Tuesday, 15 November 2016 P. 1 Rates: Short term consolidation, but environment remains bond unfriendly Overnight’s action suggests that core bond markets consolidate after the heavy post-Trump sell-off. However, sentiment remains bond unfriendly and we suggest to sell any profound upticks. Today’s eco calendar is interesting with US retail sales and NY empire manufacturing index. Currencies: Dollar near important technical resistance The trade-weighted dollar tested the 110 barrier. EUR/USD touched the 1.0711 2016 low as the dollar received interest rate support. This morning the reflation trades slows, but there is no indication of a USD trend reversal. The sterling rally is shifting into a lower gear, as markets look for the UK inflation data and a Carney hearing before Parliament. Calendar • US equities stabilized after an initial surge higher which fell short of breaking through the highs (S&P). Asian equities trade mixed with emerging Asian markets regaining some ground as the dollar stabilizes. • Ailing Italian lender Monte dei Paschi di Siena on Monday announced the terms of a planned debt-to-equity conversion, a key plank of a rescue scheme aimed at averting the bank being wound down. • The EU’s Brexit negotiators are pushing for a draft UK exit deal by mid-2018 as part of a narrow, divorce-first negotiating approach that would demand an exit bill of as much as €40bn-€60bn • Minutes of its November policy meeting showed the Reserve Bank of Australia (RBA) left rates at a record low 1.5% because it was more confident inflation would return to "normal levels" over time. The Aussie dollar barely budged. • Japanese 10-year yields rise above 0% for the first time since the policy change. That may be the start of the test of the BOJ’s resolve to safeguard its 0% objective for the 10-year. • The price of a barrel of Brent rose 1.7% in Asian trading to $45.20, up from a perilous drop on Monday to below $44 in response to doubts about long-hoped- for supply cuts and a stronger US dollar. • “A more stimulative fiscal outlook warrants higher policy rates,” Fed Lacker said, “and that can pose challenges for us when the extent of the prospective fiscal stimulus is uncertain.” Dallas Fed Kaplan expect s a hike to come soon. • Today, US retail sales and central bankers will get the most attention, but the general risk sentiment may still prime. 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, 15 November 2016
P. 1
Rates: Short term consolidation, but environment remains bond unfriendly
Overnight’s action suggests that core bond markets consolidate after the heavy post-Trump sell-off. However, sentiment remains bond unfriendly and we suggest to sell any profound upticks. Today’s eco calendar is interesting with US retail sales and NY empire manufacturing index.
Currencies: Dollar near important technical resistance
The trade-weighted dollar tested the 110 barrier. EUR/USD touched the 1.0711 2016 low as the dollar received interest rate support. This morning the reflation trades slows, but there is no indication of a USD trend reversal. The sterling rally is shifting into a lower gear, as markets look for the UK inflation data and a Carney hearing before Parliament.
Calendar
• US equities stabilized after an initial surge higher which fell short of breaking
through the highs (S&P). Asian equities trade mixed with emerging Asian markets regaining some ground as the dollar stabilizes.
• Ailing Italian lender Monte dei Paschi di Siena on Monday announced the terms of a planned debt-to-equity conversion, a key plank of a rescue scheme aimed at averting the bank being wound down.
• The EU’s Brexit negotiators are pushing for a draft UK exit deal by mid-2018 as part of a narrow, divorce-first negotiating approach that would demand an exit bill of as much as €40bn-€60bn
• Minutes of its November policy meeting showed the Reserve Bank of Australia (RBA) left rates at a record low 1.5% because it was more confident inflation would return to "normal levels" over time. The Aussie dollar barely budged.
• Japanese 10-year yields rise above 0% for the first time since the policy change. That may be the start of the test of the BOJ’s resolve to safeguard its 0% objective for the 10-year.
• The price of a barrel of Brent rose 1.7% in Asian trading to $45.20, up from a perilous drop on Monday to below $44 in response to doubts about long-hoped-for supply cuts and a stronger US dollar.
• “A more stimulative fiscal outlook warrants higher policy rates,” Fed Lacker said, “and that can pose challenges for us when the extent of the prospective fiscal stimulus is uncertain.” Dallas Fed Kaplan expect s a hike to come soon.
• Today, US retail sales and central bankers will get the most attention, but the general risk sentiment may still prime.
