Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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FX Update: Euro pounding on breakdown levels ahead of EU council meet
John J. Hardy
Chief Macro Strategist
Summary: The US dollar is back on the bid together with the Japanese yen as the euro dips ahead of a crucial EU council meeting where the market is looking for fundamental agreement on principles more than details on a technical solution. EU existential strains are clearly at stake and major EUR pairs are weighing on support ahead of the meeting.
The EU Council meeting today will dominate market attention for global markets, as the tail risk outcomes would be sufficiently large to wash over global markets. A Politico “Playbook” offers a run through of the many confusing moving parts here. As we have stated before and on this morning’s Saxo Market Call podcast, we are looking for signaling on the degree of solidarity more than the technical nature of whatever is agreed today. The setup certainly appears to be one of a debate on basic principles and mechanisms of funding rather than the prospects for a package of any given magnitude. The stakes could not be bigger, and the market will not take kind to an obvious fudge, much less an Italy or a Spain walking out of the talks in a huff. The most positive scenario would be the EU lining up to support Spain’s creative solution. The meeting is scheduled to begin at 1300 GMT.
Already this morning, we have EURUSD breaking below 1.0800 after an apocalyptic set of April flash PMIs (is there really an information value in these, given the known fact of a total shutdown?. The May data cycle will be the first one of any relevance for most countries, although after today’s US weekly initial jobless claims, that weekly data series will gain increasing relevance as portions of the US are trying to begin opening up already now.
Bad news almost all around on Covid19, as the Roche CEO poured cold water on the hopes for the rapid expansion of quality testing and the timeline for a vaccine, and as China is struggling with new outbreaks that are forcing regional shutdowns.
HUF and PLN
CEE watchers should note that things are getting interesting in Hungary and Poland as the two countries look for ways to fund their responses to the Covid19 crisis. Poland has funded some of its spending with rather opaque “private placements” of billions in spending that may be a kind of stealth monetization – watching the PLN exchange rate closely, as well as spreads on sovereign debt denominated in EUR (few signs of strain in recent days). Hungary, meanwhile, may be looking to tap global markets to the tune of EUR 4 billion, an interesting test of the market’s assessment of the country’s creditworthiness after it has slipped into one-man rule by decree. Coming into this crisis, both of the countries were running steeply negative real rates, with CPI rising above 4% while policy rates were well below, and in Poland’s case, have been cut further.
Chart: EURUSD
EURUSD is having a look below the key 1.0800 area, although the recent nominal lows have not yet been broken and the key price action will be in the wake of whatever takes place at today’s EU Council meeting. A close below together with a clear sense of aggravated existential strains arguably opens up for a test of the 1.0350 lows and potentially parity eventually.
The G-10 rundown
USD – the USD neither her nor there, but looking firm against the weakest EM and against a struggling euro this morning. Watching the correlation with risk appetite after the chunky sell-off earlier this week failed to prompt notable USD upside.
EUR – everything at stake for the euro as noted above over the EU Council meeting today – key technical levels in EURUSD and EURJPY already under fire ahead of the meeting.
JPY – the yen picking up a bid here and there this morning as the market trades on a nervous footing ahead of the EU council meeting – most focus on EURJPY, therefore, and the 116.00-25 area.
GBP – sterling firmer against the weak euro, even as the UK Apr. flash Services PMI at 12.3 was somehow not the lowest PMI of the day, with that honor going to France’s flash Services PMI reading of 10.4.
CHF – the SNB may only be able to slow the progress lower if the euro breaks weaker still after today’s EU Council meeting – 1.0500 may be serving as some kind of technical level as well.
AUD – seeing a lot of macro consensus out there that any recovery is likely to boost basic materials first on infrastructure spending and otherwise, may be more of a driver of solid AUD outperformance in some of the crosses as there is little cheer when looking at risks for Australian stocks (especially if big banks suspend their dividends).
CAD – still have huge concerns for the cycle for Canada, but USDCAD is doing nothing here and failed to rally more forcefully despite the most apocalyptic action in crude imaginable (so far). Hopes that USD liquidity is anaesthetizing this market are the likely driver of lack of more compelling price action.
NZD – New Zealand credit card spending dropped -9.1% month-on-month in March, about matching the Retail Sales drop in the US for the month of March. AUDNZD has been quick to build a base and briefly posted a new high overnight (see possible drivers above in AUD). 1.0500 appears the support there.
SEK – EURSEK price action putting us to sleep – Sweden struggling close to capacity limits in health system if the Covid19 outbreak worsens on the nation’s rather unique, more open shutdown policy. Otherwise, curious to see how the market treats the EU council meeting outcome
NOK – EURNOK still slightly north of 11.50 level this morning despite crude oil price bounce yesterday – the highs may be in here local if the lows are in for longer-dated crude (track something like December 2021 crude more than next few front months), though we are unwilling to make that call.
Economic Calendar Highlights (times GMT)
- 1230 – US Weekly Initial Jobless Claims
- 1300 – EU Council meeting starts
- 1345 – US Markit flash Apr. PMI
- 1400 – US Mar. New Home Sales
- 1500 – US Apr. Kansas City Manufacturing Survey
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