Thursday, 08 November 2018 P. 1 Internal Rates: EC autumn forecasts and FOMC meeting are key trading themes Italian media report on significantly lower growth and higher deficit forecasts in the EC’s autumn update. Italian BTP’s could underperform as the November 13 deadline to submit budget changes is nearing. The Fed is expected to give the “all clear” to continue tightening in coming months as US mid-terms didn’t surprise and the economy keeps firing on all cylinders. Currencies: Post-election USD correction short-lived Yesterday, the dollar lost temporarily ground after the results of the mid-term election. However, ongoing solid interest rate support prevent further USD losses. Today, the focus turns to the Fed policy statement. The Fed holding to its established rate hike path might put the dollar again in the driver’s seat. Sterling continues to profit from hopes on a Brexit deal. Calendar • US stock markets rallied higher yesterday marking gains over 2% following the US midterm elections. Nasdaq (+2.64%) outperformed. Most Asian indices trade positive, but, except for Japan, can’t copy WS’s gains. China underperforms. • US President Trump called for collaboration with the Democrats after they re- gained majority in the House of Representatives. Trump already said he’d consider a middle-class tax cut even if it means to re-raise corporate taxes. • Chinese exports grew 15.6% (YoY) in October in USD terms and imports by 20.1% YoY, suggesting frontloading ahead of the implementation of additional US tariffs. The trade surplus rose from $31.28bn to $34.01bn. • The central bank of New Zealand (RBNZ) left its official cash rate, as expected, on hold at a record-low 1.75%. Governor Orr added that rates would stay at this level through 2019 and into 2020. The kiwi dollar remains at $0.6775. • The ECB has chosen Italy’s Andrea Enria to become the eurozone’s chief banking supervisor over Ireland’s Donnery. This paves the way for Irish Central Bank Governor Philip Lane to become chief economist of the ECB next summer. • UK PM May has invited her senior ministers yesterday to examine the 95% of the withdrawal package that has been agreed so far. The remaining 5%, mainly the Irish border issue, is still being negotiated by officials of both parties. • Today’s economic calendar is rather thin with the Initial Jobless Claims in the US, followed by the FOMC’s Rate Decision. The European Commission will update its economic forecasts and ECB president Draghi speaks in Dublin. Headlines S&P Eurostoxx 50 Nikkei Oil CRB Gold 2 yr US 10 yr US 2yr DE 10 yr DE EUR/USD USD/JPY EUR/GBP
Transcript
Thursday, 08 November 2018
P. 1
Internal
Rates: EC autumn forecasts and FOMC meeting are key trading themes
Italian media report on significantly lower growth and higher deficit forecasts in the EC’s autumn update. Italian BTP’s could underperform as the November 13 deadline to submit budget changes is nearing. The Fed is expected to give the “all clear” to continue tightening in coming months as US mid-terms didn’t surprise and the economy keeps firing on all cylinders.
Yesterday, the dollar lost temporarily ground after the results of the mid-term election. However, ongoing solid interest rate support prevent further USD losses. Today, the focus turns to the Fed policy statement. The Fed holding to its established rate hike path might put the dollar again in the driver’s seat. Sterling continues to profit from hopes on a Brexit deal.
Calendar
• US stock markets rallied higher yesterday marking gains over 2% following the
US midterm elections. Nasdaq (+2.64%) outperformed. Most Asian indices trade positive, but, except for Japan, can’t copy WS’s gains. China underperforms.
• US President Trump called for collaboration with the Democrats after they re-gained majority in the House of Representatives. Trump already said he’d consider a middle-class tax cut even if it means to re-raise corporate taxes.
• Chinese exports grew 15.6% (YoY) in October in USD terms and imports by 20.1% YoY, suggesting frontloading ahead of the implementation of additional US tariffs. The trade surplus rose from $31.28bn to $34.01bn.
• The central bank of New Zealand (RBNZ) left its official cash rate, as expected, on hold at a record-low 1.75%. Governor Orr added that rates would stay at this level through 2019 and into 2020. The kiwi dollar remains at $0.6775.
• The ECB has chosen Italy’s Andrea Enria to become the eurozone’s chief banking supervisor over Ireland’s Donnery. This paves the way for Irish Central Bank Governor Philip Lane to become chief economist of the ECB next summer.
• UK PM May has invited her senior ministers yesterday to examine the 95% of the withdrawal package that has been agreed so far. The remaining 5%, mainly the Irish border issue, is still being negotiated by officials of both parties.
• Today’s economic calendar is rather thin with the Initial Jobless Claims in the US, followed by the FOMC’s Rate Decision. The European Commission will update its economic forecasts and ECB president Draghi speaks in Dublin.
