Tuesday, 04 February 2020

P. 1

Rates: Chinese stock markets show green shoots

Chinese markets gain up to 2.5% this morning in a welcome relief sign. Sufficient bad corona-related news is probably discounted. Core bonds slide lower. Today’s eco calendar is empty, but US President Trump’s State of the Union address serves as a wildcard. US non-manufacturing ISM, ADP employment and payrolls are highlights later this week.

Currencies: EUR/USD rebound slows but technical picture stays unchanged

The dollar profited (slightly) from a better risk sentiment and a bottoming in core yields (especially US). EUR/USD eases off Friday’s ‘peak’. Today’s eco calendar is thin. President Trumps State of the Union might cause some intraday volatility. Sterling fell prey to profit taking as EU-UK trade tensions returned to the forefront.

Calendar

• US stock markets rebounded up to 1.34% (Nasdaq) as a bounce back in the US

manufacturing sector and Chinese stimulus boosted optimism. Asian markets regain footing with China clawing back from yesterday’s plunge (+2.39%).

• Russian president Putin and Saudi King Salman agreed to join forces to ensure stability on the global oil market. OPEC+ is meeting in Vienna today to evaluate the impact of the coronavirus as Brent and WTI have slipped into a bear market.

• China is hoping the US will grant Beijing flexibility on pledges agreed in their phase one trade deal that should take effect this month as the country is facing a health crisis that threatens to slow (domestic) growth, Bloomberg reported.

• ECB’s Jens Weidmann pleaded the central bank needs an “understandable, forward-looking and realistic” inflation target. Weidmann further noted authorities can compromise if tools for gauging prices are enhanced.

• The RBA stood pat, holding its cash rate at 0.75%, and expects the economy to expand by 2.75% this year amid labour and property markets’ strength but notes the bushfires and coronavirus could temporarily hit the economy.

• Results from the Iowa caucuses, casting the first votes of the 2020 US presidential election, are delayed as party officials dealt with a “quality problem” citing “inconsistencies” in caucus results from some precincts.

• Today’s economic calendar is little inspiring (Spanish unemployment, UK construction PMI and EMU PPI) leaving trading up to global sentiment. Key event will be president Trump’s State of Union.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Tuesday, 04 February 2020

P. 2

Chinese stock markets show green shoots

Chinese investors returned from extended Lunar NY Holidays yesterday. Their catch-up losses on stock markets (-8%) didn’t spill to other global markets in what could be interpreted as a sign that quite some bad corona-related news is discounted by now. Core bonds grinded lower with US Treasuries underperforming German Bunds. A stronger-than-expected manufacturing ISM – returning above 50 for the first time since July and coming from a multiyear low – played a role. US Treasuries nevertheless ended off their intraday weakest levels after China said to seek US flexibility on Phase 1 trade pledges and as the US Centers for Disease Control and Prevention (CDC) reported a first US case of human-to-human transmission of the virus. The US yield curve bear flattened with yields rising by 3.9 bps (2-yr) to 0.7 bps (30-yr). German yields lost 0.3 bps to 0.8 bps across the curve. 10-yr yield spread changes vs Germany widen by up to 3 bps.

Asian stock markets are positively oriented this morning with China (+1.5%-2.5%) outperforming. The move occurs despite an Alphabet sales miss which sent the stock around 4% lower in after-market trading. Core bonds trade with a downward bias in this positive risk environment. Atlanta Fed Bostic said that past episodes of health events have been short-run and didn’t push him to change his outlook.

Today’s eco calendar is empty. Results of the Iowa Democratic Caucuses face some delay and its uncertain when they will be published. US President Trump holds the final State of the Union address of his current term which serves as a wildcard. Overall, we expect a further relaxation of market conditions as Chinese markets recover. That implies that core bonds could correct further down. With US manufacturing ISM, ADP employment and payrolls still coming this week, investors might be reluctant to put up strong directional bets.

Technically: core bond yields failed to take out resistance levels at -0.18% (July high)/-0.15% (38% retracement of Feb ’18 – Sep ’19 decline) for the German 10-yr yield and 1.94% for the US 10-yr yield. The Chinese coronavirus took markets hostage via risk aversion, pulling core bond yields below first support. We hold our view that this won’t be a lasting market theme. Can China’s return to trading become a turning point?

Rates

US yield -1d2 1.35 0.045 1.38 0.0310 1.53 0.0230 2.03 0.01

DE yield -1d2 -0.67 0.005 -0.65 -0.0110 -0.44 -0.0130 0.07 0.00

Af

German 10-yr yield arrived at key support (-0.41%). US 10-yr yield: 1.94% proved to be tough resistance. No escaping global risk aversion in January. Sufficient bad news discounted?

Tuesday, 04 February 2020

P. 3

EUR/USD 1.0989/81 support survives, but USD attempts a cautious

comeback.

