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Monday, 30 October 2017
P. 1
Rates: Upward bias core bonds to start new trading week
The US, 10-yr and 30-yr yields failed to close above key
resistance levels last week, suggesting some downward correction
this week with event risk looming and a likely positive impact on
core bonds (next Fed chair, main US eco data, Russian probe, tax
reforms, Catalunya,…). The US Note future could outperform the
German Bund.
Currencies: Euro remains weak and loses support versus dollar
and sterling
The post-ECB euro selling continued on Friday but its intensity
eased. Some technical supports were broken, suggesting that the
market may still a bit too long euro. We think the correction might
have somewhat further to go. However, sterling and the dollar have
issues too. Therefore, we prefer a euro sell-on-upticks ST and a
euro buy at lower, key euro supports.
Calendar
• US stock markets ended last week on a positive note with a
huge
outperformance of Nasdaq (+2%) on strong earnings from
bellwether tech companies. Asian stock markets are mixed
overnight.
• Spain faces a crucial test of its authority over Catalonia
today when regional government ministries open under the direct
control of Madrid for the first time since the country’s return to
democracy 40 years ago.
• President Trump is likely to announce Federal Reserve governor
Powell as his nominee to be the next chairman of the US central
bank next week, according to a person familiar with the matter.
• The man in charge of the ECB's €2.5 tn stimulus programme,
Benoit Coeure, hopes it will not be extended again when it expires
in September, he told a French weekly newspaper.
• Some of the world’s most powerful oil producers including
Saudi Arabia are rallying behind an extension of a global supply
cuts agreement, providing support to crude prices that have
rebounded to $60/barrel.
• S&P unexpectedly upgraded the Italian rating from BBB- to
BBB (stable outlook). The upgrade reflects Italy’s firming economic
recovery, driven by investment activity and improving labour market
trends.
• Today’s eco calendar is busy with German (CPI) and US (PCE)
inflation readings. EC EMU confidence indicators are also on the
agenda. Italy taps the markets and ECB Costa and Hansson are
scheduled to speak.
Headlines
S&PEurostoxx 50NikkeiOilCRB
Gold2 yr US10 yr US
2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP
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Monday, 30 October 2017
P. 2
Core bonds gain on Catalonia and Fed rumours.
Bunds still profited (marginally) on Friday from Thursday’s
dovish ECB meeting, while the Catalan independence vote and the
Spanish reaction of seizing control of Catalunya led to an
underperformance of Spanish assets and gains for both Bunds and US
Treasuries. The latter got additional support from a Bloomberg
report that Trump was leaning to (dovish) Governor Powell as a
successor for chair Yellen. US Treasuries jumped higher on the
first headline at 16h CET and outperformed Bunds. Strong equities
might have kept the bond rally in check, while the
stronger-than-expected US Q3 GDP had very little impact and neither
had comments of German Bundesbank president Weidmann who already
showed his disagreement with keeping APP open-ended. The price
action was technically relevant for US Treasuries. The US 5-yr
yield remains above 2% key resistance, but the break of the 2.42%
and 2.95% yield resistances for 10-yr and 30-yr were not confirmed
in the weekly close. In a daily perspective, the German yield curve
shifted 1.2 bps (30-yr) to 3.2 bps (10-yr) lower. The US yield
curve bull flattened with yield declines varying between 2.7 bps
(2-yr) and 5.4 bps (10-30-yr). On intra-EMU bond markets, Italy (+3
bps; ahead of today’s supply) and Spain (+8 bps; after Catalan
independence vote and Spanish response) underperformed versus
Germany
Calendar busy for a Monday
In EMU, the attention will focus on the European Commission
business indicators and the German HICP inflation (both for
October) The market expects a slight increase of confidence to
113.3 from 113 previously, which if confirmed would match the 2007
peak. We have no strong opinion about the outcome. German inflation
is expected to have slowed slightly in October to 1.7% Y/Y versus
1.8% Y/Y in September and also Spanish inflation is expected to be
marginally lower than in September. We side with consensus. In the
US, the personal income and spending data for September are
released, but these were already comprised in Friday’s released Q3
GDP report.
Five events may affect markets later this week. First, President
Donald Trump is due to announce his nominee for Fed Chair. Fed
governor Powell is the strong frontrunner and markets have at least
partly discounted his win. A surprise nomination of (hawk) John
Taylor would likely hit US Treasuries and favour the dollar.
