Sunrise Market Commentary
- Rates: US 10-yr yield tests 2.4%, countdown to ECB meeting
The US 5-yr yield closed above the psychological 2%-mark while the US 10-yr yield tested 2.4% resistance after a first breakthrough in the US tax reform process. We expect trading to slow down this week ahead of Thursday’s ECB meeting. Investors might be too complacent about a 9-month APP extension, ignoring the possibility of a shorter APP lifetime. - Currencies: Dollar extends cautious rebound
The dollar was better bid at the end of last week. This morning, there are tentative signs that this trend might continue. However, the gain of USD/JPY (decline of the yen) after Abe’s victory remains modest. At the same time, euro losses are limited despite Spanish uncertainty. In a broader perspective, the US currency is still captured in directionless trading
The Sunrise Headlines
- US equities closed the week on Friday with solid gains and new all-time highs as hopes on a tax cut improved after passage of the 2018 budget deal. Asian stock markets book small gains with Japan outperforming after the election outcome.
- The Spanish government will take over the regional Catalan government, once the Senate votes on art. 155 (Friday?). The Catalan government is considering an declaration of independence within days. The stand-off continues.
- The ANO party (29.6%) won the Czech elections before the Civic Democrats (11.3%) ANO party leader Babis is accused for fraud and will face difficulties to form a government. The impact on Czech markets should be modest.
- Two wealthy regions of northern Italy voted overwhelmingly for greater autonomy in referendums that could fan regional tensions in Europe at a time when Spain is striving to prevent Catalonia from breaking away.
- Japanese PM Abe’s ruling coalition secured a two-thirds parliamentary “super majority” that gave him a fresh mandate for “Abenomics” and the chance to pursue his personal priority of revising Japan’s post-war constitution.
- Fitch affirmed Italy’s BBB rating stable outlook, and raised Cyprus BB- rating to BB with a pos. outlook. Moody’s surprisingly didn’t update the Hungarian Ba1, stable outlook, rating, contrary to expectations of an upgrade of the outlook.
- The market calendar is thin today. Key eco data are limited to the EMU consumer confidence and the UK CBI trends survey. Belgium holds its OLO auction.
Currencies: Dollar Extends Cautious Rebound
Dollar cautiously higher, but within current ranges
On Friday, the dollar staged a gradual rebound after a Senate budget vote that might also pave the way for a US tax reform. The dollar traded hesitant in Europe, but captured a better momentum later in US dealing. Interest rate differentials moved only marginally in favour of the dollar. Political uncertainty in Spain maybe caused some caution on the euro going into the weekend. EUR/USD closed the session at 1.1784 (from 1.1852 on Thursday). USD/JPY finished the day at 113.52, again off one figure on a daily basis.
Overnight, the trade weighted dollar gains cautiously ground. USD/JPY is taking the lead. The yen falls as the coalition of Japanese PM Abe secured a two-thirds majority in the lower house of Parliament. The Japanese economy is expected to continue receiving support from a stimulating monetary (and fiscal) policy. Japanese equities outperform with gains of abound 1.0% . Gains in the rest of the region are modest. EUR/USD hovers in the 1.1750/75 area. The single currency remains resilient giving rising political uncertainty in in Spain. The kiwi dollar extends its decline below NZD/USD as markets ponder the impact of the new government.
The economic calendar is light today. The US Chicago Fed National Activity index is no market mover. The October EMU consumer confidence is interesting. A slight further increase to a 17-year high is expected. The reaction in the currency market will only be of intraday significance at best. The focus for euro trading will gradually turn to the ECB policy meeting on Thursday and to the developments in Catalonia. On the ECB decision, consensus has been building around a 9-month APP extension while lowering monthly purchases from the start of 2018 from €60 bn to €30 bn. We agree with the reduction in purchases, but think that growth developments argue for a shorter, 6-month. Speculation on the successor of Yellen and on the chances for fiscal easing in the US remain wildcards for USD trading.
At the end of last week, the USD momentum improved slighlty as investors saw rising chances for a US tax refrom. Still, the gain of the USD currency remained modest. The price action this morning sugests a continuation of this pattern. EUR/USD trades below the 1.18 barrier, but the euro remains resilent given the political uncertainty in the region (Spain). USD/JPY jumped temporary above the 114 barrier, but for now, the rally shows no strong momentum. We start the week with a catuious EUR/USD negative bias as we see a case for some by default USD buying (tax speculation)/euro selling (Spain). However, there is no sign that the dollar (EUR/USD and even USD/JPY ) are ready for a technically singificant move.
From a technical point of view, EUR/USD dropped below the 1.1823/ 1.2070 consolidation pattern but there were no sustained follow-through gains which was disappointing for EUR/USD bears. We maintain a cautious sell-on upticks bias. The pair needs to drop below the 1.1670/62 support to give comfort to EUR/USD bears. The USD/JPY momentum was constructive in September. The pair regained 110.67/95 (previous resistance), a short-term positive. The 114.49 correction top is the next important resistance. Sentiment improved further last week, but we still assume that a break beyond 114.49 will be difficult
EUR/USD: euro declines, but stays within the established
EUR/GBP
GBP rebounds, but uncertainty remains omnipresent
Sentiment on the UK currency improved gradually on Friday. European investors apparently drew some comfort from reconciliatory remarks of German Chancellor Merkel on Brexit. The monthly UK public finance data were also better than expected. EUR/GBP drifted again below the 0.90 barrier. Euro softness on Spain was maybe also a slightly negative for the cross rate. EUR/GBP finished the session at 0.8931 (near the intraday low). GBP/USD finished the week at 1.3190.
Today, the CBI Business optimism and trend orders will be published. Orders are expected little changed (9 from 7). This CBI report has usually only limited impact on sterling trading. Even so, after some disappointing eco data, markets are trying to find out how much room the BoE has to hike rates. Investors will also look out whether UK PM May gets backing to make further steps that might help to unlock the stalemate in the Brexit negotiations. At least this weekend’s political headlines didn’t show that things are becoming easier. Sterling still trades with a slightly positive bias against the dollar and the euro this morning. We don’t expect this trend to go far, unless the euro suffers from political uncertainty (Spain).
EUR/GBP staged a strong uptrend from April till late August and set a top at 0.9307. Rising UK inflation data and hawkish BoE comments reinforced a sterling rebound, but this rebound has run its course. EUR/GBP supports at 0.8743 and 0.8652 proved difficult to break. The recent rebound above 0.89 improved the ST technical picture of EUR/GBP, but for now there were no convincing followthrough gains. EUR/GBP 0.9026 is 50% retracement of the recent countermove
EUR/GBP: test of 0.9000 barrier rejected, for now.
