Tuesday, 28 November 2017 P. 1 Rates: Sensitive to progress on US tax reforms? Today’s eco calendar heats up in the US. Risks are tilted to the downside of consensus, but we don’t expect them to impact trading with this week’s back loaded calendar in mind. Progress on Thursday’s potential vote on the tax reform plan in US Senate will probably trigger most intraday volatility. Good news is negative for the US Note future and vice versa. Currencies: Dollar decline slows, but no sign of a trend reversal yet The dollar set now correction lows against the euro and the yen yesterday, but closed off the lows. Eco data probably won’t change fortunes for the US currency today. Powell confirming Yellen’s approach on monetary policy might be slightly supportive for the dollar. The tax reform bill remains a wildcard for USD trading. Calendar • US stock markets ended near opening levels yesterday. Asian equity indices trade with small losses overnight with China underperforming. • A US Senate Republican tax bill strongly backed by President Trump faced potential opposition from two Republican lawmakers who could prevent the sweeping legislation from reaching the Senate floor. • The ECB has received another setback in its bid to get tough on EMU banks’ problem loans, after a EC opinion found that its plans to require banks to hold more cash against their non-performing exposures overstepped the bank’s mandate. • Japan received radio signals suggesting that North Korea may be preparing for a missile launch test, Kyodo News reported, citing multiple government officials. • Powell will set the stage for further increases in interest rates while stressing the need to respond flexibly to unexpected events when Trump’s nominee to take over the chairmanship of the Fed faces his confirmation hearing. • NY Fed Dudley said he still expects that a very strong employment sector will help push inflation up over time. Dallas Fed Kaplan believes it will likely be appropriate to hike rates in the near future. • Today’s eco calendar contains US trade balance, S&P house prices, consumer confidence and Richmond Fed manufacturing index. The OECD publishes its economic outlook, Fed Harker speaks, the US Treasury sells 7-yr Notes and the Senate Banking Committee holds a hearing on Fed chair nominee Powell. 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
Tuesday, 28 November 2017
P. 1
Rates: Sensitive to progress on US tax reforms?
Today’s eco calendar heats up in the US. Risks are tilted to the downside of consensus, but we don’t expect them to impact trading with this week’s back loaded calendar in mind. Progress on Thursday’s potential vote on the tax reform plan in US Senate will probably trigger most intraday volatility. Good news is negative for the US Note future and vice versa.
Currencies: Dollar decline slows, but no sign of a trend reversal yet
The dollar set now correction lows against the euro and the yen yesterday, but closed off the lows. Eco data probably won’t change fortunes for the US currency today. Powell confirming Yellen’s approach on monetary policy might be slightly supportive for the dollar. The tax reform bill remains a wildcard for USD trading.
Calendar
• US stock markets ended near opening levels yesterday. Asian equity indices
trade with small losses overnight with China underperforming.
• A US Senate Republican tax bill strongly backed by President Trump faced potential opposition from two Republican lawmakers who could prevent the sweeping legislation from reaching the Senate floor.
• The ECB has received another setback in its bid to get tough on EMU banks’ problem loans, after a EC opinion found that its plans to require banks to hold more cash against their non-performing exposures overstepped the bank’s mandate.
• Japan received radio signals suggesting that North Korea may be preparing for a missile launch test, Kyodo News reported, citing multiple government officials.
• Powell will set the stage for further increases in interest rates while stressing the need to respond flexibly to unexpected events when Trump’s nominee to take over the chairmanship of the Fed faces his confirmation hearing.
• NY Fed Dudley said he still expects that a very strong employment sector will help push inflation up over time. Dallas Fed Kaplan believes it will likely be appropriate to hike rates in the near future.
• Today’s eco calendar contains US trade balance, S&P house prices, consumer confidence and Richmond Fed manufacturing index. The OECD publishes its economic outlook, Fed Harker speaks, the US Treasury sells 7-yr Notes and the Senate Banking Committee holds a hearing on Fed chair nominee Powell.