Second, the November FOMC meeting concludes on Wednesday, but we
don’t expect surprises. Third, the congressional Republicans will
unveil details
Rates
US yield -1d2 1,59 -0,035 2,02 -0,0510 2,41 -0,0530 2,92
-0,05
DE yield -1d2 -0,77 -0,035 -0,35 -0,0410 0,38 -0,0330 1,28
-0,01
Bund future (black) & S&P future (orange) (intraday):
Bonds and equities both higher for several reasons
German yield curve shifts lower since ECB meeting with belly
outperforming wings
Aff
EMU confidence expected at 10 yr high
German inflation expected a tad lower
US data (PCE/PI) less influential
German bonds gain more ground
US Treasuries drop rather sharply
Spain underperforms
Choice successor Fed chair Yellen
FOMC meeting
Details tax reform proposal
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Monday, 30 October 2017
P. 3
of the tax reform bill. If the details sshow bigger tax cuts
than recent rumours suggested, it would be negative for US
Treasuries. Fourth there remains the standoff between Spain and
Catalonia. Until now, it didn’t play a big role in trading, but as
long as the impasse stays, it would be core bond positive. Finally,
the US payrolls with expectations at very high, too high?,
levels.
Italian BTP auction supported by S&P rating upgrade?
The Italian debt agency taps the on the run 5-yr BTP (€2-2.5 bn
0.9% Aug2022) and 10-yr BTP (€2-2.5 bn 2.05% Aug2027). We expect no
difficulties for this relatively small auction. The positive rating
action by S&P on Friday night (BBB from BBB-) is a confidence
booster and could stimulate demand. The bonds didn’t really cheapen
in ASW spread terms going into the auction. Apart from the regular
BTP’s, the Italian debt agency also launches a new floating rate
bond (€3-3.5 bn Apr2025).
Upward bias core bonds to start the new trading week
Asian stock markets trade mixed overnight with China
significantly underperforming. The US note future is marginally
higher overnight and we expect a stronger opening for the Bund.
Today’s eco calendar is busy, but probably irrelevant for
trading. Even German/EMU CPI data lose market-moving potential as
the ECB tied its policy for another 9 months. US yields (10-yr
& 30-yr) failed to close above key resistance levels last
Friday, suggesting consolidation lower especially with looming
event risk likely positive for core bonds (Fed chair nomination,
tax reforms, Russia probe, Catalunya,… ). US eco data later this
week are a wildcard for trading (ISM’s, ADP, payrolls). Wednesday’s
FOMC is probably a non-event. We have an upward bias for core bonds
at the start of the week with a potential outperformance of the US
Note future.
Technically, the German 10-yr yield failed to break above first
resistance (0.5%) and fell back in the range after the dovish ECB
outcome. The US 10-yr yield failed to close above 2.4%-2.43%
resistance.
R2 163,43 -1dR1 162,78BUND 162,44 0,77S1 160,49S2 159,80
German Bund: once post-ECB rebound runs out of steam, it could
be an opportunity to enter new short positions
US Note future: bottoming out after failed test key support?
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Monday, 30 October 2017
P. 4
EUR/USD broke below 1.1662 support. If confirmed, the year-long
euro
uptrend would be finished
USD/JPY First test key resistance failed on Friday
EUR/USD extends decline. Dollar picture improves
EUR/USD extended its post-ECB decline on Friday, but the pace
slowed. The move was mostly due to euro softness. The prospect of
the dovish Mr. Powell eventually succeeding Ms. Yellen pushed US
yields lower in mid US trading and narrowed the interest rate
differential, but an attempt of the euro to rally was rapidly
aborted and reversed. It suggests that the market is still too long
euro. Mr. Draghi’s dovish comments look to shed euro long exposure.
EUR/USD eventually sluggishly moved higher on pre-weekend
positioning to close at 1.1610 from 1.1650. USD/JPY traded north of
opening levels, but could never really make headway. It briefly
tested the key 114.50 resistance, but a break didn’t occur despite
broad-based equity gains. After the Powell rumours, USD/JPY slid
even into negative territory, closing at 113.68 versus a 114
opening.
Overnight, FX markets traded subdued with EUR/USD and USD/JPY
little changed from openings levels around 106.09 and 113.73
respectively. The Kiwi dollar remains under pressure as the
government wants to change the RBNZ remit, which might mean
including employment objective.
Eco calendar uneventful
Today in EMU, the attention will focus on the EC business
indicators and the German HICP inflation (October). In the US, the
personal income and spending for September is released. For details
see the fixed income section. Summarizing: the data shouldn’t be of
importance for FX.
