Sunrise Market Commentary
- Rates: Catalan headache for Spanish bonds?
European markets showed a lot of resilience in the run-up to the Catalan secession vote. Madrid’s impertinent behaviour and Catalan President Puigdemont’s hint at a unilateral declaration of independence might change that today, resulting in Spanish spread widening and an outperformance of the Bund vs the US Note future. - Currencies: EUR/USD modestly lower as Catalan tensions persist
The dollar outperforms this morning, supported by higher US yields. EUR/USD returns south after a rebound at the end of last week. Tension in Catalonia might be slightly negative for the euro, but USD strength prevails. Will the US ISM be strong enough to reactivate the reflation trade and support further USD gains?
The Sunrise Headlines
- US equities had a good run Friday, closing the quarter with moderate gains (and new highs for S&P and NASDAQ). IT is still the outperformer. Asian stocks trade slightly positive too, but the Golden week keeps many bourses closed.
- Catalan separatist leaders signalled they may be moving toward unilateral independence as early as this week after many activists were injured as they tried to stop Spanish police from shutting down an illegal referendum.
- The Q3 Japanese Tankan report nurtured economic optimism. Large and small manufacturing firms were much more optimistic than expected about the current situation and the outlook. Large and small non-manufacturing firms’ results were respectively slightly better and slightly worse than expected.
- The official Chinese PMI survey showed an improvement of sentiment. The manufacturing PMI was up to 52.4 from 51.7 in August and the non-manufacturing PMI rose to 55.4 from 53.4. The Caixin PMI (more private sector oriented) slowed though to 51 from 51.6 (51.5 expected).
- President Trump admonishment of Secretary of State Tillerson for ‘wasting his time’ in seeking negotiations with N-Korea highlighted differences within the administration on how best to get Kim Jong Un to halt his nuclear program
- President Trump met with former Fed governor Warsh to discuss potentially nominating him as the next Fed chairman. Warsh has a more hawkish instinct that current chairwoman Yellen. It moved bond markets with a bear flattening.
- EMU & UK PMI and the US ISM surveys are the key eco indicators today. ECB Praet, Fed Kaplan speak (little impact?) and UK PM May speak
Currencies: EUR/USD Modestly Lower As Catalan Tensions Persist
Dollar rebound to resume?
On Friday, the dollar corrected slightly further lower after eking out gains earlier last week. However, the move petered out as core/US yields rose later in the session. US eco data were mixed and had no lasting impact on USD trading. EUR/USD returned temporary north of the 1.1823 previous range bottom, but closed the session at 1.1814. USD/JPY finished the quarter at 112.51.
Overnight, several Asian markets including China are closed. Chinese PMI’s were fairly strong. Still, the PBOC eased the reserve requirements from lending to small companies. This news helps regional sentiment. The Japan Tankan confidence report was constructive with especially manufacturing and smaller non-manufacturing firms more optimistic. . The headline manufacturing index improved from 17 to 22. There was no reaction of the yen. USD/JPY profits from overall USD strength. Markets are pondering the chances/potential impact of a US tax cut. There is also speculation that Trump might choose a more hawkish new Fed-chairman. EUR/USD declines to the 1.1775 area. USD strength prevails, but there might also a minor fall-out from the tensions in Catalonia.
In EMU, the manufacturing PMI is to be confirmed at a very strong 58.2. The EMU unemployment rate is expected to have declined to 9% in August from 9.1%. In the US, the manufacturing ISM is expected to have declined to 58 from August’s 58.8, which was near the peak of the previous cycle (2007). Regional surveys, including Friday’s Chicago PMI, were strong. So, the risks are on the upside of consensus.
The dollar rallied last week, as investors realised that the chances on a Dec. Fed rate hike have risen and as the US government stepped up its efforts to put the tax reform on the rails. Both factors propelled US yields and the dollar, but the dollar rebound ran into resistance at the end of last week. The dollar clearly needs good eco news and higher US yields. A strong US manufacturing ISM and a constructive risk sentiment might be slightly supportive for US yields and for the dollar. We also keep an eye on the developments in Catalonia/Spain. The tension won’t help the euro, but for now we think it won’t be a source of substantial euro losses. It looks like the dollar might start the week with a cautious positive bias
From a technical point of view EUR/USD hovered in a consolidation pattern between 1.1823 and 1.2070. It took time to break below the 1.1823 range bottom, but the break occurred earlier last week. There was some hesitation in the USD rebound at the end of last week, but EUR/USD closed below the 1.1823 previous range bottom. The rise in US yields looks solid and may support the USD rebound. Next support in EUR/USD comes in at 1.1662. The day-to-day momentum in USD/JPY was constructive recently, but it was primarily due to yen weakness. USD/JPY regained the 110.67/95 previous resistance, a short-term positive. The day-to-day momentum remains constructive. The 114.49 correction top is the next important reference.
EUR/USD revisits 1.1823 range bottom, but test rejected
EUR/GBP
Sterling still looking for a clear trend.
On Friday, markets focused on two negative eco topics. UK Q2 Y/Y figure was reduced from 1.7% Y/Y to 1.5% Y/Y due to downward revisions in Q3 and Q4 of 2016. At same time, output growth in the key services sector declined in July. Sterling already felt some headwinds in the run-up to the data and the move accelerated afterwards. EUR/GBP extended its rebound north of 0.88. Admittedly, part of this move mirrored an overall rise of the euro. EUR/GBP closed the session at 0.8820. Cable closed the session at 1.3398.
In the weekend, the rift between UK PM May and foreign Secretary Boris Johnson on Brexit flared up. For now, the issue has no big negative impact on sterling. Overnight, sterling is losing slightly ground against an overall strong dollar, but gains a few ticks against the euro. The topic will remain in the spotlights during the conference of the Tories that ends Wednesday. Today, the UK manufacturing PMI is expected to decline from 56.9 to 56.2. However, this is still a good level that allows the BoE to raise rates if deemed necessary. So, the market context looks neutral for sterling (EUR/GBP) at the start of the week.
EUR/GBP made an impressive uptrend from April to set a MT top at 0.9307 late August. UK price data amended the dynamics and hawkish BoE comments reinforced a sterling rebound. Medium term, we maintain a EUR/GBP buy-on-dips approach as we expect the mix of euro strength and sterling softness to persist. However, the prospect of (limited) withdrawal of BOE stimulus puts a solid floor for sterling ST term. We look how far the current correction goes. EUR/GBP is nearing support at 0.8743 and 0.8652, which we consider difficult to break. We gradually look to buy EUR/GBP on dips.
EUR/GBP: downtrend shows tentative signs of slowing
