- Rates: Limited upside for core bond yields
Yesterday’s rise in core bond yields proved fragile and temporary as rates already decline again this morning. The trade truce won’t alter the Fed’s intentions in the near term and that’s likely to be confirmed by Fed’s Williams and Mester later today. Against the background of a backloaded eco calendar we expect core bond rates to have limited upside. - Currencies: EUR/USD returns to the middle of the 1.11/1.14 trading range
The dollar rebounded post G20 yesterday even as the rise in US yields remained modest. The ST picture for EUR/USD turned neutral again. Today, USD trading might be technical in nature with few important eco data on the agenda. The focus for USD trading will turn to other important US eco data later this week. EUR/GBP 0.90 still proves to be a strong resistance
The Sunrise Headlines
- WS advanced in the wake of the renewed US/Sino trade truce. The S&P 500 (+0.77%) set a new all-time high. Asian markets are mixed as investors ponder the recent trade developments. HK is catching up with the recent risk rally (+1.35%)
- The Reserve Bank of Australia cut rates for a second time this cycle from 1.25% to 1%. The central bank said it will adjust policy further if needed to support growth and inflation. AUD/USD (0.698) dipped but recovered soon.
- The USTR presented a list of another $4bn of EU goods the US could hit with import levies after publishing a $21bn worth list in April. The move fits in the ongoing WTO dispute with the EU over aviation (Boeing and Airbus) subsidies
- Italy’s government agreed to limit the 2019 budget to 2.04% of GDP vs. the 2.4% earlier to avoid EU sanctions, according to a person familiar. Italy is counting on more revenues while also cutting social welfare spending.
- Iran said it had exceeded the 300kg stock limit of low-enriched uranium agreed under the 2015 nuclear deal. It has deliberately done so to force the EU, Russia and China to provide (economic) relief from the American sanctions.
- Premier Li said China will seek lower real rates to reduce funding costs for SME’s and that it is working on a 2tn yuan tax cut as the economy is facing new downward pressure but ruled out “flood-like” stimulus.
- Today’s event calendar eyes rather meagre with the few scheduled data releases only of secondary importance. Fed’s Williams and Mester are to speak on the economy and monetary policy.
Currencies: EUR/USD Returns To The Middle Of The 1.11/1.14 Trading Range
EUR/USD returns to middle of the 1.11/1.14 range
The dollar profited of the new trade truce yesterday after the meeting between presidents Trump and Xi this weekend. Global equities rallied. US yields rose modestly, but it was enough to support a USD rebound. The EMU manufacturing PMI declined further in contraction territory (47.6), supporting the case for ECB easing. The US manufacturing ISM printed above consensus, but details were a bit mixed. Still, the dollar kept the benefit of the doubt. EUR/USD dropped below 1.13 to close at 1.1286. USD/JPY closed stronger at 108.45.
Overnight, Asian equities are trading mixed despite a record run (S&P) on WS. Rather harsh comments of president Trump on the US-China trade talks and the US expanding a list of EU products that might be hit by retaliatory tariffs illustrate that trade tensions persist. EUR/USD hovers in the 1.1280/90 area. USD/JPY lost a few ticks (108.35 area). The RBA cut its policy rate by 0.25 bp. It wants to support a faster reduction in unemployment and bring inflation back to target. Remarkably, the AUD rebounded slightly after the RBA decision (AUD/USD 0.6985).
Today, there are only second tier eco data in Europe and the US. Investors will look out whether the risk rebound continues. Even so, US yields are holding within reach of the recent lows. For now, markets don’t see the new trade truce reducing the case for Fed easing. In theory, this can cap the topside of the dollar. Evidently, Europe has also pending issues (mediocre growth, political noise at the EU level and in some member states, lingering trade issues). After yesterday’s decline, the ST EUR/USD picture turned neutral again. The pair returned to the middle of the 1.11/1.14 range. Today, trading might be technical in nature. Later this week, the US data (non-manufacturing ISM and payrolls Friday) might further shape investor expectations on future rate cuts. First support comes in at 1.1260 ahead of the 1.1181 correction low. A return above 1.1350 would suggest that a new upside test is possible.
EUR/GBP rebounded to the high 0.89 area yesterday, but reversed the gain later. That decline mirrored a similar EUR/USD drop at that time. Today, the construction PMI is expected in contraction territory. The contenders in the race for PM are debating whether to suspend the power of parliament to block a no-deal Brexit. Still, we expect any sterling rebound to stay limited if overall uncertainty on Brexit persists.
EUR/USD: dollar rebounds after G20.
