Recession fears make a comeback

Danske Research Team Danske Bank A/S

Market movers today

We have a number of important events this week, with most prominently a potential Brexit vote tomorrow or Wednesday, as well as several central bank speeches potentially addressing the recent dovishness from policymakers. US trade negotiators are heading to Beijing for another round of talks later this week and Chinese vice PM Liu He is set to go to DC on 3 April.
Today's highlight on the data front is the German Ifo for March. After last week's uptick in ZEW expectations investors are becoming on balance a bit less pessimistic on the Eurozone/Germany outlook. However, with the disappointing PMI manufacturing figures on Friday it is clear that the Germany is not out of the woods yet and challenges for the euro area recovery still lie ahead.

Selected market news

The global manufacturing cycle continues to shift into lower gear, as both Eurozone and US manufacturing PMIs eased further in March. In Europe, weaker external demand continues to drive the deterioration in companies' order books, which are back at the worst levels since 2012. Especially Germany remains at the epicentre of the Eurozone manufacturing slowdown, leading us to revise down our forecast for German Q1 GDP growth to 0.2% q/q (from 0.3% q/q previously), see Flash Comment: Growing manufacturing abyss challenges Eurozone outlook.

Following disappointing data releases on both sides of the Atlantic markets are getting increasingly worried about the global cyclical stance. Both the EUR and the Scandi currencies were sold off and rates markets headed south. 10Y Bund yields moved below zero and in the US the yield curve has started to invert, with the 10Y Treasury yield falling below the 3M rate for the first time since 2007 - which historically has coincided with recession hitting within the next 12 months. However, the yield spread itself does not trigger an economic downturn and although the US industrial sector seems to have hit a rough patch - not being immune to global developments - we still think the US economy overall is in good shape and remains supported by fiscal stimulus this year. That said, we currently have a very strong combination of rapidly deteriorating global data combined with surprisingly soft rhetoric from the four major central banks, notable the Fed and the ECB. Hence, we see room for further fixed income performance and curve flattening this week. We continue to see 10Y Bund yields in a -10 to +15bp range the next couple of months and expect that we will soon move towards the lower end of that range.

This morning the sour risk sentiment seems to continue with Asian benchmarks in the red, while Brexit uncertainty remains elevated after reports that PM Theresa May is again facing pressure from her cabinet to resign. In the US risk sentiment might get a boost from news that US justice department special counsel Robert Mueller concluded that Donald Trump and his presidential campaign did not collude with Russia in an attempt to influence the 2016 election result.

Download The Full Daily FX Market Commentary

Author

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.