Rates: Stellar payrolls lift US yields
The US 10-yr yield closes in on the 3.26% cycle high following Friday’s stellar payrolls. Wage growth accelerated to 3.1% Y/Y. Heavy US and EMU supply are negative for core bonds this week. Main events this week are US mid-term elections, the FOMC Meeting and new EC forecasts. We start the week with a downward bias for bonds.
Currencies: USD holding strong, but rally to take a breather ahead of US elections
At the end of last week, the dollar remained well bid, supported by solid US payrolls. However, a test of the EUR/USD 1.13 support area was rejected earlier last week. Interest rate differentials remain a big support for the US currency. However, investors might take a wait-and-see approach going into the US mid-term elections.
The Sunrise Headlines
- US equity markets lost ground on Friday with tech shares (Nasdaq -1.04%) underperforming. Asian markets opened this week’s session with losses. Hong Kong (-2%) underperforms, followed by Japan and China.
- The US have re-imposed sanctions on Iran. Eight countries are expected to be given temporary exemptions to ensure crude oil prices are not destabilized. Iran’s Rouhani said Iran will break the US sanctions and continue to sell oil.
- Brexit secretary Raab urges PM May to back a plan that gives the UK the right to pull out of any ‘backstop’ plan with just 3 months’ notice. This follows on rumours that May wants to keep the UK in a customs union after Brexit.
- Chinese president Xi Jinping announced that China will cut tariffs and continue to reduce investment barriers. His comments come after positive talks with US President Trump last week, saying negotiations are moving in the right direction.
- The Chinese Caixin services PMI unexpectedly fell from 53.1 to 50.8. New business dropped to the lowest since November 2008, despite staying in expansionary territory, indicating an obviously weakening demand for services.
- Japanese PMI’s rebounded from a weather-related dip in September, rising to a six-month high in both the services (52.4) and manufacturing sector (52.5). November data will be important to assess the resilience of the economy.
- Today’s eco calendar contains the ISM Non-Manufacturing Index for October in the US. The Markit/CIPS Services/Composite PMI’s are released for the UK. ECB’s Vice President Guindos speaks in Brussels and the US taps the market
Currencies: USD Holding Strong, But Rally To Take A Breather Ahead Of US Elections
USD rally to take a breather going into US election
On Friday, EUR/USD initially extended the technical rebound that started on Wednesday. At that time, a test to break below the year low in the 1.13 area failed. Some positive noise on the US-China trade talks might have been a slightly euro positive, too. However, fortunes for EUR/USD changed again Friday afternoon. US payrolls were solid as expected. Later in the session, the euro suffered from press reports that the ECB was pondering the options to replace maturing TLTROs by a new source of cheap funding. EUR/USD declined came off the intraday peak in the mid 1.14 area and closed at 1.1388. USD/JPY also profited from the rise in US yields and finished the session at 113.20 (from 112.70).
This morning, investors in Asia take a defensive approach with indices across the region drifting into negative territory. There is no concrete positive news from the US-China trade talks. China’s (Caixin) PMI’s showed an unconvincing picture, too. The prospect of a likely further rise in US yields is no help for regional markets. The outcome of the US mid-term elections is also a source of uncertainty. The dollar is holding relatively strong. EUR/USD trades just below 1.14. USD/JPY remains well bid even as BOJ’s Kuroda questioned the effectiveness of large scale monetary easing. Later today, the eco calendar in the EMU is thin. The US non-manufacturing ISM is expected to ease from 61.6 to 59.1. A relatively soft figure is possible. Any market reaction might be subdued, as markets await the outcome of the US elections. We start the week with a neutral bias on EUR/USD. The USD continues to enjoy ample interest rate support, but last week’s rejected rest of the low 1.13 area/2018 low suggests that more positive news is needed to trigger further USD gains beyond important technical levels. Positive Brexit headlines might be slightly euro supportive, but we don’t expect this to be a game-changer for the euro. More sideways trading in the 1.13/1.16 range might be on the cards. Within this range, a sell-on-upticks approach remains favoured.
At the end of last week (and this weekend) the news flow turned more GBP-supportive (rather hawkish BoE speak, positive Brexit headlines). EUR/GBP spiked lower at the start of Asian trading this morning, but sterling gains could not be sustained. Sentiment on sterling improved, but we assume that concrete progress is needed for sterling to strengthen beyond the EUR/GBP 0.8723/0.8696 intermediate support.
EUR/USD: dollar holiding strong, but EUR/USD 2018 low proves to be tough support
