- Rates: Fragile market conditions ahead of Trump’s verdict on China
General market conditions are fragile this morning. Core bonds profit. US President Trump’s press conference risks escalating the dormant trade/economic war with China when the (global) economy already is in dire straits. Fed Chair Powell might be questioned on the probability of yield curve control, which the Fed is considering according to NY Fed Williams. - Currencies: Dollar in the defensive even as risk sentiment turns more fragile
The EUR/USD rebound accelerated as the pair cleared the 1.1018 resistance. The move was partially due to a better sentiment on the euro after the EC economic recovery plan, but there are also signs of underlying USD softness. USD/JPY is under pressure this morning and the trade-weighted dollar is testing key support. A break would be significant
The Sunrise Headlines
- US stocks erased gains in the final hour after president Trump announced a press conference on China. The DJI (-0.58%) underperformed. Asian equity markets decline though are off intraday lows. Japan (-0.7%) underperforms.
- President Trump will reveal new China policies today after the country approved the controversial security law in Hong Kong yesterday. Economic advisor Kudlow already said yesterday China will be held accountable for it.
- Meanwhile, pressure on China over the law builds as Canada and Australia joined the US in a statement urging Beijing to reconsider. The UK opened the door to citizenship for some 300 000 Hong Kong residents.
- Japanese retail sales slumped a more-than-expected -9.6% m/m in April after the government introduced a state of emergency in mid-April. Industrial production fell -9.1% m/m, the largest decline since the 2011 tsunami.
- US corporate bond sales (investment-grade debt) hit the $1 000 bn mark yesterday, smashing the previous record of 2017 (August) amid extremely low rates and other unprecedented supportive policies by the Federal Reserve.
- Germany is preparing a second phase of stimulus with a size ranging from €50-100 bn. Proposed measures which will be discussed June 2 include an increase in family subsidies and a controversial sales bonus for the car industry.
- Today’s economic calendar contains PCE inflation and Chicago PMI in the US. CPI inflation (May) is released along with some individual countries’ final GDP readings in the EMU. Fed chair Powell speeches. Italy taps the bond market
Currencies: Dollar In The Defensive Even As Risk Sentiment Turns More Fragile
EUR/USD rebound accelerates north of 1.11
After a hesitant start, EUR/USD yesterday resumed the uptrend from earlier this week. The move was both due to USD softness but at the same time also euro strength. A positive risk sentiment weighed on the dollar, but the EC recovery package also supported European assets and the euro. Technical pictures on several EU equity indices improved and intra-EMU spreads narrowed further. Eco data again had limited impact. EUR/USD ‘easily’ cleared 1.1030/35 intraday resistance and closed at 1.1077. A late session US equity correction hardly helped the dollar. The TW dollar (DXY) closed at 98.38 (below the 98.65 support). USD/JPY closed marginally lower at 107.65.
This morning, Asian equities are trading mixed. Markets await a press conference of US president Trump with the US reaction to the new China security law on Hong Kong. Still equity losses, if any, are modest. The yuan (USD/CNY 7.1650) even regains a few ticks off recent lows. The dollar remains in the defensive. USD/JPY fell off a cliff, trading in the 107.15 area. EUR/USD also stays well bid and is testing the 1.11 level.
Today, the eco calendar in Europe and the US is well filled but markets probably will consider April data as outdated. We keep an eye at the EMU CPI (ahead of next week’s ECB meeting) and the Chicago PMI. However, president Trump’s press conference on China probably is the dominant factor for global risk sentiment. In this respect, we look out whether the USD reaction function is changing. There are tentative signs of building USD weakness. Of course, it is easier for this trend to gain momentum in a risk-on context, but we have the impression that the dollar is also profiting less from a (mild) risk-off. The shortterm picture of EUR/USD improved after the break above 1.1018. A test of the end March top (1.1163) might be on the cards. Also watch for a test of downside support in the TW dollar (DXY 98.27) and in USD/JPY.
Sterling gained against a softer dollar but EUR/GBP traded stable in the upper half of the 0.90 big figure. There are few UK eco data today. EUR/GBP feels some spill-over upside pressure from the rise in EUR/USD and is testing the 0.90 barrier. We expect EUR/GBP to remain well bid. The prospect of a difficult next round of EU-UK Brexit negotiations probably won’t help sterling.
EUR/USD rally accelerates after break beyond 1.1018
