- Rates: German 10-yr yield support will be challenged by PMI’s
The German 10-yr yield is at risk of breaking -0.41%/-0.44% with the US 10-yr yield heading to last Summer’s low. Markets are anticipating a grim picture from global (mainly EMU) February PMI’s. Asian indices spell the worst this morning. A high level Fed event on monetary policy in the next downturn is a wildcard.
- Currencies: EMU PMI to decide on EUR/USD break below 1.0778 support?
Dollar strength was still the main theme for global FX trading as the US currency is considered the best haven to look for cover from fall-out of corona. Today, the EMU PMI’s will get ample attention. A poor reading should reinforce the case for euro underperformance against the dollar. Or are USD bulls getting some vertigo after the recent rally?
The Sunrise Headlines
- WS recovered gradually but only partly from a sudden sell-off yesterday. The Nasdaq (-0.67%) underperformed. Asian markets are headed for a weekly close in risk-off. South Korea underperforms amid lingering corona concerns (-2%).
- South Korean president Moon said he will outline an economic stimulus package by the end of this month to counter the impact of corona. Evidence is mounting the virus is gaining traction outside China, in particular South Korea.
- Japanese February PMI’s tumbled in the wake of the corona outbreak with readings raising prospects of a recession. The manufacturing gauge slipped to the lowest level in 7 years (47.6). The service PMI fell of a cliff, from 51 to 46.7.
- The IMF said the Belgian economy did relatively well in 2019 but is concerned about the political stalemate and deteriorating public finances. It projects a 2.25% deficit this year if policy is left unchanged, up from 1.7% last year.
- EU discussions over the bloc’s 2021-27 budget and how to fund the €75bn gap with the UK leaving, yielded no significant progress. Germany and other northern countries oppose plans to slash rebates on their contributions.
- Investor flows into socially-responsible investment funds almost quadrupled in 2019 to a record of $21bn according to Morningstar, prompting some to warn for a bubble in the making.
- Today’s economic calendar is all about PMI business confidence: from the EMU over the UK to the US. Also in the US the annual monetary policy in NY takes place. G20 finance ministers and central bank chiefs meet through Feb 23
Currencies: EMU PMI To Decide On EUR/USD Break Below 1.0778 Support?
EMU PMI to force EUR/USD below 1.0778 support?
Almost all analyses on the corona looked to support the case for a stronger dollar yesterday. The US is better shielded from the fall-out of corona compared to Asia and Europe and the US economy was already in much better shape before the corona outbreak. Holders of ‘safe haven’ USD bonds are also additionally rewarded with a nice interest rate advantage and the hope on potential capital gains if the Fed would be forced to step in later. USD/JPY again took the lead in the USD ascent and closed the day at 112.10 (from 111.37). The decline of EUR/USD was more modest but except for some intraday volatility, the pair wasn’t able to move away from the 1.0778/1.08 support area. This morning, markets are focusing on the spreading of virus outside China, especially into Korea. Most Asian equities are declining further, with mainland
China the exception to the rule and South Korea (-1.5% or more) underperforming. The yuan stays weak (USD/CNY 7.03). The USD/JPY rally (111.95) is taking a pause. AUD/USD continues to test the lowest levels since 2009 (0.66 area). EUR/USD is holding its tight range, close to, just below 1.08. Today, corona will continue to dominate global sentiment, but the EMU PMI’s will also attract ample attention. A modest decline is expected after the tentative rebound of the previous months (EMU composite expected at 47.4 from 47.9). We see little reason for an upward surprise. The market reaction will be interesting anyway. A further EUR/USD decline looks the more evident scenario. If EUR/USD shows unexpected resilience, it could be a first sign that USD bulls might get some vertigo. However, for now, there is no strong case yet to row against the USD-positive tide. The G20 meeting of finance Ministers is a wildcard, but we don’t expect big guidance for USD trading. The EUR/USD technical picture deteriorated substantially after breaking subsequent supports, including the 1.0879 2019 low. 1.0778 is the next reference (2017 gap). The pair is moving into oversold territory, but this factor alone is unlikely to trigger a rebound.
Sterling initially fell prey to further profited taking and the UK currency also didn’t profit for solid UK retail sales. EUR/GBP even closed the day marginally higher at 0.8371. Today, the UK composite PMI is expected to ease slightly after last month’s sharp rebound. Yesterday’s price action suggests that a ‘big’ positive surprise is needed to revive the GBP-momentum. EUR/GBP 0.8276 has become a solid support
EUR/USD: PMI’s to decide on break below 1.0778 support?