Sunrise Market Commentary
- Rates: Unusual correlation between stocks/bonds unlikely to persist
Tension on Asian stock markets eased overnight, but we think that the equity correction has further to go from a technical point of view. If so, it remains a strange combination to see both core bonds and stocks sell-off simultaneously. The end of the refinancing operation, doubts on US tax reforms and the weekend ahead generally favour some cautiousness as well. - Currencies: USD in the defensive as tax bill might undershoot expectations
Yesterday, there were some strange correlations on global markets, including the FX market. For new, we assume that the overall context is slightly negative for the dollar. A risk-off decline of USD/JPY might be less pronounced than is usually the case. The euro might remain relatively well supported. Brexit headlines might remain slightly GBP-negative
The Sunrise Headlines
- US stock markets corrected around 0.5% lower yesterday. They tried to erase opening weakness which spread from Asia/Europe, but failed on headlines that the US Senate aims to delay tax reforms. Asian markets are mixed overnight with Japan underperforming and China outperforming.
- Senate Republicans’ proposal to rewrite the tax code breaks significantly with the one crafted by the House GOP confronting party leaders with dozens of differences to reconcile and little time before the year-end deadline.
- The House Ways and Means Committee approved revisions to the GOP tax legislation that trimmed the bill’s cost while providing more tax relief to owners of partnerships, limited liability companies and other so-called pass-throughs.
- The EU is demanding Britain accept that Northern Ireland may need to remain inside the European customs union and single market after Brexit in order to avoid “a hard border on the island of Ireland”.
- Australia’s central bank has sliced its forecasts for core inflation which is seen lurking under its long-term target band for another two years, a strong signal that interest rates won’t rise for a long time to come.
- The ECB can tighten monetary policy more decisively once inflation is on a clear path towards the target, leaving behind its gradualist approach, Governing Council member Lane told German business newspaper Boersen-Zeitung.
- Today’s eco calendar contains UK industrial production and University of Michigan consumer confidence. Barnier and Davis hold a press conference on Brexit talks. ECB Mersch is scheduled to speak
Currencies: USD In The Defensive As Tax Bill Might Undershoot Expectations
Dollar ceded slightly ground on US tax plan
Global markets were spooked by an unexpected uptick of volatility on equity markets yesterday. At the same time, Bunds and, to a lesser extent Treasuries, came under pressure. The dollar and the euro both received interest rate support, despite the equity correction. This prevented a meaningful gain of the usual safe havens (Japanese yen, Swiss franc). Later in the session, the dollar ceded ground as more details on the Senate tax plan were aired. EUR/USD finished the session at 1.1642 (from 1.1595). USD/JPY finished the session at 113.47.
Overnight, most Asian equity indices show modest losses. China outperforms. Japan underperforms again. The yen maintains yesterday’s gains, but the Japanese currency doesn’t profit from the additional equity losses overnight. EUR/USD holds near yesterday’s closing levels in the 1.1650 area. So, the US currency remains slightly in the defensive. The RBA expects underlying inflation to remain below its inflation target band till early 2019. This suggest that a policy rate hike isn’t on the cards anytime soon. AUD/USD (currently 0.7685 area) trades within reach of the recent lows, but there are few additional losses.
Today’s eco calendar remains uninspiring with only University of Michigan consumer confidence for November. Consensus expects a small increase in both the headline, from 100.7 to 100.9, and expectations, from 90.5 to 91, components of the report. Both indices trade near/at decade-highs. ECB Mersch is scheduled to speak, but probably won’t touch on monetary policy.
Global markets (including FX) showed some unusual links yesterday. The global risk-off sentiment/rise in volatility coincided with a rise in core (especially German) yields. This rise in German (and to a lesser extent in US yields) supported the euro and the dollar against the usual FX safe havens. Uncertainty, on the tax bill was a negative for the dollar. Today, the Michigan consumer confidence might be slightly supportive for the dollar. However, the focus of markets is elsewhere. Yesterday’s price action suggests that the developments in core interest rate markets are currently more important for trading in the major FX cross rates rather than global risk sentiment. Regarding the latter, it isn’t sure that the sell-off will continue, but we assume that equity enthusiasm has cooled a bit short-term. This will probably remain a negative for USD/JPY even as the pace of the decline might be less pronounced than is usually the case. The absolute low level of German/European interest rates makes that the euro will probably receive interest rate support in case of a risk-off correction. Uncertainty on the US tax plan might be slightly USD negative, too
In this context we change our day-to-day bias for EUR/USD from negative to neutral. For now, there are also no indications of selling pressure on EUR/JPY due to the global risk-off sentiment.
From a technical point of view, EUR/USD dropped below 1.1670/62 support, the subsequent follow-through price action occurred very slow. Still the pair dropped to a new post-ECB low on Tuesday. A sustained break would confirm that the recent EUR/USD uptrend is broken. EUR/USD 1.1423 (38% retracement of 2017 rise) is the next downside target on the charts. USD/JPY’s momentum was positive in past months. The pair regained 110.67/95 resistance and tested the 114.49 MT range top, but the attempt failed. A sustained break would improve the technicals. We remain cautious to preposition for further USD/JPY gains. This week’s price action remains unconvincing.
EUR/USD: euro rebounds on higher EMU yields, despite risk-off
EUR/GBP
Brexit continues to dominate GBP trading
Sterling felt additional selling pressure yesterday. There were no important eco data in the UK. Investors kept a close eye on the next round of official Brexit negotiations that started in Brussels. EU negotiators were said to maintain a very cautious approach as they tried to ponder the consequences of the political turmoil in the UK. The overall risk-off context is usually a negative for sterling, too. EUR/GBP closed the session at 0.8856 (from 0.8840). Cable finished the session at 1.3145. The pair received some support from overall USD weakness.
The UK September production data, the trade balance and the NIESR GDP estimate will be published today. Production is expected to rise at a modest pace (0.3% M/M). The trade deficit is expect to narrow after a bad figure the previous month. We don’t expect the data to bring additional negative news for sterling. Markets will be more focused on the Brexit negotiations in Brussels. Press headlines suggest that the negotiations on the border between Ireland and Northern Ireland are more difficult than previously expected. This might be a slightly additional negative for sterling. A risk-off context also doesn’t help sterling. So, we maintain an cautious upward bias for EUR/GBP.
MT technical: Sterling rebounded in September as the BoE prepared markets for a rate hike. This rebound ran into resistance as markets anticipated that any rate hikes would be very gradual and limited. This view was confirmed at last week’s BoE policy meeting. EUR/GBP currently trades in a 0.8733/0.9033 consolidation range. A downside test of this range was rejected last week. We maintain the view that the 0.8733 -0.8652 support area will be tough to break in a sustainable way. A EUR/GBP buy-on-dips approach is favoured. EUR/GBP 0.9023/33 is the first important resistance
EUR/GBP: off recent low, but no sustained rebound, yet
