- Rates: Entering end-of-year trading conditions?
Core bonds markets classified lukewarm EMU PMI’s, clearing the sky for end-of-year conditions to kick in. Main EMU/US eco data and event risk is gone. Prepare for low volume, order-driven trading within technical ranges. This morning’s announcement by Boeing risks have ramification on US growth next year. - Currencies: Sterling rally stalls as reports suggest Brexit noise might return
Sentiment remained risk-on yesterday, but still had only modest impact on USD/JPY or EUR/USD. The latter ignored a poor EMU PMI, holding most of its recent gains. Sterling already fell prey to modest profit taking yesterday. Sterling momentum faded further overnight on reports data PM Johnson might take legal steps to prevent a further Brexit delay end next year
The Sunrise Headlines
- US stock markets grinded higher yesterday as investors digested the freshly agreed US/Sino trade deal. Nasdaq (+0.91%) outperformed. Asian equities are following in lockstep. China outperforms, adding up to 1.7%.
- UK prime minister Johnson will change the law to make sure the Brexit transition phase, currently running until the end of next year, is not extended. That could possibly lead to a no-deal exit after all.
- France is headed for a third week of strikes as president Macron stands tall in his bid to transform the country’s pension system. PM Philippe has invited labour unions and employer organisations for discussions on Wednesday.
- The Mexican government agreed to increase minimum wages by 20%. The move follows a 16% increase earlier this year and spurs fears that (core) inflation will further rise above the central bank’s 3% target.
- The Bank of England will double the counter-cyclical buffer from 1% to 2%, to take effect by the end of 2020 and lower other capital requirements by the same amount to better ensure lending during times of economic distress.
- US plane maker Boeing will halt the production of the grounded 737 Max in January in a move to save cash (inventory costs) which might have important ramifications for the wide string of suppliers and ripple through the economy.
- In today’s economic calendar we watch for US housing data and industrial production. The October labour report in the UK is due. Several members of the Fed and ECB are scheduled to speak.
Currencies: Sterling Rally Stalls As Reports Suggest Brexit Noise Might Return
Sterling rally blocked as Brexit noise returns
With the event risk of an escalation in the US-China trade war out of the way, markets are moving to end of year trading conditions. Moves in bonds and FX developed in a gradual/subdued way. The low-volatility context gave some further comfort to equity investors with US indices at new record levels. EMU PMI’s didn’t convince. Especially manufacturing continues to struggle. Even so, it didn’t bother EUR/USD much. The pair soon reversed minor losses and closed at 1.1144. USD/JPY also profited from the record race on the equity markets. The pair finished at 109.55, but the key 109.73/110 resistance was left intact.
The risk rally continues this morning with China outperforming. The yuan stays near USD/CNY 7. USD/JPY holds near the top of the established range, but without real upside test. The Korean won extends its rally supported by a strong tech performance. The Aussie dollar (AUD/USD 0.6865) loses a few ticks as RBA Mintues indicate the RBA will reassess the need for further policy stimulatioin in February.
US housing starts, building permits and industrial production will be published today. The latter is expected to rebound (0.8% M/M) after a steep fall last month. That data won’t change the US eco picture. The technical picture of EUR/USD improved. The pair settled in the higher part of the 1.10/1.12 trading range. The Fed has put the bar for any rate hikes very high, limiting the propsect for USD rate support. The impact of the risk rally on FX is modest, but the euro shows underlying resilience. 1.12/1.1250 is next resistance. Some further EUR/USD gain is possible, but some positive EMU news is needed to reinforce this trend.
The post-election sugar rally of sterling met resistance. UK PMi’s indicated that uncertainty was/is still affecting activity, with both the manufacturing and services measures printing below 50. It caused modest sterling profit taking. Sterling faced additional selling on reports that PM Johnson might take legal action to block a delay of the transition period, putting the (tail-?)risk of a no deal Brexit again on the radar. EUR/GBP is trading in the 0.84 area. The sterling rally shows signs of topping. EUR/GBP 0.8276 is becoming first meaningful support. We turn more neutral on sterling short term. Labour data and orders will be published today ahead of tomorrow’s BoE policy decision.
EUR/USD shows underlying resilience despite poor EMU PMI’s.