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, 15 November 2016
P. 2
Some calm returns in Europe, US Treasuries sell-off
Yesterday, global core bonds fell prey to limited short covering after reaching new cycle lows during European trading. US Treasuries hit again the skid late in the US session. From a technical point of view, the German 10-yr yield bounced into 0.33% resistance (upper bound sideways trading range), but couldn’t take it out. In a daily perspective, the German yield curve bear steepened a tad with yields 1 bp (2-yr) lower to 1 bps (30-yr) higher. The US Treasuries rout continued and they underperformed Bunds sharply (even when taking into account catching up on Friday’s action). The US curve initially bear flattened, but by the end the belly registered the biggest losses. The US yield curve shifted 8.7 bps (2-yr) to 12.5 bps (5-yr) higher, while 10- and 30-yr yields added 11.1 and 7.5 bps. The US 2-yr yield closed at the 1% mark. It’s interesting to see the front end of the US yield curve underperforming. This suggests that investors start adapting positions for a scenario of more frequent Fed rate hikes than previously thought. On intra-EMU bond markets, 10-yr yield spread changes versus Germany widened 3-5 bps for Spain, Portugal and Italy. France underperformed again (fears Le Pen win at the presidential elections?).
ECB Vice-President Constancio recently said that inflation may reach 1.3% Y/Y in Spring 2017, but he softened this comment yesterday by adding that concerns about core inflation are as high than before (“domestic drive inflation has not yet started to accelerate”). He doubted the positive impact on European growth from higher US growth (Trump victory) due to risks of protectionism.
Interesting eco calendar and lots of CB speakers
The German ZEW economic expectation index is expected to make marginal progress in November to 8.1 from 6.2. The current situation index is expected to improve to 61.6 from 59.5 and is at very high level. In the US, Oct retail sales are expected strong with the headline figure at 0.6% M/M, identical to the September result and the control group rebounding to 0.4% M/M following a weak 0.1% M/M previously. Higher gasoline station and car sales will have contributed, but also other categories should have done well. A small improvement to -2 from -6.8 is expected for the NY manufacturing index while the import price decline will slow further (to -0.3% Y/Y). ECB Lautenschlaeger and Nowotny, hawks, speak. How will they assess the impact of Trumponomics on euro area growth and inflation? Fed Rosengren who didn’t dissent anymore at the last meeting, speaks. What will we learn? Fed Kaplan and Fischer already spoke recently.
T-Note future (black) S&P future (orange) (intraday): Downward pressure remains on Treasuries while equities close narrowly mixed
US 10-yr yield sets new sell-off high at 2.30%. What a difference a week makes on bond markets.
US curve bear flattens, as Fed enters investors’ mind
Small changes in German bond market
Intra-EMU spread widening slows
France still underperforms
Fed Rosengren, Kaplan & Fischer speak
Retail sales expected strong, while NY manufacturing should improve a bit.
ECB Nowotny & Lautenschlaeger speak
Tuesday, 15 November 2016
P. 3
Unfriendly bond environment
Overnight, Asian stock markets trade mixed in line with WS yesterday as the stronger dollar and higher rates start outweighing benefits from improved US growth prospects. The sell-off on the US Treasury market halted, while also Brent crude rebounded somewhat, suggesting a neutral opening for the Bund.
Today’s eco calendar is interesting with US retail sales and NY empire manufacturing index. Given that markets consider a December Fed rate hike a “done deal” (92% probability), their market impact could be limited. Central bank speakers (see above) are wildcards, but again unlikely to impact intraday trading dynamics. Yesterday’s and overnight’s action suggests that core bond markets consolidate after the heavy post-Trump sell-off. However, sentiment remains bond unfriendly and we suggest to sell any profound upticks. Markets expect a reflationary policy which will boost growth and inflation. Since Trump’s election victory, the 5y5y market based measure for US inflation expectations increased from 2.21% to 2.43%, something years of easy monetary policy couldn’t do. If inflation expectations rise too rapidly, they could force the Fed to accelerate the timing of its very gradual tightening cycle. Yesterday’s Sharp rise of ST rates suggests that investors start taking into account this scenario.
