Sunset Market Commentary

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Global core bonds gain ground today with US Treasuries outperforming German Bunds. Asian equity markets traded mixed this morning and European equities climbed higher despite Eurozone Markit PMI’s printing lower than expected. Business confidence lost ground on all sublevels. The Eurozone Composite PMI declined from 54.1 to 52.7 (53.9 expected). The subcomponents indicate that not only exports disappoint. More forward-looking indicators like new orders are also taking a hit. The safe haven flows pushed core bonds higher. Despite deteriorating business confidence, EU equities preserved modest gains. US equities opened slightly lower. However, trading remains volatile. After the European Commission rejected Italy’s budget proposal on Tuesday, BTP futures basically stabilized. The underperformance of Italian equities might be in play. The Investor focus shifts to tomorrow’s ECB meeting . Last couple of weeks, ECB members maintained a rather positive tone. Will Draghi admit some cracks are emerging in the positive outlook? German yield curve changes are mixed with changes ranging from -1.2 bps (10-yr) to +0.6 bps (30 y). The US yield curve shifts down with the belly of the curve outperforming the wings. Changes range from -1.2 bps (2-yr) to -3.8 bps (5-yr). Peripheral bond spreads tighten with Spain (-4 bps) and Portugal (- 4bps) outperforming.

Price moves in EUR/USD (and other major FX cross rate) often were confined to tight ranges of late. The moves, if any, were mostly driven by global factors/risk sentiment. At least for EUR/USD, this analysis didn’t work today. EUR/USD traded little changed in Asia. Early in European dealings, the EMU PMI’s were significantly weaker than expected, suggesting a further cooling of growth in the second half of the year. Especially, the slowdown in activity in Germany did catch the eye. It will be interesting to see whether/to what extent this signal will be picked-up at Draghi’s ECB press conference tomorrow. If continued, a growth slowdown might complicate the ECB’s efforts to gradually normalize policy. The jury is still out, but it was a good enough reason for euro investors to push EUR/USD for a test of the 1.14 barrier. Early in US dealings, sentiment on risk tentatively improved. However, global equity markets continue to trade volatile. For now, swings support further USD gains anymore. EUR/USD hovers in the low 1.14 area. USD/JPY is changing hands near 112.62. The dollar maintains the benefit of the doubt?

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Trading in the EUR/GBP cross rate show a rather lackluster trading pattern today as markets await key meetings within the UK conservative party/government on Brexit that are expected to take place later today and tomorrow. EUR/GBP traded with a slightly negative bias intraday, but this was mainly due to overall euro softness rather than anything else. Cable drifted further south in the 1.29 big figure mirroring overall USD strength.

News Headlines

The Swedish Riksbank kept its base rate unchanged at -0.5%. The decision was widely expected as was a hint from the central bank for a possible rate hike next December given the uptick in the latest inflation data. However, the Riksbank refrained from any new guidance. The krona slightly disappointed.

In his medium-term fiscal outlook, South-Africa’s freshly appointed finance minister Mboweni has cut the 2018 growth forecasts by more than half from 1.5% to a mere 0.7%. He warned the fiscal deficit would rise to 4.0% from earlier 3.6% projections as tax revenues disappoint, public-sector wages increase and state-owned groups are witnessing debt distress.
 
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