• Rates: Chinese weakness doesn’t spill to other markets
    Chinese investors return from extended Lunar NY holidays this morning. Chinese equity indices lose up to 8%, but the catch-up move no longer translates in negative risk sentiment on other markets. Core bonds trade off Friday’s best levels. Today’s US manufacturing ISM is expected to continue to paint a bleak picture of the manufacturing sector.
  • Currencies: EUR/USD rebounds on overall USD weakness
    A sharp decline in core/US yields finally triggered broad-based USD profit taking. EUR/USD rebounded further of the 1.0980/90 support area, easing imminent pressures. Today, the focus turns to the US ISM. A weak figure might weigh further on the dollar. The post-BoE sterling rebound halted. EUR/GBP also rebounded off a first intermediate support

The Sunrise Headlines

  • US stock markets slid up to -2.09% (DJ) as investors got jittery. Chinese stock markets tumbled (up to -7.9%) in the first trading session after the extended lunar NY break as the coronavirus got investors running for cover.
  • The Chinese central bank pumped liquidity into markets and cut its 7-day and 14-day reverse repo rates by 10 bps to cushion the country’s economy and plunging financial markets from the blow of the spreading of the coronavirus.
  • China’s oil demand has dropped by about 3 million barrels a day, equivalent to 20% of consumption as the coronavirus squeezes the economy, Bloomberg reported. Refineries may soon cut the volume of crude they process by 15-20%.
  • OPEC and its allies are weighing guesses to respond to the recent fall in oil prices in light of flagging demand. Russia is giving green light to Saudi Arabia’s push for an emergency meeting this month, likely taking place on 8-9 or 14-15 Feb.
  • Increasing labour costs will flare up inflation in the euro zone, ECB’s Philip Lane said in an interview with FT. Lane disclosed the ECB is contemplating whether its inflation gauges should give more weight to housing costs.
  • China’s Caixin manufacturing PMI eased to 51.1 in January from 51.5, beating the 51 forecast as business sentiment rose strongly amid easing US-China trade tensions. The gauge does not yet reflect the damage of the coronavirus.
  • In today’s economic calendar investors are looking out for US manufacturing ISM and regional PMIs across Europe. The Iowa caucuses kicks off today and will be the first polling event of the Democratic presidential primary calendar

Currencies: EUR/USD Rebounds On Overall USD Weakness

EUR/USD finally receives some breathing space..

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The corona related risk-off also dominated FX trading last Friday. Smaller, less liquid currencies mostly lost further ground. USD/JPY turned further south, with the move accelerating in US dealings. The decline was partially yen strength, but also USD weakness as US yields declined much faster than Japanese and German ones. An awful Chicago PMI only reinforced this process. EUR/USD succeded a ‘remarkable’ rebound even as EMU Q4 growth (0.1% Q/Q) and the January core CPI (1.1% Y/Y) again disappointed. However, overall USD weakness caused a ‘by default’ EUR/USD rebound (close at 1.1093 (from 1.1032).

This morning, mainland China markets are catching up with the corona driven risk-off on other markets. The onshore yuan also weakens north of USD/CNY 7. The PBOC took several steps to provide the market with ample liquidity and to lower the cost of funding. The Aussie dollar (AUD/USD 0.67 area) is nearing multi-year lows touched last year. USD/JPY is holding near Friday’s lows and even shows tentative signs of bottoming, more or less in line with US Treasury yields. EUR/USD hovers in a tight range in the 1.1080/90 area.

The US manufacturing ISM and final EMU PMI’s will be published today. Of late, there were tentative signs that the worst might have been over for manufacturing, but signs of a rebound are uneven. Still, we have the impression that the dollar is becoming more vulnerable for negative eco news. Regarding the corona related risk-off correction, the decline in core yields might slow. If so, it might help some bottoming in USD/JPY and maybe also slow losses of other USD cross rates. So, probably a big miss in the US ISM is needed to extend last week’s EUR/USD rebound.

Last week, the EUR/USD 1.0989/81 support survived, and EUR/USD was squeezed back higher. EUR/USD received some breathing space. A rebound beyond 1.1100/20 would further ease downward pressures. A break beyond the MT range top (1.1250 area) still looks a very long call.

The post-BoE rebound of sterling gradually slowed on Friday. EUR/GBP found a bottom near the 0.8388 support/previous correction low. This morning EUR/GBP rebounds back north of 0.84. A first portion of good UK news is apparently discounted. Headlines on the upcoming EU-UK trade negotiations suggest more political noise ahead. The 0.8388 area looks a first ST-reference/cap for sterling trading.

EUR/USD 1.0989/81 support survives. Euro rebounds

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