- Rates: Risk rally runs out of steam
The Eastern risk rally ran into trouble yesterday with stock markets correcting 2% (US) to 4% (Europe). A flurry of negative economic news amplified the risk-off environment. Core bonds benefited with US Treasuries outperforming and curves flattening. Peripheral yield spreads widen further following Europe’s lukewarm fiscal response.
- Currencies: Dollar takes the upper hand
A poisonous cocktail of poor earnings, horrendous US data and a warning for a slump in oil demand by the IEA created a hostile environment for risky assets and benefited the dollar. We expect a similar context today with US housing and labour market (jobless claims) due while the earnings season continues. We keep an eye at DXY nearing 100.
The Sunrise Headlines
- US equities tumbled on gloomy economic data and dismal earnings reports. The broad S&P 500 underperformed (-2.20%). Asian markets follow suit with Japan (-1.37%) leading losses while South Korea colours green in a catch-up move.
- The IMF expects Asia’s economic growth to grind to a standstill this year for the first time in 60 years, as the coronacrisis takes an unprecedented toll on the region’s services sector and major export destinations.
- Speaking to the parliamentary committee, RBNZ governor Adrian Orr said the central bank chose to explore the QE path, which can be increased further, as its first crisis tool but negative rates are not off the table.
- US president Trump is unveiling new federal guidelines today to ease stay-athome orders in a bid to begin the process of reopening the country, claiming the coronavirus shows signs of plateauing in some regions.
- Fitch slashed Mexico’s credit rating for the second time in less than a year from BBB to BBB-, one notch above junk with a stable outlook amid fears that the economic shock caused by the corona pandemic will provoke a severe recession.
- The Trump administration reportedly mulls compensating US oil producers to leave as much as 365mln barrels of crude in the ground to mitigate a glut that caused prices to crash and tipped some drillers over the edge.
- Today’s economic calendar contains the eye catching US jobless claims that will continue to run high for a 4th week in a row. US housing data will also feel the negative impact of the coronacrisis. Several Fed governors are scheduled to speak. France, Spain and the UK tap the bond market
Currencies: Dollar Takes The Upper Hand
Dollar takes the upper hand again
Risky assets took a hit yesterday as poor earnings, a stark warning from the IEA regarding slumping oil demand and dismal US data (retail sales, industrial production, NY manufacturing index) highlighted the dramatic impact from Covid-19. The Fed’s beige book also acknowledged that economic activity contracted sharply across all regions. Oil neared multi year lows. Equities slipped, core bonds gained. The dollar shined on currency markets. EUR/USD fell well below 1.09 intraday but managed to close slightly above eventually (1.0910). The trade-weighted greenback’s test of the 100 level failed, closing at 99.46. USD/JPY rose from the low 107 to finish at 107.46.
Asian shares decline in the wake of WS’s poor performance yesterday though moves are more contained. Japan and Australia underperform. The Australian job report was better than expected but doesn’t capture the full blow from the virus yet. The Aussie slips below 0.63 amid overall USD strength. The kiwi dollar extends a decline below 0.60. The RBNZ hasn’t ruled out negative rates if QE were to ran out, governor Orr said. EUR/USD dips to 1.088, DXY advances towards 100.
Today’s US housing and labour market (jobless claims) data are expected to draw much of attention. More horrific readings could keep investors on their guard, even more so as earnings continue to underwhelm. We hold our cautious bias for today and see the dollar profiting from the risk-off environment. EUR/USD’s breach below 1.09 again paved the way lower also from a technical perspective. The couple is currently testing the upward trendline. We eye first support around 1.084 (23.6% fibo retracement from March high to low). Next on the radar is 1.0769 (April low). A sustained break above DXY 100 might well be the trigger.
Sterling initially felt some selling pressure during yesterday’s risk-off session and as the UK said it won’t agree to an extension to the Brexit deadline. The pound clawed back in the end however. EUR/GBP closed marginally higher at 0.871. The decline of the pair shows signs of bottoming but we see little reason for a sustained comeback for now. EUR/GBP looks to have found a short term equilibrium around 0.87.
EUR/USD again under pressure as dollar enjoys safe haven bids.