Headlines
S&PEurostoxx 50NikkeiOilCRB
Gold2 yr US10 yr US
2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP
Tuesday, 28 November 2017
P. 2
Core bonds marginally higher in uneventful session
The Bund opened the session unchanged and traded a bit erratic throughout the European session, but overall with a slightly positive bias. Changes were minimal and technically insignificant. On intra-EMU bond markets, yield spread changes ended virtually unchanged. The eco calendar was thin and ignored. Oil prices traded range-bound and European equities with a negative bias. The 2-and 5-yr Note auctions were average, but US Treasuries kept some minor gains.
Calendar heats up
The EMU calendar contains second tier releases, which shouldn’t question the current buoyant economic expansion. EMU M3 money supply is expected to have stabilized at 5.1%, while lending likely strengthened slightly. German and French consumer confidence are expected little changed at cyclical high levels. The US trade deficit is expected to have risen slightly in October ($65B from $64.1B). Consumer confidence (Conference Board) is expected to have eased to 124 in November from 125.9 in October, which was the highest since the end of 2000. As Michigan consumer sentiment fell slightly off the cycle highs, we bet on a similar, meaningless, decline. Markets should take it into stride without too much impact. Richmond Fed manufacturing sentiment is expected broadly unchanged in November at 14. Given the outcome of the NY and Philly Fed surveys, there are some downside risks. Fed chair nominee Powell will appear for the Senate Banking Committee (hearing). He will be grilled on his views regarding monetary policy and financial market regulation. However, he already stated in his written testimony that, if confirmed as next chairman, he expects the Fed to continue raising interest rates gradually and build back (gradually) the asset portfolio to support the Fed’s twin goals. So, he casts himself as a figure of stability and continuity for the Fed. On regulatory issues, he would consider ways to ease the regulatory burdens on banks, while preserving the key reforms Congress passed to prevent another financial crisis. These comments are completely in line with market expectations and the market impact should be limited if Powell sticks to his written comments. Overnight, NY Fed Dudley sees full employment, labour market tightening and a bit more wage growth. Therefore, he doesn’t see the need for tax cuts. Dudley is firmly in the Yellen camp that wants to continue raising rates gradually, but he will resign mid-2018 meaning his views don’t carry much weight anymore.
US T-Note future (black) & S&P future (orange) intraday: Slight upward bias US Treasuries but in very tight range
German 10-yr yield (long term): Yield in the middle of its sideways range. ST support around 0.30%, resistance near 0.5%
Aff
Dull trading in opening session
Tuesday, 28 November 2017
P. 3
Average US 2- and 5-yr Note auctions
The US Treasury started its end-of-month refinancing operation with two auctions yesterday: a mixed $26 bn 2-yr Note auction and an average $34 bn 5-yr Note auction. The 2-yr Note auction stopped right on the bid side, but the bid cover was rather light (2.73). Bidding details showed weak indirect demand. The 5-yr Note auction stopped on the 1:00 pm bid side as well with an average bid cover (2.46). Bidding details showed a solid overall buyside. The US Treasury concludes its refinancing operation today with a $28 bn 7-yr Note auction. The WI trades currently around 2.22%.
Because month-end falls on Thursday, and US Treasury allows at least one day between the auctions and settlements, the timing of this month’s auctions has been pulled forward.
Sensitive to progress on US tax reforms?
Asian stock markets lose slightly ground this morning with China outperforming. Japanese media report on a North Korean missile threat. Fed governors (Powell, Dudley, Kaplan) suggest a continuation of gradually removing accommodation. The US Note future and Brent crude trade flat, suggesting a neutral opening for the Bund.
Today’s eco calendar heats up in the US. Risks are tilted to the downside of consensus, but we don’t expect them to impact trading with this week’s back loaded calendar in mind (PCE deflator, ISM manufacturing). Progress on Thursday’s potential vote on the tax reform plan in US Senate will probably trigger most intraday volatility. Good news is negative for the US Note future and vice versa. We expect trading to remain technically insignificant and occur in tight range. On intra-EMU bond markets, Irish bonds could be sensitive to political developments as today’s motion of no-confidence risks collapsing the government.
Technically, US Treasuries will probably trade in the 124-06 to 125-25 range going forward. This corresponds with a 2.3%-2.47% band in yield terms. The trading range for the Bund going forward is between 160.24 and 163.43. Any moves towards the topsides of the ranges could be used to put up short positions.
