- Rates: German 10-yr yield breaks north of 0.15%
The German 10-yr yield broke through 0.15% resistance yesterday, ending the downleg since early October and paving the way towards 0.27%. Positive risk sentiment and decent eco data can inflict more pain on core bonds today. Markets seem to be embracing to new reflation bets with event risks vanishing, central banks sidelined and eco data gently improving. - Currencies: EUR/USD rally blocked as dollar restores balance on strong data
The revival of the reflation trade yesterday initially favored the euro, but the EUR/USD break beyond 1.14 was aborted by strong US data. Today, there are plenty of EMU/US eco data to inspire FX trading. USD/JPY is the preferred beneficiary of good news. The picture for EUR/USD is more balanced. The sterling rally stalled as Brexit headlines are receding?
The Sunrise Headlines
- US equity markets lost modest ground yesterday for a third consecutive day with losses up to 0.3%. Asian equities are trading higher overnight with China and Japan outperforming following positive news from MSCI and stronger data.
- Federal Reserve Chairman Powell stated that a rise in productivity last year gives more room for wages to grow without the risk of higher inflation, offering another reason why the US central bank can stay on the sidelines.
- North Korean leader Kim Jong Un vowed to meet with US President Trump again after nuclear talks abruptly ended yesterday with no agreement. He said the summit was productive and hopes to continue talks in the near future.
- UK farming minister George Eustice resigned from the UK government yesterday as he opposes any delay to Britain’s exit. He said May’s proposed vote on extending article 50 would lead to the “final humiliation of our country”.
- MSCI Inc., the world’s largest leading equity index provider, will expand the weighting of China-listed shares in benchmark indexes. The move could lead to an estimated $125bn flowing into Chinese equities this year.
- The Chinese Caixin PMI Mfg index rose to 49.9 in February vs. 48.3 a month before and beating expectations (48.5). The Japanese Tokyo CPI (ex fresh food) rose 1.1% (Y/Y) in February, beating 1% Y/Y forecasts.
- Today’s US eco calendar contains EMU consumer inflation (Feb), the UK Mfg PMI (Feb) and German retail sales (Jan). The US prints ISM Manufacturing (Feb) and Canada’s Q4 results are released. Fed’s Bostic speaks.
Currencies: EUR/USD Rally Blocked As Dollar Restores Balance On Strong Data
Strong US data restored EUR/USD balance
Sentiment in Europe remained rather constructive yesterday, despite geopolitical tensions in Asia (failed meeting between the US and North Korea, Pakistan-India). Still, investors saw growing chances of a bottoming in EMU growth and inflation even as CPI’s from EMU member states printed mixed. EMU yields and the euro rebounded further. EUR/USD traded north of 1.14 before the publication of the US data. Q4 growth printed at 2.6% QoQa (2.2% expected) and the core PCE deflator was higher than expected. The Chicago PMI also succeeded an impressive beat (64.7 vs 57.5 expected). The strong US data triggered an intraday USD rebound. EUR/USD finished little changed at 1.1371. USD/JPY rallied to a new ST correction top (close at 111.39).
Overnight, sentiment in Asia remains risk-on. The China Caixin manufacturing PMI rose to 49.9 (48.5 expected), easing market doubts on the country’s slowdown. Japanese equities profit from a weaker yen. USD/JPY extends its gains (111.70 area). Asian markets also feel some comfort from solid US data yesterday.
Today, the calendar is well filled with the final EMU manufacturing PMI’s and EMU February inflation. Several EMU countries will also publish labour market data. In the US, the December spending and income data will get less attention after yesterday’s Q4 GDP release, but the more timely/forward-looking Manufacturing ISM is interesting. A modest easing from 56.6 to 55.8 is expected. Another solid US figure might revive some kind of reflation trade. However, with sentiment on Europe also improving, the impact on EUR/USD isn’t that straightforward.
USD/JPY is probably the first beneficiary of better eco news. We started this week with a cautious USD bias after some disappointing US data last week. At the same time EUR/USD show tentative signs of a rebound and drifted back higher in the 1.12/1.15 range. Yesterday’s US data restored the balance in favour of the dollar. Still have the impression that the EUR/USD downside remains well protected. A bottoming in EMU inflation data might support this process.
Yesterday, sterling finally fell prey to profit taking. FX markets had apparently discounted the declining probability of a no-deal Brexit. EUR/GBP rebounded and closed the session at 0.8573. Brexit headlines are becoming a bit less prominent for GBP-trading short-term. Today, the UK credit data and the manufacturing PMI might grab some market attention as markets might start to ponder the chances for a BoE rate hike in case a no deal Brexit is avoided. We expect some further EUR/GBP consolidation, further digesting recent sterling rally.
EUR/USD: rally running into resistance as strong US data restore balance
