. Italy remains a source of uncertainty as the country presents its budget to the EC. For now, we see no clear trigger for the EUR/USD to break out of the 1.1432/1.1815 ST range. We look out whether the dollar comes under pressure again if the correction on (US) equity markets were to resume.
Sterling lost slightly ground Friday, after a good rebound due to brexit hopes earlier last week. During the weekend, negotiations between UK’s Raab and EU’s Barnier couldn’t solve the issue of the Irish border ahead of this week’s EU summit. This failure weighs on sterling this morning. However, the damage is not excessive. EUR/GBP trades in the 0.88 area. The news might be slightly negative for sterling, but we expected sterling traders to keep a wait-and-see bias.
EUR/USD: dollar shows no clear trend as sentiment on risk deteriorates again
