Tuesday, 07 November 2017

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Rates: Test of contract high (Bund) likely; sell-the-uptick?!

The German Bund is near the 163.43 contract high. Failure to sustainably move above this level could be an opportunity to sell-the-uptick. The rally of oil prices didn’t impact bonds until now and we look out whether that remains the case. The start of the US’ quarterly refinancing operation is negative for US Treasuries.

Currencies: Dollar fails to overcome technical resistance, for now

The dollar came close to/tested important technical levels yesterday and against the euro and the yen, but no real break occurred. Today, the calendar is again thin. Still we look out whether a next attempt might succeed. Sterling regains most of the post-BoE decline. For now, we don’t seen any fundamental news to explain the move.

Calendar

• US equities ended with small gains, led by the energy sector after crude price

soared more than 3%. Brent crude rose above $64/barrel for the first time since June 2015. Asian indices gain up to 1% this morning.

• Australia’s central bank showed increasing confidence in the investment picture outside mining while retaining concerns about the prospects for household spending as it kept interest rates at a record-low 1.5%.

• New Zealand’s government confirmed it’s considering a dual mandate for the central bank targeting full employment alongside price stability. WSJ reported that Fed Williams advocates the adoption of a price level targeting strategy in the face of the ongoing low inflation.

• The ECB will reinvest €130bn of bonds that are set to mature in the coming year, according to data released yesterday – but the early months of 2018 are likely to see a low amount of re-investments.

• The ECB’s plan to force banks to set aside more money against future bad loans got tacit support from euro zone finance ministers despite concerns in Italy the move might weaken some of its banks.

• Italy’s centre-right led by former prime minister Berlusconi has fended off a strong challenge from the populist Five Star Movement to win the presidency of Sicily, ringing alarm bells for Matteo Renzi and his centre-left Democratic party (PD) in a poll seen as the final test ahead of Italy’s next general election.

• Today’s eco calendar contains German industrial production, EMU retail sales and US JOLTS job openings. ECB Draghi, Lautenschlaeger and Nouy speak at an ECB conference. Austria, Germany and the US tap the market.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Tuesday, 07 November 2017

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Core bonds trade constructively, despite higher oil

Core bonds started the European session with a move higher that lasted till 10am CET. Afterwards, dull sideways trading in a very tight range kicked in. We don’t have a good explanation for this initial spurt higher. Eco data were certainly not the reason. Dovish, but no new, comments of ECB Praet and some technical buying (Bund opened above 162.78 first resistance) and a temporary dive of equities in early European session may go some way to explain the move. Key resistance in the Bund (contract high at 163.43) remained as of yet out of reach, lowering the significance of yesterday’s price action. US Treasuries followed Bunds higher, but the latter outperformed. There were no US eco data and a speech of NY Fed Dudley went by without fuss. Interestingly, core bonds ignored a sharp rise of oil, which is often linked to inflation (expectations) and thus bonds negative.

In a daily perspective, the German yield curve bull flattened with yields down between 0.9 bps (2-yr) and 2.8 bps (10-yr). The US yield curve also flattened with yields 0.7 bps (2-yr) higher to 1.9 bps (30-yr) lower. On intra-EMU bond markets, 10-yr yield spreads versus Germany ended little changed (-1 to +2 bps).

Market calendar misses punch today

The eco calendar remains also thin today with the September US JOLTS job openings report and EMU retail sales. None is a market mover. The JOLTS report concerns also the month of September, when tropical storms distorted the labour market. EMU retail sales are volatile and on top not a good pointer to consumption spending. The speeches of Draghi, Lautenschlager and Nouy at the ECB forum on supervision on “Europe’s changing banking landscape” might be important for banks shares, but not for FX or bond markets. The speech of the Fed’s newcomer Quarles at the Clearing House annual conference is likely only of sectorial importance. The start of the US quarterly refunding and some political events may be the focus today.

Rates

US yield -1d2 1,62 0,015 1,99 -0,0110 2,32 -0,0230 2,80 -0,02

DE yield -1d2 -0,76 -0,015 -0,37 -0,0210 0,34 -0,0330 1,21 -0,02

Bund future (orange) & EuroStoxx (black) (intraday): Bund spurts initially higher, but stabilizes in tight range, undisturbed by oil rally

5-yr/5-yr inflation expectations and Brent oil (orange): recent increase oil price leaves expectations broadly unchanged.

Aff

Modest gains core bonds

Ongoing curve flattening

Sharp rally oil ignored

Intra-EMU spreads little changed

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Austria and the US start this week’s supply

The Austrian treasury kicks off this week’s scheduled EMU bond supply by tapping the on the run 5-yr RAGB (0% Sep2022) and 10-yr RAGB (0.5% Apr2027) for a combined €1.15 bn. Bonds on offer didn’t cheapen in ASW spread terms going into the auction. The ongoing Austrian coalition talks, which might end up with the inclusion of the extreme right Freedom Party, could weigh on demand. The US Treasury starts its quarterly refinancing operation with a $24 bn 3-yr Note auction. The WI trades currently around 1.75%.