Headlines
S&PEurostoxx 50NikkeiOilCRB
Gold2 yr US10 yr US
2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP
Thursday, 08 November 2018
P. 2
US 10-yr yield heading for test of 3.26% cycle high
Core bonds lost ground yesterday as positive risk sentiment lifted main European indices over 1% higher while their US counterparts even recorded +2% gains. US mid-term elections as expected resulted in a split US Congress. The US dollar and US yields initially faced minor downward pressure, but that move didn’t persist. A rise in oil prices, inspired by rumours of 2019 production cuts, was eventually undone by higher inventory data. The US Treasury’s $19bn 30-yr Bond auction didn’t go well, causing a final sell-off at the very long end of the US curve. That curve still bear flattened in a daily perspective, despite the late drama. Daily yield changes range between +2.9 bps (2-yr) and -0.2 bps (30-yr). The Fed is expected to give the go ahead for its tightening cycle tonight as US mid-terms delivered no surprises and as the US economy is still firing on all cylinders. The German yield curve moved in similar fashion with yields 1.7 bps (2-yr) to 0.8 bps (30-yr) higher. 10-yr yield spread changes vs Germany remained broadly unchanged with Greece (-5 bps) and Italy (-7 bps) outperforming.
Asian stock markets trade positive this morning, but, with the exception of Japan, don’t copy WS’s exuberance. Chinese exports and imports surged in October anticipating the implementation of US tariffs. The US Note future treads water. We expect a neutral opening for the Bund.
The EC’s new autumn forecasts will be a good proxy to test BTP’s recent resilience. Italian media report on a projected budget deficit of 2.9% of GDP next year while breaching the 3% Maastricht ceiling in 2020. The EC think that growth will be 1% instead of the Italian government’s eyed 1.5% next year. The new forecasts come as Italy approaches the November 13 deadline to send its budget review to the EC. Italian political leaders so far showed no intention to deviate from their original plans, lining up for battle. We expect BTP’s to underperform today. The EC is generally expected to lower growth forecasts while keeping inflation estimates stable, but we don’t expect that to impact global trading. Speeches by ECB Villeroy, Coeure and Draghi are wildcards. US investors will be more interested in tonight’s FOMC meeting. We expect no big deviations in the new policy statement, confirming the Fed’s resilience to continue hiking the policy rate towards neutral levels. The next rate hike will normally take place in December. This message should keep the upward momentum of US yields going with the 10-yr yield heading for a test of the 3.26% cycle high. The German 10-yr yield hovers higher in the sideways band between 0.3% and 0.6%.
US 10-yr yield ready to test cycle high (3.26%) as Fed is expected to give the go ahead for tightening cycle
US S&P 500 index extends stellar November performance, correcting after October sell-off
Af
Thursday, 08 November 2018
P. 3
EUR/USD: dollar correction short-lived. Will Fed put USD again in the
driver’s seat?
EUR/GBP: sterling extends gain as market sees rising chance of
EU-UK Brexit deal
Post-election USD correction short-lived Markets assessed the impact of the US elections yesterday. A divided Congress was seen as leading to less aggressive fiscal stimulus, initially resulting in a modest decline of US yields and of the dollar. EUR/USD tested the 1.15 level. However, the decline is US yields was blocked by a solid equity rally. Yields rose further after a poor US 30-y government bond auction. In the end, US-German 2-y and 10-y spreads stayed at/ close to cycle peaks and the dollar reversed earlier losses. EUR/USD closed the day unchanged at 1.1426. USD/JPY (113.52) even succeeded a modest gain. This morning, Asian equities are a trading in positive territory with Japan outperforming. However, gains are modest given the strong rally in the US. The dollar stabilizes near yesterday’s closing levels. USD/JPY gains a few more ticks. The RBNZ applied a slightly more neutral tone. The kiwi dollar rises only marginally after recent rebound. Today, the EC will publish its autumn economic forecasts. Aside from the overall E(M)U forecast, markets will take a close look at the Italian forecasts. Low Italian growth and/or a rising budget deficit might be a slightly negative for the euro. However, the focus for global FX trading will be on the FOMC policy decision/statement. We expect the statement to be close to the September text and don’t expect the Fed to give much weight to recent volatility. Rate hike expectations for December and for next year shouldn’t change. If so, this might be mildly supportive for US yields and the dollar. The reaction of (US) equity markets is a wildcard. Over the previous days, the USD rebound lost some momentum. A EUR/USD test of the 1.13 support area was rejected last week and the outcome of the mid-term elections weighed temporarily on the USD. Even so, yesterday’s price action suggests that the downside in the USD remains well protected. The topside of the EUR/USD 1.13/1.16 looks solid. The Fed holding to its rate hike intentions might already be enough for EUR/USD to turn back south.
Over the previous days sterling was supported by headlines that a UK-EU Brexit deal might be finalized anytime soon. EUR/GBP near the 0.87 barrier. The Brexit headlines will dominate sterling trading today. In a-day-to-day perspective, there is no reason to row against the positive sterling tide, but PM May still has to convince her Party to approve the deal. Any noise from that corner might still cause GBP corrections. EUR/GBP nears a first important support area (0.8723/0.8681/0.8621)
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