Thursday, 08 February 2018

P. 1

Rates: Core bond sell-off resumes

The short squeeze in core bonds earlier this week seems to have done its job. Underlying negative core bond sentiment takes the upper hand again. The US Congress’ 2-yr spending deal will significantly raise US deficits and is structurally negative for Treasuries. Speeches by Fed/ECB governors and the US 30-yr Bond auction could also impact trading.

Currencies: Dollar gains traction on higher yields and expansive fiscal policy

The dollar rebound accelerated as a poor US bond action and prospects for a big US budget deficit propelled US yields. The downside of the dollar looks better protected. EUR/USD dropped below intermediate support. The BoE’s policy decision and inflation report might keep the door open for a next rate hike later this year. This might be slightly supportive for sterling.

Calendar

• The comeback of US stock markets stalled with indices ending mixed between

flat (Dow) and -0.9% (Nasdaq) lower. Most Asian indices are in positive territory this morning with China underperforming.

• Congressional leaders said they had reached an agreement on a 2-yr budget deal, charting a path out of the turmoil over spending and immigration that had shuttered the government last month and left its long-term funding in jeopardy.

• China’s export growth (11.1% Y/Y) bested expectations in January as the value of imports (36.9% Y/Y) vastly exceeded forecasts thanks in part to the timing of the Lunar New Year and a recovery in oil prices from a year earlier.

• The Reserve Bank of New Zealand kept its official cash rate at 1.75%, and also said it expects inflation to reach the mid-point of its target two years later than forecast. Governor McDermott said the kiwi will weaken as the Fed hikes.

• Oil prices dropped to their lowest point in 2018 after US government data showed US crude stockpiles rose faster than expected last week and monthly data for domestic production surpassed all-time highs.

• Sources said that China has resumed an outbound investment scheme after a 2y hiatus, granting licenses to about a dozen global money managers, signalling that Beijing is less worried about capital outflows amid a surge in the renminbi.

• Today’s eco calendar contains the BoE’s policy meeting and US weekly jobless claims. The ECB publishes its economic bulleting and several ECB & Fed governors speak. Ireland and the US tap the bond market.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Thursday, 08 February 2018

P. 2

Core bond sell-off gains new traction

Core bonds traded less volatile yesterday and eventually closed somewhat lower. The short squeeze triggered by Monday’s huge sell-off on (US) stock markets seems to have done its job, resulting again in a more neutral market positioning. German Bund underperformed US Treasuries. The US yield curve bear steepened with yields 1.7 bps (2-yr) to 4.8 bps (30-yr) higher. German yields added 2.2 bps (2-yr) to 5.2 bps (10-yr). 10-yr yield spreads vs Germany narrowed up to 3 bps with the periphery significantly outperforming (-5 bps to -10 bps).

The US Note future loses more ground overnight after US Congress stroke a 2-yr budget deal (still needs to be approved!) which will result in a significantly wider US deficit. Voting Fed governor Williams said that he has no strong view between 3 or 4 Fed rate hikes this year. Asian risk sentiment is positive with China underperforming. Brent crude lingers near the lowest levels YTD. We expect a slightly softer opening for the Bund.

Today’s eco calendar is extremely thin with only weekly jobless claims. Core bond sentiment is bearish. The US budget deal could cause underperformance of US Treasuries vs German Bunds. Plenty of Fed and ECB governors speak. From earlier Fed speeches we recall that most governors’ view on monetary policy isn’t altered by the recent stock market correction. In ECB members’ speeches, we look out whether they draw conclusions towards policy about the German wage deal reached earlier this week. We’d also pay additional attention to tonight’s 30-yr US bond auction. Yesterday’s 10-yr Note auction was somewhat below average. Another failure would be negative for US treasuries, steepening the curve further. Risk sentiment on stock & commodity markets is a wildcard for trading.

Strong growth momentum, rising inflation (expectations) and the global turn towards monetary policy normalization are structurally negative factors for core bonds medium term. US and German yields cleared resistance levels earlier this year and moved at high-speed towards next targets. The trading band for the US 10-yr yield is 2.64%-3.05%. Correction towards the lower bound could be used to put up short positions in the Note future. The German 10-yr yield’s trading band is 0.62%-1.06% trading band.

