Sunrise Market Commentary
- Rates: Consolidation phase to continue
The eco calendar remains rather dull today. The Spanish matter remains a factor of uncertainty. JP Morgan and Citigroup are the first big companies to report Q3 earnings and can influence intraday sentiment via stock markets. Central bank speakers are wildcards. We expect the consolidation/correction higher in core bonds to continue. - Currencies: EUR/USD extends comeback
EUR/USD continued the rebound from earlier this week. The move was due to overall dollar softness. Catalan developments hardly affect the single currency. US PPI data are expected to rise today. However, USD investors probably want a clear signal from tomorrow’s key US data before changing tactics on the dollar
The Sunrise Headlines
- US stock markets ended up to 0.25% higher with main indices putting another record closing high in place. Risk sentiment in Asia remains positive overnight with indices 0.25%-0.5% higher.
- Most Federal Reserve officials believed at their September meeting that they would likely raise short-term interest rates again this year, but some cautioned the decision would hinge on whether inflation picks up.
- Spanish PM Rajoy gave the Catalan government eight days to drop an independence bid, failing which he would suspend the Catalonia’s political autonomy and rule the region directly.
- A longer extension of the ECB’s bond-buying programme may be more beneficial during periods of calm, chief economist Praet said, just weeks before the bank decides whether to extend stimulus.
- The Italian government won two confidence votes on a fiercely contested electoral law that is likely to penalise the anti-establishment 5-Star Movement in next year’s national election.
- President Trump plans to sign an executive order to start the unwinding of the Affordable Care Act, paving the way for changes to health-insurance regulations by allowing the sale of less-comprehensive agencies health plans to expand.
- Today’s eco calendar contains US PPI data, weekly jobless claims and EMU industrial production data. Italy and the US sell bonds and plenty of central bankers are scheduled to speak.
Currencies: EUR/USD Extends Comeback
EUR/USD extends rebound
The developments on Catalonia dominated the news headlines, but had little impact on the markets outside Spain. EUR/USD extended its gradual rebound. This was mostly USD softness. The Fed Minutes confirmed that most Fed members envisage an additional rate hike this yea, but low inflation remains a source of internal debate. The dollar lost marginal further ground after the report. USD/JPY closed the session little changed at 112.50. EUR/USD finished at 1.1859 (from 1.1808).
New record closing levels on WS also support equity gains in Asia overnight. However, the equity rally has no impact on core yields. The dollar doesn’t receive additional interest rate support. USD/JPY even trades marginally softer at 112.34. EUR/USD regained the previous 1.1823 range bottom and trades around 1.1875. The Spanish/Catalan crisis entered a period of ‘distress’ as the Catalan leaders have five days to clarify whether they declared independence. For now the political uncertainty doesn’t weigh on the euro.
Today, EMU industrial production is expected to have grown strongly in August. Risks are on the upside, but the report is outdated. In the US, the initial claims are expected to decline further (to 252K) following the pop-up due to the hurricanes. US Producer prices are expected to have increased by 0.4% M/M and 2.6% Y/Y in September, following a more modest 0.2% and 2.4% Y/Y in August. Core PPI inflation is expected unchanged at 2% Y/Y. Markets are sensitive to inflation data, but price action may be modest as the more important CPI inflation will be released tomorrow. Global markets will also keep an eye at the first earnings reports from the first major US Banks (JP Morgan and Citigroup).
After a cautious comeback, the dollar is again losing ground this week. No news is apparently bad news for the dollar. USD investors want concrete news on the tax reform, on the economy and on the Fed’s rate intentions. The absence of progress on these issues causes some ‘by-default’ USD selling. A higher PPI might be slightly USD supportive, but it won’t be a trigger for a U-turn. For that, we probably have to wait for tomorrow’s US retail sales and/or CPI. There will still be plenty of headlines on Catalonia, but we don’t expect negative impact on the euro. The next important steps will probably occur next week. We look for tentative signs of a USD bottoming out ahead of tomorrow’s US data. Even so, this week’s price action is disappointing for USD bulls
From a technical point of view, EUR/USD dropped below the 1.1823/ 1.2070 consolidation pattern last week. The USD rebound developed very slowly. The 1.1662 support came on the radar, but no real test occurred. Yesterday, the pair even returned above the 1.1823 previous range bottom, which is disappointing for EUR/USD bears, but we wait for tomorrow’s US data to amend our EUR/USD sell-on-upticks bias. The USD/JPY momentum was constructive of late, but for an important part due to yen weakness. USD sentiment recently improved though. USD/JPY regained 110.67/95 (previous resistance), a short-term positive. The 114.49 correction top is the next important resistance. The rally lost momentum last week. So a break beyond 114.49 is difficult.
EUR/USD returned north of the 1.1823 previous range bottom
EUR/GBP
Sterling remains in consolidation modus
There were no important eco data in the UK yesterday. Sterling initially traded with a modest negative bias, especially against the euro. UK Chancellor of the Exchequer Hammond said he is considering to release more money to prepare for a ‘No deal Brexit’ scenario if there aren’t clear signs of progress by early 2018. There was no reaction of sterling to the Hammond comments. However, they illustrate that the clock is ticking against the UK and that UK companies desperately need progress and clarity on the Brexit process. EUR/GBP closed the session at 0.8970, nearing the recent correction top. Cable finally closed the session marginally higher at 1.322, but this was mostly due to USD weakness.
The RICS House price data were marginally stronger than expected this morning. There are no other important eco data in the UK today. BoE chief economist Haldane gives a speech in Washington late this evening. We don’t expect him to bring high profile news on monetary policy. There’s still no trigger for a clear directional move in EUR/GBP. The pair might continue to drift sideways in the 0.89 big figure, awaiting new eco or other news.
EUR/GBP staged a strong uptrend since April to set a top at 0.9307 late August. UK price data 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, but this rebound has run its course. EUR/GBP supports at 0.8743 and 0.8652 are difficult to break. We look to buy EUR/GBP on dips. Last week’s rebound above the 0.89 area improved the ST technical picture of EUR/GBP. EUR/GBP 0.9026 is the 50% retracement of the recent countermove
EUR/GBP rebound slows, but holds north of 0.89
