- Rates: Core bonds revive on safe haven flows
Global core bonds traded mixed yesterday as risk sentiment swung both sides. Disappointing data in China/Japan tilted the risk balance south overnight, supporting core bonds. Retail Sales are expected to remain solid in the US, while Markit PMI’s in France, Germany and the EMU will most probably bottom out. The countdown to the Fed starts. - Currencies: Dollar to maintain benefit of the doubt ahead of Fed meeting
The ECB policy meeting/press conference provided little new guidance for EUR/USD trading yesterday. Today, the EMU PMI’s and US retail sales have market moving potential. Decent US eco data in a risk-off context should be moderately USD supportive going into next week’s Fed meeting. The sterling ‘relief really’ is already losing momentum
The Sunrise Headlines
- US equities ended mixed after a lacklustre session. Nasdaq (-0.39%) underperformed. Asian markets are trading in negative territory with Japan (- 1.8%) and Korea (-2.2%) underperforming.
- According to the Bank of Japan’s 4Q Tankan index companies (both small and large, manufacturing and non-manufacturing) are more optimistic about the current business environment but show far less confidence in the 3m outlook.
- Chinese November retail sales (8.1% YoY) were below expectations (8.8%), as were industrial production data (5.4% YoY vs 5.9% expected). Property investment stabilised at 9.7% YoY while the jobless rate declined to 4.8%.
- The Reserve Bank of New Zealand is pondering a near doubling of the amount of “high quality capital” banks have to hold. Increasing the shareholders stake in banks would incentivise management scrutiny and strengthen the banking system.
- EU leaders rebuffed May’s request for any legal guarantees about the Irish backstop, only saying they hope it won’t have to be triggered, but that the legal brexit agreement cannot be renegotiated.
- The French parliament rejected a motion of no confidence in President Macron’s government. The vote came after weeks of demonstrations by the Yellow Vests, initiated by the government’s tax plans.
- Today’s economic calendar provides markets with US November retail sales and EMU PMI’s for December. ECB’s Vice-President Guindos is scheduled to speak. The European Council holds its second day meeting
Currencies: Dollar To Maintain Benefit Of The Doubt Ahead Of Fed Meeting
USD holding tight range, counting down to the Fed
The ECB policy decision and press conference were not able to force the EUR/USD cross rate out of the established consolidation pattern, yesterday.The ECB slightly revised down 2018 and 2019 growth. Draghi summarized the ECB attitude as ‘continuing confidence with increasing caution’. This assessment was hardly a surprise for markets. The euro traded with a slightly negative bias during the press conference, but reversed most of this decline later. EUR/UISD closed the session at 1.1361 (from 1.1369). USD/JPY held a cautious upward bias, even as sentiment on risk turned less positive later in the session. The pair closed at 113.63. Overnight, the economic news flow didn’t comfort global investors. China November retail sales and production were substantially weaker than expected. The BoJ Tankan outlook painted a mixed picture. Sub-indices on the current assessment held up well, but Japanese firms grow ever more concerned on the outlook. Regional equities are ceding ground with Japanese and Chinese indices losing 1-2%. Negative regional sentiment is weighing heavily on the Aussie (AUD/USD 0.7190) and the Kiwi dollar (0.68 area). The RBNZ considering higher capital requirements for banks is an additional negative for the kiwi dollar. Yen gains are again modest given the risk-off sentiment (USD/JPY mid 113 area). EUR/USD is trading little changed in the mid 1.13 area. Later today, the eco calendar is well filled with the EMU PMI’s, US retail sales and production data. Will EMU PMI’s bottom after the decline over the previous months? US core retail sales are expected solid (0.4% control group). We expect a decent report. A combination of a risk-off context and decent US eco data might tilt the intraday balance on the FX markets in favour of the dollar going into next week’s Fed meeting. Of late, the EUR/USD 1.1450/1.15 area proved to be a though resistance. We don’t see a trigger for a break ST.
Sterling regained some further ground yesterday after PM May survived a confidence vote, avoiding an immediate period of outright political chaos. EUR/GBP drifted a bit further below the 0.90 handle. UK PM May yesterday joined the EU summit in Brussels. For now, It looks the EU is only prepared to give clarifications rather than concessions on current Brexit deal. This opens few perspectives on an approval of the Brexit deal in the UK parliament. Overnight, sterling already reversed part of the recent ‘relief’ rally. We still avoid sterling long exposure.
EUR/USD: ECB fails to unlock EUR/USD stalemate. Countdown to next week’s Fed meeting continues
