- Rates: Looking for new clues
Technically-inspired and sentiment-driven trading characterizes core bond moves the past days. The thin eco/event calendar today and tomorrow, suggests more of the same. Italian BTP’s profited from a relief rally following Wednesday’s bumper 15y syndicated deal. - Currencies: How long will USD maintain the benefit of the doubt?
The dollar rebounded this week as markets focused on US economic outperformance (especially versus EMU) instead of on a softer Fed. However, as there is also plenty of event risk in the US, this trade might run into resistance soon. Sterling rallied on market hopes for a softer Brexit or a delay. This move might also halt unless there are concrete signs of progress
The Sunrise Headlines
- US equity markets gained modest ground yesterday as earnings season started better than expected. Asian equities opened mainly in green, but very cautiously.
- UK PM May remains in the saddle as her government survived the no-confidence vote, called by opposition and Labour leader Corbyn, very narrowly (325/306). Afterwards, she invited opposition leaders to join the talks.
- US federal prosecutors are said to take a more aggressive stance against the Chinese company Huawei, as the investigation of the tech giant for stealing trade secrets from US partner companies is entering an advanced stage.
- Greek PM Tsipras survived a 4th vote of no confidence (151/149) of his term in office. He lost majority after his coalition partner pulled out of the government in protest over a reform with its northern neighbouring Republic of Macedonia.
- Italian PM Conte said that his cabinet will approve the final budget today and confirms that it contains key measures of income support for the poor and a lower retirement age for some.
- Fed’s beige book paints a rather positive picture for the US economy but said optimism is fading among businesses. Trade disputes, government shutdown and rising borrowing costs causes companies to scale back planned investments.
- Today’s US economic calendar contains the Philadelphia Fed Business Outlook for January and weekly jobless claims. The earnings season continues (Morgan Stanley, Netflix,…) and several ECB/Fed governors speak. Spain taps the market.
Currencies: How Long Will USD Maintain The Benefit Of The Doubt?
USD rally to shift into lower gear?
The (trade-weighted) dollar continued its rebound yesterday. Doubts on the EMU economy counterbalanced expectations for a cautious Fed and capped the EUR/USD rebound from the start of the year. US equities outperformed and interest rate differentials widened in favour of the US dollar. Good results from major US banks gave investors some further confidence on the resilience of the US economy. The Fed Beige book reported respondents to become less optimistic but had little impact on the dollar. EUR/USD closed at 1.1392 (from 1.1413). USD/JPY ended the day at 109.09 (from 108.68). Asian indices show a mixed picture This morning. Headlines on the US probing Huawei is bringing the China-US trade tensions again to the forefront, slowing the global risk rally. Changes in the major USD cross rates are limited, but the (trade-weighted) dollar (DXY 96.15 area) maintains a tentative upward bias. EUR/USD is trading near 1.1385. USD/JPY is running into resistance. The pair struggles not to fall back below 109. Later today, the EMU CPI is expected to be confirmed at 1.6% Y/Y. US housing data are postponed due to the government shutdown. The Philly Fed Business outlook is expected little changed (9.5 from 9.1) after a decline in previous months. Maybe there are downside risks. Last week, the dollar eased on a softer Fed. This week the focus turned to the relative performance between the US and EMU economies. Markets currently 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, but the day day-to-day momentum is EUR/USD negative. We look for a bottoming out process. EUR/USD 1.1309 is first minor support. We also look out whether the dollar can maintain its positive spin if the (US-inspired) risk rally and the rise in US yields were to slow.
Sterling maintained recent gains against the euro and the dollar yesterday, as markets saw a rising chance of a delay of the March 29 Brexit deadline and/or a softer Brexit. UK PM May surviving a no-confidence vote, didn’t change the overall picture on Brexit. PM now tries to work out a new deal with parliament. We don’t expect a break-through anytime soon. If so, the recent sterling rally might run into resistance and more sideways, erratic-like sterling trading might again be on the cards with Monday’s appearance of PM before Parliament the next milestone. The low EUR/GBP 0.88 area is first minor support
USD (trade-weighted): Dollar profits as markets still see relative outperformance of the US economy.
