Rates: Carnage on US stock markets
The stock market sell-off remained the key trading theme with US indices this time leading the way lower, closing 2.4% to 4.4% lower. Core bonds profit, but the magnitude of the moves is smaller. We don’t think that correction on bourses is already over. The ECB will keep policy unchanged, but Draghi might sound slightly more cautious on the outlook.
Currencies: Dollar profits only modestly from global risk-off
EUR/USD dropped on a disappointing EMU PMI’s yesterday. However, later the dollar rally stalled as US markets were hard hit in the risk-off correction, preventing the dollar to further play its safe haven role. Today, the focus will be on the ECB press conference and on equities. It might not be evident for the dollar to really take the lead if global uncertainty persists
The Sunrise Headlines
- US equity markets lost substantial ground yesterday as all major indices lose more than 2%, with Nasdaq (-4.4%) underperforming. Asian markets opened in deep red as well with Japanese indices falling hardest
- Former US president’s Barack Obama and the Clinton family were among the targets of suspected package bombs delivered to highly ranked Democrats and the news station CNN. The FBI said it was investigating it as an act of terrorism.
- South Korea’s growth slowed more than expected, with a GDP growth of only 0.6% in Q3 (QoQ, 0.8% exp.) and 2.0% year-on-year (2.3% exp.). This growth slump could lead to the central bank refraining from tightening policy this year.
- The Bank of Canada raised its benchmark interest rate for a 3rd time this year by 0,25% to 1.75%. The BoC acknowledged for the first time in more than a decade it expects to completely remove monetary stimulus from the economy.
- The Saudi Crown Prince Mohammed bin Salman, widely expected to be behind the Khashoggi murder, has called the murder hideous and pledged to bring the killers to justice. He also struck a conciliatory tone with Turkey.
- Marek Mora, board member of the Czech National Bank, said he sees a 50/50 chance that he will support another interest rate hike at the next board meeting on November 1st. The CNB already hiked four times this year.
- Today’s eco calendar contains US Jobless Claims and German IFO business sentiment. The ECB and Norges Bank meet. Fed’s Vice Chairman Clarida speaks, the US taps the market and Amazon & Alphabet report earnings
Currencies: Dollar Profits Only Modestly From Global Risk-Off
Dollar profits only modestly from global risk-off
EMU PMI’s rekindled fears for a meaningful slowdown in the region yesterday morning. EUR/USD tumbled from the 1.1475 area to fill bids near 1.1380 early in US dealings. Later, US events/data brought some balance to the bad news story. US new home sales disappointed again (-5.5% M/M). Headlines on bomb packages for several democrats didn’t help to comfort markets. A genuine US equity sell-off accelerated throughout the session. The move suggests investor worries that also the US economy might near a cycle peak, despite solid earnings reported so far. As was the case earlier in this (US) equity correction, the dollar didn’t profit any further. EUR/USD stabilised in the 1.14 area. USD/JPY drifted off the intraday peak to close the day at 112.26. This morning, the equity sell-off continues in Asia. Tech stocks are again hit hard with Japan underperforming. Losses on other markets are substantial (1.5% to 2.5%), but could have been even worse given the sell-off in the US. Other interesting observation, EM currencies like the INR, IDR and even CNY are holding up reasonably well given the global context. EUR/USD tries to regain the 1.14 barrier. USD/JPY dropped (temporarily?) below 112. Later today, the IFO German confidence and US durable orders are interesting. However, the market focus will be on equities and on the ECB press conference. We assume Draghi to stay neutral-to-positive in its guidance. Question is whether markets will believe him given recent data and tensions on Italy. Stocks remain a wildcard. As US markets are currently hit at least as hard as Asian/European markets. It is less evident for the dollar to take up its safe haven role. Recently, we saw some ‘by default’ USD buying even as the move showed little conviction. EUR/USD drifted lower and cleared the last support ahead of the 1.1301 correction low. A test of this low is still possible. As markets apparently also question US future growth, we don’t anticipate a EUR/USD break to a new 2018 low yet. The yen performance also wasn’t convincing of late. A break below USD/JPY 111.63 could trigger further yen buying.
Yesterday, UK PM May again survived a meeting with conservative MP’s. However for now there is no indication that a solution is coming closer. Sterling remained in the defensive. Today, there are no UK eco data. Sterling trading might be a bit more affected by global factors. We see risks for ongoing sterling underperformance against the dollar and, to a lesser extent, the euro in case of ongoing global market tensions
EUR/USD drops below 1.14 support, but sustained break of 1.1301 year low looks not that evident
