Sunrise Market Commentary
- Rates: US 10-yr yield heading for test of 2.16% support?
Today’s market calendar heats up in the US. Risks for ADP are tilted on the downside of expectations while the price component of the manufacturing ISM could disappoint as well. This combination could push the US 10-yr yield for a test of 2.16% support (currently 2.21%) and push the US Note future temporary to a new contract high. - Currencies: Euro holds strong even as EMU inflation declines
Yesterday, the euro outperformed the other majors even as EMU inflation dropped more than expected. The dollar remained in the defensive. Today, the focus is on the US ADP report and the manufacturing ISM, ahead of tomorrow’s key payrolls. A test of EUR/USD 1.1268 resistance is likely. Sterling still feels political headwinds.
The Sunrise Headlines
- US equities managed to undo initial weakness and closed the day marginally lower. Overnight, Japanese stocks outperform on strong data (capex, PMI, company profits) while China loses ground on a sub-50 PMI reading.
- President Trump said he would make an announcement today on the Paris climate treaty, with White House officials saying he is expected to withdraw from the accord, although they cautioned that the situation may yet change
- SF Fed Williams said that 3 rate increases is a reasonable view for this year, but there is upside potential for the economy which would warrant 4 hikes. He isn’t worried about recent inflation data which reflect “temporary factors”.
- The private Chinese Caixin manufacturing PMI fell to 49.6 from 50.3 in April (vs 50.1 consensus), the lowest level since June 2016 and back below the boom/bust mark (50).
- The US economy expanded at a modest to moderate pace from early April through late May but showed little sign of breaking out of a recent trend of sluggish inflation, the latest Beige Book showed.
- Brazil’s central bank slashed the key interest rate from 11.25% to 10.25%, continuing its pace of cuts amid a political crisis that has sown uncertainty just as the economy was seen as crawling back from its worst recession ever.
- Today’s eco calendar is interesting with ADP employment, weekly claims and manufacturing PMI/ISM’s in EMU (final), the UK and the US. Spain and France tap the market. Several ECB governors speak at Brussels economic forum and Fed Powell talks on the normalization of monetary policy
Currencies: Euro Holds Strong Even As EMU Inflation Declines
Euro rebounds. Dollar continues to struggle.
The euro outperformed other major currencies yesterday. EMU inflation declined more than expected, but German and EMU unemployment beat market consensus. The combination of good growth, low inflation and the expectation of only gradual ECB normalisation supported European assets and the euro. At the same time, the dollar remained in the defensive. EUR/USD came within reach of the 1.1268 correction top, but a real test didn’t occur. The pair closed the day at 1.1244. USD/JPY remained in the defensive even as US equities reversed most of the intraday dip. The pair finished the day at 110.78.
Overnight, country specific issues dominated trading in several Asian markets. Positive capital spending data and corporate profits supported Japanese equities. The yen stays strong despite positive risk sentiment. USD/JPY hovers in the 111 area. A rebound in the oil price is also slightly positive for regional sentiment. The Chinese picture is a bit ambiguous. The Caixin manufacturing PMI dropped below 50 (49.6) and weighs on Chinese equities. At the same time, the yuan jumps sharply higher. Chinese authorities apparently want to discourage CNY/CNH shorts and fixed CNY/USD sharply stronger. The poor Chinese PMI and disappointing domestic capital spending also weigh on the Aussie dollar. AUD/USD dropped to the 0.74 area. EUR/USD maintains yesterday’s gains.
The EMU manufacturing PMI is expected to confirm the strong preliminary ready (57) today. However the focus for trading will be on the US data. ADP private job creation is expected more or less stable at 180K. Recent labour subindices in other surveys showed a loss of momentum. Is there a risk for a downward ADP surprise? The US ISM manufacturing is expected little changed at 54.7. We don’t have much reason to take different view from the consensus. We also keep an eye at the prices sub-index. Here is maybe a risk for some easing. To conclude: US data might confirm a scenario of decent growth, but a negative surprise is possible. Over the previous days, the decline of the dollar slowed and the euro rally took a breather. Yesterday’s price action suggested that both underlying trends aren’t over yet. Of late, the USD’s reaction to the ISM and ADP was often modest. The payrolls are more important. Even so, we don’t expect the US data to provide much USD support. CB speakers and the decision of Trump on the Paris Climate agreement (risk-off in case of a rejection?) are wildcards. A real test of the EUR/USD top at 1.1268 is likely. USD/JPY hardly profits from constructive risk sentiment
In a broader perspective, the dollar traded soft recently. US data were a bit disappointing, markets turned more cautious on Trump’s pro-growth agenda and US yields declined. At the same time, the euro profited of reduced political risk on the region. Last week, there were tentative signs that the dollar decline could slow. However, the jury is still out whether enough USD softness is discounted? This week’s payrolls and, to a lesser extent today’s ISM, might be important in this assessment.
Technical picture
The USD/JPY rally ran into resistance early May. A mini-sell-off pushed the pair below the previous top (112.20), making the short-term picture negative. Return action lower in the 108.13/114.37 range is possible.
Earlier this month, it looked that EUR/USD could revisit 1.0821/1.0778 support (gap), but poor US data and political upheaval propelled EUR/USD north of the 1.1023 range top. The pair reached a short-term correction top at 1.1268. The correction top at 1.1300/1.1366 is next resistance. USD sentiment will have to be extremely negative to clear this hurdle short-term. So, a clean break of this won’t be that easy. A return below 1.1023 would indicate that the upside momentum has eased.
EUR/USD: holding near recent top. US eco data to decide whether there is room for further gains
EUR/GBP
Sterling decline slows, but political uncertainty still weighs
Yesterday morning, investors sold sterling after a YouGov poll indicated that the Conservative party might fail to secure a majority in the June 08 election. Other polls still indicate quite a substantial lead for PM May. Cable dropped temporary below 1.28. EUR/GBP rebounded north of 0.87. The pressure on sterling eased later in the session, maybe as other polls still give quite a significant lead for the conservative party. Especially cable rebounded and closed the session at 1.2890, reversing the overnight loss. EUR/GBP closed the session at 0.8723, still within reach of the recent top.
Today, the UK manufacturing PMI is expected to decline slightly from 57.3 to 56.5. However, the focus for sterling trading remains on the potential outcome of the UK election. Political uncertainty will probably prevent a sustained sterling rebound before the June 08 election. However, in a day-to day perspective, sterling could enter some calmer waters as quite some negative news should already be discounted after the recent sell-off. Next resistance comes in 0.8788.
EUR/GBP nears recent highs as election uncertainty grows