Events plentiful this week
Five events may affect FX markets. First, President Trump is due
to announce his nominee for Fed Chair. Fed governor Powell is the
frontrunner and markets have at least partly already discounted his
win. A surprise nomination of (hawk) John Taylor would likely hit
US Treasuries and favour the dollar. Second, the November FOMC
meeting concludes on Wednesday, but no surprises are expected and
thus it should be neutral FX-wise. Third, the Republicans will
unveil details of the tax reform bill. If the details show bigger
tax cuts than recently suggested, it would be negative for US
Treasuries and dollar positive. Fourth, the standoff between Spain
and Catalonia. Until now, it didn’t play a big role in EUR/USD
trading, but as long as the impasse stays, it would be slightly
dollar positive. Finally, the payrolls with too high?
expectations.
Currencies
R2 1,2225 -1dR1 1,2167EUR/USD 1,1608 -0,0043S1 1,1511S2
1,1331
Euro remains under pressure vs USD
Powell positive comment can’t help euro
USD/JPY cannot break key 114.50 resistance
Eco calendar uneventful today
Fiver major themes this week: Nomination new Fed chair, FOMC
meeting, Tax reform bill, Catalunya and US payrolls
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Monday, 30 October 2017
P. 5
Dollar to make more corrective gains versus euro?
The euro traded strong in the run-up to the ECB decision. The
dollar failed to gain against the euro despite widening interest
rate differentials since early September. This trading dynamic was
broken after the ECB decision and extended on Friday. Policy
divergence between the ECB and the Fed is again on the radar of
(FX) markets. A EUR/USD sell-on upticks bias remains favoured. Any
additional interest rate support for the dollar will probably be
modest near term, especially if Powell is nominated to succeed
Yellen. So, any further EUR/USD decline might develop gradually.
For today, we have a neutral bias.
Technicals: EUR/USD uptrend brokenFrom a technical point of
view, EUR/USD dropped below 1.1670/62 support. If confirmed, it
would signal that the uptrend in place since the turn of the year
is broken, as the higher highs, higher lows pattern is shattered.
EUR/USD 1.1423 (38% retracement of 2017 rise) is the next downside
target on the charts. USD/JPY’s momentum was positive in September.
The pair regained 110.67/95 resistance, a positive. The 114.49
correction top is the next resistance. Sentiment improved last
week, but the first test on Friday failed. We don’t preposition for
a sustained break higher.
EUR/GBP returns below 0.89 on euro weakness
On Friday, EUR/GBP initially returned to the 0.89 area, despite
EUR/USD staying near the post-ECB lows. Ongoing diffuse comments on
the Brexit process from inside and outside the UK weighed on
sterling. However, the sterling fought back and gained even some
more ground versus the euro (and dollar) after 16 CET when the
rumour that Trump leans towards the nomination of dovish Powell
couldn’t push EUR/USD sustainably higher. EUR/GBP closed around
0.8840.
The UK eco calendar contains the money supply and lending data,
but these are unlikely to make the difference, while EMU data won’t
affect the overall euro trading either. The key for sterling might
be on Thursday when the market expects a BoE rate hike to 0.50%.
There is a strong majority of economists expecting a rate hike and
markets price a 88.4% chance of a rate hike. This means
asymmetrical risks for sterling. Slight gain in case of rate
increase, but heavy losses in case of an unchanged decision. We
don’t expect that the rate hike will be the start of a genuine rate
cycle and neither does the market. Ahead of the BOE we expect
sideways trading in the 0.8743 to 0.9033 range maybe with slight
sterling gains on the basis of the technicals. We maintain a
EUR/GBP buy-on-dip bias, but are in no hurry to add exposure until
we see signs that euro correction is over.
EUR/GBP staged a strong uptrend from April till late August with
a top at 0.9307. Rising UK inflation and the BoE preparing markets
for a rate hike caused a sterling rebound, but it has run its
course. EUR/GBP recently tried to regain the 0.90 area, but there
were no follow-through gains. The drop below the 0.8855 area
(neckline minor double top) on Friday may, if confirmed, open the
way for a return to the 0.8743 or even 0.8652 supports. This area
will be tough to break.
R2 0,9415 -1dR1 0,9307EUR/GBP 0,8842 -0,0012S1 0,8743S2
0,8657
EUR/GBP: minor double top, if confirmed, may push sterling
correction a bit further. Still sell sterling on up-ticks.
