Markets
Global core bonds initially lost ground yesterday as risk-sentiment improved. However, swings in German Bunds and US Treasuries were again modest given the swings in the equity markets. At the ECB press conference, president Draghi confirmed the economic assessment from September and maintained his mildly positive tone despite growth concerns. Risk sentiment changed when major US tech companies published disappointing earnings (Amazon, Alphabet (Google)) after the close. Treasuries regained ground into US close. The US yield curve shifted higher with changes between 1.3 bps (10-yr, 30-yr) and 2.0 bps(5-yr). German yields rose marginally ranging from 0.2 bps (10-yr) and 0.8 bps (2-yr). Core bonds continued to rise at opening this morning as risk sentiment is again negative in Asia. Eye catcher on today’s eco calendar is the US Q3 GDP. A solid report is probably needed to reverse the down in US yields. A disappointing outcome results could confirm investor concerns on slowing growth. This scenario will give some backwind to US Treasuries and could push US yields even further down. The US 10-y yield needs to regain the 3.10/12% area soon to prevent a deterioration in the ST technical picture.
European equity markets resisted the equity sell-off in the from the US and Asia yesterday, but the direct impact on the dollar (and on core bonds) was modest. EUR/USD settled in a tight range in the low 1.14 area. The pair gained a few ticks early at the ECB press conference as president Draghi basically confirmed the economic assessment from September, but the gain was short lived. The pair even set a new ST correction low later. The move was probably mainly USD strength as US equities rebounded after Wednesday’s sell-off. EUR/USD closed the session at 1.1375. Overnight, Asian equities are again under pressure. Korean markets are underperforming. The USD/CNY (6.96) briefly touched beyond the end 2016 peak, even as China’s PM Li reiterated that the country won’t recur to a competitive devaluation. Negative risk sentiment also weighs on the Aussie dollar, with AUD/USD (0.7028) touching the lowest level since February 2016. EUR/USD (1.1365 area) hovers within reach of yesterday’s low. The yen gains a few ticks (USD/JPY 112.15). Later today, the first estimate of the US Q3 GDP will be closely looked at. Growth is expected at 3.3% Q/Qa (from 4.2%). We assume that the dollar needs a really good figure. Otherwise, markets might question the Fed rate hike intentions going forward. Sentiment on risk remains a wildcard. Risk-off weighs on USD/JPY, but the impact on EUR/USD is less obvious. Of late, we had a cautious USD positive view. EUR/USD is drifting in lower in the 1.1621/1.13 consolidation pattern. There is no reason to row against the tide for now. However, USD bulls might feel some vertigo when nearing the EUR/USD 1.1301 2018 low.
Sterling remained in the defensive yesterday as ECB’s Draghi made some cautious remarks on the Brexit process. Voice from the UK only confirmed that it is very difficult to reach on consensus within the government on the Brexit strategy. With no important eco data on the agenda, we expect sterling to remain in the defensive. News Headlines
Richard Clarida, Fed’s new vice-chairman, signaled more gradual rate rises are ahead despite US President Trump’s attacks. He added that there is room for the US jobs market to strengthen further without fuelling excessive inflation, suggesting he is not set to increase short-term interest rates too aggressively.
Japanese PM Shinzo Abe and Chinese PM Li Keqiang announced that they will work together on the North Korea issue as they have major responsibility for ensuring regional security. Both countries also signed a bilateral currency swap agreement of $30 billion aimed at enhancing financial stability.
