Sunrise Market Commentary
Rates: Further underperformance of US Treasuries with key US eco data?
The US manufacturing ISM will probably key in today’s trading session. We put risks on the upside of expectations, which should cause last week’s underperformance of US Treasuries vs German Bunds to continue. The focus remains on the US later this week with ADP employment, non-manufacturing ISM, FOMC Minutes and payrolls.
Currencies: Dollar shows no clear trend at the start of Q2. Euro softness prevails
Last week, the dollar rebounded, but the move was not convincing. EUR/USD remained in the defensive as markets are scaling back FX bets positioning for early ECB normalization. Today, the focus turns to the early month data. The dollar needs strong data to gain sustained ground. Sterling remains well bid even as the Brexit procedure started.
The Sunrise Headlines
- US equities closed the final session of a strong quarter with minor losses (S&P: +5.5%). Lower bank shares offset gains in utilities and real estate. Asian markets started Q2 on the front foot, overcoming WS’s negative lead.
- US president Trump said he plans to inform Chinese president Xi that the US will act alone against North Korea if it doesn’t get more help from Beijing. Trump pushed his view that China engages in trade abuses that lead to deficits.
- S&P raised Spain’s outlook of its BBB+ rating to Positive from Stable on balanced eco performance and narrowing deficit.
- French left-wing candidate Jean-Luc Melenchon’s creeping gain to 16% in the polls is adding a new layer of risk to France’s election. He is now within touching distance of Fillon in third place.
- Crude stockpiles are starting to drop, OPEC Secretary-General Barkindo said, a sign that supply cuts are restoring balance. However, US oil drillers added rigs for an 11th time to 662 last week, more than double the 2016 low,
- The PBOC raised interest rates for standing lending facility loans, aimed mainly at small- and medium-sized financial institutions. Rates were increased on overnight, 7-day and one-month contracts as it tries to rein in leverage.
- Confidence among Japan’s large manufacturers improved in the first three months of the year as a weaker yen helped profits rise to a record.
- Today’s eco calendar contains ISM manufacturing sentiment, car sales and construction spending. EMU data contain final PMI’ and unemployment rate.
Currencies: Dollar Shows No Clear Trend At The Start Of Q2. Euro Softness Prevails
USD shows no clear trend at the start of Q2
On Friday, EUR/USD entered calmer waters even as the EMU inflation slowed much more than expected. The news was apparently discounted after German and Spanish data on Thursday. EUR/USD hovered in a tight range in the high 1.06 area for most of the day, but closed the session at 1.0652 (from1.0674). USD/JPY failed to sustain Thursday’s rebound as the rise in core yields and the equity rally did ran into resistance. The pair closed the session at 111.39 (from 111.92).
Overnight, Asian equities are starting the quarter on a positive footing. The headline Japan Tankan indicator improved for the second quarter in a row, but the rise was more modest than expected. Capex was slightly stronger than expected. The dollar continues to trade mixed. EUR/USD is holding with reach of the correction lows reached late last week. So, the euro remains in the defensive. USD/JPY is holding in the mid 111 area.
Today, manufacturing ISM sentiment, car sales and construction spending will get attention. The March manufacturing ISM is expected to have eased slightly from 57.7 to 57.2.Most sentiments indicators improved further in March. Also on a global level, sentiment improved further. So, we put the risks on the upside of expectations. Construction spending is expected to have recouped January’s 1% M/M decline in February. Given the solid single family housing starts in January, we see no reasons to deviate from consensus. Speeches of ECB Coeuré, Fed Dudley and Harker are probably less important as all three spoke already in past days.
Last week, USD sentiment improved as the US reflation trade regained traction after a very strong US consumer confidence. US Fed speakers also confirmed that further policy normalization is to be expected throughout 2017. At the same time, the euro faced headwinds. Market rumours questioned the case for early ECB policy normalization. The move was reinforced by very soft EMU inflation data. In Friday both the decline of the euro and the rebound of the dollar slowed. A good US ISM manufacturing should support a further rebound in US yields and in the dollar. That said, we have the impression that the dollar needs very strong data to gain more ST term. For EUR/USD, has the repositioning away from early ECB normalization s already been worked out. We maintain a cautious EUR/USD negative bias, but the decline might slow compared to last week’s pace. We stay more cautious on the USD/JPY upside potential.
From a technical point of view, USD/JPY regained the 111.36/60 previous range bottom. This called off the imminent downside alert in this cross rate. For now, we maintain a neutral bias. EUR/USD extensively tested the topside of the MT range, but the test was rejected last week. The 1.0874/1.0906 area now looks a solid resistance. EUR/USD might return lower in the previous 1.0875/1.05 trading range.
EUR/USD: euro drifting lower in the 1.09/1.05 range
EUR/GBP
No negative Brexit fall-out on sterling yet
The final UK Q4 GDP printed at a good 0.7% Q/Q and 1.9% Y/Y on Friday, but details suggested a softening in consumer spending even as the savings ratio declined. Net exports made a substantial positive contribution to growth. Will exports continue to compensate for a slowdown in domestic spending as the Brexit-procedure continues? In a guideline for the Brexit-negotiations, EU Tusk indicated that enough progress has to be made on issues regarding the separation process before talks on future trade relations can start. The news was a bit mixed to even slightly negative for sterling, but for now it didn’t hurt the UK currency. Especially EUR/GBP declined further, partially on euro weakness. The pair closed the session at 0.8485 (from 0.8562). Cable hovered mostly in the higher half of the 1.24/lower 1.25 big figure but closed the session at 1.2550.
The UK manufacturing PMI is expected to rebound slightly from 54.6 to 55.0 today. We have no reason to take a different view from the consensus. Mid- March, sterling found a better bid. Substantially higher than expected UK inflation and a more hawkish tone from the BoE supported sterling. We changed our shortterm bias on EUR/GBP from positive to neutral. Last week’s decline of the euro reinforced the EUR/GBP downside momentum. Further consolidation in the MT sideways range might be on the cards. The return below the 0.8592 previous break-up suggests that a full retracement to the 0.8402 range bottom is possible. Longer term, Brexit-complications remain a potential negative for sterling. We are not convinced that the BoE will raise rates anytime soon, even not after recent higher inflation data.
EUR/GBP: euro decline and sterling short-squeeze push EUR/GBP lower in the established trading range
