Sunrise Market Commentary
- Rates: Huge sell-off on US stock markets triggers short squeeze in bonds
The sell-off on US stock markets accelerated yesterday evening (-4% and more) and caused a huge short squeeze in an oversold US Treasury market with yields ending up to 15 bps lower. Risk aversion could support core bonds somewhat short term and cause a revisit of previous range tops in yield terms. Any downleg in yields is expected to stop there. - Currencies: USD little affected by global risk-off correction
The focus for global trading remains on equities and bonds/yields. FX markets are little affected by the aggressive risk-off correction. EUR/USD stays within the established range. The euro is holding strong. USD/JPY loses slightly ground, but yen gains are still blocked by ongoing verbal monetary interventions from BOJ officials
The Sunrise Headlines
- US stocks suffered their worst fall in more than six years (-4% to -4.5%), erasing gains for the year. Asian equity indices can’t escape the sell-off this morning and record losses of 3% to 5% (Japan).
- Industrial workers and employers in southwestern Germany struck a deal on pay and working hours, setting a benchmark for others. The agreement foresees a 4.3% raise from April and other payments spread over 27 months.
- ECB Draghi warned that the euro’s recent surge creates ‘new headwinds’ and should be closely watched. The comments are the latest sign that a stronger euro could slow ECB efforts to unwind its giant monetary stimulus program.
- The Australian central bank kept its policy rate unchanged at 1.5%. RBA governor Lowe reiterated that a return of rapid wage growth remains a distant prospect despite strengthening business investment and a hiring bonanza.
- The House intelligence committee voted to release a memo that rebuts Republican criticisms of the FBI probe into Russian interference in the 2016 election, setting the stage for a potential clash with President Trump.
- German coalition negotiations were extended for a second day as SPD leaders seek to wring concessions on labor and health-insurance rules from Merkel’s Christian Democratic-led bloc. A yes-or-no decision is expected today.
- Today’s eco calendar contains the US trade balance. Austria, Germany, Greece (?), Finland (?) and the US tap the market. ECB Weidmann and Fed Bullard are scheduled to speak
Currencies: USD Little Affected By Global Risk-Off Correction
USD little affected by global risk-off correction
Equity sentiment turned negative in Europe yesterday, but the decline developed orderly. Bonds rebounded off last week’s lows. The dollar continued trading mixed, gaining slightly ground against the euro, but struggling against the yen. Even so, the rise of the yen was hampered by soft comments from Japanese officials. This trading pattern basically persisted in US dealings as equities nosedived and as yields declined sharply. EUR/USD finished the session at 1.2367. The yen finally attracted some safe haven flows. USD/JPY closed at 109.09 (from 110.17 on Friday). Still, the rise of the yen was modest given global panic.
In extremely volatile trading, Asian equities are losing up to 5% (losses were even bigger earlier in the session). US yields decline further, but the pace slows. EUR/USD (currently near 1.2375) still holds a tight range. Yen gains remain modest. USD/JPY dropped to the mid-108 area, but already rebounded slightly. The swings on other markets (e.g commodities) are also modest. The Reserve bank of Australia kept its policy unchanged. Economic growth remains on track, but the RBA maintains a wait-and- see approach. AUD/USD (0.7850 area) lost further ground, but this is probably due to the risk-off sentiment.
Today’s eco calendar is thin. The US trade deficit is expected at a huge $52.1 bn. Trade imbalances might become more important for FX trading but today’s data will be overshadowed by the equity story. Current volatility is in the first place an equity correction. The impact on FX is modest. Dollar bulls/euro bears might be disappointed that risk-off didn’t help the dollar more against. At the same time, investors are cautious to row against verbal monetary interventions from the BOJ, preventing further JPY gains. Over the previous days, we were looking for a technical sign in EUR/USD. This sign isn’t there yet despite big swings on other markets. It suggests that the downside in EUR/USD remains quite solid for now. Technical picture: the dollar decline slowed of late, but no meaningful rebound occurred. 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 USD).
The sterling correction accelerated yesterday. Brexit noise, global risk-aversion and a disappointing services PMI were to blame. EUR/GBP rebounded to the 0.8870 area. Sterling’s decline against the euro might slow ahead of the BOE meeting. EUR/GBP 0.8928 is first resistance.
EUR/USD: holding a tight range despite rise in global volatility
