Tuesday, 19 January 2016 P. 1 Rates: Calm trading. Bonds to give back some ground? Today, risk sentiment trumps the eco data as driver. Chinese data improved the risk sentiment cautiously. Oil set a doji yesterday, a potential technical turnaround signal, but it occurred in a shallow market. Copper rebounds too. Bonds are near key resistance and equities near key support. Will equities stage a buy the dip, temporary, recovery? Currencies: Dollar profits slightly from Chinese soft landing data The dollar and sterling entered calmer waters after Friday’s sell-off. This morning, global markets react in a rather constructive way to soft Chinese GDP data. This might be slightly supportive for the dollar. Sterling traders look out for the UK December CPI data. How much bad news is already discounted in sterling after recent sell-off? Calendar • European shares lost about 0.50% yesterday as financials were under pressure following a sell-off in Italian financials. US Equities were closed in observance of Martin Luther King Day. In Asia this morning, shares are trading with broad- based gains led by Chinese stocks (+3%). • China’s economic growth slowed further at the end of the year. The annual rate of growth eased to 6.8% Y/Y, from 6.9% Y/Y in the third quarter, adding to signs of weakening momentum in the world’s second-largest economy. The outcome was also slightly below the market consensus of 6.9% Y/Y. • The ECB said during the weekend it had asked a number of euro zone lenders about high levels of bad loans as it steps up efforts to tackle the mountain of bad debt. The situation is particularly marked in Italy, where bank stocks fell more than 5% yesterday with Monte dei Paschi shares plunging almost 15%. • Oil prices dropped to new lows yesterday, but are trading slightly higher this morning. The Brent crude oil price jumped above $29/barrel and the US benchmark, the WTI, is hovering around $29.50/barrel currently. Copper prices are gaining more than 3% with the future back above the $200/lb. • Bank of England policymaker Vlieghe signalled yesterday he would take a patient approach to raising interest rates as the recovery lost some momentum and warned there was even a change he might favour a cut if the economic slowdown worsened. Vlieghe added that real interest rates may remain significantly lower than in the past. • Today, the eco calendar contains the final reading of euro zone HICP inflation for December, UK December inflation, the German ZEW indicator and the US NAHB housing market index. Bank of England Governor Carney speaks in London. Headlines S&P Eurostoxx50 Nikkei Oil CRB Gold 2 yr US 10 yr US 2 yr EMU 10 yr EMU EUR/USD USD/JPY EUR/GBP
Transcript
Tuesday, 19 January 2016
P. 1
Rates: Calm trading. Bonds to give back some ground?
Today, risk sentiment trumps the eco data as driver. Chinese data improved the risk sentiment cautiously. Oil set a doji yesterday, a potential technical turnaround signal, but it occurred in a shallow market. Copper rebounds too. Bonds are near key resistance and equities near key support. Will equities stage a buy the dip, temporary, recovery?
Currencies: Dollar profits slightly from Chinese soft landing data
The dollar and sterling entered calmer waters after Friday’s sell-off. This morning, global markets react in a rather constructive way to soft Chinese GDP data. This might be slightly supportive for the dollar. Sterling traders look out for the UK December CPI data. How much bad news is already discounted in sterling after recent sell-off?
Calendar
• European shares lost about 0.50% yesterday as financials were under pressure
following a sell-off in Italian financials. US Equities were closed in observance of Martin Luther King Day. In Asia this morning, shares are trading with broad-based gains led by Chinese stocks (+3%).
• China’s economic growth slowed further at the end of the year. The annual rate of growth eased to 6.8% Y/Y, from 6.9% Y/Y in the third quarter, adding to signs of weakening momentum in the world’s second-largest economy. The outcome was also slightly below the market consensus of 6.9% Y/Y.
• The ECB said during the weekend it had asked a number of euro zone lenders about high levels of bad loans as it steps up efforts to tackle the mountain of bad debt. The situation is particularly marked in Italy, where bank stocks fell more than 5% yesterday with Monte dei Paschi shares plunging almost 15%.
• Oil prices dropped to new lows yesterday, but are trading slightly higher this morning. The Brent crude oil price jumped above $29/barrel and the US benchmark, the WTI, is hovering around $29.50/barrel currently. Copper prices are gaining more than 3% with the future back above the $200/lb.
• Bank of England policymaker Vlieghe signalled yesterday he would take a patient approach to raising interest rates as the recovery lost some momentum and warned there was even a change he might favour a cut if the economic slowdown worsened. Vlieghe added that real interest rates may remain significantly lower than in the past.
• Today, the eco calendar contains the final reading of euro zone HICP inflation for December, UK December inflation, the German ZEW indicator and the US NAHB housing market index. Bank of England Governor Carney speaks in London.
