Headlines. Monday, 12 September Rates: Sell-off bonds contained, but now joined by equities and oil

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1 Rates: Sell-off bonds contained, but now joined by equities and oil The sell-off on bond markets continued on Friday. ECB Rimsevic and Fed Rosengren reminded markets that there is risk central banks will become less dovish than hitherto. Today, attention turns to Fed heavyweight Brainard. Will she throw off her dovish feathers? If so, a September Fed rate increase becomes likely. Currencies: Dollar supported as Fed rate debate continues On Friday, the dollar initially gained substantially as Fed talk kept the door for a September rate hike open. However, an equity sell-off prevented further USD gains. Fed talk will again be the key driver for USD trading today. As long as a September rate hike remains a real option, the downside of the dollar should be rather well protected. Calendar 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 US equities sold off on Friday, closing down by 2.45% as Fed s Rosengren suggested rates might need to be increased. This morning, also Asian shares show broad-based losses. Brent crude oil prices dropped 3.5% on Friday, reversing Thursday s gains as US drillers added oil rigs for a tenth week in the previous eleven, while also equity market sentiment was poor. Japan s core machinery orders rose unexpectedly in July, for a second straight month, but strength is unlikely to sustain as external demand remains weak as a result of the strong yen. Measures should be taken to put a break on the excessive bubble expansion in the property sector, the Chief Economist of the PBOC s Research department said, adding that they should curb excessive financing into the real estate sector. The rift between the IMF and European Union over how to make Greece s debt sustainable is damaging the country s attempts for an economic recovery, Greek PM Tsipras said during the weekend, as it prevents the inclusion of Greek debt in the European Central Bank's QE asset purchase programme. Today, the eco calendar is empty both in the US and euro zone, but the focus will be on speeches from Fed s Lockhart, Kashkari and Brainard. P. 1

2 Rates Bear steepening continued; Equities down too now Corrective bear steepening: day 2 Repositioning on Central Bank thinking Intra-EMU spread changes limited between -1 and +2 bps US yield -1d 2 0,7861 0, ,2177 0, ,6629 0, ,3708 0,1395 Fed dove Rosengren pleads for rate increase after an unusually agnostic Mr. Draghi doesn t say anything about extending QE DE yield -1d 2-0,6190 0, ,4770 0, ,0230 0, ,6216 0,2016 The corrective bear steepening on rate markets continued Friday amid an empty eco calendar. The move was initiated on Thursday by the ECB s inaction and deepened after a late afternoon surge in oil prices, following unexpectedly sharply lower oil inventories. Markets reacted disappointed and doubt the ECB s willingness, capability and determination to ease monetary policy further. Governing council member Rimsevics said that the task committees will work until December on the options for the QE-programme, implicitly downgrading the October policy meeting. In a daily perspective, the German yield curve shifted 1.2 bps (2-yr) to 10 bps (30-yr) higher. Technically, the German 30-yr yield broke above the neckline of a double bottom (0.57%), to the highest level since the British EU-referendum. The German 10-yr yield is near key resistance at 0.029/0.05%. Fed Dove turns more hawkish: Eventful after Draghi The US yield curve bear steepened as well with yields 1.2 bps (2-yr) to 9.1 bps (30-yr) higher. Since Thursday, the odds of a September rate hike increased from 22% to 30%. Chances of a December move went from 51% to 60%. Boston Fed Rosengren, who votes on policy this year and traditionally had a dovish profile, said there is a reasonable case for a rate rise. He sees risks of waiting too long to tighten, including bubbles. Inflation is slowly returning to the 2% goal, while the US may already be a little beyond full employment. Modest upward pressure on wages is visible, he added. Fed Tarullo on the contrary sounded still dovish, saying he is still in the show me camp (wait & see). US Treasuries couldn t profit from the steep correction lower of equities or from the decline of oil prices. The main concern is central bank tightening, hitting bonds, equities (and oil) in a similar way. The down-move of the T-Note, through the downtrend line, is technically relevant, but only a break below the support (June 23 low; base) would change the picture more fundamentally. Bund future (black) and S&P future (orange) intraday: Repositioning following ECB meeting and ahead of Fed meeting US curve (2 day change) Sharp bear steepening Will Fed Brainard stick to wait and see? The eco calendar is thin today, both in the US and euro zone, but attention goes to the speeches by Fed s Lockhart, Kashkari and Brainard. The appearance from Washington board Fed governor and heavyweight Brainard was only very recently put on the Fed calendar. Coming one day before the start of the black-out period, her appearance is maybe not so innocent. P. 2