German Bund: sideways trading range between 160.24 and 163.63. Sell around upper bound
US Note future: trading band between 124-06 and 125-25?
Tuesday, 28 November 2017
P. 4
EUR/USD: no follow-through gains, but holds above 1.1880 range top
USD/JPY: decline slows, but no sign of a rebound yet.
USD decline slows?
Yesterday, a softer equity sentiment initially kept the dollar in the defensive. USD/JPY dropped below 111. EUR/USD set a minor new correction top north of 1.1950. During the US session, the dollar regained ground on headlines that the odds for a Senate tax proposal were rising. EUR/USD closed the session at 1.1898 (from 1.1933). USD/JPY finished the day at 111.09 (from 111.53).
Overnight, the correction on Asian equity markets that started last week slowed. The correction remains very orderly, but, there are tentative signs of fall-out on other markets (e.g. some commodities). There are rumours that North Korea could prepare a new missile launch. The headlines on the US Senate tax plan were less constructive than yesterday evening. USD/JPY trades stable in the low 111 area. EUR/USD trades in the 1.19 area.
Today, the EMU calendar only contains second tier releases, which shouldn’t question the current buoyant economic expansion. In the US, the trade deficit is expected slightly wider in October (65B from $64.1B). Consumer confidence is expected to have eased to 124 from 125.9, which was the highest since the end of 2000. We see a slight downward risk. Fed chair nominee Powell will appear for the Senate Banking Committee. His written statement is already published. He confirms the Yellen approach on gradual easing (see Fixed Income part). The focus remains on the eco data and events later this week. If anything, the data might be neutral for the euro and slightly negative for dollar. Powell comments might be a marginally dollar supportive. The fate of the Senate tax bill remains a wildcard and so is the global equity performance. Yesterday, we advocated not to row against the USD correction as long as there was no clear trigger to change fortunes in favour of the US currency. The dollar is in the defensive as markets question the Fed’s rate hike intentions beyond December. We still see a good chance that the Fed will realize its 2018 intentions, but data or other events (tax cuts) are needed for markets to reconsider a more USD positive scenario. Yesterday’s, price action was a bit more USD constructive, but not good enough to qualify it as a U-turn. We want more convincing signs that the USD correction has run its course.
US data are interest, but probably no game-changer
US tax bill and sentiment on risk wildcards for trading today
Dollar stabilizes in Asian trading
Tuesday, 28 November 2017
P. 5
From a technical point of view, EUR/USD set a post-ECB low mid-November, but regained on Friday the 1.1880 MT correction top. This break opens the way for a full retracement to the 1.2092 top. A return below 1.1713 would signal that the rebound in EUR/USD is aborted. The USD/JPY momentum was positive in October, but deteriorated this month. Last week, USD/JPY dropped below the 111.65 neckline. There was no aggressive follow-through selling, but the break makes the picture outright USD negative.
Sterling awaits more concrete news on Brexit
in technical trade, sterling (re)gained yesterday a few ticks against the euro and the dollar. EUR/GBP closed the session at 0.8935. Cable broke temporary above the 1.3348 intermediate resistance but finished the session at 1.3318 as the dollar rebounded later in the session. There were no UK data ad no new info on the Brexit negotiations.
There are again no eco data in the UK today. BoE’s Carney gives a press conference after the publication of the Financial stability report. We don’t expect him to bring high profile news on monetary policy. The Brexit countdown continues, but we don’t expect a break-through right now. A further escalation of the Irish political crisis complicates further progress on Brexit. However, there is no one-to-one link with the performance of sterling. More erratic, technical sterling trading might be on the cards as long as this issue is pending.
MT view/technical picture. A BoE driven sterling rebound ran into resistance early this month. Sterling declined again as markets anticipated that the rate cycle would be very gradual and limited. Brexit headlines cause day-to-day gyrations. EUR/GBP trades in a 0.8733/0.9033 consolidation range. We changed our ST bias on EUR/GBP from positive to neutral two weeks ago. The 0.9015/33 area might be tough to break short-term.
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