Rates: German 10-yr yield closes above 1st minor resistance
Fresh rumours of German fiscal spending plans and fear that the ECB won’t be able to live up to huge easing expectations built over Summer triggered new selling in Bunds. The German 10-yr yield closed above 1st minor resistance at -0.61%. US Treasuries slid in lockstep. Today’s empty eco calendar suggests that similar themes could remain in play.
Currencies: EUR/USD rebound blocked as both US and EMU yields rise
EUR/USD initially made some further progress as the debate on EMU/German fiscal stimulus flared up, but the move was counterbalanced by higher US yields. The theme of fiscal stimulus is in theory euro supportive. However, EUR/USD will probably stay in wait-and-see modus ahead of Thursday’s ECB meeting
The Sunrise Headlines
- US stocks reversed intraday gains to close virtually unchanged. The Nasdaq (-0.19%) underperformed. With little news to guide investors, Asian equities are trading mixed. China (-0.5%) underperforms.
- Chinese CPI accelerated to 0.7% MoM (2.8% YoY) in August. The increase is almost entirely driven by a further rise in pork prices due to the swine-flu outbreak. Producer prices meanwhile declined -0.1% MoM (vs. -0.2% in July).
- PM Johnson’s second bid for an early election on October 15 did not receive the required two-third majority again yesterday. After closing a tumultuous session, the British Parliament is now suspended until October 14.
- The trade war and the prospect of a no-deal Brexit are “darkening” the global outlook, rating agency Fitch said, adding that the latter would “materially lower” EMU growth. Fitch also downgraded Chinese growth forecasts.
- North Korea said it is willing to restart denuclearization discussions in late September, but warned that the US had to come up with a different approach or talks could fail again as they did in February.
- Italian PM Conte won the first of two confidence votes in parliament yesterday. Conte pledged to work closely with Brussels on the 2020 budget that would entail lower labour taxes and a minimum wage.
- Today’s economic calendar contains US small business optimism (NFIB). The July labour report is due in the UK. Germany (2046 linkers) and the US (3-year Notes) tap the bond market
Currencies: EUR/USD Rebound Blocked As Both US And EMU Yields Rise
Broad rise in yields keeps EUR/USD in balance
The euro traded with a cautiously positive bias yesterday. Early in the session, German July exports printed stronger than expected. Later, the euro was supported by headlines that Germany might be prepared to relax its budget rules and consider fiscal stimulus. Especially LT European yields rose, and EUR/USD rebounded to the 1.1065 area. However, a late session rise in US yields helped the dollar to fight back. EUR/USD closed at 1.1048. USD/JPY finished well above 107 (107.24).
Overnight, Asian equities are trading mixed with Japan outperforming and China underperforming. China CPI was unchanged at 2.8% Y/Y, supported by higher food prices. However, PPI printed at -0.8% Y/Y, as prices at Chinese factories are pressured by the trade war. Yesterday, US Fin Min Mnuchin sounded cautiously optimistic on the US-China trade talks. He also indicated that the US wants the currency (manipulation) to be discussed in the talks. The yuan strengthens this morning (USD/CNY 7.1160 area). USD/JPY stabilizes after earlier gains (currently 107.35/40). EUR/USD is drifting sideways in the 1.1040/50 area.
There are again mostly second tier US and EMU data today. US NFIB small business confidence (expected 103.50 from 104.70) is interesting but no market mover. We also keep an eye at the US 3-year action. The debate on fiscal stimulus is euro supportive but the rise in yields is broad-based (US and Europe).
The USD rally halted last week. EUR/USD regained 1.10. We expect technical, euro cautious trading ahead of the ECB meeting. The euro might gain some further ground if the ECB doesn’t deliver on high expectations or if the market feels that the bank has limited ammunition left. Technically, EUR/USD shows tentative signs of bottoming. A return north of 1.11 would call off the ST negative alert for EUR/USD.
Sterling initially rebounded on solid UK production yesterday. Markets also interpreted comments of UK PM Johnson as easing its stance on Brexit. However, the votes in Parliament (Johnson didn’t get an early election) illustrated that the political chaos persists. As parliamentary action is suspended, poltical headlines might fade. UK labour data might have intraday impact on sterling. We expect technical trade in EUR/GBP near current levels as long as the poltical stalemate perisits. Or will Johnson finally make some progress in its talks with the EU?
EUR/USD holding north of 1.10, but no further progress as bot US and EMU yields are trending higher
