- Rates: Textbook risk-on correlations
Core bonds lost ground yesterday as risk sentiment flourished thanks to progress in US-Sino phase one trade talks. The US S&P 500 set a fresh all-time high. The German 10-yr yield recorded its highest close since July with the US 10-yr yield heading for a test of 1.94% resistance, possibly already after tomorrow’s FOMC meeting (hawkish cut?!)
- Currencies: EUR/USD losing momentum ahead of tomorrow’s Fed meeting
Yesterday, USD/JPY and EUR/USD profited only modestly from a positive risk sentiment. Investors ponder the impact on the dollar of tomorrow’s Fed meeting and key US eco data later this week. A ‘hawkish Fed rate cut’ short term might be a bit more USD supportive. Sterling is holding strong even as the focus of UK politics is turning to (the outcome of) new elections
The Sunrise Headlines
- WS rallied (up to 1.01%) on the back of increased hopes for a truce to the longsimmering US-China trade dispute and the prospect of a Fed rate-cut. Asian markets are trading mixed, with Japan outperforming (+0.81%).
- Boris Johnson was thwarted for the third time in his attempt to secure an early Brexit election under the Fixed-Term Parliaments act, losing the vote by 299/70. Under the act, Johnson needed 2/3rd of the MPs to back the poll.
- The Fed proposes easier rules for when banks must set aside cash to safeguard derivatives trades between affiliates. This could potentially free millions of dollars at large banks but perhaps at the expense of financial stability.
- China set up a $29 billion state-backed fund to invest in its chip industry, moving onward with efforts to scale down dependency on the US by establishing its own supply chain from chip design to manufacturing.
- Core consumer price growth in Tokyo, a leading indicator of nationwide inflation, remained stagnant in October (0.5%) despite the sales tax hike, underscoring the challenge the BoJ faces in stocking inflation.
- The House of Representatives is set to take its first vote on Thursday to support the ongoing impeachment inquiry of US president Trump. The vote aims to nullify Republicans’ main complaint that the process is illegitimate.
- In today’s economic calendar the US consumer confidence indicator (October) takes centre stage alongside Q3 earnings reports. Market reaction is expected to be moderate ahead of tomorrow’s Fed meeting
Currencies: EUR/USD Losing Momentum Ahead Of Tomorrow’s Fed Meeting
EUR/USD rally losing momentum ahead of Fed
Trading in major FX cross rates was mainly driven by global sentiment yesterday. Risky assets continued to perform well as investors took comfort from ongoing constructive headlines on the US-China trade talks. The S&P 500 touched a new all-time record. EUR/USD and USD/JPY held a cautiously positive bias but struggled to take out nearby big figures. EUR/USD finished at 1.1100. USD/JPY closed at 108.94.
The trade-driven equity rally is losing momentum in Asia this morning. Japan and Indian markets outperform. China underperforms. The yuan is making incremental gains near USD/CNY 7.06. USD/JPY is still testing the 109 big figure even as the Japanese 10-y yield hits the highest level in more than four months. EUR/USD (1.1095 area) still fails to regain the 1.11 barrier in a sustainable way. Today, the US consumer confidence (conference board) is interesting but markets probably will continue to look forward to more important data and events. Confidence is expected to rebound (128 from 125.1) after an unexpectedly sharp decline last month. A rebound to lofty levels might raise the question how much additional stimulus the US economy still needs after tomorrow’s (discounted) Fed rate cut. The risk rally running out of steam might also prevent further EUR/USD and USD/JPY gains as markets await tomorrow’s Fed decision.
The technical picture of EUR/USD remains moderately constructive, but the upside momentum is waning. The tone of Fed’s Powell at tomorrow’s press conference and the ISM/payrolls will decide whether there is room for a further USD rebound. ST resistance stands at 1.1179/1.1250. A return below 1.10 would reject the improved picture.
Yesterday, sterling maintained a cautiously positive bias even as the next steps in the UK political process remain uncertain. The EU approved to delay Brexit beyond 31 October (flextension). At the same time, Boris Johnson is trying to secure parliamentary elections on December 12. A first attempt failed yesterday, but a new alternative vote will be brought to parliament today. If approved, sterling trading will be at the mercy of the opinion polls on the outcome of this election. In this context, sterling trading could again become more erratic. We maintain the working hypothesis that already quite some good news is discounted for sterling at current levels
EUR/USD rebound losing momentum. Fed and US darta to decide whether there is room for a (modest) further USD comeback