Rates

US yield -1d2 1,19 0,005 1,93 0,0010 2,44 0,0030 3,07 0,00

DE yield -1d2 -0,79 -0,025 -0,56 -0,0310 0,18 -0,0330 0,92 -0,03

German 10-yr yield: short-lived correction; uptrend remains in place

US 10-yr yield: ready to attack this year’s highs and the 3.05% resistance next

Af

Thursday, 08 February 2018

P. 3

EUR/USD: finally drops below1.2323/35 support as dollar rebounds

EUR/GBP: returns within ST consolidation pattern ahead of BoE

EUR/USD drops below intermediate support

EUR/USD finally broke 1.2323/35 support yesterday. Later in US dealings, different factors supported the US dollar. The US 10-yr yield ticked higher after a poor 10-yr action. US Senate leaders announced a 2-yr budget deal (still to be approved) that would raise government spending by $300 bn, raising the budget deficit. The prospect of an expansionary fiscal policy and higher rates inspired further USD gains and hurt equities. EUR/USD finished the day at 1.2264. USD/JPY held north of 109 despite renewed nervousness on equity markets.

Asian equities are trading mixed with Korea and Japan outperforming, supported by the stronger dollar. China is mixed as trade data show a very sharp rise of imports. The Yuan eases after touching the highest level in more than two year yesterday. Higher US yields are keeping USD/JPY well supported (109.60 area). EUR/USD hovers near yesterday’s closing levels. The kiwi dollar (NZD/USD 0.72) weakened as the RBNZ indicated that inflation will only reach the 2.0% target in 2020.

There are few important data today. Many ECB members attend a conference in Frankfurt. We keep a close eye at the US 30-yr Bond auction. The prospect of a rising deficit supports the rise in US yields. The dollar could regain traction on higher US yields and on the prospect of an expansive US fiscal policy. Risk sentiment remains a wildcard. Yesterday’s price action suggests that the downside of the dollar is becoming better protected. ECB speakers will probably reiterate that ECB normalization will develop in a very gradual way and that FX volatility is a risk. Technical picture: the dollar decline slowed of late and EUR/USD finally dropped below 1.2323/35 support. A break below 1.2165 would call off the ST downside alert (for USD). A correction of EUR/JPY reinforced the EUR/USD decline yesterday, but this factor might ease if risk aversion cools.

The BoE decides on policy and publishes its inflation report today. The BoE might be slightly more positive on growth and keep its assessment on inflation (rise in sterling to counterbalance higher oil price?). The BoE assessment might keep the door open for a next rate hike later this year (August?). Today’s BoE communication might be slightly supportive for sterling. Of late, a break of the EUR/GBP 0.8928 resistance failed. A neutral (not too soft) BoE assessment might push EUR/GBP back lower in the established range. EUR/GBP 0.8690 remains solid support. A break probably won’t be easy as long Brexit uncertainty persists.

