- Rates: German 10-yr yield reaches lowest level since 2016
Last week’s dovish ECB signal pulled the German 10-yr yield to the lowest level since the end of 2016. A return to negative levels is likely unless growth/activity data picks up. This week’s US eco calendar is interesting, starting with retail sales today. Consensus expect a rebound after a weak December. We especially expect market reaction in case of a new disappointment. - Currencies: EUR/USD avoids break lower, at least for now
EUR/USD hovered near the bottom of the MT range on Friday. US payrolls were weak and weighed on the USD, preventing an outright break lower of EUR/USD. Still the decline of the dollar was modest. Uncertainty on (global and EMU) growth remains a potential negative for the euro. Sterling will trade more volatile as no Brexit-breakthrough has been reached yet.
The Sunrise Headlines
- US equity markets edged lower on Friday, but proved rather resilient after disappointing payrolls. Asian equities are largely trading in green this morning with Chinese indices outperforming.
- PBOC governor Yi said China and the US are agreeing on crucial issues in trade talks and FX discussions are progressing. Vice Commerce Minister Shouwen added that an enforcement mechanism must be ‘two way, fair and equal’.
- PBOC chief Yi said China has more room to lower the reserve ratio for banks, but it’s smaller than in previous years. Yi confirmed the PBOC will keep credit growth aligned with the pace of nominal GDP and better support small firms.
- UK Cabinet members are seeking last-minute concessions by the EU so UK PM May can get her Brexit deal through Parliament tomorrow. May is under pressure to announce her resignation if parliament forces an extension.
- Kramp-Karrenbauer, Germany’s CDU chief, warned for ‘European centralism’ in response to French president Macron’s ‘European Renaissance’, as she thinks shifting more powers from national members to the EU level is not a solution.
- The Bank of England asked some UK banks to hold three times more easy-tosell assets to cope with a possible no-deal Brexit market meltdown, so they are able to withstand 100 days of ‘severe stress’, more than the usual 30 days.
- Today’s US eco calendar contains US retail sales and German industrial production data for January. The US kicks of this week’s government auctions and sells 3-yr Notes today. BoE’s Haskels speaks
Currencies: EUR/USD Avoids Break Lower, At Least For Now
EUR/USD avoids break lower, for now …
EUR/USD initially hovered in the low 1.12 area on Friday, as investors pondered the consequences of Thursday’s easing in ECB interest rate guidance. Doubts on growth were the focus for global trading going into the US payrolls report. The jobless rate declined to 3.8% and wages rose a stronger than expected 3.4% Y/Y, but the most important indicator of the report, net job growth, missed the consensus by a big margin. The report initially triggered a further risk-off repositioning, but investors soon deliberated whether this was more than a oneoff. The damage for US equities and for the dollar stayed modest. USD/JPY closed at 111.17 (from 111.58). EUR/USD finished the day at 1.1235 (from 1.1193).
This morning, sentiment on Asian markets is not too bad considering the turmoil at the end of last week. Most indices show modest gains, with China outperforming. Amongst others, markets apparently expect soft growth prospects to potentially being mitigated by soft monetary and fiscal conditions globally. The dollar shows no clear trend with the trade-weighted index near 97.40. EUR/USD (1.1235 area) is holding near Friday’s intraday peak. USD/JPY is trading in the low 111 area.
Today (and later this week) markets will keep a close eye on regional and local growth. Activity data even from EMU member countries might have some more impact on euro trading than is usually the case. US retail sales will also get ample attention. A modest rebound (0.6% M/M control group) is expected after an unexpected sharp December decline. The USD reaction function is not that evident as markets will look to the US picture and to the global story. USD/JPY will be most straightforward. The reaction of EUR/USD is less evident, especially in case of a poor figure. EUR/USD is struggling not to fall below the bottom of the 1.12/1.16 MT trading range. After last week’s ECB decision, the euro has no prospect on additional interest rate support anytime soon. In this context, it is not evident for EUR/USD to rebound even in case of soft US data. Uncertainty on global growth might weigh on EUR/JPY and on EUR/USD. We remain cautious on EUR/USD long exposure. The single currency needs better EMU eco data. This will probably take time.
There was no break-through on the Brexit negotiations this weekend. So, talks in Brussels will continue today. With no agreement just one day before the key Pariamentary Brexit vote, uncertainty on the political developments in the UK is again growing. Is PM May’s job again at risk? We expect sterling investors to remain mostly side-lined. That said, low visibility and the risk of a binary/negative outcome are in theory sterling negative
EUR/USD: struggles not to fall below the 1.12 range bottom
