Sunrise Market Commentary
- Rates: Bund resistance should hold, underperformance US Treasuries?
Risks for the German IFO are on the upside of expectations which should keep the Bund below key resistance (164.90). EMU markets remain sensitive to French election news, which is a wildcard. The FOMC Minutes aren’t expected to reveal much new info after last week’s Yellen testimony. We nevertheless think that US Treasuries will underperform Bunds. - Currencies: EUR/GBP tests 0.8450 support
The dollar remains in the drivers’ seat as the reflation trade continues. EUR/USD tests the short-lows in the low 1.05 area, but this decline is also for an important part due to euro weakness. For now, this pattern might continue. Euro weakness also pushes EUR/GBP for a new test of the 0.8450 support area.
The Sunrise Headlines
- US stock markets extended their record race, gaining more than 0.5% after Monday’s public holiday. Overnight, Asian equity sentiment is less bullish, with most indices recording small gains.
- Shares in Fannie Mae and Freddie Max tumbled by more than a third on after a court struck a blow to a group of investors in their quest to overturn the government’s decision to take all of the US mortgage giants’ profits
- China home prices increased last month in the fewest cities in a year, signalling property curbs to deflate a potential housing bubble are taking effect. New home prices, excl. subsidized housing, gained last month in 45 of the 70 cities
- BoJ Governor Kuroda said the chance the central bank will deepen negative interest rates is low for now, backing market expectations that no additional monetary easing is forthcoming in the near future.
- The head of Australia’s central bank, Lowe, gave the clearest signal yet that further cuts in interest rates would not be in the national interest as the danger of a debt-fuelled boom and bust was just too severe.
- Political uncertainty is slowing trade growth, a World Bank report has concluded, indicating that the rise of Donald Trump may already be casting a shadow over the global economy.
- Cleveland Fed Mester said policy makers don’t want to surprise the market on interest rates and they have to be “nimble” to adjust their outlook amid global and domestic risks.
- Today’s eco calendar contains German IFO, the second reading of UK Q2 GDP, finale EMU CPI data, US existing home sales and FOMC Minutes. Fed Powell speaks on the economic outlook and Germany and the US tap the market
Currencies: EUR/GBP Tests 0.8450 Support
By default’ USD buying continues
EMU PMI’s were stronger than expected yesterday. Core (German and US) yields and equities rose after the PMI release, but didn’t help the euro. France remained a euro negative and the resumption of the reflation trade supported the dollar. The rally slowed later in the session as US bond yields softened. Even so, the US currency still closed the session with decent gains. EUR/USD closed the session at 1.0536 (from the 1.0614) area. USD/JPY finished the day at 113.68 (from 113.10).
Overnight, most Asian equities indices follow the rally from the US yesterday. Japanese equities struggle to avoid loses as USD/JPY lost modest ground. In a speech in Singapore, Fed Mester sounded a bit dovish as she said that the Fed doesn’t want to surprise markets on interest rates. The dollar, especially USD/JPY, softened a bit. At the same time, US bond yields maintain a slightly upward bias. So, there is again a slight discrepancy across markets. USD/JPY is trading near 113.50. EUR/USD changes hands in the 1.0525 area. RBA’s Lowe warned on the debt load of Australian households. At the margin, the risk of too high debt might make the RBA cautions to cut rates further. AUD/USD rises slightly overnight, currently trading in the 0.7690 area.
Today, the German IFO is expected slightly softer at 109.6 (from 109.8). After strong German PMI’s, an upward surprise is possible. In the US, the Minutes of the January FOMC meeting are in focus. They probably won’t give us new insight in the timing of the next rate hike. However, since the meeting, economic data have been very strong and inflation surprised on the upside. Yellen was more hawkish at the testimony before Congress as she said “it would be unwise to wait too long before tightening”. Several governors pointed to the possibility of a March rate hike. A slightly hawkish tone in the Minutes shouldn’t come as a surprise. Over the previous days, French election worries fuelled uncertainty on European markets (French spread widening). It weighed on the euro and supported USD/EUR gains, as the global/US reflation trade continues. Call it by default USD buying/euro selling. USD/JPY underperformed the USD/EUR gains. The political uncertainty in Europe will continue to play its role. At the same time, the focus in the US will turn to Trump’s fiscal plan and Fed comments. The combination of both factors suggests further USD buying against a weak euro. We maintain a more cautious bias on USD/JPY. Selling pressure from EUR/JPY might continue to weigh.
Global context. The dollar corrected lower since the start of January as the Trump reflation trade slowed down. Two weeks ago, the dollar bottomed out, supported by Trump’s tax promise. Underlying euro weakness due to political uncertainty in the area is a factor too. We see 1.0874 as solid resistance and favour a sell EUR/USD on upticks approach. The downside test of USD/JPY is also rejected. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) remains a key support. The comments of Yellen before Congress (and of other Fed members) were USD supportive, but had little lasting impact on yields. We keep a cautious USD positive bias, but remain more cautious on the upside potential of USD/JPY compared to USD/EUR.
EUR/USD: testing recent low on euro softness and USD strength
EUR/GBP
EUR/GBP sliding below 0.8450 support.
Yesterday, sterling gained ground against an overall weak euro, but stabilized against broadly strong dollar. At a hearing before Parliament, BoE’s Carney defended the assessment of the February inflation report. The central bank raised its growth forecast, but kept its inflation forecast unchanged as the BoE said that unemployment could decline further before wages rise. Some BoE governors disputed Carney’s assessment. Even so, sterling remained well bid. Especially, EUR/GBP was pressured by the decline of EUR/USD. The pair closed the session at 0.8448, testing the key 0.8450 support. Cable close the session at 1.2474 (from 1.2463).
Overnight, EUR/GBP is extending its test beyond the 0.8450 support. Euro weakness remains the driver. The first stage of the Brexit debate in the House of Lords didn’t bring any new roadblocks for PM May. The nest step is scheduled for early next week. The risk-on context is also a ST sterling supportive. Later today, the details of the UK GDP Q4 GDP will be published. A confirmation of the 0.6% Q/Q and 2.2% Y/Y growth is expected. We don’t expect a lasting impact on sterling trading. EUR/GBP recently hovered in a tight range north of the 0.8450 support. Sterling sentiment softened slightly as the market feels that a BoE rate hike is still very far away. At the same time, euro softness weighed on EUR/GBP.
Longer term, we have a sterling negative view as the Brexit still has to (negatively) impact the UK economy. However, this is no issue at this stage. Euro weakness prevails. A sustained break below the 0.8450 might trigger additional stop-loss selling. The EUR/GBP 0.8304 correction low is the next key support.
EUR/GBP: 0.8450 support again under (heavy) pressure
