- Rates: US data to cause slight UST outperformance
Core bond yields rebounded from an intraday dip as sentiment gradually turned better. Today’s economic calendar (US retail sales, industrial production and Michigan consumer confidence) might cause some slight outperformance of US Treasuries vs. the German Bund. We expect only a minor impact from potentially disappointing EMU growth.
- Currencies: EUR/USD continues fighting an uphill battle
Euro weakness rather than USD strength was still the dominant topic on global FX markets. Poor growth prospects are clouding the eco picture. Several euro cross rates dropping below important technical levels reinforced global stop-loss selling. Today’s data probably won’t be a big help for the euro. Sterling profits from investor speculation on fiscal spending
The Sunrise Headlines
- WS had a turbulent Thursday, fluctuating between gains and losses amid mixed news on the coronavirus outbreak, eventually grinding lower (up to -0.43%, DJI). Asian markets are trading mixed with China outperforming (+0.56%).
- S&P Global warned China, that is currently rated A+ with a stable outlook, could be downgraded if the government responded to the economic consequences of the coronavirus epidemic with a spending splurge.
- The NY Fed said it will further scale back (term) repo operations in March after trimming the amount by $5 bn starting next week. Thereby it reduces support to the money market that was intended to keep a lid on ST interest rates.
- The Fed’s Williams asserted the US economy is in a ‘very, very good place’ and expects it to grow at around trend this year. Yet, some risks to the outlook persist such as subdued global growth and developments like the coronavirus.
- The IMF expects the Chinese economy to remain resilient and weather the coronavirus outbreak in the medium- to long-term. Yet, the IMF acknowledged it remains challenging to gauge the short-term impact of the fast-moving virus.
- Ireland’s centre-right party Fi anna Fail announced it doesn’t consider going into a government with left-wing nationalist party Sinn Fein. The decision is likely to prevent the latter from entering power for the first time.
- In today’s economic calendar retail sales and consumer confidence is due. China and the US are expected to lower tariffs on respective imports. In EMU, euro area Q4 GDP is due as well as Spanish inflation. Belgium taps the bond market
Currencies: EUR/USD Continues Fighting An Uphill Battle
EUR/USD fighting an uphill battle
Bonds and equities traded indecisively yesterday. Investors pondered incoming news on corona after China applied a new methodology of reporting. Still, the euro downtrend remained firmly in place. The EMU economy already suffered ‘pre-corona’ and last year’s evidence showed EMU is vulnerable to disruptions in supply chains from China. Technical factors were also in play. EUR/USD, EUR/JPY and EUR/GBP more or less simultaneously dropped below technically relevant levels, reinforcing a stop-loss repositioning. The euro even struggles against some smaller currencies (PLN, NOK, HUF….). EUR/USD closed at 1.0841 (from 1.0874). USD/JPY closed at 109.82, still within reach of the 110 handle. This morning, Asian equities are mostly trading higher with Japan underperforming. US equity futures try to resume their uptrend after yesterday’s pause. The yuan eases marginally but USD/CNY is holding below the 7.00 reference. USD/JPY stabilizes in the 108.80 area. EUR/USD remains under pressure (1.0835 area).
EMU growth to be published later today (expected at a meagre 0.1% Q/Q) is a bit outdated. Still, any negative surprise or poor details could raise further questions on the health of the economy already before corona and on the ECB’s reaction, with the risk of further negative implications on the euro. In the US, retail sales, industrial production and Michigan consumer confidence will be published. We keep an eye at the retail/consumer data after a loss of momentum in Q4 consumer spending. However, US data probably have to be quite weak to break the USD bid and to change fortunes for EUR/USD. The EUR/USD technical picture deteriorated substantially after breaking subsequent supports, including the 1.0879 2019 low. 1.0778 is next reference (2017 gap). A sustained rebound above 1.0879/1.0925 would be first tentative sign that pressure might be easing.
Yesterday, UK political turmoil turned out to be supportive for UK yields and for sterling. Fin Min Javid resigned after a dispute with PM Johnson. His successor Rishi Sunak is seen as more open to a less strict budgetary approach. Sterling extended gains after the reshuffle. Euro weakness accelerated the EUR/GBP decline to the 0.83 area. The post-election low (0.8277) is on the radar. There are no UK eco data today. Further euro weakness still might cause a retest of correction low.
EUR/USD: technical picture deteriorates after 1.0879 break