EUR/GBP: sterling hammered as EU-UK discord takes centre stage.

EUR/USD finally receives some breathing space.. Yesterday, headlines on the coronavirus still dominated market news, but the direct grip on trading was less tight than last week. Equites and core yields bottomed and so did USD/JPY. A strong US manufacturing ISM briefly accelerated the USD rebound, but lingering noise on corona (spreading in the US, lower oil price, disputes between the US and China) soon blocked further gains. USD/EUR followed a similar pattern. The dollar rebounded after Friday’s short squeeze. EUR/USD spiked to the 1.1040 area after the ISM, but USD gains could not be sustained. The pair closed at 1.1063 (from 1.1093 on Friday). Overnight, Asian markets are looking for a bottom/new ST equilibrium as investors still ponder the impact of the coronavirus. The yuan rebounds back below USD/CNY(H) 7.00r. The RBA kept its policy rate unchanged at 0.75%. Governor Lowe acknowledged the impact of corona and the bushfires on the economy, but the RBA maintained its growth forecasts for 2020 (2.75%) and 2021 (3.0%). AUD/USD rebounds to the 0.6720 area. USD/JPY extends a cautious comeback (108.85). EUR/USD is holding a very tight range in the 1.1060 area. The eco calendar in EMU and the US is thin. President Trump’s State of the Union is a wildcard (taxes, (trade) relations with Europe,….). Of late, a better risk sentiment and a bottoming in core yields often supported the dollar more than the euro. A further bottoming of USD/JPY is likely in this scenario. A risk rebound might also support the reversal of Friday’s USD decline against the euro. That said, the performance of EUR/USD after the US ISM yesterday wasn’t that bad.

Last week, the EUR/USD 1.0989/81 support survived, and EUR/USD was squeezed back higher. EUR/USD received some breathing space. A rebound beyond 1.1100/20 would further ease downward pressures. A break beyond the MT range top (1.1250 area) still looks a very long call. Yesterday, speeches of EU’s Barnier and UK PM Boris Johnson on the upcoming EU-UK trade talks, illustrated fundamentally different views on their future relationship and on how an agreement can be reached. This discord provided a good reason for sterling profit-taking after the post-BoE rebound. EUR/GBP returned north of 0.85. From here, we keep a closer eye on UK eco data. A further improvement might be sterling supportive, despite ongoing noise on the trade talks.

Currencies

R2 1.1265 -1dR1 1.1199EUR/USD 1.1060 -0.0033S1 1.1000S2 1.0879

R2 0.8798 -1dR1 0.8676EUR/GBP 0.8511 0.0111S1 0.8275S2 0.8117

Tuesday, 04 February 2020

P. 4

Tuesday, 4 February Consensus Previous US 16:00 Factory Orders (Dec) 1.20% -0.70% 16:00 Cap Goods Ship Nondef Ex Air (Dec F) -- -0.40% UK 10:30 Markit/CIPS UK Construction PMI (Jan) 47.1 44.4 EMU 11:00 PPI MoM/YoY (Dec) 0.00%/-0.70% 0.20%/-1.40% Italy 11:00 CPI EU Harmonized MoM/YoY (Jan P) -1.70%/0.50% 0.20%/0.50% Australia 04:30 RBA Cash Rate Target 0.75%A 0.75% Events Q4 earnings Snap (aft-mkt), Ford Motor (22:05) … 04FEB President Trump Holds State of the Union

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 1.53 0.02 US 1.35 0.04 DOW 28399.81 143.78DE -0.44 -0.01 DE -0.67 0.00 NASDAQ 9273.402 122.47BE -0.19 0.00 BE -0.60 0.00 NIKKEI 23084.59 112.65UK 0.51 -0.01 UK 0.48 -0.03 DAX 13045.19 63.22

JP -0.05 0.01 JP -0.14 0.00 DJ euro-50 3661.27 20.36

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0.36 1.36 0.65 Eonia -0.4540 0.00005y -0.30 1.35 0.66 Euribor-1 -0.4550 -0.0010 Libor-1 1.6619 0.000010y -0.06 1.48 0.73 Euribor-3 -0.3930 0.0000 Libor-3 1.7511 0.0000

Euribor-6 -0.3380 0.0000 Libor-6 1.7453 0.0000

Currencies Close -1d Currencies Close -1d Commodities Close -1d

EUR/USD 1.1060 -0.0033 EUR/JPY 120.21 0.04 CRB 168.05 -2.25USD/JPY 108.69 0.34 EUR/GBP 0.8511 0.0111 Gold 1582.40 -5.50GBP/USD 1.2995 -0.0211 EUR/CHF 1.0685 -0.0004 Brent 54.45 -2.17AUD/USD 0.6692 0.0000 EUR/SEK 10.672 -0.0019USD/CAD 1.3286 0.0049 EUR/NOK 10.2596 0.0530

Calendar

Tuesday, 04 February 2020

P. 5

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