- Rates: Room for profit taking on stretched core bond rally?
US Treasuries significantly outperform Bunds in US dealings yesterday following a huge negative surprise of the manufacturing ISM and as stock markets lost up to 3%. Risk sentiment improved overnight on trade developments. Together with an expected strong payrolls report, it could provide the setting for some profit taking on the stretched core bond rally. - Currencies: Dollar to ease on ‘softer’ Powell?
FX markets were looking for a new equilibrium yesterday after the early morning ‘flash crash’/yen rally. Later in the session, the dollar declined further as a poor ISM reinforced investor concerns on US growth. Today, the focus for USD trading will be on the US payrolls and on an interview of Fed’s Powell. The combination of an easing in the risk-off trade and a ‘softer’ Powell might weigh on the dollar.
The Sunrise Headlines
- US equities dropped heavily yesterday with losses up to 3% after Apple’s revenue warning and a disappointing ISM. Asian equities are trading mixed, with China outperforming on new trade hopes.
- The US and China confirmed to hold trade talks on Monday. A US delegation, led by Deputy Trade Representative Jeffrey Gerrish, will visit Beijing for a first face-to-face negotiation since both countries agreed to a 90-day truce.
- The US House of Representatives, now lead by Democrats, passed funding bills yesterday aimed to end the partial shutdown of the government. US President Trump already signalled to veto the bills as it doesn’t include wall funding.
- Italy is weighing its options to rescue the latest endangered lender, Banca Carige, to shield small savers and taxpayers from losses. A larger bank to take over Carige or a capital increase are the options currently under consideration.
- China’s Caixin PMI Services increased modestly in December to 53.9, up from 53.8. The Composite PMI rose to 52.2, up from 51.9 in November. Meanwhile, the Chinese government continues to support small business financing.
- Ireland booked its first surplus in 2018 since the economic crisis in 2008. PM Varadkar said they are now well-prepared for a no-deal Brexit. However, the surplus mainly depends on corporate tax receipts from multinationals.
- Today’s economic calendar contains US Payrolls, Average Hourly Earnings and the Unemployment Rate, while for the EMU we receive inflation data. Ex-Fed giants Yellen, Bernanke and current chair Powell speak
Currencies: Dollar To Ease On ‘Softer’ Powell?
Dollar the ease on more dovish tone from Powell?
FX markets were looking for a new equilibrium in the wake of the sharp rally of the yen early in Asia yesterday. The yen gradually reversed part of the gain acquired during the FX flash crash. Risk sentiment remained fragile but initially core/US yields stabilized after the recent decline. USD showed no clear direction. US data were mixed with strong ADP private job growth, but the manufacturing ISM tumbled sharply from 59.3 to 54.1 and rekindled investor fears on US/global growth. US yields, equities and the USD started a new downleg. EUR/USD rebounded to the 1.14 area. Remarkably, USD/JPY held rather ‘strong’ despite a further decline in US interest rates and equities. EUR/USD finished the day at 1.1394. USD/JPY rebounded after the flash-crash to close the day at 107.68 (from 108.88). Overnight, Asian equities show a mixed picture. Japan shows losses of 1.50%/2.25% as they return from the New Year holidays, but the Japan manufacturing PMI (52.6) wasn’t too bad. The Chinese Caixan services/composite PMI’s also surprise on the upside, easing growth fears. Chinese equities are rebounding. EUR/USD stabilizes just below 1.14. USD/JPY (108.15 area) gains a few ticks as the risk-off trade is losing some traction. Later today, the final EMU PMI’s, EMU inflation and German labour data will be published. Inflation will probably be soft, but the impact on the euro might be modest. In the US, the payrolls take centre stage. Solid job growth (184K) is expected. However, labour data are a lagging indicator. So, the impact might be less than e.g. of the ISM’s. There is probably also an asymmetrical risk with the dollar more sensitive to a negative rather than to a positive surprise. Last but not least, markets will keenly monitor a scheduled interview of Fed’s Powell together with his predecessors Yellen and Bernanke. Some dovish concessions (data dependence and taking into account financial conditions) might weigh on the dollar. EUR/USD recently held in the 1.12/15 consolidation pattern. EMU and US data might be mixed, but we continue to see modest downside risk for the dollar in case of an easing of the risk-off trade or in case of some ‘soft’ concessions of Fed’s Powell. EUR/USD might drift a bit further north.
Sterling was mainly driven by technical considerations yesterday. EUR/GBP returned back to the low 0.90 area after an initial spike higher due to the flash crash. We expect more wait-and-see trading. The UK services PMI proably will only be of intraday significance. A less negative risk context might be slightly GBP-supportive.
EUR/USD: drifting higher in the 1.12/1.15 trading range
