Rates: German Bunds lifted by European risk aversion
Core bonds gained ground yesterday as risk sentiment deteriorated on Brexit turmoil with German Bunds outperforming US treasuries. US Treasuries paired some of those gains on strong US equities, led by technology and banking shares. As there is no economic data to steer trading, general risk sentiment will be today’s driver.
Currencies: Sterling hammered on Brexit turmoil. Euro holding fairly strong
Sterling nosedived yesterday as it became clear that it would be very difficult for PM May to get a Brexit deal approved. Initially the dollar profited, but dollar gains/euro losses evaporated later. Today, the eco calendar is thin. Brexit remains a source of uncertainty. However, for now, the dollar again fails to fully play its role as safe haven
The Sunrise Headlines
- US equities rebounded following a lacklustre start yesterday. Tech stocks outperformed (Nasdas + 1.7%). Asian stock markets are trading mixed with Japan underperforming (-0.5%).
- Fed’s Powell said on Thursday he will review the way the Fed guides the US economy. Its goals will remain unchanged, but the process – ending in mid-2019 – could lead to a rethink of the used tools and the way it communicates.
- To support its currency the Mexican central bank raised interest rates to 8% whilst suggesting further increases ahead. The peso came under heavy pressure as several recent market unfriendly policy decisions rattled markets.
- British environment Secretary Gove rejected May’s offer to make him Brexit Secretary because he isn’t allowed to renegotiate the deal – which May fiercely defended during a Parliamentary Q&A and a press conference afterwards.
- US Secretary of Commerce Wilbur Ross said he still expects a China deal eventually but probably not by January, leaving open the possibilities for a tariff increase to 25% as soon as early next year.
- After the Swedish parliament voted against Moderate party leader Ulf Kristersson as new PM, Centre Party leader Annie Lööf will take control of government formation talks to break the 2 month lasting political stalemate.
- Today’s economic calendar is rather uninspiring. Final EMU CPI data are due this morning. The US publishes industrial production data later today. ECB President Draghi and Bundesbank President Weidmann are scheduled to speak
Currencies: Sterling Hammered On Brexit Turmoil. Euro Holding Fairly Strong
Sterling hammered on Brexit chaos
Political turmoil in the UK initially caused a global risk-off repositioning yesterday. The dollar spiked higher and EUR/USD dropped below the 1.13 mark. However, the Brexit fall-out on global trading eased later. US eco data were mixed. Equities recovered and the USD reversed earlier gains. Rumours on progress in the US China-talks supported global risk sentiment even as US officials downplayed the progress. Fed speakers Bostic and Kashkari indicated that the US monetary policy is moving closer to a neutral stance, suggesting that they might be in favour of a slowdown in policy normalisation next year. EUR/USD finished the session at 1.1328 (from 1.1310 on Wednesday). USD/JPY closed at 113.64, almost unchanged. So, the usual safe havens (USD, yen) didn’t profit much from the Brexit turmoil. At the same time, the euro held up rather well. This morning, Asian markets profit only modestly from the rebound in the US yesterday evening. Tech stocks underperform again (Nvidia results). Markets also still try to assess whether there is any progress in the US-Sino trade talks in the run-up the G20 meeting later this month. Chinese equities slightly outperform. Japan underperforms. Brexit remains a source of caution. USD/JPY (113.30 area) is drifting south. EUR/USD is changing hands in the 1.1345 area. Later today, the eco calendar is only moderately interesting with the final EMU CPI and the US production data. ECB’s Draghi and Bundesbank president Weidmann speak in Frankfurt. Evidently, global (FX) traders will continue to keep a close eye at the Brexit sage/drama developing in London. Over the previous days, we had a neutral bias on EUR/USD, expecting more erratic trading in the 1.11/1.15 trading band as many conflicting topics are in play. We maintain that view. Given the potential event risk on Brexit, caution on EUR/USD long exposure remains warranted. That said, the dollar disappointed yesterday. Are investors turning less convinced on the Fed rate hike intentions in 2019?
Sterling was hammered yesterday as the political drama in London suggested that it would be very difficult for PM May to get any Brexit deal approved in Parliament. The risk of outright political chaos is growing. EUR/GBP jumped from the 0.87 area to close the day at 0.8867. The outcome of the Brexit process is impossible to predict with several binary political options possible. Some of these outcomes (e.g. a second referendum) might in the end turn out sterling supportive. However, given almost ‘zero visibility’ on UK political developments in the near future, we avoid sterling long exposure.
EUR/USD: euro resists Brexit turmoil quite well
