- Rates: US 10-yr yield nears 2.78% key support
A new US equity sell-off dragged US yields up to 6 bps lower on Friday with the US 10-yr yield now near the key support level of 2.78%. Today’s eco calendar won’t inspire trading with risk sentiment probably setting the tone again. European investors take into account Thursday’s ECB meeting, searching for clues on new TLTRO’s and changes to the reinvestment policy. - Currencies: Dollar struggles as US yields decline further
The dollar is losing the most ground. The US currency fails to fulfill its safe haven role as US yields are tumbling lower. Markets ponder US growth prospects as the trade-rift with China intensifies again. EUR/USD is drifting further north in the 1.12/1.1621 trading range. Sterling suffers going into tomorrow’s key Brexit vote.
The Sunrise Headlines
- US stock markets closed deep in the red on Friday as losses stranded between -2% and 3% on investor concerns that growth has peaked and the ongoing US/China trade spat. Asian bourses lose up to 2% this morning.
- China has summoned the US ambassador in Beijing to demand the release of Ms Meng’, CFO of China’s Huawei, in a sign US-Chinese relations are heating up. China also threatened Canada with “serious consequences” for arresting her.
- Germany’s CDU has elected Merkel’s protégé, Annegret Kramp-Karrenbauer, to succeed her as party leader. Germany has also dropped its long-held EU migrant quota demand in a bid to fix the EU’s asylum system.
- Maurice Obstfeld, the IMF’s departing chief economist, warned the global growth slowdown will likely have a drag on the US economy as well. His assessment is a downgrade of the “steady global growth” forecast from Oct.
- Belgium’s N-VA party has left the government, as it cannot agree with its coalition partners to support the UN migration pact. PM Michel will now form a minority government until the new national elections in May next year.
- The Japanese economy shrank 0.6% Q/Q in Q3, the most in over four years, with business spending decreasing the hardest. China’s consumer inflation disappointed with 2.2% inflation in November (2.4% expected).
- Today’s economic calendar is rather thin, with only second-tier data. The US releases the Job Openings for October. In the EU, the German trade balance and Italy’s industrial production for October will be published.
Currencies: Dollar Struggles As US Yields Decline Further
USD struggles as US yields nosedive
Global markets initially entered calmer waters on Friday. Oil prices bottomed as OPEC+ agreed to cut production. The US payrolls were a little softer than expected but still painted a healthy labour market. Both factors helped to ease global market tensions, at least temporary. The USD held relatively tight ranges against the euro and the yen. However, risk-off sentiment returned later. The political bickering between the US and China on the arrest of the Huawei CFO intensified. US yields nosedived again. Of late, this was no guarantee for a USD decline. However, this time, the US currency struggled despite the global risk-off context. EUR/USD finished at 1.1379. USD/JPY closed at 112.69. The risk-off trade continues in Asia this morning. Political tensions between the US and China, soft Chinese data this weekend (trade & prices) and a downward revision of the Japan Q3 GDP are weighing on sentiment. Moves in the major FX cross rates stay modest and orderly, but the dollar remains in the defensive. The trade-weighted dollar dropped below 96.50. EUR/USD extends gains north of the 1.14 level. USD/JPY trades in the112.40 area. Later today, the eco calendar is thin with only second tier data in the US (JOLTS job openings) and in Europe. The Fed entered its blackout period. Even so, interest rate markets are ever more embracing the scenario that there will hardly be any additional Fed hikes after next week’s meeting. We don’t see this scenario confirmed by the US data. Even so, markets have growing doubts on US growth. For now, there are tentative signs that this is also weighing on the US dollar. It is difficult to give the euro some kind of a safe haven status. However, short-term, it looks that a riskoff sentiment combined with a further decline in US yields might be a (moderate) negative for the dollar. Of late we advocated more range trading in the 1.12-1.15/1.1621 trading range. ST, EUR/USD might drift a bit further north in this range.
Sterling remained in the defensive on Friday and this morning as the key Brexit vote scheduled for tomorrow is coming closer. During the weekend, there was still pressure on UK PM May to delay the vote and try to get a better deal from Europe. However, for now, it looks that a vote with no approval remains the most likely scenario. This continues to weigh on sterling. EUR/GBP clearing the 0.8939 resistance illustrates the fragile sentiment on sterling
USD (trade-weighted –DXY) dollar struggles as US yields discount ever less Fed tightening beyond 2018
