Sunrise Market Commentary
- Rates: Cautiousness ahead of the weekend?
US Treasuries outperform this morning as US political risk showed another dimension. Risk sentiment will to continue to play a key role today. The proof of yesterday’s risk rebound is in today’s eating. We remain suspicious about the sustainability of the move (bull trap?) and have an upward bias for bond trading going into the weekend. - Currencies: Dollar fails to extend rebound
The dollar regained slightly further ground yesterday, but the move was unconvincing given the moves on other markets. The potential positive impact from the progress in Congress on a tax bill is counterbalanced by political uncertainty on the investigation versus the Trump campaign team regarding the Russia links. Dollar sentiment remains fragile
The Sunrise Headlines
- US stock markets followed the general risk rebound and closed around 0.8% higher with Nasdaq outperforming (+1.2%). Asian bourses rally further overnight with China underperforming.
- The US House passed a bill that would usher in the most far-reaching overhaul of the US tax system in 31 years. After the House’s passage of tax legislation, the Senate finance committee approved its own bill, enabling Senate majority leader McConnell to bring it to the floor for debate the week after next.
- Special counsel Robert Mueller’s team in mid-October issued a subpoena to President Trump’s campaign requesting Russia-related documents from more than a dozen top officials, according to a person familiar with the matter.
- Corporate bonds may make up a larger share of the ECB’s asset purchase programme from January when it will halve the size of the scheme to €30 bn per month, ECB governing council member Nowotny said.
- China’s central bank injected $47bn into its financial system yesterday, its largest intervention in nearly a year, in an effort to calm investor fears that the crackdown on debt-fuelled growth would put a break on expansion.
- Investors retreated from high-yield bond funds last week as a sell-off rippled across the $1.3tn asset class, pulling money from the vehicles at the fastest pace in more than three years.
- Today’s eco calendar contains US housing starts and building permits. ECB Draghi and ECB Weidmann are scheduled to speak.
Currencies: Dollar Fails To Extend Rebound
Dollar fails to extend rebound
An improvement in global risk sentiment and a rise in US yields supported a modest USD rebound yesterday. (US) data were mixed and had no significant impact on trading. EUR/USD finished the session at 1.1770 (from 1.1791). USD/JPY finished at 113.06 (from 112.88). So, the dollar traded off Wednesday’s lows, but the rebound was far from impressive.
Asian markets show somewhat of a diffuse picture overnight. Most indices opened with good gains in the wake of yesterday’s strong WS close. However sentiment dwindled throughout the session. Mainland China indices even trade in the red as the PBOC added liquidity to the system. The dollar came under pressure early in Asia on headlines that President Trump’s election campaign received a subpoena of special Counsel Robert Mueller on the links between the campaign leaders and Russia. USD/JPY dropped from the 113+ area and set a minor new low for the week in the 112.40 area (currently 112.55). EUR/USD returned north of 1.18.
The eco calendar is thin today. The EMU current account is no market mover. US housing starts and permits are expected to rebound after a mediocre performance of late. These data will only be of second tier importance for USD trading. There were quite some conflicting headlines overnight from the US. Congress made some progress on a tax reform bill, but there was negative political noise from Special council Mueller’s subpoena. Asian equity markets modestly trade in positive territory, but the intraday swings suggest some underlying uncertainty. It’s far from sure that the risk rally will continue in Europe and/or in the US. It looked that the dollar could enter calm waters yesterday after a potential ST trend reversal sign on Wednesday. The dollar indeed regained slightly further ground, but the gains were unconvincing. The overnight price action also suggests that underlying sentiment on the US currency remains fragile. The dollar at least doesn’t receive much support from a rise in ST US yields/interest rate differentials. We keep a close eye at the 1.1861/80 top. This level can again come under pressure if risk sentiment turns negative again. The overnight price action in USD/JPY doesn’t give much comfort for USD bulls
From a technical point of view, EUR/USD set a new post-ECB low on Tuesday last week, but the move petered out. EUR/USD this week regained intermediate resistance at 1.1690/1.1837, but the 1.1880 MT correction top was left intact. A break above the latter would suggest a full retracement to the 1.2092 correction top. We don’t preposition for such a scenario yet unless there comes real negative news from the US. Wednesday’s intraday price action suggested that a ST EUR/USD top could be in place , but this isn’t confirmed yet. We look out whether 1.1861/1.1880 resistance can do the job. USD/JPY’s momentum was positive in past months. The pair regained 110.67/95 resistance and tested the 114.49 MT range top. The attempt failed. A sustained break would improve the technical picture. However, last week’s price action was unconvincing despite a solid interest rate support. The pair dropped temporary below the 112.96 support early this week and struggles to prevent further losses. We see no sign yet of a sustained USD/JPY rebound.
EUR/USD fails to extend Wednesday’s correction
EUR/GBP
EUR/GBP declines off 0.9033 range top
EUR/GBP traded in the mid 0.89 area yesterday morning, off Wednesday’s top. Sterling profited from the better risk sentiment. Wednesday’s potential trend reversal signal in EUR/GBP (and in EUR/USD) also weighed on the euro cross rates. UK retail sales were marginally stronger than expected at 0.3% M/M, but printed the first negative Y/Y reading since 2013 (-0.3%). Sterling finally gained slightly further ground, especially against the euro. Press headlines indicating that UK and EU politicians acknowledge the need for an orderly, well-organised Brexit may have been slightly supportive for sterling. EUR/GBP closed the session at 0.8921. Cable finished the day at 1.3195.
There are no important UK data today. The focus for sterling trading will on politics/Brexit. UK PM May will meet several EU leaders, including EU president Tusk, at a summit on Labour and social reform in Gothenburg. It is unlikely that there will be an outright agreement e.g. on the amount of the divorce bill. However, politicians from both sides might hold a positive tone after informal meetings, indicating further progress in the run-up to the EU summit. We expect sterling to hold a waitand see modus. Investors probably don’t want to be positioned aggressively short sterling as more constructive Brexit news remains a potential positive event risk for sterling. In technical trade, sterling might regain some further ground. We changed our ST bias on EUR/GBP from positive to neutral yesterday. We maintain this assessment. Further overall euro gains remain a risk to this approach.
MT technical: Sterling rebounded in September as the BoE prepared markets for a rate hike. This rebound ran into resistance and sterling declined again as markets anticipated that any rate hikes would be very gradual and limited. EUR/GBP trades in a 0.8733/0.9033 consolidation range. Earlier this week, the EUR/GBP rebound ran into resistance just ahead of the 0.9033 range top. The 0.9015/33 area might be tough to break short-term.
EUR/GBP: topside test rejected. Room for a further technical rebound of sterling?
