- Rates: S&P keeps Italian rating unchanged
S&P kept the Italian rating (BBB) and outlook (negative) unchanged despite the expected surge in public debt. We could see some relief rally in BTPs today with Asian stock markets already in a positive mood after WS’s sprint into the close on Friday. The start of the US end-of-month supply operation could cause underperformance of US Treasuries today. - Currencies: USD bid eases as global sentiment improves
On Friday, EUR/USD spiked temporarily lower, but the USD safe haven bid eased later as US equities gained on (admittedly) mixed headlines on a restart of the economy. The risk rally continues this morning. However, uncertainty probably stays too high for investors to already substantially reduce USD buffers. EUR/USD might enter a 1.0730/1.10 consolidation pattern
The Sunrise Headlines
- US equities rebounded on Friday after fresh (positive) rumours on the Gilead drug against the coronavirus. The Nasdaq took the lead (1.65%). Asian markets climb with Japan outperforming (2.75%). India is closed.
- The BoJ pledged to purchase unlimited amounts of government bonds and is increasing its scope for buying corporate bonds and commercial paper by raising the ceiling on its holding to $20tn yen to tackle the coronacrisis.
- Italy dodged a credit downgrade, relieving bond holders, as S&P affirmed the country’s BBB rating. However, the S&P retained Italy’s outlook at negative, warning it could lower the ratings if the country’s borrowing costs rise further
- Saudi Arabia moved ahead, turning down the oil taps before the agreed date of May 1. The kingdom is scaling down output from 12mln barrels per day to its target level of 8.5mln barrels per day, Bloomberg reported.
- The Fed is further dialling back the pace at which it plans to buy Treasuries under its unlimited QE program. The program kicked off on March 13, peaking in size at $75bn/day, and is this week being trimmed from $15bn to $10bn/day.
- USTS Mnuchin expects the economy to sharply rebound in summer, citing states’ efforts to reopen their economies and the government’s spending spree into the economy that should boost demand and business activity.
- Today’s meagre economic calendar contains the Dallas Fed manufacturing activity. Investors brace for another flurry of corporate earnings with oil companies (e.g. Exxon Mobil) closely gauged. The US taps the bond market
Currencies: USD Bid Eases As Global Sentiment Improves
USD bid eases as global sentiment improves
Markets started in a risk-off modus on Friday pushing EUR/USD down to the 1.0730 area. Negative headlines on a potential corona drug, the EU struggling to find a common response to the corona crisis and poor EMU data (Ifo) all added to the risk-off, weighing on the euro/supporting the dollar. However, sentiment improved during US dealings. Diffuse headlines that parts of the (US) economy could reopen in a not-that-distant future supported sentiment, easing the USD-bid. EUR/USD more than reversed the initial loss and closed at 1.0823. USD/JPY was locked in its very tight range in the mid 107 area.
This morning, Asian markets are joining the risk rally on WS. The BoJ eased policy further. It will increase corporate bond/CP buying, removed the limit on government bond buying and took additional measures to facilitate credit to flow to the economy. Despite the additional easing, the yen gained after the BoJ decision (USD/JPY 107.25 area). The risk-on is weighing on the dollar overall. EUR/USD trades near 1.0840. The Aussie dollar continues its recent outperformance (AUD/USD 0.6465).
Today’s eco calendar is thin. Later this week, the Fed and the ECB will hold regular policy meetings. The Q1 earnings season will come in full swing. Investors might be eager to get the assessment from different sectors of the economy. The debate on the timing/speed of a reopening of the economies in the US/Europe evidently is key to global sentiment. For now, markets see the glass rather half full than half empty, but the process will remain bumpy. The trade-weighted dollar is dropping back below the 100 mark. EUR/USD last week extensively tested the downside but the temporary break below 1.0770 didn’t trigger further follow-through losses. EUR/USD might regain some further ground, but we think that the overall level of uncertainty remains too high for investors already to substantially reduce their USD buffers. Some EUR/USD consolidation in the 1.0730/1.10 range might be on the cards.
Sterling traded sideways against the dollar but in the end lost some ground against a (rebounding) euro last Friday. (close 0.87l52). Headlines on the UK-EU brexit negotiations suggest very little progress. A risk-on context, might also support sterling in a daily perspective. Even so, we still see the 0.8680/0.87 area as a strong support.
EUR/USD: downside test rejected as better risk sentiment eases USD bid, at least for now
