Sunrise Market Commentary
- Rates: German 10-yr yield ready for test of 0.5%
EMU inflation could beat expectations, suggesting that the sell-off of the Bund can continue at least until the German 10-yr yield tests 0.5% resistance. Risks for the US PCE deflator are on the downside of consensus. If so, it will be interesting to see whether US Treasuries can profit or not. The current repositioning and Fed Yellen’s credibility might hamper gains. - Currencies: Dollar cannot find its composure
EUR/USD continued its rally and is now closing in on the key resistance zone which, if broken, would end the 3-yr sideways trading that followed the downtrend of the pair. We think it is too early for such a break though and thus remain cautious about the possibility of substantial short term further EUR/USD gains.
The Sunrise Headlines
- US stock markets slid around 0.8% in a rising yield environment with Nasdaq underperforming as a selloff in tech stocks accelerated (-1.44%). Asian stock markets also lose up to 1% (Japan underperforming)
- UK PM May won parliamentary approval for her legislative program after being forced into a concession on abortion rights to stave off a defeat. This episode showed just how vulnerable May is and how quickly she can capitulate.
- Brexit is hurting sentiment, with both UK consumers and businesses expressing doubts about the outlook. GfK’s consumer-confidence dropped to -10 in June (–5 in May) amid political uncertainty and declining spending power.
- Japanese inflation reading disappointed and remain very low, both the national May readings and the Tokyo June outcomes. The June Tokyo CPI ex-fresh food and energy even returned to negative territory (-0.2% Y/Y).
- Japan’s unemployment rate rose to 3.1% in May, hitting its highest level this year while the ratio of jobs to applicants continued to rise from 1.48 to 1.49 (above expectations of a stabilisation).
- China’s official manufacturing PMI came in at 51.7 (consensus 51). The services measure also rose, to 54.9 from 54.5. Economic activity is more robust than expected, giving China room to focus on financial risks and the property sector.
- Inflation readings are key today with Eurozone CPI (German data surprised positively yesterday) and US PCE deflator. Chicage PMI, Michigan consumer confidence (final), UK Q1 GDP (final),German unemployment and German retail sales are also on the calendar.
Currencies: Dollar Cannot Find Its Composure
Dollar can’t find its composure in repositioning
The repositioning after Mr. Draghi turn towards the start of normalisation on Tuesday continued in various markets. The euro profited, helped by narrowing yield differentials, strong EMU economic sentiment data and higher than expected German inflation. Even equity weakness (Europe & US) favoured the euro yesterday. US eco data were near consensus and ignored. EUR/USD opened around 1.1380 and closed near the intraday highs at 1.1440. The fate of USD/JPY was different. European equity weakness had initially little impact on the pair, as higher US yields and wider rate differentials trumped weak equities and benefited the dollar. USD/JPY reached an intraday high at 112.93, but the safe haven motive took the driver’s seat when WS hit the skids, allowing the yen to recover and leaving the pair little changed in the close at 112.18 (versus 112.30 previously).
Overnight, Asian equities lose up to 1%. Japanese equities underperform on weak Japanese eco data and modest safe haven-related yen strength. Chinese PMI’s were better than expected, which confirms the economic improvement. However, will markets take notice during the great repositioning? USD/JPY weakened somewhat and trades just below 112. EUR/USD is nearly unchanged at 1.1440.
The US Personal income and spending report (May) will attract a lot of attention. The market expects a weak 0.1% M/M, which would be disappointing, but nevertheless keeps spending on track for 2.5%+ growth in Q2. Given the decline in May CPI, we might also see a small drop in the (core) PCE deflator, which might not gone unnoticed and is dollar negative. The Chicago PMI for May reached its highest level in more than 2 years (59.4). Given some weakening of the orders component, we expect a somewhat lower overall outcome for June (consensus: 58) The final Michigan consumer sentiment might be slightly revised higher from the preliminary 94.5 (based on a strong conference board confidence). Following higher than expected German (and Spanish) inflation figures, the risks for the EMU HICP inflation is on the upside of expectations (1.2% Y/Y for the headline and 1% Y/Y for the core).
The US eco data won’t support the dollar, but higher EMU inflation may already have been partially (?) discounted after the upward surprise of German (and Spanish). Is the re-positioning on the possible change in the EMU and global turn to a more normal monetary policy over and thus will rate differentials stabilize? In that case, dollar weakening against the euro may be in for a pause/correction. We wouldn’t pre-emptively position for such a scenario as the momentum in EUR/USD is still intact. The US dollar desperately needs good news (both on activity and price data) for markets to focus again more on the Fed’s policy normalisation process. The dollar could perhaps get more support next week, with the payrolls and ISM.
Yesterday’s intraday price development in USD/JPY was again disappointing. Core yields and yield differentials primed in the morning to the benefit of the dollar, before yen favourable equity weakness drove the action in the US session. We remain cautious on USD/JPY longs.
Technical picture: Euro prevails, USD struggles
Poor US data, US political upheaval and strong EMU eco data propelled EUR/USD higher since April, but a first test of the 1.1300/66 ahead of the FOMC decision was rejected. A combination of hawkish ECB comments and weaker eco data pushed EUR/USD this week above the 1.1300/66 resistance area with a new high at 1.1448 reached yesterday. We want a weekly close above the key resistance to consider it really broken. However, the key resistance area to watch out for is now the 1.15 area with eventual extensions to previous test of this zone at the 1.1616/1.1714 LT correction tops. This would end the long consolidation period that followed the sharp decline of EUR/USD in 2014/early 2015. Such a key area will be difficult to break for now. A drop below 1.1119 would suggest the pair enters calmer waters.
EUR/USD nears key resistance that if broken would make the LT trend euro positive. Difficult for now
EUR/GBP
No post-Carney follow-through gains for sterling
Following wide swings on comments by Draghi and Carney in previous days, the EUR/GBP cross rate was an area of perfect calm yesterday. The pair was locked in a very narrow range close to the 0.88 pivot. Cable followed EUR/USD higher and closed at the 1.30 level. Overnight the pair tried to force its way to the ST key resistance at 1.3048, but it retreated back to the 1.30 level where it is staying now.
Consumer confidence declined quite sharply in June, according to the GfK report published overnight. The Lloyds business barometer, on the contrary, improved to 30 in June from 27 previously. The report won’t leave traces in the European session. Later today, the UK final Q1 GDP report will be released together with the current account, the index of services and total investment. We don’t think these will affect sterling trading much. Sterling might get direction from the main crosses. All in all, we see EUR/GBP staying below the key resistance of 0.8854/66 and cable’s fate will depend on EUR/USD. If the cross would move higher, cable may test the 1.3048 resistance but a break looks unlikely.
From a technical point of view, EUR/GBP set a minor top north of the 0.8854/66 resistance (2017 top), but a sustained break didn’t occur. Recent setbacks will probably block further gains ST. A return below the 0.8655 correction low would indicate easing pressure on sterling. Such a break lower will be difficult. A EUR/GBP buy-on-dips approach remains favoured.
EUR/GBP: EUR/GBP topside test rejected, but danger new test not excluded. Prefer buy-on-dip