GBP/USD longer term in upward corrective channel, but short term
consolidation
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Monday, 30 October 2017
P. 6
Monday, 30 October Consensus Previous US 13:30 Personal Income
(Sep) 0.4% 0.2% 13:30 Personal Spending (Sep) 0.9% 0.1% 13:30 Real
Personal Spending (Sep) 0.5% -0.1% 13:30 PCE Deflator MoM / YoY
(Sep) 0.4%/1.6% 0.2%/1.4% 13:30 PCE Core MoM / YoY (Sep) 0.1%/1.3%
0.1%/1.3% Japan 00:50 Retail Sales MoM / YoY (Sep) A 0.8%/2.2%
-1.6%/1.8% 00:50 Dept. Store, Supermarket Sales (Sep) A 1.9% 0.6%
UK 10:30 Net lending on dwellings (Sep) £4B £4B 10:30 Mortgage
approvals (Sep) 66K 66.6K EMU 11:00 Economic Confidence (Oct) 113.3
113.0 11:00 Business Climate Indicator (Oct) 1.40 1.34 11:00
Industrial Confidence (Oct) 7.1 6.6 11:00 Services Confidence (Oct)
15.0 15.3 11:00 Consumer Confidence (Oct F) -1.0 -1.0 Germany CPI
Baden Wuerttemberg MoM / YoY (Oct) --/-- 0.3%/1.9% 08:00 Retail
Sales MoM / YoY (Sep) 0.5%/3.0% -0.4%/2.8% 09:00 CPI Saxony MoM /
YoY (Oct) --/-- 0.2%/2.0% 10:00 CPI Brandenburg MoM / YoY (Oct)
--/-- 0.2%/1.6% 10:00 CPI Hesse MoM / YoY (Oct) --/-- 0.3%/2.1%
10:00 CPI Bavaria MoM / YoY (Oct) --/-- 0.2%/1.8% 10:30 CPI North
Rhine Westphalia MoM / YoY (Oct) --/-- 0.1%/1.9% 14:00 CPI MoM /
YoY (Oct P) 0.1%/1.7% 0.1%/1.8% 14:00 CPI EU Harmonized MoM / YoY
(Oct P) 0.1%/1.7% 0.0%/1.8% Belgium CPI MoM / YoY (Oct) --/--
-0.10%/2.01% 15:00 GDP SA QoQ / YoY (3Q P) --/-- 0.4%/1.5% Spain
09:00 GDP QoQ / YoY (3Q P) 0.8%/3.1% 0.9%/3.1% 09:00 CPI EU
Harmonised MoM / YoY (Oct P) 0.4%/1.7%-- 0.6%/1.8% Sweden 09:30
Wages Non-Manual Workers YoY (Aug) -- 2.0% Events 11:00 Italy to
Sell 0.9% 2022, 2.05% 2027, Floating 2025 11:30 ECB Costa speaks in
Lisbon 15:30 ECB's Hansson Speaks at Roundtable in Tallinn
Calendar
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Monday, 30 October 2017
P. 7
10-year Close -1d 2-year td -1d Stocks Close -1dUS 2,41 -0,05 US
1,59 -0,03 DOW 23434,19 33,33DE 0,38 -0,03 DE -0,77 -0,03 NASDAQ
6701,263 144,49BE 0,64 -0,03 BE -0,63 -0,03 NIKKEI 22011,67 3,22UK
1,35 -0,04 UK 0,46 -0,02 DAX 13217,54 84,26
JP 0,07 0,00 JP -0,15 -0,01 DJ euro-50 3652,23 15,03
IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0,08 1,94 0,94 Eonia
-0,3600 0,00405y 0,21 2,12 1,10 Euribor-1 -0,3720 -0,0010 Libor-1
1,2423 0,000710y 0,86 2,38 1,40 Euribor-3 -0,3310 0,0000 Libor-3
1,3801 0,0021
Euribor-6 -0,2750 -0,0010 Libor-6 1,5727 0,0082
Currencies Close -1d Currencies Close -1d Commodities Close
-1d
EUR/USD 1,1608 -0,0043 EUR/JPY 131,97 -0,82 CRB 186,89
0,96USD/JPY 113,67 -0,31 EUR/GBP 0,8842 -0,0012 Gold 1271,80
2,20GBP/USD 1,3128 -0,0033 EUR/CHF 1,1586 -0,0036 Brent 60,44
1,14AUD/USD 0,7677 0,0017 EUR/SEK 9,7041 -0,0229USD/CAD 1,2808
-0,0039 EUR/NOK 9,4562 -0,0633
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 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.
Contacts
Rates: Upward bias core bonds to start new trading
weekCurrencies: Euro remains weak and loses support versus dollar
and sterlingCalendarUpward bias core bonds to start the new trading
week