Currencies

R2 1,1145 -1dR1 1,0851EUR/USD 1,0487 -0,0036S1 1,0518S2 1,0458

R2 0,8828 -1dR1 0,8689EUR/GBP 0,8510 -0,0015S1 0,846S2 0,8333

Thursday, 08 February 2018

P. 4

Thursday, 8 February Consensus Previous US 14:30 Initial Jobless Claims 232k 230k 14:30 Continuing Claims 1940k 1953k Japan Eco Watchers Survey Current SA (Jan) A: 49.9 53.9 Eco Watchers Survey Outlook SA (Jan) A: 52.4 52.7 00:50 Housing Loans YoY (4Q) A: 2.9% 3.0% 00:50 BoP Current Account Adjusted (Dec) A: ¥1479.6b ¥1700.5b China Exports YoY CNY / Imports YoY CNY (Jan) A: 6%/30.2% 7.4%/0.9% Trade Balance CNY (Jan) A: 135.80b 361.98b Exports YoY / Imports YoY (Jan) A: 11.1%/36.9% 10.9%/4.5% Trade Balance (Jan) A: $20.34b $54.69b BoP Current Account Balance (4Q P) -- $40.5b 08FEB-18FEB Foreign Direct Investment YoY CNY (Jan) -- -9.2% UK 01:01 RICS House Price Balance (Jan) A: 8% 8% 13:00 Bank of England Bank Rate 0.500% 0.500% 13:00 BOE Asset Purchase Target (Feb) 435b 435b 13:00 BOE Corporate Bond Target (Feb) 10b 10b Germany 08:00 Trade Balance (Dec) 21.0b 23.7b 08:00 Current Account Balance (Dec) 28.0b 25.4b 08:00 Exports SA MoM / Imports SA MoM (Dec) -1%/-0.7% 4.1%/2.2% France 08FEB-09FEB Bank of France Ind. Sentiment (Jan) 110 110 Spain 09:00 Industrial Production MoM / SA YoY (Dec) -0.3%/4.0% 1.0%/4.2% Events 09:45 ECB’s Weidmann Speaks in Frankfurt 10:00 ECB Publishes Economic Bulletin 10:15 Live Twitter Q&A with ECB’s Praet 10:15 Fed Kaplan Speaks in Frankfurt 11:15 ECB’s Villeroy Speaks in Frankfurt 11:30 ECB’s Mersch Speaks in London 11:30 Ireland to Sell Bonds 11:45 ECB’s Praet Speaks in Frankfurt 13:00 Bank of England Inflation Report 14:00 Fed’s Harker Speaks on Economy: Outlook and Impact for College 15:00 Fed’s Kashkari Speaks in Moderated Q&A 19:00 US to Sell $16bn 30-yr Bonds

Calendar

Thursday, 08 February 2018

P. 5

10-year td -1d 2-year td -1d Stocks td -1dUS 2,44 0,00 US 1,19 0,00 DOW 19762,6 0,00DE 0,18 -0,03 DE -0,79 -0,02 NASDAQ 5383,117 0,00BE 0,51 -0,04 BE -0,69 -0,02 NIKKEI 19114,37 0,00UK 1,24 0,00 UK 0,08 0,00 DAX 11575,57 94,51

JP 0,05 0,00 JP -0,18 0,00 DJ euro-50 3302,48 11,96

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,11 1,69 0,69 Eonia -0,3290 0,00005y 0,06 2,00 0,86 Euribor-1 -0,3680 0,0000 Libor-1 0,7717 0,000010y 0,64 2,34 1,23 Euribor-3 -0,3190 0,0000 Libor-3 0,9979 0,0000

Euribors-6 -0,2210 0,0000 Libor-6 1,3177 0,0000

Currencies td -1d Currencies td -1d Commodities td -1d

EUR/USD 1,0487 -0,0036 EUR/JPY 123,15 0,11 CRB 192,51 0,00USD/JPY 117,43 0,52 EUR/GBP 0,8510 -0,0015 Gold 1151,70 0,00GBP/USD 1,2326 -0,0018 EUR/CHF 1,0714 -0,0008 Brent 56,82 0,00AUD/USD 0,717 -0,0040 EUR/SEK 9,5408 -0,0323USD/CAD 1,3417 -0,0024 EUR/NOK 9,0556 -0,0236

Brussels Research (KBC) Global Sales Force Mathias van der Jeugt +32 2 417 51 94 Brussels Peter Wuyts +32 2 417 32 35 Corporate Desk +32 2 417 45 82 Institutional Desk +32 2 417 46 25 Dublin Research France +32 2 417 32 65 Austin Hughes +353 1 664 6889 London +44 207 256 4848 Shawn Britton +353 1 664 6892 Singapore +65 533 34 10 Prague Research (CSOB) Jan Cermak +420 2 6135 3578 Prague +420 2 6135 3535 Jan Bures +420 2 6135 3574 Petr Baca +420 2 6135 3570 Bratislava Research (CSOB) Marek Gabris +421 2 5966 8809 Bratislava +421 2 5966 8820 Budapest Research David Nemeth +36 1 328 9989 Budapest +36 1 328 99 85

ALL OUR REPORTS ARE AVAILABLE VIA OUR KBC RESEARCH APP (iPhone, iPad, Android) This non exhaustive information is based on short term forecasts for expected developments

This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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