Rates: No adverse reaction to brexit-vote defeat
UK PM May’s brexit defeat didn’t came as a surprise with global markets taking it relatively well. Risk sentiment will probably set the tone as the eco calendar is again beheaded by the US government shutdown. We don’t expect technically significant moves on core bond markets. German Bunds tend to outperform US Treasuries this week.
Currencies: Dollar again received the benefit of the doubt.
USD traders adapted positions last week to a softer Fed approach, weighing on the dollar. This week the focus turned to the relative growth performance between the US and Europe. For now the perception is more EMU underperformance weighing on EUR/USD. Sterling is holding gains, despite PM May’s Brexit deal being rejected by a huge majority
The Sunrise Headlines
- US equity markets gained ground yesterday with technology shares outperforming (Nasdaq +1.17%). Asian equities opened mixed this morning with Japanese indices underperforming on a strong yen and disappointing data.
- The UK Parliament rejected PM May’s Brexit deal very decisively (432n/202y). Labour leader Corbyn tabled a vote of no confidence in PM May, held tonight. She is expected to survive, but it remains very unclear what will happen next.
- ECB chair Draghi said the euro-area economy isn’t headed for a recession, as he addressed the EP. He added, however, that the softening momentum could last longer than expected and underscored the need for ECB stimulus.
- Kirsten Gillibrand announced she will join the 2020 race for the US presidency. Gillibrand, a US Senator for New York, is a prominent advocate for women’s rights and an outspoken critic of Donald Trump.
- China’s PBoC made its biggest daily cash injection ($83bn), evidence of further policy easing. However, this is common ahead of the Spring Festival to avoid a credit squeeze as people spend extra and companies need to pay their taxes.
- Japanese producer price inflation decreased in Dec. with -0.3% (M/M) and declines to 1.5% (Y/Y), down from 2.3% in Nov. and below the 1.8% expectations. Machine orders dropped to 0.0% in Nov., down from 7.6%.
- Today’s economic calendar contains US NAHB Housing Market Index and UK & German (final) inflation readings. BoE Carney speaks. The US Federal Reserve Beige Book is released and Germany taps the bond market
Currencies: Dollar Again Received The Benefit Of The Doubt
EUR/USD extends decline on EMU growth doubts
The euro stayed in the defensive yesterday. European equities couldn’t maintain the positive momentum from Asia. This underperformance weighed on the euro. Euro selling accelerated after the publication of mediocre (but as expected) German 2018 growth (1.5%). A poor Empire manufacturing survey weighed temporarily on the dollar, but euro selling resumed soon. ECB’s Draghi said he didn’t see a recession ahead, but acknowledged recent loss of momentum in growth. Ample policy stimulus will still be needed. Brexit-related uncertainty was also no help for the euro. EUR/USD closed at 1.1413. USD/JPY fared better and profited from a US equity rebound to close the session at 108.68. This morning, Asian equities fail to join the risk rebound from the US yesterday evening and are trading mixed. The dollar stabilizes. EUR/USD is changing hands in the low 1.14 area. USD/JPY (108.40) is slightly declining as the risk rebound eases. There are only second tier data in EMU today. The publication of the December US retail sales is postponed (shutdown). The Fed Beige book preparing the Jan 30 meeting might contain some ‘anecdocal evidence’ on the health of the US economy. Last week, the dollar softened as markets adapted positions in line with a more cautious Fed. This week the focus turned to the expected relative performance between the US and EMU economies. For now, markets tends to see more risks to EMU growth than is the case for the US. This balance might tilt again (e.g. due to the shutdown), but for now the dollar gets the benefit of the doubt. We still see no hard case for a sustained USD rally going forward, but for now day day-to-day EUR/USD momentum is again negative. We look for a botomming out process. EUR/USD 1.1309 is first minor support.
EUR/GBP traded quite volatile in the run-up to the ‘meaningful vote’ yesterday. In some kind of erratic trading, sterling came under pressure in the hours just before the vote, but strengthened afterward even as PM May’s deal was rejected by a huge majority. Today, the labour Party will trigger a no-confidence vote against the government, but May might survive it. From a market/sterling point of view, sterling traders assume that a delay of Brexit beyond March 29 is likely. This scenario gives sterling some downside protection short-term. Some further technical sterling gains might be on the cards short-term, but we assume that a sustained sterling rebound will be difficult as long as political visibility remains as low as it is right now.
EUR/USD: dollar again gets the benefit of the doubt, at least for now