Test of contract high (Bund) likely; sell-the-uptick?!

Asian stock markets perform strong overnight with gains of 0.5% to 1% with Japan outperforming and the Nikkei on the highest level since 1992. Brent crude hangs on to yesterday’s significant gains and trades above $64/barrel for the first time since June 2015. The US Note future has a very small downward bias, but we expect a neutral opening for the Bund.

Today’s eco calendar is uninspiring. Central bank speeches are wildcards, but unlikely to influence trading given the current monetary policy stances (US December rate hike fully discounted, ECB outlined future of APP). We have no strong view on trading and expect sentiment-driven action. Core bonds could be lured towards nearby resistance levels, but we don’t anticipate breaks higher. The rally of oil prices didn’t impact bonds until now and we look out whether that remains the case. The start of the US’ quarterly refinancing operation is negative for US Treasuries.

Technical resistance for the T-Note future stands at 125-25+ and support at 124-06. We have a longer term US Treasury negative bias and would short the Note future around 125-25+ or in case of a break below the 124-06 low. The Bund’s technical picture is interesting, as 163.43 contract high is nearby. Also for the Bund we favour a sell-on-upticks around this level. Underlying growth momentum remains very strong in EMU and warrants higher (LT) rates.

R2 165,18 -1dR1 163,43BUND 163,09 0,40S1 160,49S2 159,80

German Bund: Near key resistance. Prefer a sell-on upticks around 163.43

US Note future: bottoming out after failed test key support. Sell-on-upticks near 125-25+

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EUR/USD nearing the 1.1575 post-ECB low, but no real test yet

USD/JPY: no topside break yet

Dollar holding near recent highs

Yesterday, FX trading showed two faces. Initially, the euro was in the defensive even as EMU eco data were strong. USD/JPY, EUR/JPY and EUR/USD all lost ground in lockstep. EUR/USD dropped temporary below 1.16, but the correction stalled ahead of the 1.1575 post-ECB low Late in Europe, the dollar came under pressure. The USD decline coincided with a new up-leg of the oil price. EUR/USD closed the session at 1.1610, little changed from Friday. USD/JPY finished the session at 113.71 (from 114.07).

Overnight, Asian equities are in very good shape. Several indices including the Nikkei are trading at multi-year highs. Higher oil and commodity prices are supporting energy and materials companies. USD/JPY trades again in the 114 area. The USD/JPY performance remains mediocre given the stock market rally. EUR/USD is little changed in the 1.1605/10 area. The Reserve Bank of Australia as expected left its policy rate unchanged at 1.5%. The RBA remains positive on growth and employment, but low inflation/wages and a high consumer debt make the RBA cautious to raise rates in the foreseeable future. The AUD trades little changed below 0.77.

The eco calendar remains thin today, with the September US JOLTS job openings and the EMU retail sales. None is a market mover. The speeches of Draghi, Lautenschlager and Nouy at an ECB forum on supervision on “Europe’s changing banking landscape” might be important for banks shares, but not for FX or bond markets. The start of the US quarterly refunding and some political events may be the focus today.

Last week, EUR/USD held close to the post-ECB low, but there were no follow-through losses for the euro. The nomination of Powell as next Fed-Chairman, new proposals to change the US tax code and Friday’s payrolls were not able to break this stalemate. Until now, the dollar failed to really profit from high interest rate differentials (especially at the short end of the curve). This is slightly disappointing for USD bulls. That said, EUR/USD currently trades more than 400 ticks below the cycle top. The wide positive interest rate differential should give the dollar downside protection unless there is high profile US negative news. For now, the rise in oil prices had hardly any impact on interest rates or on FX. We look out whether this remains the case. Yesterday’s USD price action was mixed. EUR/USD failed to go for a test of the 1.1575 area. USD/JPY was again not able to break the 114.50 range top. We maintain a sell-on-upticks bias, but the dollar clearly needs good news to realise any sustained gains. It is not sure this news will come in very soon.

Currencies

R2 1,188 -1dR1 1,169EUR/USD 1,1610 0,0002S1 1,1511S2 1,1331

Dollar gains marginally after mixed payrolls and strong US ISM

Asian equities extend gains

USD shows no clear trend

AUD continues to trade soft

Eco calendar remains thin today

Will the rise of the oil price finally impact interest rate and FX markets?

FX trading showed two faces.

Oil rally weighs on the dollar

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From a technical point of view, EUR/USD dropped below 1.1670/62 support, but no convincing follow-through dollar gains occurred. A break below the 1.1575 post-ECB low would confirm that the recent EUR/USD uptrend is broken. EUR/USD 1.1423 (38% retracement of 2017 rise) is the next downside target on the charts. USD/JPY’s momentum was positive in past months. The pair regained 110.67/95 resistance. The pair tested the 114.49 MT range top, but the attempt failed. A sustained break would improve the technicals. We remain cautious to preposition for further USD/JPY gains.

