Sunrise Market Commentary
- Rates: More underperformance of US Treasuries?
Today’s eco calendar heats up with EMU PMI’s, more US supply and FOMC Minutes. The EMU composite PMI is forecast to correct lower from a multi-year high. Minutes should reflect the previous Fed’s statement hawkish tone. US Treasuries’ underperformance against German Bunds can continue. - Currencies: Dollar tries to fight back
Yesterday, the dollar extended the gradual rebound that started at the end of last week. Today, the focus is on the Minutes of the January Fed meeting and on the US Treasury auctions. We expect the Fed to confirm a modestly hawkish stance. The downside of the dollar looks a bit better protected.
The Sunrise Headlines
- US markets ended mixed yesterday. The Nasdaq closed merely flat while the S&P (-0.5%) and Dow (-1%) lost ground. Most Asian equity indices trade positive with mainland China still closed for Lunar NY.
- Dutch FM Hoekstra told the FT that the Netherlands is demanding that private investors face mandatory dent write-downs in future EMU bailouts.
- US Special Counsel Mueller stepped up pressure on two former Trump campaign aides to cooperate in his probe into possible collusion with Russia, unsealing a criminal charge against a lawyer for lying to Mueller’s investigators.
- The FT reports that a group of Tory Eurosceptic MPs has tried to flex its political muscle with a letter to PM May, urging her to hold firm on plans for Brexit to mean leaving the single union and customs union.
- Japanese manufacturing activity expanded at a slower pace in February (PMI down to 54 from 54.8) as growth of new export orders slowed due to the yen’s appreciation.
- Australian wages rose a tad faster than forecast in Q4. Wages increased by 0.6% Q/Q and 2.1% Y/Y. However, a RBA rate hike is still some distance away.
- Today’s eco calendar contains EMU PMI’s, the UK labour market report, US existing home sales and FOMC Minutes. The US taps the market. Fed Harker speak on the eco outlook while several BoE members testify to Parliament
Currencies: Dollar Tries To Fight Back
More underperformance of US Treasuries?
Global core bonds started on a weak footing yesterday morning. US Treasuries had some catching up to do following Monday’s President’s Day Holiday, but the Bund lost ground as well (higher-than-expected German PPI). The intraday downside was rapidly exhausted with core bond markets returning to opening levels (US Note future) and beyond (German Bund). US Treasuries underperformed German Bunds. The start of this week’s heavy US supply operation went plain vanilla. US yields ended 1 bp (7-yr) to 2.9 bps (2-yr) higher. Changes on the German curve varied between -0.5 bps (5-yr) and +0.8 bps (30-yr). 10-yr yield spread changes vs Germany widened up to 3 bps with Greece underperforming (+11 bps).
The US Note future trades near yesterday’s official close. Asian stock markets don’t copy WS losses, but risk sentiment seems fragile. Oil prices lose some ground. We expect a neutral opening for the Bund.
Today’s eco calendar heats up with EMU PMI’s and FOMC Minutes. The composite PMI hit a multiyear high in January. A small setback is expected today, but PMI’s will still point at good growth levels going forward. They probably won’t move markets. The US’s heavy supply operation continues with amongst others a 5-yr Note auction against a background of an uptrend in yields and a projected increase in the US’s twin deficit. FOMC Minutes will probably be hawkish in line with the Fed’s previous statement in which it twice added the word “further” in relationship with more tightening. US events could push additional downward pressure on US Treasuries, with more underperformance vs Bunds. US yields are near cycle highs and might be attracted by key resistance levels (eg US 10-yr yield 3.05%; 2014 high). Philly Fed Harker speaks on the economic outlook. He’s a non-voter this year who favoured 2 rate hikes in his previous public address early February.
Strong growth momentum, rising inflation (expectations) and the global turn towards monetary policy normalization are structurally negative factors for core bonds medium term. US and German yields cleared resistance levels earlier this year and are moving towards next targets. The trading band for the US 10-yr yield is 2.64%-3.05%. The German 10-yr yield’s trading band is 0.62%-1.06%. Correction towards the lower bounds could be used to put up short positions in the Bund and the US Note future.
German Bund consolidates around sell-off lows
USD tries to fight back
The dollar extended its the gradual rebound yesterday. German ZEW sentiment was better than expected, but didn’t help the euro. Interest rate differentials widened in favour of the dollar. The US 2-yr auction was a bit sluggish, but with little impact on global markets. EUR/USD declined in the 1.23 big figure, drifting further away from the key 1.2555/98 resistance area. The pair closed the session at 1.2337. USD/JPY finished the day at 107.33.
Most Asian equities show modest gains this morning, supported by a gradual further rise of the USD (despite the negative WS close). USD/JPY is drifting to the high 107 area. EUR/USD trades near 1.2325. Australian wages grew slightly faster than expected in Q4 (0.6% Q/Q; 2.1% Y/Y). AUD/USD ticked briefly higher, but turned back south in line with overall USD strength. An RBA rate hike isn’t around the corner yet.
February EMU PMI’s will be published today. A modest decline from historically high levels is expected. The impact on the euro should be limited. In the US, the PMI’s, existing home sales and the Minutes of the January Fed meeting will be published. The Treasury will sell 2y floating rate Notes and 5y bonds. We expect the Minutes to be modestly hawkish. The auction might keep US yields under upward pressure. Over the previous days, the dollar staged a cautious rebound. This rebound might still go a bit further today. US equities show tentative signs of underperformance. Of late this context was often mildly USD positive. From a technical point of view, EUR/USD 1.2555/98 (correction top, 62% retracement) is a key resistance. A break would indicate more trouble for the USD. Economic fundamentals don’t call for a break, but USD sentiment stays fragile. We expect EUR/USD to hold the 1.2598/1.2206 band.A downside break would call of the ST USD alert.
Sterling regained some further traction yesterday as markets hoped for a more constructive approach from the EU in the Brexit negotiations. At the same time, the pressure from hardline Brexiteers on PM May persists. Today, the UK labour data will be published. Employment growth is expected solid, but wage growth might remain modest (2.5% Y/Y). Over the previous days, sterling was better bid as the test of EUR/GBP 0.8930 was rejected. However, we don’t expect this move to go very far as long as there is no real progress on Brexit
EUR/USD: drifting back south in the 1.2206/1.2555 ST range
