- Rates: EMU PMI’s to add to growth worries?
Global core bonds profited from safe haven flows as stock markets took a scare while Italian BTP’s faced new selling pressure as the EU asked changes to the draft budget. EMU PMI’s could add to global growth worries today, suggesting stock markets aren’t out of the woods yet. Key technical yield support levels, might cap intraday core bond gains.
- Currencies: Dollar maintains recent gains, but no convincing rally yet
Yesterday, trading in the major USD cross rates mostly held to established ranges. The US currency preserves some kind of ‘by default’ bid, but USD bulls also show no strong conviction. Today, we don’t see a compelling factor to change the overall picture of USD trading. Sterling traders keep an eye at yet another key Brexit meeting within the UK Conservative party
The Sunrise Headlines
- US equity markets opened yesterday’s session with substantial losses, but recovered (partially) throughout the day. Asian markets opened mixed this morning with Chinese indices outperforming.
- President Trump called the Federal Reserve the biggest risk to the US economy as chairman Powell continues raising interest rates. He added that he is maybe regretting the Fed nomination of Mr. Powell.
- The European Union officially rejected the Italian budget proposal, saying it had no alternative but to demand changes. Italy has now three weeks to submit a new budget, but already commented it would “not give up” on its plans.
- Raphael Bostic, the normally rather dovish Atlanta Fed president, said he supports further gradual interest rate hikes and warned that too much stimulus risks overheating the economy and rising inflation (expectations).
- President Trump said the Khashoggi murder was the “worst cover-up ever” by Saudi Arabia. Congress will discuss adequate efforts to punish the country and will revoke the visas of the people responsible of the murder.
- The Japanese manufacturing PMI rose from 52.5 in September to 53.1 in October. The rebound is the strongest improvement in six months suggesting the slowdown in Q3 GDP might be temporary
- Today’s eco calendar contains EMU and US PMI’s. The Bank of Canada is expected to hike rates while the Riksbank will stay put. The Fed releases its Beige Book with governors George, Bullard, Mester and Bostic on the wire
Currencies: Dollar Maintains Recent Gains, But No Convincing Rally Yet
Dollar holding tight ranges
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On Tuesday, EUR/USD hovered in a relatively tight range approximately between 1.1440 and 1.1495. Initially, negative sentiment from Asia spilled over to Europe and weighed on the euro. During the day, the decline on equity markets slowed and so did the euro. The rift between the EU and Italy on the Italian budget will probably continue for a while as the EU formally rejected the country’s budget proposal. However, this formal step in the procedure had little additional negative impact on the euro. Later, US yields reversed part of an earlier decline, amongst others on rather hawkish Fed comments (Bostic). The impact on the dollar was limited. EUR/USD finished the day at 1.1471. USD/JPY closed at 112.40, within established ranges. This morning, tension on Asian equity markets show tentative signs of easing, with China outperforming. The yuan (USD/CNY at 6.9370) gains a few ticks against the dollar. USD/JPY (112.60) trades with a cautiously positive bias. EUR/USD shows no clear trend, holding in the 1.1470 area. Today, the eco calendar contains the first estimate of the EMU October PMI’s. A modest further erosion is expected. This shouldn’t be a big surprise for the euro anymore. US data are probably of second tier importance. Fed speakers, US corporate earnings and the Fed Beige Book are wildcards. Of late, the dollar slightly outperformed other majors including the euro. However, this looks as some kind of ‘by default’ choice. Conviction of USD bulls also wasn’t really strong. Of late, we held a cautious USD positive bias (negative EUR/USD). We don’t see a compelling reason to change tactic. That said, EUR/USD recently failed to break below the 1.1432 support. If Italy would move a bit to the background, downside pressure on the euro might also ease. With multiple event risks on both sides of the Atlantic, sideways trading in the 1.14/1.16 area might be on the cards.
On Tuesday, there were again rumours on proposals (from the EU) to unlock the UK-EU Brexit negotiations. However, any positive impact on sterling was limited/temporary as markets first want clarity on how the rift within the UK conservative party will be solved. EUR/GBP closed the session on the 0.8835 area. Today, the focus will be on a new meeting of UK PM May with the MP’s of her party (1922 Committee). Question is whether this meeting will result in a clear, unequivocal Brexit view for the party. As long as UK political uncertainty remains the key obstacle for a Brexit deal, we stay cautious on sterling
EUR/USD: dollar maintains benefit of the doubt, but USD bulls show no strong conviction either