Sunrise Market Commentary
- Rates: Higher yields contaminate other markets
The global core bond sell-off continued last Friday following strong US payrolls and average hourly earnings. Higher rates contaminated stock markets with a huge correction in main US indices (-2%/-2.5%). Sentiment remains bearish in both bonds and stocks this morning. The US- and German 10-yr yields are heading at high-speed towards the psychological levels of 3% and 1%.
- Currencies: Dollar holds indecisive pattern despite higher yields and rising volatility
On Friday, the dollar gained only modest ground after a strong US payrolls report. The sharp rise in US yields and the spike in global volatility provides no clear guidance for the dollar. The services PMI’s/ISM are probably only of second tier importance today. Will the euro stay strong if the risk-off correction continues?
The Sunrise Headlines
- US stock markets suffered a huge correction last Friday as the surge in yields starts to bite. Main indices lost around 2% to 2.5%. Asian bourses lose more than 1% this morning with Japan underperforming (-2%).
- Democrats have sounded the alarm of a potential constitutional crisis in Washington, warning that President Trump may use the release of a top-secret memo as grounds to fire his deputy attorney-general.
- China’s services sector got off to a flying start in 2018, expanding at its fastest pace in almost six years as new orders surged and companies rushed to hire more staff. The Caixin Services PMI rose from 53.9 to 54.7.
- Outgoing Fed chair Yellen said US stocks and commercial real estate prices are elevated but stopped short of saying those markets are in a bubble.
- SF Fed Williams said US central bank’s decision on whether to hike by three times or four in 2018 will be driven by the data, and that both possibilities are “still reasonable at this point to think about as options.”
- UK PM May has ruled out staying in the EU’s customs union after Brexit, a government official said, adding it isn’t government policy to stay in "a" customs union either.
- Today’s eco calendar contains the EMU and UK services PMI’s and US (ISM). EMU retail sales will also be released. ECB President Draghi speaks in European Parliament.
Currencies: Dollar Holds Indecisive Pattern Despite Higher Yields And Rising Volatility
Dollar shows no clear trend despite global risk-off
Friday’s US payrolls were strong, including good wage growth. The report caused a further rise in US yields. USD/JPY spiked north of 110 and stayed there even as US equities sold off sharply. The BOJ’s commitment to keep an easy policy and the rise in core (US and EMU) yields prevented a yen rebound. The pair closed the session at 110.17. The dollar gained modest ground against the euro. EUR/USD finished the day at 1.2463.
Asian equities are under pressure overnight after Friday’s sell-off in the US. Japan underperforms. The losses on Chinese equity markets remain modest. Even so, the US 10-y yield is setting a new cycle high north of 2.85%. The dollar is a place of relative calm give the global volatility. EUR/USD hovers in the mid 1.24 area. The yen gains a few ticks. USD/JPY is drifting back below 110. Before Parliament, BOJ’s Kuroda said that quantitative easing is highly needed to reach 2% inflation. The rise of core bond yields and the verbal offensive of the BOJ currently prevent the yen from taking up its safe haven role.
Today, EMU January services PMI, EMU retail sales and the US nonmanufacturing ISM are interesting. The US ISM is expected to improve from 55.9 to 56.5. Markets will especially look for clues on inflation. In this respect, (too much) good news might be bad for bonds and for risky assets. For now, the sharp rise in core yields and the up-tick in volatility provided no clear guidance for the dollar. We tend to believe that a protracted period of risk aversion should be modestly negative for the euro, or at least prevent a further rise. Admittedly, the jury is still out on this issue. We still look out for a technical sign. Technical picture: the dollar decline slowed of late, but no meaningful rebound occurred, especially not against the euro. EUR/USD 1.2537/98 remains the first topside resistance. A break would signal more trouble for USD short term. EUR/USD 1.2323/35 is a minor support A break below 1.2165 would call off the ST downside alert (for the dollar).
Sterling declined further on Friday. Ongoing Brexit noise and a global risk-off context weighed on the UK currency. EUR/GBP rebounded above 0.88. Today’s UK services PMI is expected little changed at 54.1. The Brexit debate in the conservative Party suggests that Brexit hardliners are gaining momentum. This might weigh on sterling even as investors look out for this week’s BoE meeting.
EUR/USD: USD going nowhere despite strong payrolls