Sunrise Market Commentary
- Rates: Consolidation on core bond markets
Monthly US PCE readings are expected at relatively high levels while consensus forecasts a small setback in the manufacturing ISM, but we see downside risks. Any rebound of US Treasuries will probably be short-lived with Fed Powell’s comments in mind. The Bund tends to outperform in recent days ahead of this weekend’s European political risk. - Currencies: EUR/USD tests key support. Sterling feels Brexit headwinds.
Optimistic comments of Fed Powell kept the dollar near recent highs. EUR/USD is testing the 1.22/1.2165 support area, but a real break didn’t occur yet. Today’s US data maybe won’t be strong enough to force the break, but the battle will continue. Sterling is sold as Brexit tensions are mounting ahead of PM May’s Brexit speech tomorrow.
The Sunrise Headlines
- US equity markets lost another 0.75% (Nasdaq) to 1.5% (Dow) yesterday. Asian markets lose ground as well this morning with Japan underperforming (-1.5%) and China outperforming (small gains).
- President Trump is set to announce steep tariffs on steel (25%) and aluminium (10%) imports in what would be one of his toughest actions yet to implement a hawkish trade agenda that risks antagonizing friends and foes alike.
- Growth in China’s manufacturing sector unexpectedly picked up to a six-month high in February (Caixin PMI: 51.6 from 51.5) as factories rushed to replenish inventories to meet rising new orders.
- Theresa May said that no UK prime minister could ever accept new EU proposals that could keep Northern Ireland under the bloc’s rules, as she hit out at Brussels first draft of a Brexit treaty.
- BoJ Kataoka cautioned against a premature exit from the BOJ’s ultra-loose monetary policy and called for a ramping up of the bank’s massive stimulus programme.
- Brent crude dropped from $67.5/barrel to $64.5/barrel the past two days. US crude stockpiles unexpectedly rose to the highest level YTD. Meanwhile, a shale boom sent US production to a record high in November.
- Today’s eco calendar heats up in the US with PCE deflator, manufacturing ISM, weekly jobless claims. The UK manufacturing PMI and EMU unemployment rate will also be published. Fed Powell speaks. Spain and France tap the market
Currencies: EUR/USD Tests Key Support. Sterling Feels Brexit Headwinds
EUR/USD test of 1.22/1.2165 continues
The (trade-weighed) dollar held near the post-Powell top yesterday, but there were no big follow-through gains. EMU inflation (1.2% Y/Y) was soft but with little impact on FX. US yields/interest rate differentials didn’t rise further. Markets want confirmation on Powell’s optimistic assessment from US data. EUR/USD hovered close to, but mostly slightly north of 1.22 (close 1.2194). USD/JPY suffered a late session setback as equity sentiment dwindled. The pair closed the session at 106.68.
Most Asian indices are trading in negative territory. China outperforms. The Caixin manufacturing PMI was marginally stronger than expected contrary to the ‘official’ PMI’s yesterday. Japanese data, including Q4 capital spending, were OK. Even so, BOJ officials confirm the need for further policy stimulation. Those monetary interventions don’t weaken the yen for now. USD/JPY is holding in the 106.50/85 area. EUR/JPY struggles no to fall below 130. EUR/USD (near 1.2190) tries to sustain below the 1.2206 neckline. USD strength prevails except for USD/JPY.
US income and spending data and the manufacturing ISM have market moving potential today. The PCE deflator is expected at 0.4% M/M and 1.7% Y/Y. The consensus for the monthly rise is quite high. A positive surprise won’t be easy. The ISM manufacturing is expected at 58.7 from 59.1. We see downside risks. In a daily perspective, the data probably won’t support further USD gains. Equity sentiment and the second part of Powell’s hearing before Congress are wildcards. A negative equity sentiment was a tentative USD supportive (ex USD/JPY) of late. We advocated consolidation of EUR/USD in the 1.25/1.2165 range ahead of the Powell hearing. The Powell comments brought the range bottom within reach. Chances on a break are growing if the key early month US data confirm solid US growth. Preparing a revisit of the 1.20 level? Further EUR/JPY losses might also weigh EUR/USD.
The open rift between the EU and the UK on the EMU draft Brexit text weighed on sterling yesterday. EUR/GBP jumped back higher to the 0.8850 area. Today, the UK manufacturing PMI is expected to ease slightly from 55.3 to 55.0. Sterling might be slightly more sensitive to a negative surprise than to a positive one. Still, the focus remains on tomorrow’s Brexit speech of PM May. There are no signs that the EU and the UK will reach a compromise soon. Sterling will probably stay in the defensive, but we don’t see a break out of the 0.87/0.9033 range.
EUR/USD: testing key 1.2206/1.2165 support.
