Rates: US Treasuries profit from sub-50 ISM
US Treasuries significantly outperformed German Bunds in the wake of a very weak US manufacturing ISM. The German 10- yr yield tested the all-time low, but a break didn’t occur. The eco calendar is thin, but ECB/Fed speakers are queuing up. The Beige Book will be scrutinized for more signs of (manufacturing) weakness. US Treasuries have more room to outperform.
Currencies: Dollar rally blocked as trade war also hurts US production sector
The dollar initially continued to profit from global uncertainty yesterday, but the US currency lost its shine as the manufacturing ISM indicated that the trade war is reaching the US production sector, too. Interest rate differentials narrowed in the disadvantage of the dollar, but a sustained EUR/USD comeback remains difficult ahead of the ECB.
The Sunrise Headlines
- US equities lost around 1% (DJI, Nasdaq) after the manufacturing ISM fell below 50 in August. Asian markets are performing well with better than expected Chinese PMI’s softening the US fallout.
- US manufacturing ISM slipped below the 50 boom/bust mark in August (49.1), the lowest since January ‘16. New (export, 43.3) orders (47.2) slumped at the fastest rate since April ’09. Employment (47.4) declined to March ‘16 levels.
- British MP’s with support of Tory rebels voted yesterday to seize control of the legislative agenda today. They will try to push through legislation to block a nodeal. Johnson threatened to call for immediate elections if MP’s persisted.
- Australia grew 0.5% QoQ in Q2, matching an upwardly revised Q1. The data comes after the RBA left rates unchanged yesterday and turned more optimistic about future growth. The Aussie dollar gains (AUD/USD 0.678).
- Italy is set to form its next government after 80% of 5SM supporters backed Conte as PM. Conte will bring a list of ministers and the government program to president Mattarella today. The government could be sworn in later this week.
- The Argentine peso surged over the past two days. The government imposed currency controls and authorized the central bank to restrict dollar purchases to halt the currency slide. USD/ARS is trading at 55.35 vs. 59.5 last Friday.
- Today’s economic calendar doesn’t contain a lot of data but an avalanche of ECB, Fed and BoE speeches is bound to trigger some volatility. The US Fed also releases its Beige Book. Germany taps the bond market.
Currencies: Dollar Rally Blocked As Trade War Also Hurts US Production Sector
Dollar rally blocked by poor US ISM
‘By default USD strength’ initially prevailed yesterday. Persistent uncertainty on the US-China trade conflict and the Brexit crisis coming to a culmination point pushed UK and EMU yields to new lows. EUR/USD dropped further in the 1.09 big figure. The US manufacturing ISM changed fortunes for the dollar. The headline figure dropped below the 50 boom-or-bust level.Details also showed that the trade war is hurting US production. US yields and the dollar declined. EUR/USD finished at 1.0974 (from 1.0970). USD/JPY closed below the 106 handle.
Asian equities are trading mixed to slightly higher, despite a poor performance in the US yesterday. The China Caixin services PMI printed better than expected. The yuan regains some ground (USD/CNY 7.1650 area). EUR/USD stabilizes in the 1.0975 area. Australian Q2 GDP printed as expected (0.4% Q/Q). The report eased fears of a sharper slowdown. The Aussie dollar extends yesterday’s rebound (AUD/USD 0.6775).
The final EMU PMI’s and the US trade balance will be published today. Several Fed policy makers are scheduled to speak. We don’t expect them to overthrow expectations for a 25 bp September rate cut. Brexit remains a source of volatility for the euro.
The USD rally was blocked yesterday after a poor US ISM. EUR/USD rebounded, but is still holding below 1.1027 previous support. US yields recently declined more on bad news than German/EMU ones. We look out whether this continues and whether it slows the USD’s rise. That said, the technical EUR/USD picture stays fragile and a real euro comeback is not eviden before next week’s ECB decision. EUR/USD 1.0821/1.0778 (gap April 2017) remains next technical support.
Sterling and UK yields nosedived yesterday morning as the Brexit crisis reached a culmination point with a first key vote to block Johnson’s no-deal Brexit approach. However, sterling already reversed most of the intraday loss before the vote. Parliament is likely to formally block a no-deal Brexit today. Will this result in fresh elections? For sterling, we yesterday took the approach that quite some bad news is already discounted. For further sterling losses, we probably need a scenario in which the UK is heading to a chaotic Brexit. As long as this isn’t ‘sure’, we stay cautious to engage in ‘last minute’ sterling shorts.
Dollar rebound halts after poor US ISM, but sustained EUR/USD rebound probably difficult ahead of ECB meeting
