- Rates: US Treasuries rally on market jitters ahead of Fed
Global core bonds were mixed yesterday. Ongoing growth concerns and slumping oil prices caused US equities to slide to a multi-month low. US Treasuries heavily outperformed German Bunds. With only secondary housing data in the US and IFO Expectations in Germany, risk sentiment will remain in today’s driver’s seat ahead of tomorrow’s Fed meeting. - Currencies: Diminishing interest rate support prevents USD to play its safe haven role
Yesterday, the dollar lost modest ground intraday. Overall uncertainty caused investors to question the Fed’s rate hike intentions for next year. Interest rate differentials narrow in the disadvantage of the dollar. Today, USD traders will further countdown to tomorrow’s Fed decision. Will the USD gradually stop losing interest rate support?
The Sunrise Headlines
- Wall Street has put up another dismal performance, suffering 2%+ losses. Nasdaq now joined the Dow Jones and S&P 500 in the red for the year. Asian stock markets slide as well, with setbacks ranging between -1% and -2%.
- UK Labour leader Corbyn suggested a motion of no-confidence in PM May, but was rapidly rebuffed by back benching Tories and the DUP who said to be unwilling to vote with Labour, even as they oppose May’s brexit deal.
- The NAHB housing market index dropped unexpectedly from 60 to 56 in December, the weakest level since 2015 and providing more evidence that borrowing costs and property prices are cooling the US housing market.
- Chinese President Xi offered no specific new measures to boost the economy at a high-level conference. China Daily earlier reported that individual income tax cuts will be a priority for the Chinese government next year.
- Chinese US Treasuries’ holdings fell a fifth month straight in October, by $12.5bn to $1.14tn and equalling mid-2017 levels. Total foreign holdings dropped by more than $60bn, the largest decline since November 2016.
- WTI crude closed below $50/barrel for the first time since October last year. Rumours suggest a big jump in US inventories ahead with others worrying about OPEC’s ability to stick to next year’s production cut agreement.
- Today’s economic calendar contains US housings starts and building permits and German Ifo Business sentiment. New Zealand confidence data beat consensus this morning, lifting NZD/USD from 0.68 to 0.6850.
Currencies: Diminishing Interest Rate Support Prevents USD To Play Its Safe Haven Role
USD losing interest rate support
Uncertainty on the global economy continued to haunt (equity) markets yesterday. US equities were hit hard and investors questioned the path of further Fed rate hikes in 2019. Poor US data, including a substantial further decline in NAHB housing confidence added to uncertainty. US yields nosedived. Sentiment on markets outside the US also turned further negative, but the loss of interest rate support this time prevented the dollar to fulfil its safe haven role. The US currency underperformed the euro and the yen. EUR/USD closed the session at 1.1348 (from 1.1306). USD/JPY finished at 112.83 (from 113.39). The risk-off trade spreads further to Asia overnight, even as losses are smaller than in the US yesterday. In a long-awaited speech, Chinese president XI Jinping confirmed the need for further reforms but didn’t provide much info on new initiatives to address the current slowdown or on the US-China trade relations. The dollar maintains yesterday’s decline. EUR/USD hovers in the 1.1340 area. The yen profits (albeit modestly) from a safe haven bid. USD/JPY trades in the 112.60 area. The yuan (USD/CNY 6.8970 area) trades little changed despite the risk-off. The kiwi dollar was supported by strong domestic confidence data. NZD/USD rebounded to the 0.6850 area after recent setback. Later today, the German IFO business confidence will be published. In the US, housing starts and permits are scheduled for release. On both sides of the Atlantic, markets look for clues on a potential further slowdown. Recently, the repositioning on US markets was at least as violent as was the case in most non-US markets. Question is whether the USD will lose further interest rate support going into tomorrow’s Fed policy meeting. We expect the Fed to remain much more positive on the economy (and on policy normalisation) compared to current market pricing. In theory, this should support the USD. However, at least until now, the market wasn’t inclined to embrace a (modestly) positive US eco scenario. The dollar traded rather neutral and didn’t profit from safe haven flows. More technical trading in the EUR/USD 1.12/1.15 trading range might be on the cards going into the Fed rate decision. EUR/GBP didn’t go anywhere yesterday and meandered in the high 0.89 area as the political stalemate on Brexit persists. An attempt of labour to trigger a no confidence vote failed. UK PM May indicated that she will continue negotiations with the EU going into early next year. This might bring some temporary calm for sterling. Still we avoid sterling long exposure.
EUR/USD: a loss of interest rate support prevents to dollar to play its traditional safe have role
