Rates: Equity sell-off eases, but sentiment remains fragile
Global core bonds gained ground on Friday as fear of a global slowdown overshadowed ongoing progress in US-Sino trade talks and strong US data. Today, core bonds opened neutral with a cautious downward bias as the equity sell-off eased in Asia. Only second tier data on the economic calendar today, with investors already eying the Fed meeting of Wednesday.
Currencies: Dollar to maintain benefit of the doubt going into the Fed meeting
The euro suffered from poor EMU PMI’s on Friday. At the same time, the dollar enjoyed strong US retail sales. EUR/USD dropped to the 1.13 area. This morning, the dollar stabilizes. We expect the US currency to remain well bid going into the Fed decision as there is still a big discrepancy between market positioning and (expected) Fed dots.
The Sunrise Headlines
- Wall Street nosedived Friday, registering losses to 2%+. Tech equities underperformed. Asian markets are trading mixed this morning with China underperforming.
- The Australian government presented the strongest budget outlook in a decade. The country expects a budget surplus in 2019/20 of 4.1b Australian dollar compared to 2.2b projected in May. Growth expectations (2018-19) have been lowered however, from 3% to 2.75%
- The Italian government has found an agreement on the “numbers and contents” of the revamped budget it will propose to Brussels, in an attempt to reach a final deal. The initial proposal had been rejected by the EC back in October.
- Demonstrations in Hungary grow as opposition parties, students and trade unions revolted by the thousands on Sunday against PM Viktor Orban’s increasingly authoritarian reign.
- In its Q4 review, the BIS warned for more selloffs as markets are adjusting to a world of monetary tightening against the backdrop of increasing fears for an escalating trade war and world economic growth. Rising inflation, lower-rated US corporate debt and EU banking sector weakness a.o. are listed as challenges.
- The White House’s musical chairs following the midterms continues as Secretary of Interior is set to leave the Trump administration by the end of the year. People familiar hinted Homeland Security’s Nielsen and Commerce Secretary Wilbur Ross could be next on the list.
- Today’s economic calendar contains the US Empire Manufacturing index. The NAHB Housing Market Index is worth eyeballing after last month’s steep decline. The EMU publishes final November inflation data.
Currencies: Dollar To Maintain Benefit Of The Doubt Ahead Of Fed Meeting
USD to keep benefit of the doubt ahead of the Fed
Data favoured euro bears and dollar bulls on Friday. A poor French PMI (49.3) kickstarted a EUR/USD selling-wave. The German and EMU PMI’s confirmed that the poor performance of France wasn’t a country-specific exception. An ongoing risk-off sentiment also didn’t help the single currency. EUR/USD slipped below the 1.13 level. In US trading, the news flow turned further USD positive with strong (core) US retail sales. US yields and the dollar rose modestly after the retail sales, but it wasn’t able to remove market uncertainty on global growth. The rise in US yields and the dollar did run into resistance. EUR/USD closed the day at 1.1306 (from 1.1361). USD/JPY gained a few ticks after the retail sales but any gains soon evaporated as equities were sold again. The pair closed at 113.39 (from 113.3). Asian equities are trading mixed overnight. Australia and Japan are outperforming. China is struggling to prevent further losses. The dollar is trading little changed from Friday evening (EUR/USD 1.1310 area; DXY 97.45 area; USD/JPY gains a few ticks 113.45 area). The eco calendar is only modestly interesting later today. EMU final November CPI is expected to be confirmed at 1.0% (core) and 2.0% headline. In the US, the Empire manufacturing survey and NAHB housing market sentiment are interesting. The manufacturing index is expected to ease from 23.3 to 20.0. NAHB is expected at 61 (from 60) after last month’s steep decline. We have no reason to take a different view from the consensus. Decent US eco data might still be slightly USD supportive going into Wednesday’s Fed policy decision. The Fed policy decision is the key topic for (USD) trading this week. Currently, there is still an immense gap between the (September) Fed dots and market pricing. We still see a good chance of the Dec Fed dots still signalling 3 additional rate hikes next year. Anyway, the risk is for the Fed to remain much more hawkish than the market. Investors will probably take a cautious stance going into the Fed meeting. However, we expect some by default USD bid to persist. If so, EUR/USD could drift further south with 1.1216 (correction low) and 1.1187 (62% retracement) as obvious supports. Sterling entered calmer waters end of last week. EUR/GBP hovered in the upper half of the 0.89 big figure as euro softness (poor EMU PMI’s) and sterling caution kept each other in balance. During the weekend, the PM rejected the idea of a second referendum and will probably continue to do so today. We still avoid sterling long
EUR/USD drifting lower in the established range going into the Fed meeting
