Markets
Yesterday, the ECB surprised markets. It extended policy stimulation in a much more profound way than was largely expected. The ECB will start new TLTRO financing, providing 2-year liquidity starting in September this year and running till March 2021. Even more significant, it changed forward guidance and signalled current low rates to remain in place at least through the end of this year. In its staff projections the ECB downwardly revised the growth and inflation forecasts, in particular for this year. The ECB is convinced the EMU economy needs ample stimulus for longer. The ECB guidance triggered a broad market repositioning in EMU but also on broader markets. German yields declined between 3 bp and 6 bp, with the belly of the curve outperforming. Treasuries slightly underperformed Bunds, but the US yield curve showed a similar trend with yields declining between 4.3bp (2-y) and 5.9bp (10-y). The ECB-driven rally of core bonds was reinforced a global risk-off positioning. Markets focused on a poor global growth outlook and weren’t convinced that the ECB action will be able to address investor concerns on growth. The risk-off correction also spread to Asian markets this morning. Negative sentiment was exacerbated by a sharp decline of China exports (-20.7% Y/Y) in February. Chinese stocks are underperforming with losses of up to 4.0%. Japan Q4 GDP printed stronger than expected (1.9% QoQa), but didn’t stop the bleeding. US Treasuries continue trading near yesterday’s peak levels and are nearing key resistance levels.
Today, the fall-out from yesterday’s ECB announcement will still be in play. The market focus will gradually shift to the US. February payrolls as investors look for guidance on the health of the US economy after a growing number of indications that the global economy might be losing further momentum at the start of 2019. After yesterday’s soft ECB assessment on the EMU economy, there is little room for US eco data to disappoint. Of late, indications on the US labour market were mostly OK. Even so, a solid report is probably needed to prevent the US 10-y yield from retesting the 2.60% support area. The 2.54% 2019 low is again on the radar, especially if risk sentiment would further deteriorate. The German 10-y yield is extensively testing the 0.07% area, the last defence before returning to the 0.0% level last seen at the end of 2016.
Yesterday, the euro lost any perspective on interest rate ‘support’ in the foreseeable future as the ECB cut its growth and inflation forecasts and pledged prolonged monetary stimulus. EUR/USD was hammered. The pair already touched the lowest level since mid-2017. The pair is now clearly at risk of falling below the 1.1217/1.1187 support. A sustained break would clearly deteriorate the technical picture. A solid US payrolls report might trigger such break. However, the picture might also be complicated in case of a disappointing US payrolls report. In theory this scenario should be USD negative. However, it might also reinforce an outright risk-off sentiment. In that scenario, the yen might be favoured. A sustained EUR/USD rebound might still be difficult in case this risk-off triggers simultaneous USD/JPY and EUR/JPY selling. A sustained break of the 1.12 area would suggest a new environment of outright euro weakness (rather than USD strength). Stop-loss protection on EUR/USD longs might be warranted. We also keep a close eye at the EUR/JPY charts. FX (and other) markets are at important crossroads.
Uncertainty on the Brexit negotiations and the ECB policy decision were the main drivers for sterling trading yesterday. EUR/GBP rebounded temporary above 0.86 as Brexit uncertainty persisted but nosedived after the ECB decision to close the day at 0.8555. Cable dropped below 1.31, mainly driven by the EUR/USD decline. The EU is said to have made some new proposals on the Irish backstop, but they are not meeting UK demands. Make-or-break negotiations will likely continue into the weekend. Sterling risk remains highly binary in nature.
News Headlines
China foreign trade data added to investor worries that the economy is losing momentum. Exports dropped 20.7 Y/Y in February. The decline came after a strong January performance and might be distorted due to the Lunar new year. Still, the decline was much bigger than expected. Imports (-5.2%) also missed the consensus.
The Japanese economy grew 1.9% QoQa in the first quarter, better than the preliminary reading of 1.4%. Capital investment was solid (2.7% Q/Q), but private consumption disappointed (0.4% Q/Q).
Today, the US payrolls report is the key feature on the eco agenda. Markets still expect job growth of 180k, in line with recent averages. The unemployment rate is expected to decline to 3.9%. Wage growth is expected at 0.3% M/M and 3.3% Y/Y. In EMU, German factory orders and production data in other member states are worth looking at. After the close of US markets, Fed’s Powell is scheduled to discuss policy normalization.