Medium term technical pictures deteriorated. Better eco data, rising inflation expectations and central banks’ change of tone (extraordinary policy won’t last forever) triggered the sell-off which started at the beginning of October. The US 10-yr and 30-yr yields broke above 2% and 2.75% resistance. Next targets are 2.25% and 3.25%. The German 10-yr yield tested the upper bound of the trading range (0.10%-0.30%). A break opens the path to 0.50%
US Note future: Core bonds suffer after Trump’s election victory. Sell-on-upticks
Tuesday, 15 November 2016
P. 4
EUR/USD tests 1.0711 2016 low
On Monday, the dollar started the week on a strong footing as the post-Trump reflation trade continued. The trade-weighted dollar jumped temporary north of 100 as the US 2-year yield jumped above 1.0%. Later in in the session, the rise of US yields slowed, but dollar remained well bid. EUR/USD tested the 1.0711 year low, but a sustained break didn’t occur. USD/JPY outperformed most other USD cross rates even as the equity rally slowed. The pair closed the day at 108.42 (106.65 on Friday). EUR/USD finished the session off the intraday lows at 1.0737.
Overnight, the reflation repositioning slowed. US bond yields decline a few basis points. The USD rally is taking a breather. The trade-weighted dollar is holding just below the 100 barrier. Asian equities trade narrowly mixed. USD/JPY hovers in the low 108 area. The Japan 10-year yield jumped just north of 0% as the rise on other markets filtered through. There is market talk/speculation that that BOJ might consider to allow the 10-year yield to go slightly beyond the 0% policy objective. This might temporary slow the decline of the yen, but probably won’t be a game-changer as the global trends continue. USD/CNY also holds near the recent highs (6.86 area). In line with the overall USD performance; EUR/USD is holding in the 1.0750 area, slightly off yesterday’s low.
Today, German November ZEW economic expectation index is expected to make marginal progress to 8.1 from 6.2. The current situation index is expected to improve to 61.6 from 59.5, a very high level. We expect little impact. In the US, Oct retail sales are expected strong with the headline figure at 0.6% M/M, and the control group rebounding 0.4% M/M. Gasoline station and car sales will have been strong, but also other categories should have done well. A small improvement to -2 from -6.8 is expected for the NY manufacturing index while the import price decline will slow further (to -0.3% Y/Y).
Since the US election result, USD dollar trended decisively higher propelled by rising US bond yields as the Trump-driven reflation trade unfolded. Longer-term, this reflation trade probably has further to go. This morning it looks that the dollar is taking a breather as the US currency meets technical resistance (e.g. in EUR/USD). However, later today, the US data might still be USD supportive. This might already be enough for a continuation of the reflation trade.
The reflation trade shifts into a lower gear overnight
Asian equities are trading narrowly mixed
The dollar is slightly off yesterday’s top
USD holds strong as global repositioning continues
We don’t row against the USD-positive tide
.
EUR/USD: tests 1.0711 year low
USD/JPY breaks beyond intermediate resistance
Tuesday, 15 November 2016
P. 5
At some point, the negative impact of a stronger dollar on the US economy might return on the radar of the markets. However, there is no indication of such change in mindset at this stage. There is no reason to row against the USD positive tide.
From a technical point of view, EUR/USD dropped below the 1.0851 support, improving the picture of the dollar after a failed test of the 1.13 barrier. A Fed December rate hike looks a done thing. The ECB’s intentions regarding tapering of the APP are unclear. We maintain a sell-on-upticks bias for EUR/USD. The 1.0711 correction low is under test. A break will bring the cycle low of 1.0524 on the radar. The picture for USD/JPY also improved. Of late, interest rate differentials rather than the risk-on/risk-off paradigm were the main driver for USD/JPY. USD/JPY simply joins the broader USD rally. The trend looks well supported as long as the dollar receives interest rate support. However, how long will the risk rally last and what will be the reaction of USD/JPY if equity sentiment turns less positive?
Sterling rebound to slow?
On Monday, sterling traded again in line with EUR/USD. EUR/GBP hovered in a sideways consolidation pattern around the 0.8600 pivot. In A speech, PM Theresa might sounded quite guarded on globalism. This also suggests a potential choice for a hard Brexit. However, the impact on sterling was limited. EUR/GBP closed the session at 0.8596 (from 0.8624). Cable finished the day at 1.2490 from 1.2596 on Friday .
