Sunrise Market Commentary
- Rates: German politics and risk sentiment in focus
The failed German coalition talks are a short term positive for Bunds. Risk sentiment on stock markets will probably remain key for core bond trading. The German Dax is still in the “danger zone” between 12 900 and 13 000. Losing this technical area would suggest a more pronounced downward correction. The eco calendar is uneventful today. - Currencies: EUR declines on political uncertainty in Germany
Last week, the euro was more resilient than the dollar to global uncertainty. This morning, the euro suffered a setback as the German government negotiations collapsed. The jury is still out whether this will have a lasting impact on FX trading. Short-term, we assume that the topside in the euro has become better protected
The Sunrise Headlines
- US stock markets ended the week on a weaker note, closing up to 0.4% lower. Asian bourses cede ground overnight as well with China underperforming (-1%) as the PBOC tightened asset management rules.
- The protracted struggle to form a new German government under the leadership of Angela Merkel collapsed, plunging Europe’s biggest economy into political uncertainty and raising the prospect of new elections.
- UK PM May is expected to get the green light from ministers today to increase her Brexit “divorce bill” offer, narrowing the gap with the EU’s €60bn estimate in a bid to break the deadlock in talks with Brussels.
- China’s central bank issued sweeping guidelines to tighten rules on asset management business, the latest step by Beijing to fend off systemic risks in the country’s rampantly growing shadow banking sector.
- Special Counsel Mueller’s team investigating whether President Trump sought to obstruct a federal inquiry into connections between his presidential campaign and Russian operatives has now directed the Justice Department to turn over a broad array of documents, ABC News has learned.
- Republican hopes to pass a tax bill may hinge on whether to repeal the Obamacare rule that requires people to buy health insurance. Senator Collins said that would be "a problem," a sign that changes will be needed.
- Today’s eco calendar is extremely thin with only central bank speeches from ECB Nowotny, Lautenschlaeger, Draghi and Constancio
Currencies: EUR Declines On Political Uncertainty In Germany
German political crisis to weigh on the euro?
On Friday, sentiment on risk remained fragile and the dollar struggled to prevent further losses. Diffuse news from the progress on the US tax bill and from the investigation into the Russia links of the Trump campaign kept investors in a waitand- see modus. Strong US housing data couldn’t provide a lasting support for the US currency either. EUR/USD held near the 1.18 level for most of the session and closed the day at 1.1790. USD/JPY experienced stronger headwinds and tested the 112 area. (close at 112.10).
Overnight, risk sentiment in Asia remains negative. Most regional indices are trading down. China underperforms as the Chinese regulator proposed new measure to curb risk in some parts of the financial sector. Japanese trade data were strong, but close to expectations and had no big impact. The collapse of the German coalition talks filters through into market sentiment. EUR/USD dropped from the 1.18 area and trades currently in the 1.1740 area. For now, USD/JPY suffers no further losses. The pair holds in the 112 area.
Today, the eco calendar is thin, except for the US leading indicators, no market mover. Several ECB members including Nowotny, Lautenschlaeger (hawks), Draghi and vice-president Constancio (doves), will speak at different occasions. The views of all speakers are well-known. Further out this week, the eco calendar remains thin and dominated by the US Thanksgiving holiday on Thursday and Black Friday. The US durables and the Minutes of the last FOMC meeting on Wednesday are the sole releases of interest. In EMU, the calendar is somewhat more interesting with the preliminary PMI’s for November and the ECB Minutes of the last policy meeting on Thursday and the German IFO on Friday.
Asian markets opened with a risk-off bias this morning. European investors will ponder the potential impact from the collapse of the German government negotiations. Last week, the dollar was more sensitive to global risk aversion than the euro. Given the developments in Germany, the balance between the euro and dollar might turn more neutral or even tilt to the disadvantage of the euro. In this respect, we keep a close eye on the price action in the EUR/JPY cross rate. The pair is currently testing the key 131.40 support. A sustained break of this support area, combined with a more protracted risk-off sentiment might weigh on EUR/USD and, to a lesser extent on USD/JPY. We start the week with cautiously negative bias on the euro.
From a technical point of view, EUR/USD set a new post-ECB low two weeks ago, but the move petered out. EUR/USD last 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 unless real negative news from the US pops up. On the downside, the 1.1554 reaction low remains the first important reference, but it is still far away. A further downside correction within the 1.1554/1.1880 range is favoured. The USD/JPY’s momentum was positive in October, but deteriorated this month. The pair tested the 114.49 MT range top, but the attempt failed. Recent price action was unconvincing despite a solid US interest rate support. Last week’s drop below the 112.96 support reinforces the downside pressure. 111.65 is the next key support. A break would turn the picture outright USD negative.
EUR/USD: Will uncertainty on Germany break the euro positive momentum ?
EUR/GBP
EUR/GBP: topside test again rejected
Earlier last week, markets saw rising chances of a potential positive development in the Brexit negotiations. On Friday, sentiment was less constructive as UK Brexit Minister Davis indicated that it was now up to the EU to do concessions. The news flow from the Gothenburg EU meeting /summit also didn’t suggest that big Brexit progress could be in the making. PM May and EU’s Tusk finally came to an obvious conclusion: There is more work to be done! EUR/GBP jumped back north from the low 0.89 area to the 0.8960 area late in the morning session. The pair closed the session at 0.8923. Cable dropped from the 1.3250/60 area to the 1.3170 are, but rebound later in the session. The pair closed the session at 1.3215 and holds the established sideways consolidation pattern.
There are no important eco data in the UK today. BoE deputy governor Dave Ramsden speaks at King’s College in London. However, we don’t expect BoE talk to change the outlook for the sterling going forward. EUR/GBP declined on the negative headlines from Germany overnight. At the same time, there are press rumours that the UK is considering to raise the amount it is prepared to pay for the Brexit divorce. ST, these developments might be positive for sterling and negative for the euro. In a longer term perspective , a political stalemate in Germany probably also won’t make the Brexit process easier. However, in a day-to-day perspective, euro softness due to the uncertainty on Germany will probably prevail as a driver for EUR/GBP trading.
MT technical: Recently, the BoE driven sterling rebound ran into resistance and sterling declined again as markets anticipated that any rate cycle would be very gradual and limited. EUR/GBP trades in a 0.8733/0.9033 consolidation range. Last week, the EUR/GBP rebound ran into resistance just ahead of the 0.9033 range top. We changed our ST bias on EUR/GBP from positive to neutral last week. 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?
