Markets
Spotlights were on EUR/USD yesterday, but it was EUR/GBP that turned out to be star of the show. EUR/GBP sprinted from a 0.9078 open to a 0.9226 close, taking out 0.9176/0.9184 resistance (June top/62% retracement from March/April rally). From a technical point of view, EUR/GBP 0.9307/0.9325 (2017top /2019 top) offer final intermediate resistance before retracing to the multiyear high reached at the beginning of this year (0.95). Yesterday’s rally was a three-phased one, initiated earlier this week by UK PM Jonhnson’s high stakes brexit gamble to rewrite part of the EU/UK withdrawal agreement in case both parties fail to agree a trade deal by the end of the year. Irish PM Varadkar castigated the kamikaze move, warning that a hard brexit at this stage becomes the most likely outcome of deadlocked negotiations. Euro strength took over from sterling weakness in a second phase after rumours that the ECB wouldn’t overreact to euro gains. The (carefully timed?) rumours hit the screens within the space of one minute after ECB President Lagarde started her press conference. They immediately dismantled a potential explosive subject in the hands of a clumsy communicator. Markets afterwards didn’t bother about subtle changes to GDP/inflation forecasts or Lagarde’s notion to completely use the €1.35tn PEPP-envelope. By default euro strength pushed EUR/USD to an intraday high above 1.19 in the wake of Lagarde’s Q&A session. Yesterday’s final push in EUR/GBP’s back came from a turn in global risk sentiment. US stock markets couldn’t build on a decent open and turned south, dragged lower by tech stocks. Main indices eventually lost 1.5% (Dow) to 2% (Nasdaq). Risk aversion weighs on sterling against other majors. The U-turn on stock markets triggered a similar U-turn in EUR/USD, with the pair eventually closing near opening levels at 1.1815. Yesterday’s combination of early sterling weakness and late dollar strength sent cable (GBP/USD) two big figures lower (1.28 from 1.30). US Treasuries outperformed German Bunds in the final stages of dealings. The end of this week’s all-in-all decently digested US supply played as well. The US yield curve bull flattened with yields shedding 0.8 bps (2-yr) to 3.8 bps (30-yr). German yields added 1.7 bps (30-yr) to 3 bps (10-yr). They were already trending higher and the inaction at the ECB meeting gave an additional push. 10-yr yield spread changes vs Germany narrowed by up to 5 bps (Greece/Italy).
Asian stock markets trade mixed this morning with Japan outperforming. The frontrunner in PM Abe’s succession race backtracked on the need for an additional sales tax hike. US Democrats shot down a skinny Republican fiscal support bill in Senate, but that had been coming. Today’s eco calendar contains US CPI inflation and speeches by ECB heavyweights Weidmann and Lane. US inflation numbers lost relevance since the Fed moved to average inflation targeting and as long as they remain below 2%. Possible ECB comments on FX remain a wildcard though less likely after yesterday. We think that risk sentiment on (US) stock markets will remain the key market driver. Technical charts suggest that the correction isn’t over yet. If so, US Treasuries and the US dollar could profit in the short run. Ahead of the weekend, we thus advise to err on the side of caution.
News Headlines
Chances of a new US stimulus program have further declined. The US Senate rejected to advance to the floor a Bill introduced by the Republicans. The bill (estimated $500 -700 bln) was a slimmed down package compared to an earlier proposal of the Republican party (1 trillion). The Democrats rejected the bill as being too small and continue to support their proposal estimated to be worth USD 2.2 bln.
Yoshihide Suga, who is the frontrunner to replace Shinzo Abe as the next Japanese Prime Minister, changed his view on the need for a further sales tax hike. Earlier he said that a further increase would be inevitable giving the country’s aging population. However, now he joins Shinzo Abe’s view that there is no need for another hike in the next decade. Abe raised the sales tax in October last year, but the economy has contracted in every quarter since then.