Today, the focus for sterling trading might turn to the UK side of the story. Markets will keep a close eye at the UK October price data. The headline CPI is expected to rise 0.3% M/M and 1.1% Y/Y. PPI input prices evidently will see more upward pressure from post-Brexit decline of sterling (consensus at 2.0% M/M and 9.3% Y/Y). BoE governor Carney and other BoE policy makers will appear before parliamentary Commission hearing on the BoE inflation report. What balance Carney will strike on the prospects for growth and inflation. The BoE already left its easing bias. We don’t expect Carney to turn more hawkish. He will probably continue to warn on global and domestic uncertainty. However, it is not sure that a relatively soft BoE assessment will be enough to change the recent positive momentum on sterling as global factors play an important role in this process. Last week, the decline of EUR/USD also weighed on EUR/GBP. EUR/GBP dropped below the 0.8725 previous top. This makes the short-term picture more sterling friendly. We are not convinced on the sustainability of the GBP rebound. However, for now, we stay side-lined as long as the decline of EUR/USD weighs on EUR/GBP.
Tuesday, 15 Nov Consensus Previous US 14:30 Import Price Index MoM / YoY (Oct) 0.4%/-0.3% 0.1%/-1.1% 14:30 Empire Manufacturing (Nov) -2.5 -6.8 14:30 Retail Sales Advance MoM (Oct) 0.6% 0.6% 14:30 Retail Sales Ex Auto MoM (Oct) 0.5% 0.5% 14:30 Retail Sales Ex Auto and Gas (Oct) 0.3% 0.3% 14:30 Retail Sales Control Group (Oct) 0.4% 0.1% 16:00 Business Inventories (Sep) 0.2% 0.2% UK 10:30 CPI MoM / YoY (Oct) 0.3%/1.1% 0.2%/1.0% 10:30 CPI Core YoY (Oct) 1.4% 1.5% 10:30 RPI MoM / YoY (Oct) 0.2%/2.3% 0.2%/2.0% 10:30 PPI Input NSA MoM / YoY (Oct) 2.0%/9.3% 0.0%/7.2% 10:30 PPI Output NSA MoM / YoY (Oct) 0.4%/1.8% 0.2%/1.2% 10:30 House Price Index YoY (Sep) 8.1% 8.4% EMU 11:00 Trade Balance SA (Sep) 22.1b 23.3b 11:00 ZEW Survey Expectations (Nov) -- 12.3 11:00 GDP SA QoQ / YoY (3Q P) 0.3%/1.6% 0.3%/1.6% Germany 08:00 GDP SA QoQ / WDA YoY (3Q P) 0.3%/1.8% 0.4%/1.8% 11:00 ZEW Survey Current Situation (Nov) 61.6 59.5 11:00 ZEW Survey Expectations (Nov) 8.1 6.2 France 08:45 CPI EU Harmonized MoM / YoY (Oct F) 0.1%/0.5% 0.1%/0.5% Italy 10:00 GDP WDA QoQ / YoY (3Q P) 0.2%/0.8% 0.0%/0.8% Norway 08:00 GDP QoQ / Mainland QoQ (3Q) -0.5%/0.3% 0.0%/0.4% Spain 09:00 CPI EU Harmonised MoM / YoY (Oct F) 0.8%/0.5% 0.8%/0.5% Sweden 09:30 CPI CPIF MoM / YoY (Oct) 0.4%/1.4% 0.2%/1.2% Events 00:30 Fed's Williams Speaks in San Francisco on Panel 01:30 RBA Nov. Meeting Minutes 09:30 ECB's Lautenschlaeger Speaks at Euro Finance Week in Frankfurt 11:00 BOE's Carney, Shafik, Saunders at Treasury Committee Hearing 13:30 Fed's Rosengren Speaks to Portland, Maine Chamber of Commerce 15:05 Fed Governor Tarullo Speaks in Washington 19:00 ECB's Nowotny Gives Speech on Brexit in Vienna 19:30 Fed's Fischer Speaks at Brookings Instituton Market Liquidity 19:30 Fed’s Kaplan speaks in Dallas
Calendar
Tuesday, 15 November 2016
P. 7
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
ALL OUR REPORTS ARE AVAILABLE ON WWW.KBCCORPORATES.COM/RESEARCH 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.
Contacts
10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 2,21 -0,01 US 1,00 0,01 DOW 18869 18868,69DE 0,32 0,00 DE -0,62 -0,02 NASDAQ for Exch - NQI #VALUE!BE 0,74 0,03 BE -0,59 -0,01 NIKKEI 17668 17668,15UK 1,41 0,04 UK 0,18 -0,04 DAX 10693,69 10693,69JP 0,01 0,02 JP -0,16 0,03 DJ euro-50 3040 3039,80
