Rates: Peripheral bonds and US stocks sell-off, lifting core bonds
Core bonds benefited from their safe haven status yesterday with both EMU peripheral bonds and US stocks selling off. There is no compelling case to neither expect yesterday’s hiccup to last, nor to see a strong risk rebound. We slightly favour the former scenario. The German 10-yr yield hits first key support around 0.41%.
Currencies: EUR/USD nears 1.1432 intermediate support
Yesterday, the dollar remained strong. The euro couldn’t maintain initial resilience as the rift between the EU and Italy on the Italian budget was formally escalated. EUR/USD is near the 1.1432 support. A further rise in US yields and uncertainty on Italy might keep EUR/USD in the defensive for now
The Sunrise Headlines
- US equity markets lost ground yesterday with losses over 1%. Technology shares underperform. Asian markets trade mixed this morning with China strongly rebounding from earlier losses.
- The European Commission said in a letter to Italy’s Finance Minister Tria that the country’s 2019 budget draft is in serious breach of EU budget rules. The Commission asked to give some explanation by Monday.
- Chinese top financial officials have tried to shore up confidence in its tumbling stock market. Heads of China’s central bank, securities watchdog and banking and insurance regulator promised measures to help ease financial pressure.
- Fed Governor Quarles said he favours a path of gradual rate hikes. He added that a tick-up in the economy’s potential growth rate is possible without overheating, hinting that a slower hiking path could be more appropriate.
- Steve Mnuchin, US Treasury secretary, is the next political heavyweight to withdraw from the Future Investment Initiative conference in Saudi Arabia as international tensions rise over the disappearance of journalist Jamal Khashoggi.
- China’s economic growth slowed to 1.6% Q/Q & 6.5% Y/Y in Q3. Retail sales (9.2% YoY) beat expectations in September, while industrial production (5.8% YoY) fell back more than expected showing the impact of US trade tensions.
- Today’s eco calendar is extremely thin with no important data to be released. Bank of England Governor Carney speaks in New York, as do Federal Reserve’s Bostic and Kaplan.
Currencies: EUR/USD Nears 1.1432 Intermediate Support
EUR/USD nears 1.1432 intermediate support
On Wednesday, the dollar got a shot in the arm as the minutes of the September Fed meeting indicated a continuation of gradual rate hikes. US interest rates jumped and so did the dollar. Yesterday, in Europe, the dollar rally temporarily took a breather as European equities held up rather well compared to other (Asian) markets. However, euro resilience could not be sustained. Riskoff gradually returned and there were ever more rumours that the EU would challenge the Italian budget proposal. This was formalised in a letter from the EU to the Italian government later in the session. US/German interest rate differentials remained near a record peak and the euro suffered. EUR/USD closed at 1.1453, near the intraday low. USD/JPY also declined in line with the global risk-off the finish the day at 112.21. Overnight, Asian equities join the correction from the US yesterday. China Q3 GDP was softer than expected (6.5% Y/Y) but September retail data suggest that domestic spending remained healthy. Chinese authorities this morning also indicated that they would take action to address liquidity issues and said that equity valuations in the country were low. This official support put a floor for Chinese equities this morning. The yuan held near the lowest level since early 2017 (6.94 area). EUR/USD trades near 1.1460. USD/JPY is holding up well despite the regional risk-off. Today, the US & EMU eco calendar is thin. US existing home sales are the exception to the rule. Global factors will probably drive USD trading. In case, the risk-off correction could slow, US yields and interest rate differentials might remain USD supportive. At the same time, uncertainty on Italy might remain a slightly negative for the euro. Over the previous days, EUR/USD drifted lower off the 1.1600/20 resistance area. A retest of the 1.1432 ST range bottom is very well possible now. A break would open the way to the 1.1301 August correction low. Yesterday, EUR/GBP trading held to a rather tight 0.8770/0.88 trading range. The UK currency was more or less immune to all kinds of Brexit noise in the wake of the EU summit. Even poor UK retail sales had only a limited impact. EUR/GBP gained some ground on the overall risk-off later. Today, the UK public finance data are probably no sterling mover. We expect more directionless trading as long as the Brexit stalemate persists
EUR/USD: dollar remains well bid. Euro suffers from Italy. Test of EUR/USD 1.1432 might be on the cards