Headlines
S&P Eurostoxx50
Nikkei Oil
CRB Gold
2 yr US 10 yr US
2 yr EMU 10 yr EMU
EUR/USD USD/JPY
EUR/GBP
Tuesday, 19 January 2016
P. 2
Bund slightly higher; Portugal remains under pressure
Global core bonds had an uneventful trading session. EMU and US calendars were empty and US markets closed for Martin Luther King holiday. Oil prices opened at new cycle lows (Brent < $28/barrel) after international sanctions on Iran were lifted, but stabilized afterwards. European equities traded with minor losses, except for the Italian bourse where banks got hit after trading was halted in Banco Monte dei Paschi and Intesa Sanpaolo was halted after rumours of a potential delay in the creation a bad bank. Several Italian lenders were also asked by the ECB to submit data on their NPL’s against the background of a review by the Single Supervisory Mechanism. The Bund traded with a small upward bias after a weaker opening. Volumes were thin. In a daily perspective, changes on the German yield curve are minimal (less than 1 bp lower). On intra-EMU bond markets, 10-yr yield spreads versus Germany were nearly unchanged with Greece and Portugal again underperforming (see yesterday’s sunset and story on reclassification of some senior bank bonds).
Today, the eco calendar contains the final reading of euro zone HICP inflation data, the German ZEW indicator and NAHB housing market index. BoE’s Carney speaks in London and BOA & Morgan Stanley report Q4 earnings.
According to the first estimate, euro zone HICP inflation stayed unchanged at 0.2% Y/Y in December, while a limited increase was expected. Also core inflation was unchanged (at 0.9% Y/Y), while a limited increase was forecast. The final readings should confirm the first estimates. In Germany, the ZEW indicator is expected to have weakened in January, from 16.1 to 8, following two consecutive monthly increases. We believe however that the risks are for a weaker outcome due to turmoil on financial markets and Chinese tensions. In the US, the NAHB housing market indicator is forecast to show a stabilization at 61 in January. We believe that the risks are for a weaker outcome as the Fed rate hike might weigh on housing market sentiment.
Bund future (black) and EuroStoxx (orange): Uneventful session with some initial volatility. Volumes low.
Portuguese 10-yr yield spread: underperformance since end 2015 following bail-in 5 Novo Banco bonds
.
German bonds trade sideways in uneventful session.
Risk off still no major item peripherals, even as Portugal (and Greece) lose some ground.
Downside risks for ZEW and NAHB indices
EMU inflation to be confirmed.
Tuesday, 19 January 2016
P. 3
EMU Supply from Finland, Spain and France
Today, the Finnish treasury taps the on the run 5-yr RFGB (0.375% Sep2020) and 30-yr RFGB (2.625% Jul2042) for a combined €1.5B. In the run-up to the auctions, both bonds cheapened in ASW-spread terms with the long end of the Finnish curve underperforming. In the 5-yr sector of the curve, the bond on offer trades rather cheap whereas the Jul2042 RFGB trades normal. Overall, we expect a plain vanilla tap.
Today: Crucial days for S&P. Impact on US Treasuries?
Overnight, Chinese eco data (Q4 GDP, retail sales, industrial production) were slightly softer than expected. After some hesitation, risk sentiment gradually turned for the better (Fear of worse data?, Stable yuan fixing?) and Chinese equities currently trade around 3% higher. Overnight, the US Note future trades modestly lower, suggesting a weaker Bund opening.
Today, the eco calendar includes final EMU CPI data, German ZEW and US NAHB Index. Risks for ZEW and NAHB are on the downside of expectations, but the potential intraday positive impact on bonds might only be temporary at best. While sentiment remains beneficial for core bonds, Bund markets are already quite dovish positioned going into Thursday’s ECB meeting and are thus vulnerable to an eventual rebound of oil, commodities and equities. We keep a close eye at the S&P 500 as well in coming days. A break below the 1870/1890 support area would technically very important and suggest more downside towards the 1600-area. That could further underpin the US Treasury market. However, it is not excluded that another buy on-dip saves the S&P temporarily.
This year, sentiment turned again in favour of core bonds on the back of crashing equities, evolutions in China, lower oil prices and Fed speak. More and more Fed governors indicate that doubts about inflation expectations would tend to push off further rate increases. From a technical point of view, the US Note future nears overbought conditions, which could hamper short term gains. The Bund approaches key resistance (160.66).
German Bund: Sideways trading range; ready for test of 160.66 resistance.
US Note future: Dovish reaction on payrolls and Fed speak suggests that Asian/Chinese turmoil is key for markets at this stage.
Tuesday, 19 January 2016
P. 4
Dollar profits (slightly) from China soft landing data
On Monday, USD stabilised off Friday’s lows against the euro and the yen There were no important data in Europe and US markets were closed (Martin Luther King day). European equities and oil rebounded early in the session, but the rebound stalled later on, giving little directional guidance for USD trading. EUR/USD closed the session at 1.0892 (from 1.0916 on Friday). USD/JPY ended the day at 117.32 (from 116.98 on Friday).
