Sunrise Market Commentary
- Rates: Positive bias core bonds
European stock markets remain fragile and oil prices could be prone to a more pronounced downward correction. Both are supportive for core bonds (bull flattening) even if traditional market correlations were loose of late. US CPI and retail sales are expected to moderate, but in current sentiment such outcome could be considered disappointing.
- Currencies: Euro in pole-position. Will US data be strong enough to save the dollar?
Strong EMU eco data squeezed the euro sharply higher yesterday. A decline in US yields weighed on the dollar. Today, the focus is on the US CPI and retail sales. Both series are expect soft after a strong reading in September. If so, they won't help the dollar short-term.
The Sunrise Headlines
- US stock markets opened weaker, but didn't suffer additional losses by the closing bell. They ended around 0.25% lower. Risk aversion reigns in Asia overnight with Japan underperforming, losing up to 1.5%.
- Senate Republicans attached a provision to their tax overhaul that would repeal the requirement that all Americans have health insurance, a new twist in the GOP lawmakers' efforts to rewrite much of the US tax code.
- The Japanese economy grew by 1.4% Q/Qa in Q3 2017 as the country recorded its longest run of unbroken expansion since 2001 (7 quarters). The pace was slower than in Q2 (2.6% Q/Qa) though and below consensus (1.5% Q/Qa).
- AUD/USD falls to lowest since July as traders push back expectations for RBA tightening after weaker-than-expected wage price data (0.5% Q/Q and 2% Y/Y vs 0.7% and 2.2% expected). Consumer confidence also disappointed.
- Oil prices dropped yesterday following the IEA's prediction that growth in US oil output until 2025 will be the strongest seen by any country in the history of crude markets, making it the “undisputed” leader among global producers.
- The Federal Reserve should aim to raise interest rates gradually, despite weak inflation readings, in part because any spike in demand could push the US economy beyond its sustainable levels, Atlanta Fed Bostic said.
- Today's eco calendar heats up contains US CPI inflation, retail sales and empire manufacturing. UK traders focus on the labour market report. Several central bankers speak and Germany holds a 10-yr Bund auction
Currencies: Euro In Pole-Position. Will US Data Be Strong Enough To Save The Dollar?
Euro in pole position. US data key for next USD move
Euro strength was name of the game yesterday. A very strong German Q3 GDP propelled the euro. Other EMU eco data confirmed the health of the EMU economy. Initially, there was again a disconnect with the moves on interest rate markets. The dollar also ignored a stronger US PPI. Later in the session, a risk-off driven decline in US yields put the dollar further under pressure. EUR/USD closed the session at 1.1798 (from 1.1667). Quite an impressive gain! USD/JPY finished the session at 113.46.
Profit taking on risky assets continues in Asia overnight. Equities extend their correction. Some commodities correct lower after their recent rally. Japan Q3 growth was marginally below consensus at 1.4% Q/Qa, with especially private consumption being a drag on growth. The Q3 GDP report probably added to the decline of Japanese equities. USD/JPY is drifting further south in the 113 big figure (113.25 area), but the gains of the yen remain modest given the global risk-off. EUR/USD (1.1790 area) maintains yesterday's gains. The Aussie dollar set a new ST correction low on soft wage data and on a weaker than expected consumer confidence. AUD/USD dropped further below the 0.7625 support area and trades currently at 0.7580.
The focus for trading is on the US data today, with CPI, Empire manufacturing survey and retails sales. CPI inflation is expected at 0.1% M/M and 2.0% Y/Y after a strong September reading (0.5% M/M, 2.2% Y/Y). Yesterday's PPI's were higher than expected, but we doubt that the same factors will be at work for the CPI. Headline retail sales are expected unchanged after a strong September print. The control group underlying measure is expected to rise a modest 0.3% M/M. Monthly (nominal) sales data are volatile and a soft October figure shouldn't question the established trends in the US economy. Today's data might be unconvincing and unable to change the day-to-day sentiment in favour of the US currency. The debate on the US tax bill also remains a sources of uncertainty. Of late, a global risk-off sentiment was usually more supportive for the euro than for the dollar.
We started the week with a cautious bias on the dollar. Yesterday's short-squeeze of EUR/USD was a bit exaggerated given the data and developments in other markets, but it illustrates markets' ST hesitant mind-set vis-à-vis the dollar and the ST positive momentum on the single currency. For now we don't fight the sort-term decline of the dollar as we see no a trigger to improve sentiment. We look out whether a further risk-off will continue to support the euro (keep an eye on EUR/JPY).
From a technical point of view, EUR/USD dropped below 1.1670/62 support, but subsequent follow-through price action occurred very slowly. The pair dropped to a new post-ECB low on Tuesday last week, but the move petered out. Yesterday's rebound north of 1.1690 questions recent downside momentum. Next resistance stands at 1.1837/80. A break above the latter would suggest a full retracement to the 1.2092 correction top. We don't preposition for such a scenario yet unless there comes real negative news from the US. USD/JPY's momentum was positive in past months. The pair regained 110.67/95 resistance and tested the 114.49 MT range top. The attempt failed. A sustained break would improve the technical picture. However; last week's price action was unconvincing despite a solid interest rate support. A break below 112.96 would indicated further downside ST.
EUR/USD rebounds north of 1.1690. Next resistance comes in at 1.1837/80
EUR/GBP nears ST range top/resistance
UK headline inflation was stable at 3.0%M Y/Y yesterday (consensus 3.1% Y/Y). Other price indicators were also slightly softer than expected. In its November inflation report, the BoE assumed inflation to peak above 3.0% in October. If inflation cools from current levels, the BoE can shift into wait-and-see modus. Sterling won't get any additional interest rate support anytime soon. This prospect weighted on sterling. Cable dropped (temporary?) below 1.31, but the decline was reversed as cable followed the rebound of EUR/USD. The pair closed the session at 1.3165. EUR/GBP extended gains well north of 0.89. The move was reinforced by overall euro gains. EUR/GBP closed the day at 0.8961.
The UK labour market data will be published today. The unemployment rate is expect stable at the very low level of 4.3%. Employment growth is expected to moderate. Wage growth is expected to remain very soft (2.1% Y/Y). We expect the labour market report to be lest important for sterling trading. The market focus probably will be on the wage data. Given very low expectations, there is room for a slight upward surprise. This might give sterling some relief after yesterday's sharp decline (against the euro). However, we don't expect today's labour report to change the broader picture for sterling trading. Markets will also continue to keep an eye at the debate on the ‘EU Withdrawal Bill' in the UK Parliament. Of course, the global euro moves will also affect EUR/GBP trading. We have a EUR/GBP bias short-term and we don't change that assessment yet. That said, the upside momentum might slow a bit after the recent rally.
MT technical: Sterling rebounded in September as the BoE prepared markets for a rate hike. This rebound ran into resistance as markets anticipated that any rate hikes would be very gradual and limited. This view was confirmed at this month's BoE policy meeting. EUR/GBP currently trades in a 0.8733/0.9033 consolidation range. A downside test of this range was rejected. We assume that the 0.8733-0.8652 support will be tough to break. A EUR/GBP buy-on-dips approach for return action to the EUR/GBP 0.9023/33 ST range top is favoured
EUR/GBP nears MT range top. Time for the rebound to take a breather?