Sterling extends rebound

On Friday, sterling regained modest ground after Thursday’s post-BoE sell-off. This rebound continued yesterday. We didn’t see any eco or political news to explain the follow through sterling buying. Maybe some investors hope on progress in the next round of Brexit-negotiations which starts later this week. For now, the political scandals (inside and outside the Conservative party) don’t affect sterling trading. EUR/GBP closed the session at 0.8815. The decline was at least partially due to euro softness. Cable also rebounded and finished the session at 1.3171.

Overnight, the Like for like BRC retail sales unexpectedly declined 1.0 Y/Y (a more modest slowdown from +1.9% Y/Y to +0.8% was expected). Later today, the Halifax house prices will be published. They probably won’t be important for sterling trading. So, domestic politics and Brexit will probably set the tone for trading. We look out how far the repositioning of sterling goes.

MT technical. In September, sterling rebounded as the BoE prepared markets for a rate hike. This rebound ran into resistance as markets anticipated that any rate hikes would be very gradual and limited. This view was confirmed at last week’s BoE policy meeting. EUR/GBP currently trades in a 0.8733/0.9033 consolidation range. A downside test of this range was rejected last week. We maintain the view that the 0.8733 -0.8652 support area will be though to break in a sustainable way. A EUR/GBP buy-on-dips approach is favoured. 0.9023/33 is the first important resistance for the EUR/GBP cross rate.

R2 0,9307 -1dR1 0,9033EUR/GBP 0,8815 -0,0062S1 0,8743S2 0,8657

EUR/GBP: reverses most of post-BoE sterling decline, but no important technical levels are hit.

GBP/USD: downside test rejected. Cable holds sideways consolidation pattern

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Tuesday, 7 November Consensus Previous US 16:00 JOLTS Job Openings (Sep) 6053 6082 Japan 01:00 Labor / Real Cash Earnings YoY (Sep) 0.5%/-0.2% 0.9%/0.1% Australia 04:30 RBA Cash Rate Target A 1.50% 1.50% China Foreign Reserves (Oct) $3109.5b $3108.5b UK 01:01 BRC Sales Like-For-Like YoY (Oct) A -1% 1.9% 09:30 Halifax House Prices MoM & 3Mths/Year (Oct) 0.1%/4.5% 0.8%/4.0% EMU 11:00 Retail Sales MoM / YoY (Sep) 0.6%/2.8% -0.5%/1.2% Germany 08:00 Industrial Production SA MoM / WDA YoY (Sep) -0.8%/4.4% 2.6%/4.7% 09:30 Markit Germany Construction PMI (Oct) -- 53.4 Italy 10:00 Retail Sales MoM / YoY (Sep) 0.2%/0.5% -0.3%/-0.5% Events 10:00 ECB's Draghi, Lautenschlaeger, Nouy Speak in Frankfurt 11:15 Austria to Sell 0% 2022 & 0.5% 2027 Bonds 11:30 Germany to Sell €0.5 bn 0.5% I/L 2030 Bonds 18:35 Fed’s Quarles Speaks at Clearing House Conference 19:00 US To Sell $24 bn 3-yr Notes 19:30 Bank of England’s Taylor Speaks in London 20:30 Yellen to Receive Award for Ethics in Government

Calendar

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10-year Close -1d 2-year td -1d Stocks Close -1dUS 2,32 -0,02 US 1,62 0,01 DOW 23548,42 9,23DE 0,34 -0,03 DE -0,76 -0,01 NASDAQ 6786,436 22,00BE 0,58 -0,02 BE -0,64 -0,02 NIKKEI 22937,6 389,25UK 1,26 -0,01 UK 0,45 0,00 DAX 13468,79 -10,07

JP 0,03 0,01 JP -0,18 0,00 DJ euro-50 3682,36 -7,60

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0,09 1,93 0,89 Eonia -0,3540 -0,00105y 0,18 2,06 1,04 Euribor-1 -0,3710 0,0010 Libor-1 1,2432 0,000010y 0,81 2,29 1,32 Euribor-3 -0,3290 0,0000 Libor-3 1,3919 0,0000

Euribor-6 -0,2760 0,0000 Libor-6 1,5902 0,0000

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

EUR/USD 1,1610 0,0002 EUR/JPY 132,01 -0,41 CRB 192,57 3,19USD/JPY 113,71 -0,36 EUR/GBP 0,8815 -0,0062 Gold 1281,60 12,40GBP/USD 1,3171 0,0094 EUR/CHF 1,1580 -0,0036 Brent 64,27 2,20AUD/USD 0,7691 0,0041 EUR/SEK 9,7505 -0,0385USD/CAD 1,2704 -0,0060 EUR/NOK 9,4443 -0,0492

Brussels Research (KBC) Global Sales Force Piet Lammens +32 2 417 59 41 Brussels Peter Wuyts +32 2 417 32 35 Corporate Desk +32 2 417 45 82 Mathias van der Jeugt +32 2 417 51 94 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

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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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