Rates: Risk sentiment set to improve, downward bias for core bonds
Risk sentiment is set to improve as weekend comments suggest that common sense could avoid an escalation in the trade disputes. Core bonds could lose some ground with the US Note future underperforming the Bund ahead of supply and after the test of 2.80% support in the US 10-yr yield last week.
Currencies: Trade tensions block any USD upside attempts, at least for now
Global FX remains less affected than equities and bonds by the uncertainty on the US foreign trade policy. The dollar remains slightly in the defensive. Investors apparently want more clarity on the trade issue before considering to engage in additional USD long positions.
The Sunrise Headlines
- US stock markets closed lost 1.75% (Dow) to 2.5% (Nasdaq) after US President Trump threatened to veto a huge spending bill (which he eventually didn’t). Losses on Asian stock markets are smaller overnight.
- China and the US have quietly started negotiating to improve US access to Chinese markets, after a week filled with harsh words from both sides over Washington’s threat to use tariffs to address trade imbalances. (WSJ)
- The Federal Reserve is set to elevate SF Fed President Williams to the presidency of the New York Fed, one of the central bank’s most important positions, just as it faces a potential turning point for setting interest-rate policy.
- Italy’s anti-establishment 5SM and the far-right Lega Nord struck a deal to elect the speakers of the country’s parliament, increasing chances that they could join forces to form a populist-led government in the coming weeks. (FT)
- S&P raised Spain’s rating from BBB+ to A- (positive outlook). Spain’s overall economic and budgetary performance has not been hampered by political tensions in Catalonia and GDP will outperform EMU average over 2018-2021.
- Britain’s opposition Labour Party will demand that parliament has the final say on the government’s Brexit deal, including an option to send ministers back to the negotiating table rather than leave without an exit agreement.
- Today’s eco calendar contains only contains second tier eco data. ECB Weidmann, Fed Dudley and Fed Mester speak. The US and Italy tap the market
Currencies: Trade Tensions Block Any USD Upside Attempts, At Least For Now
Trade debate remains a (modest) USD negative
On Friday, global trade tensions had again less impact on FX compared to bonds or equities. The dollar came under moderate pressure as risk sentiment in the US deteriorated going into the weekend. USD/JPY dropped below 105, but the decline remained modest given the steep losses on US equity markets. EUR/USD closed higher on a daily basis (1.2353 from 1.2302), but held within the established ranges.
Asian equities are mostly in negative territory this morning, but the losses are moderate given the sell-off in the US on Friday. South Korea outperforms. The country received an exemption on the US steel tariffs and the two countries are working to revise an existing free trade pact. Markets are pondering whether this could be some kind of blueprint to solve other bilateral issues between the US and its trading patterns. For now, the tentative easing of tensions (US equity futures are trading in positive territory) doesn’t help the dollar much. EUR/USD trades in the 1.2370 area. USD/JPY struggles to regain the 105 barrier.
There are only second tier eco data in the US and Europe today. Several Fed and ECB members (including Dudley, Mester, Quarles & Weidmann) speak. Tensions between the US and its trading patterns and the impact of the issue on global sentiment remains the dominant driver for FX trading.US equity futures suggest that markets might shift to a more neutral wait-and-see attitude. This is unlikely to be enough to trigger a sustained USD rebound, especially if there is no other USD supportive news. EUR/USD is holding more or less in the middle of the 1.2155/1.2555 range. USD/JPY remains more vulnerable. The pair is holding near the lowest level since November 2016.
Sterling rebounded temporary on Friday. Comments from the EU summit suggested that talks between the EU and the UK developed in a rather constructive way. BoE’s Vlieghe, seen as a dove, confirmed that a scenario of one or two rate hikes this year is possible. However, the deterioration in global risk sentiment didn’t help sterling, especially not against the euro. EUR/GBP closed the session at 0.8742. UK housing loans will probably only be of intraday significance for sterling trading today. EUR/GBP is holding north of the 0.8668/52 support. We don’t see a trigger for a sustained break at this stage
EUR/USD: Trade tensions prevent USD rebound