3 So, expectations are high that Brainard s comments on the outcome of the September FOMC meeting will have market moving potential. Brainard has rapidly become the leading voice of the dovishly oriented (and until now majoritarian) Fed governors. In the past years she didn t speak much in public, but often came out just before FOMC meetings. She advocated patience as she saw downside risks, especially coming from outside the US, and is concerned about too low inflation expectations. Globalization of finance leaves the Fed unable to fully resist the pull of negative rates in Japan and the euro area, she declared. So, if Brainard would leave her position and suggests that time is ripe for higher rates, a September rate hike is likely and markets will discount it further. If she stands her ground and advocates patience, the outcome of next week s FOMC remains open and December may remain the favoured timing. R2 168,86-1d R1 165,67 BUND 163,54-1,9700 S1 163 S2 161,11 Larger correction looming if Brainard gives all clear Overnight, Asian stock markets lose up to 2%, in line with the US and Europe on Friday. Technically, the S&P 500 dropped below first support, suggesting more downside. The US Note future and Brent crude stabilise following Friday s crash. Today s eco calendar is empty apart from speeches from Fed governors Lockhart, Kashkari and Brainard (see above). Especially Brainard s speech could be interesting. If the Fed really wants to hike in September, it could be a final chance to communicate it to markets. Somewhat more hawkish comments from a dovish FOMC member would carry a lot of credibility. That would send core bonds further down with this time also the front end of the (US) curve taking a hit. First support in the US Note future stands at Last week, markets started questioning the ECB s capacity, willingness and determination to add more stimulus. Especially the long end of European bonds markets sold off. Those could signal the start of a European taper tantrum. The Bund is currently still within its sideways range, but a test of the bottom (163) seems likely. The recent turn of central banks (especially if Brainard signals all clear for September hike) made the environment less friendly for bonds, with a larger correction looming. German Bund (Dec. contract!!): Sell-off following ECB. European taper tantrum? US Note future (Dec contract!!): closing in on support. September tightening back on the table? P. 3

4 Currencies Dollar supported as Fed rate hike debate continues Dollar profits from higher yields, but risk-off sentiment limits the USD gains R2 1,1428-1d R1 1,1366 EUR/USD 1,1248-0,0004 S1 1,1123 S2 1,1046 Thin eco calendar Fed speakers continue to set the tone for USD trading On Friday, there were few eco data, but markets again pondered the possibility of a September Fed rate hike. This supported the dollar across the board. The rise in US yields and gains of the dollar were supported by Fed s Rosengren comments. EUR/USD dropped to the low 1.12 area. USD/JPY rebounded to the 103 area. Later in US trading, the dollar returned part of its earlier gains as equities were sold aggressively. USD/JPY declined off the intraday highs and closed the session at (from ). The dollar lost also slightly ground against the euro. EUR/USD finished the day at (from ). Overnight, Asian equities extend the sell-off. July Japan machinery order were much stronger than expected and suggest a pick-up investment. However, the report isn t able to break the risk-off sentiment. There is still a lot of market chatter whether the BOJ can/will take action to steepen the yield curve. This is keeping long term interest rates under upward pressure. In China, the focus is on tensions in the property market as authorities as official float idea of limiting the financing for property projects (and state owed companies). Market fear for tighter monetary conditions in the US and combined with an equity sell-off, is a mixed context for the dollar. USD/JPY hovers in the area. EUR/USD also holds a tight range in the mid 1.12 area. Commodities suffer from higher yields and the stronger dollar. The Aussie dollar declined throughout Friday s session. AUD/USD holds near the recent lows, trading in the area. Today, The eco calendar is empty, but attention goes to speeches by Fed s Lockhart, Kashkari and Brainard. Especially the comments from Fed s Brainard will be scrutinized (see fixed income part of this report). Until now, Brainard was dovish oriented. If she would leave her position and suggest that time is ripe for higher rates, a September rate hike is likely and markets will discount it further. If she stands her ground and advocates patience, the outcome of next week s FOMC remains open and December may remain the favoured timing. On Friday, markets pondered whether the era of ultra easy monetary conditions has reached its peak. The rise in core bond yields is supportive for the dollar rather than for the euro or the yen. A the same time, the brisk-off context prevent further gains in USD/JPY and this caps progress in other dollar cross rates, too. We expect this indecisive trading pattern to persist today. Even so, we assume the downside of the dollar remains well protected, unless Brainard would be extremely dovish. EUR/USD: modest dollar gains as Fed rate hike debate continues USD/JPY: Decline halts P. 4

