- Rates: Core bonds thrive on hawkish trade rhetoric
The relationship between the US and China soured again on many levels, creating a risk-off environment in which core bonds flourished. Overnight developments offer no signs of improvement yet, on the contrary. Risks to today’s key US eco data (ADP & non-manufacturing ISM) are tilted to the downside, suggesting core bonds can retain their momentum. - Currencies: EUR/USD rebound blocked as sentiment turned risk-off
Yesterday, FX markets experienced a typical risk-off session as trade tensions came back to the forefront. USD/JPY declined. EUR/USD showed resilience after Friday’s rise. We look out whether soft US eco data might cause further USD losses. However, global uncertainty might complicate a consistent USD reaction.
The Sunrise Headlines
- US equities stumbled (up to -1%) as trade hopes waned and induced a risk-off environment. Asian markets are tracking the fall on Wall Street with Australia underperforming (-1.58%).
- The US House of Representatives vigorously approved a bill that would enforce sanctions on China over human rights abuses against Uighur Muslims. China threatened retaliation, casting a shadow over US-China trade negotiations.
- US-China trade tensions intensified as US commerce secretary Wilbur Ross stated the US will proceed with its plan to impose another round of tariffs on Chinese goods on December 15 if no first phase deal is on the table by then.
- Australia’s economy expanded 0.4% (Q/Q) in Q3 down from 0.6% in Q2. Growth missing expectations (0.5%) and the government’s reluctance to stimulate through fiscal stimulus could prompt the RBA to resume easing.
- HK’s PMI fell to 38.5 in November down from 39.3 in October, its lowest reading since the SARS epidemic in 2003. Increasingly violent anti-government protests and softening global demand push the city in a severe downturn.
- China’s services sector accelerated to a 7-month high in November. The Caixin services PMI rose to 53.5 in November from 51.1 in October. New (export) business picked up while business expectations/sentiment remain subdued.
- In today’s economic calendar we line up for US jobs data and the ISM non-manufacturing PMI. The Bank of Canada meets, likely leaving rates unchanged. ECB & Fed speeches are due. Germany taps the bond market.
Currencies: EUR/USD Rebound Blocked As Sentiment Turned Risk-Off
Risk-off caps EUR/USD rebound
For the first time in a while markets experienced a typical risk-off session yesterday. President Trump is on collision course with France, both on the future of NATO on tax and trade issues. Markets were also unsettled as the president said he is in no hurry to strike a deal with China. This might even be delayed till after the US elections. The risk of a prolonged period of trade uncertainty triggered a return to safe havens. Equities were sold, core bonds and gold jumped higher. USD/JPY declined further below 109 (close 108.63). EUR/USD was resilient after Monday’s rise and held a tight range in the upper half of 1.10 (close 1.1082).
This morning, Asian equities stay under pressure, mostly with losses of up to 1.0%. Australia under performs. The US Congress approving a bill to impose sanctions on China for not respecting human rights of Muslim minorities, further complicates the US-China relations. China’s services and composite PMI’s were quite strong but are overshadowed by the political headlines. The yuan weakens further (USD/CNY 7.07). USD/JPY hovers around 108.50/60. EUR/USD is losing a few ticks (1.1075 area).
Today, the final EMU PMIs, the US ADP labour report and the non manufacturing ISM will be published. On Monday, the dollar declined on divergent US and EMU data and a (slight) narrowing of the interest rate differential. It is interesting to see whether this trend will be confirmed by other data evidence. We are cautious on the US data compared to consensus. However, any market reaction will be complicated by the flaring up of global tensions. Even so, we are keen to see whether EUR/USD can make further progress in case of softer US data.
Last week, EUR/USD extensively tested the 1.0989 support, but the pair rebounded Monday on divergent US-EMU eco news, including a soft US ISM. The EUR/USD rebound stalled in yesterday’s risk-off trade, but the 1.11 resistance stays within reach. A break above 1.11 would call off the ST downward alert and open the way for a retest of the 1.1179 top. Any downticks in sterling, as happened on Monday, apparently are still used to reduce sterling short exposure. EUR/GBP yesterday reversed Monday’s up-tick. There was little high-profile news on the elections campaign. Most polls still suggest a lead for the conservative party. EUR/GBP again hovers in the lower part of 0.85 and can stay there going into the election. EUR/GBP 0.8475 is key technical support/reference.
EUR/USD preserves most of Monday’s gain, but rebound was blocked by yesterday’s risk-off.
