Fundamental Analysis

Dollar Maintains Benefit of the Doubt

Typography

 

  • European equities trade near opening levels in another uneventful trading session. US stock markets open little changed as investors await more guidance from the payrolls and/or US political developments.
  • The leader of Germany's Social Democrats has called for EU member states to commit to a "United States of Europe" by 2025, setting out an ambitious European reform agenda as a condition for holding talks with Chancellor Merkel on the formation of a new government.
  • German industrial production unexpectedly declined for a second month in October as workers took extra days off, interrupting a run that put Europe's largest economy on track toward its best performance in six years. Output declined 1.4% from September, when it fell a revised 0.9%.
  • The number of Americans filing for unemployment benefits unexpectedly fell last week to 236k (vs 240k expected), suggesting a rapid tightening of the labor market that bolsters expectations the Federal Reserve will raise interest rates next week.
  • President Trump will face off with Democratic leaders of Congress later today in a high-stakes White House meeting intended to bridge differences over a spending bill and prevent a government shutdown.
  • A spokesman for Jean-Claude Juncker, EC president, said there was still "no white smoke" in the talks which have stumbled as Theresa May tries to find a suitable border arrangement to satisfy the Democratic Unionist party in Northern Ireland.

Rates

More range bound trading

Global core bonds traded in a narrow sideways range today. Second tier eco data (disappointing German industrial production, confirmation EMU Q3 GDP and strong jobless claims) didn't affect trading. US Treasuries slightly outperformed as political risk remains elevated (debt ceiling, tax reforms, Mueller investigation, Jerusalem). Risk sentiment on equity and commodity markets remains fragile, but the selloff didn't continue.

At the time of writing, the German yield curve bear steepens with yield changes ranging between -0.3 bps (2-yr) and +1.5 bps. The test of 0.3% support in the German 10-yr yield is ongoing. The specific curve movement could be related to comments from the German deputy FM who said that the Finanzagentur will continue to rely on 30y funding next year while even suggesting the possibility of a 50-yr bond. The US yield curve bull flattens with yields up to 2.5 bps lower (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany are nearly unchanged with Portugal (-5 bps) and Italy (-3 bps) outperforming.

Currencies

Dollar maintains benefit of the doubt

There was no high profile news to guide trading in the major FX cross rates today. The risk-off correction slowed, but there was no sustained rebound. Data were second tier and close to expectations. Investors await tomorrow's US payrolls and a solution on the US government spending bill. Trading in the major cross rates was technical in nature, with the dollar gaining on points. Investors apparently don't want to be positioned USD short ahead of tomorrow's payrolls.

Asian equities showed a diffuse picture. Japan outperformed with gains of 1% +. China and Korea underperformed. The profit taking move of the previous sessions slowed, but there is no big story to start a clear directional move/rebound. USD/JPY held in the mid 112 area. The pair lost only limited ground in yesterday's risk-off correction. EUR/USD stabilized near 1.18. At 93.60, the trade-weighted dollar (DXY) holds near the highest level in 2 weeks.

There was absolutely no unequivocal story to guide trading in Europe. European equities tried to join this morning's rebound in (some) Asian markets, but the move lacked any conviction. Core yields also didn't go anywhere. EMU Q3 growth was revised marginally higher to 2.6% Y/Y (from 2.5%). Evidently this was not enough to inspire any directional move. In line with the 'price action' earlier this week, the dollar maintained the benefit of the doubt recording marginal gains against the euro and yen.

The 'USD-bid' slowed this afternoon. US jobless claims were slightly better than expected (236K vs 240K expected), but that wasn't enough to cause any USD repositioning ahead of tomorrow's US payrolls. Headlines from the parties involved in the reconciliation of the House and Senate tax bill suggested further progress but we assume that (FX) markets didn't give much weight to it yet. USD/JPY trades in the 112.65 area. EUR/USD is changing hands just below 1.18. Dollar gains remain minimal, but investors apparently don't want to be positioned short USD going into tomorrow's US payrolls.

Sterling awaiting 'new' Brexit news

There was also little hard news on Brexit today. Rumours continued to swirl. Ireland indicated that it wants to be helpful in case UK PM may comes up with a new proposition, but its basic position on the issue of the Irish border hasn't changed. At the same time, the EU suggested that it might be more flexible on the deadline for PM May to finalize a proposal that would be presented at the EU summit at the end of next week. For now, there are no indications that there is any progress on the heart of the matter. Sterling was captured in erratic order-driven trading as most investors are avoiding directional positions as long as the binary Brexit-risk persists. EUR/GBP hovered up and down around the 0.88 pivot (currently 0.8810). Cable spiked briefly to the 1.3320 area, but trades again near 1.3375.

Author: KBC BankWebsite: https://www.kbc.be/dealingroom
KBC Bank
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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