Overnight, the China Q4 GDP growth was marginally softer than expected at 1.6% Q/Q and 6.8% Y/Y (6.9% expected). 2015 GDP growth came out in line with expectations at 6.9%. December China production and retail sales were also marginally softer. The head of the Chinese statistical Bureau said consumption contributed 66.4% to 2015 growth. He also said that the Chinese economy doesn’t need a continued yuan depreciation. Asian equity markets initially reacted mixed to the China data. However, sentiment gradually improved. Chinese equities trade currently in positive territory. The PBOC kept the fixing of the yuan little changed. The on-shore yuan also trades little changed (6.5795 area). The off-shore yuan weakened north of USD/CNH 6.60 after the growth data. Brent oil stabilizes close to $29 p/b. EUR/USD trades little changed in the 1.0885/90 area. USD/JPY trades slightly stronger at 117.55. So for now, markets react modestly constructive as Chinese data as is suggests a soft landing.
Later today, the German ZEW economic confidence and the final December EMU CPI data will be published. We see downside risks for the ZEW confidence (consensus at 8.1 from 16.00) and expect the preliminary EMU CPI to be confirmed (0.2% Y/Y for the headline). A weaker than expected ZEW release might be slightly negative for the euro, but global risk sentiment will be more important. In the US, the NAHB housing index is expected stable at 61. In a day-to-day perspective, the reaction of the European and the US markets to the China eco data will be key. For now, the reaction looks constructive. If confirmed, this might be slightly positive for the dollar, especially for USD/JPY. However, we still don’t see a trigger for EUR/USD or USD/JPY to break out of the recent ranges. We also keep an eye at the oil prices. A stabilisation/ gradual rebound would be an indication that the global risk-off trade is easing
Dollar yesterday stabilized in a session devoid of important economic news
Eco data of second tier importance for USD trading
A positive reaction to the Chinese data might be slightly supportive for the dollar.
EUR/USD drifting sideways in a tight range
USD/JPY: cautious rebound off recent lows
Tion
Asian equity markets rebound after soft China growth data.
PBOC sets yuan little changed
USD trades marginally stronger
Tuesday, 19 January 2016
P. 5
From a technical point of view, EUR/USD failed to regain important resistances at 1.1087 (breakdown) and 1.1124 (62% retracement from the October high). Two weeks ago, EUR/USD failed also to sustain below 1.0796 support (07 Dec low). Next support is at 1.0650 (76% retracement off 1.0524/1.1060) and at 1.0524. On the topside, 1.1004 (reaction top) is a first reference. This level was left intact even after the poor US eco data on Friday. Next resistance comes in at 1.1060/1.1124 (15 Dec top/62% retracement). We expect this resistance to be strong and difficult to break. The picture for USD/JPY remains negative below 120. Next support comes in at 116.18 (August low). The pair is in oversold territory and now tries to put a bottom in place .
UK CPI focus for sterling trading
On Monday, sterling rebounded slightly after Friday’s steep sell-off. The rebound started in Asia (even as oil set new lows) and EUR/GBP declined to the 0.76 area early in the session (versus 0.7697 Friday). The move was initially supported by an intraday rebound of (European) equities and of oil. However both moves stalled later and so did the rebound of sterling. EUR/GBP closed the session at 0.7648 (from 0.7656 on Friday). The intraday ‘gains’ of cable were even completely reversed. Soft comments from BoE’s Vlieghe might have played a role. Cable even set a new minor multi-year low and closed the session at 1.4243 (from 1.4258).
Today, the UK December price data will be released. Headline CPI is expect flat on the month to be up 0.2% Y/Y (0.1% Y/Y in November). Core CPI is expected unchanged at 1.2% Y/Y. We side with consensus. Ongoing low inflation, both for domestic and external reasons, keeps the BoE muted on the timing of a first rate hike. Markets go even further and pushed expectations for a first rate hike well into 2017. Sentiment on sterling was very negative of late, but we have the impression that markets already discount quite a negative economic/interest rate scenario. So the reaction of markets to the CPI is interesting, whatever the outcome. We look for signs of a short-term consolidation after the recent sell-off of sterling. A stabilisation/rebound in the oil price could also help to slow the decline of sterling. Once again this is nothing more than a working hypothesis. Later in the session BoE’s Carney speaks
In a longer term perspective, uncertainty on Brexit and global negative risk sentiment are important drivers for sterling weakness. As long as these issues aren’t solved, a sustained sterling rebound is unlikely. The medium term technical picture of sterling against the euro remains negative as EUR/GBP broke above the 0.7493 Oct top. Next resistance stands at 0.7715. Sterling is in oversold territory against the euro and the dollar, but it is no good enough a reason to rush into sterling longs.
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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.
