- Rates: US stock markets take double hit
A hawkish US stance against Chinese territorial claims and the Californian economic reopening reversal hurt risk sentiment, triggering an outperformance of US Treasuries. Today’s eco data are only an amuse-bouche in this week’s back-loaded agenda. Risk sentiment remains the needle in the market compass, with Q2 corporate earnings potentially influential.
- Currencies: Dollar hardly profits even as sentiment tuns more cautious
EUR/USD maintained most of the intra-day gains yesterday despite a late session correction on WS. The 1.1375/1.1422 resistance stay within reach. EUR/JPY also nears intermediate resistance. EUR/GBP’s trip below 0.90 was short-lived, illustrating that sustained sterling gains remain difficult for now.
The Sunrise Headlines
- Wall Street fainted during the last hours of trading amid rising geopolitical tensions and coronavirus cases. The Nasdaq (-2.13%) underperformed. Asian-Pacific markets trade heavy in lockstep with China lagging peers (-1.3%).
- The US rejected China’s territorial claims in the South China Sea, reversing a previous stance not taking sides in territorial disputes in the region. The Defence Department called China’s military exercises in the Sea unlawful last week.
- California closed indoor dining and bars and some gyms and salons which were on a monitoring list. Hong Kong also tightened rules again to contain the virus while Japan said a state of emergency is possible if infections rise further
- China printed a surprise advance in trade as most developed countries further reopened the economy in June. Exports rose a modest 0.5% y/y (from -3.3% in May) while imports recovered 2.7% y/y after the -16.7% setback in May.
- Singapore plunged into a recession as GDP fell -41.2% q/q annualized during the partial lockdown in Q2. Growth declined -3.3% in Q1. Construction (-95.6%), manufacturing (-23.1%) and services (-37.7%) were all decimated.
- US advisors to president Trump have ruled out undermining the Hong Kong peg as a way to punish China over the recently imposed security law. The aides didn’t gather enough support and are concerned it would end up hurting the US.
- Today’s economic calendar contains US June NFIB small business optimism and CPI. Germany publishes ZEW investor confidence for July. A slew of Fed speeches are due. Q2 earnings seasons kicks off. Italy taps the bond market
Currencies: Dollar Hardly Profits Even As Sentiment Tuns More Cautious
EUR/USD stays strong despite risk-off correction
Yesterday’s sentiment on risk was constructive for most of the day, but a flaring up of geopolitical tensions between the US and China and negative headlines on corona from the likes of California finally caused US equities to return most gains (Dow) or close in the red (S&P; Nasdaq). The TW dollar followed the swings in sentiment intraday, but in the end the dollar didn’t profit while the euro held up well. EUR/USD jumped from the 1.13 area to test 1.1375 intraday and preserved part of its gain despite the late session risk-off (close 1.1340). USD/JPY even maintained gains to close at 107.29. The USD/JPY performance probably was also supported by a solid bid in EUR/JPY which tested the 121.95 resistance.
This morning, Asian markets joined the correction on WS late yesterday. The dollar again hardly profits (TW DXY stable near 96.55). The yuan is losing modest ground (USD/CNY 7.01 area) even as China June trade data (imports and exports) printed better than expected. EUR/USD (1.1345 area) and USD/JPY (107.25) are also little affected by risk-off. Today, the calendar is better filled compared to previous days including German ZEW confidence and EMU May production. In the US NFIB small business confidence is expected to rise only modestly. US June headline inflation is expected to rise to 0.6% Y/Y but core is expected only at 1.10%. Global sentiment remains the driver for overall USD moves. That said, it looks that ‘usual’ USD gains due to the risk-off is a bit hindered by negative US corona developments. EUR/USD (and also EUR/JPY) are nearing intermediate resistance, suggesting a constructive sentiment on the euro. We saw EUR/USD developing a buy-on-dips pattern, with the 1.1255 area providing good support. A break above 1.1375/1.1422 would further improve the ST picture. A constructive message from the EU summit later this week might reinforce the euro bid.
Sterling returned a big part of last week’s gain against the euro yesterday with EUR/GBP returning north of 0.90. Euro strength played a role but we didn’t seen any UK specific news. This morning, May UK GDP and production data were weaker than expected, confirming that the road of the UK recovery will be (very) long. Sterling is losing a few ticks. The UK currency recently decoupled a bit from the usual risk-on/risk-off pattern. Even so, yesterday’s poor performance suggests that a sustained return below EUR/GBP 0.90 won’t be that easy, especially if sentiment on risk turns more cautious
EUR/USD: 1.1375/1.1422 resistance stay within reach