5 Last week, an awful US non-manufacturing ISM (after a weak manufacturing ISM and mediocre payrolls) made a September Fed rate hike unlikely. However, Fed comments suggest that the debate isn t completely over. EUR/USD rebounded (temporary?) above the first resistance at This made us change our short-term bias from USD positive to neutral. The ECB policy decision didn t change the picture for EUR/USD trading. Range trading in the / remains favoured. Even so, the topside of EUR/USD still looks well protected. Sentiment on USD/JPY also showed some swings during the week. Receding chances of a Fed rate hike and uncertainty about the BOJ s commitment to ease policy further, initially weighed on USD/JPY. The day-to-day momentum in USD/JPY remains fragile/indecisive, but we expect the 99.54/99.02 area to provide strong support is now the first point of reference on the topside. Sterling slightly under pressure R2 0,8815-1d R1 0,8725 EUR/GBP 0,8467 0,0040 S1 0,8344 S2 0,8251 On Friday, the UK data had no decisive impact on sterling trading. The UK July trade deficit was again slightly wider than expected and stays at a high level. On the other hand, the UK July construction output was stronger than expected. However, the data were largely ignored. The price action in the euro and the dollar were the major driver for Cable and EUR/GBP. EUR/GBP initially hovered in the /60 area. Gradually the decline of EUR/USD filtered also through in the EUR/GBP cross rate, but was reversed later. EUR/GBP closed the session and trades currently near , little changed from Thursday. Overall USD strength pushed cable to new lows for this week. The pair closed the session off the intraday highs at (from ). Today, the UK eco calendar is empty, leaving sterling trading again at the mercy of global factors and of the swings in the euro and the dollar. A risk-off context, like today, is usually a slightly negative for sterling. Sterling had a strong run from mid-august as the UK economy showed remarkable resilience post-brexit. EUR/GBP declined off the post-brexit top. Gradually a lot of good news was discounted and finally sterling fell prey to profit taking. For the technical picture of sterling against the euro to improve, EUR/GBP should drop below /33 and even This looks difficult short-term. A countermove is developing. Cable also showed a positive momentum. A first resistance at was temporary regained /1.35 is key before concluding the bottoming out process after the steep post-brexit fall is finished. We expect sterling s consolidation/correction on the August rally to continue EUR/GBP: rebounds after rejected test of the area GBP/USD: rally running into resistance. P. 5

6 Calendar Monday, 12 September Consensus Previous Japan 01:50 Machine Orders MoM YoY (Jul) A 4.9%/5.2% -0.9%/8.3% 01:50 PPI MoM YoY (Aug) A-0.3%/-3.6% 0.0% / -3.9% 08:00 Machine Tool Orders YoY (Aug P) % Italy 10:00 Unemployment Rate Quarterly (2Q) 11.5% 11.6% Sweden 08:00 PES Unemployment Rate (Aug) % Events 14:05 Fed's Lockhart Speaks to Business Economists in Atlanta 15:45 ECB Publishes QE Details 15:50 Bank of England Bond-Buying Operation Results 19:00 Fed's Kashkari Speaks on Economy and TBTF 19:15 Fed's Brainard Speaks about Economic Outlook in Chicago 10-year td - 1d 2 -year td - 1d STOCKS - 1d US 1,66 0,06 US 0,79 0,01 DOW ,45 DE 0,02 0,08 DE -0,63 0,02 NASDAQ for Exch - NQI #VALUE! BE 0,26 0,08 BE -0,56 0,02 NIKKEI ,92 UK 0,86 0,10 UK 0,16 0,04 DAX 10573, ,44 JP -0,01 0,00 JP -0,22-0,03 DJ euro ,20 USD td -1d IRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,342-0,005 3y -0,198 1,094 0,482 Euribor-1-0,37 0,00 Libor-1 USD 0,27 0,27 5y -0,100 1,216 0,586 Euribor-3-0,30 0,00 Libor-3 USD 0,38 0,38 10y 0,370 1,507 0,884 Euribor-6-0,20 0,00 Libor-6 USD 0,52 0,52 Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENT EUR/USD 1,1245-0,0036 EUR/JPY 115,23 0,08 182, ,96 47,33 USD/JPY 102,49 0,38 EUR/GBP 0,8465 0,0005-1d -3,10-8,55-2,19 GBP/USD 1,3279-0,0046 EUR/CHF 1,0968 0,0008 AUD/USD 0,7533-0,0118 EUR/SEK 9,5324 0,02 USD/CAD 1,3062 0,0148 EUR/NOK 9,2821 0,07 P. 6

7 Contacts Brussels Research (KBC) Global Sales Force Piet Lammens Brussels Peter Wuyts Corporate Desk Joke Mertens Institutional Desk Mathias van der Jeugt France Dublin Research London Austin Hughes Singapore Shawn Britton Prague Research (CSOB) Jan Cermak Prague Jan Bures Petr Baca Bratislava Research (CSOB) Marek Gabris Bratislava Budapest Research David Nemeth Budapest ALL OUR REPORTS ARE AVAILABLE ON This non-exhaustive non exhaustive information information is based on short-term is based forecasts on for expected short developments term forecasts on the financial for expected markets. KBC Bank developments 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. P. 7