Sunrise Market Commentary
- Rates: Profit taking ahead of Friday’s payrolls?
Stronger eco data could be countered by increased uncertainty over Catalonia, the next Fed chair and promised tax reforms. Adding the prolonged sell-off, it suggests that investors might take some profit on short positions ahead of Friday’s payrolls. The US Note future remains in a sell-on-upticks environment with proposed entry levels around 126. - Currencies: EUR/USD shows no clear trend on political issues in US and EMU
The dollar rally stalled yesterday. EUR/USD might continue a ST consolidation pattern as political issues in the US (nomination of successor for Yellen, tax reform) and in EMU (Catalonia) might prevent investors to take directional positions. The USD/JPY rally might also slow if the equity rally takes a breather.
The Sunrise Headlines
- WS (+ 0.3%) clocked a second straight day of record highs for each of its major indices. Most Asian stock markets trade positive overnight with China still closed. The Japanese services PMI dropped to its weakest level in 11 months.
- Catalonia will declare independence ‘in a matter of days’, Catalan President Puigdemont was quoted as telling the BBC, a move that would defy Madrid and attempt to implement the directive of Sunday’s illegal referendum.
- Donald Trump said ‘you can say goodbye’ to Puerto Rico’s debt. ‘They owe a lot of money to your friends on Wall Street and we’re going to have to wipe that out,’ Mr Trump told a Fox interviewer. ‘You can say goodbye to that.’
- President Trump’s aides have given him a final short list of recommended candidates to head the Fed, people familiar said. Janet Yellen, Gary Cohn, Kevin Warsh and current governor Jerome Powell are being considered.
- Auto sales hit their briskest monthly pace for the year, as Labor Day discounts, higher fleet sales and hurricane-related replacements restored momentum heading into the final months of the 2017.
- Boris Johnson has distanced himself from leadership speculation, claiming that ‘the cabinet is united’ on PM May’s Brexit strategy. He laughed off what he called ‘potshots from behind’ as an ‘occupational hazard in my line of work.’
- Today’s eco calendar heats up with September services PMI’s in EMU (final), the UK and the US (ISM). US ADP employment is also on the agenda while Germany holds a 10-yr Bund auction.
Currencies: EUR/USD Shows No Clear Trend On Political Issues In US And EMU
Dollar rally takes a breather
Yesterday, the dollar rally took a breather, awaiting more guidance from key eco data (including the US payrolls) later this week. A series of pending political issues in the US were also a slightly USD negative. EUR/USD made a cautious intraday rebound and closed the day at 1.1744. USD/JPY hovered in the 113 area for most of the day, but finally dropped below the big figure even as major US equity indices continue to set new all-time record levels.
Overnight, Asian equities ex-Australia continue their uptrend. The Japan services PMI dropped from 51.6 to 51.00 in September, indicating modest growth in the sector. However, it didn’t hurt the yen. The dollar declined slightly further as the political debate on a successor for Fed’s Yellen intensifies. There are rumours that chances of Fed member Powell, also on the shortlist, are growing. USD/JPY dropped to the mid 112 area. In the same vein, EUR/USD settled again in the upper half of the 1.17 big figure.
Today, the EMU calendar contains the final PMI. The preliminary reading rose to 55.6 from 54.7, suggesting buoyant activity in the sector. Any revision is usually limited and with little impact on markets. The US calendar is more interesting. The ADP employment report is expected to show a modest net 135K gain of private sector jobs. Markets discount an negative effect from the tropical storms. Any significant deviation of consensus will probably be ignored. The ISM non-manufacturing business confidence is expected to have marginally increased to 55.5 from 55.3 in August, but risks are firmly on the upside of expectations.
The eco data (US non-manufacturing ISM) might be USD supportive. However, there is also political noise on both sides of the Atlantic. Tensions in Catalonia remain high as the region might declare independence within days. For now, Catalonia was hardly a factor for the euro, but this might change. In the US, investors look for more clarity on the nomination of a successor for Yellen and on the tax reform. However, Investors are unlikely to big directional bets ahead of the payrolls (Friday). EUR/USD might hover in the 1.1696/1.1833 ST consolidation pattern. A more cautious risk sentiment after the recent equity rally might block the topside in USD/JPY
EUR/USD downtrend slows as political issues on both sides of the Atlantic keep investors sidelined
EUR/GBP
EUR/GBP nears 0.89 resistance area .
The positive sterling momentum ebbed recently and this continued yesterday. EUR/GBP rebounded further off the key 0.8742/75 support. The UK construction PMI suggested a contraction in the sector. Coming on the heels of a softer manufacturing PMI on Monday, it was a sterling negative. The BoE also warned for potential disruptions in clearing activity after Brexit and on financing of UK corporations via European banks. EUR/GBP closed the session at 0.8871. Cable still set another ST correction low intraday and finished at 1.3237.
Today, the UK services PMI will be published and UK PM May will give a key speech at the Conservative Party meeting. The services PMI is expected to stabilize at 53.2. Another negative surprise will fuel market expectations that the room for the BoE to raise rates is limited. We don’t expect too much from the speech of PM May . Her party is divided on the Brexit strategy and she probably will avoid to give concessions to Europe that will angry the grass root anti-EU party base. The noise on Brexit remain a modest sterling negative. Political uncertainty on Catalonia is a negative for the euro. Even so, we think that the downside in EUR/GBP is becoming ever better protected.
EUR/GBP made an impressive uptrend since April to set a 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. The prospect of (limited) withdrawal of BOE stimulus triggered a good sterling countermove. However, this rebound has apparently run its course EUR/GBP supports at 0.8743 and 0.8652 are probably difficult to break. We look to buy EUR/GBP on dips. A sustained rebound above the 0.89 area would improve the ST technical picture of EUR/GBP
EUR/GBP: downside support becomes more solid
