Headlines. Monday, 13 November Rates: Side-lined ahead of central bankers and US eco data?

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1 Rates: Side-lined ahead of central bankers and US eco data? Today s eco calendar remains uninspiring. We expect trading to be sentiment-driven and technical in nature. The downward equity correction hasn t run its course yet, but failed to support core bonds last week. Investors might decide to stay sidelined ahead of key US eco data later this week and with an avalanche of central bankers scheduled to speak Currencies: Dollar to trade cautiously ahead of key eco data At the end of last week, the dollar couldn t profit even as core bond yields maintained an upward bias. US traders look out for the key US eco data later this week, including CPI and retail sales. Soft data won t derail a Fed rate hike, but might still weigh on the USD. Sterling is again under pressure as Conservative PM s are said to challenge PM May s leadership. Calendar 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 US stock markets closed marginally lower on Friday in an uneventful trading session. Asian stock markets are mixed overnight with Japan underperforming and China outperforming. Sterling loses ground this morning after reports that a group of Conservative lawmakers had agreed to sign a letter of no-confidence in British PM May. Political turmoil in Australia risks undermining fragile economic confidence as the loss of another lawmaker in the dual-citizenship fiasco left PM Turnbull leading a minority government. Philly Fed Harker, voting FOMC member, said he s looking for another rate increase this year and that he is comfortable with three hikes in 2018 if inflation picks up. German political parties grappling to form a government have set a deadline of Thursday to produce an agreement that will pave the way for formal coalition talks. The head of the House Republicans tax-writing committee said he would not accept elimination of a federal deduction for state and local taxes, opposing a proposal from Senate Republicans that would hike taxes for some middle class Americans. Today s eco calendar is empty. Italy holds a BTP auction while ECB Constancio and Nowotny are scheduled to speak. P. 1

2 Rates Core bonds lose more ground, together with stocks US yield -1d 2 1,65 0,02 5 2,05 0, ,40 0, ,86 0,06 Curve steepening in EMU and US DE yield -1d 2-0,75 0,01 5-0,33 0, ,41 0, ,31 0,04 Global core bonds lost more ground last Friday. The main move already occurred in Asian dealings (US Note future) and the European opening (Bund). In the US, it was rather strange given the growing stand-off between US House and Senate Republicans on tax reforms. After the European opening, core bond trading occurred in a narrow sideways range until very late in the session when a new downleg occurred once the intraday lows were broken. Core bond weakness went again hand in hand with fragile stock markets, overruling typical risk correlations. At the end of the day, the German yield curve bear steepened with yields 0.6 bps (2-yr) to 4.2 bps (30-yr) higher. The US yield curve shifted in similar fashion with yields 2 bps (2-yr) to 6.4 bps (30-yr) higher. On intra-emu bond markets, 10-yr yield spreads versus Germany ranged between -2 bps and +1 bp. Very thin eco calendar Today s eco calendar remains uninspiring with no eco data of importance. ECB Constancio and Nowotny are scheduled to speak. Vice-governor Constancio generally holds a dovish tone as he is on the same line as other ECB heavyweights Draghi and Praet. ECB Nowotny already spoke last week. He joined the German-Franco view that the ECB should have given an intent to end its QE-program rather than keeping it open-ended. A rate hike in 2018 is excluded with the current monetary policy stance, he added. Af German Bund future (black) & Dax index (orange) (intraday, 2 days): unusual correlation. Both selling off. German Dax: correction time P. 2

3 Heavy issuance calendar R2 165,18-1d R1 163,43 BUND 162,27-0,39 S1 160,49 S2 159,80 The Italian debt agency kicks off this week scheduled EMU bond supply today by tapping the on the run 3-yr BTP ( bn 0.2% Oct2020), 7-yr BTP ( bn 1.45%Nov2024) and 15-yr BTP ( bn 2.45% Sep2033). Bonds on offer cheapened in ASW spread terms going into the auction. We expect plain vanilla demand. Some investors could already have next year s general election in the back of their minds and decide to keep a cautious approach. The Dutch debt agency sells up to 3 bn in a 10-yr DSL auction (0.75% Jul2027) tomorrow. Germany taps the bond market twice this week with a 5bn Schatz (0% Dec2019) auction tomorrow and a 3 bn Bund (0.5% Aug2027) auction on Wednesday. The French treasury holds a small OAT auction ( 4-5 bn) on Thursday by tapping two off the run (3.5% Apr2020 & 0.5% May2025) and one on the run (0% Mar2023) bond. Additionally they ll try to raise bn via inflation-linked notes. The Spanish debt agency sells 4 on the run bonds (0.05% Jan2021, 0.45% Oct2022, 1.45% Oct2027 and 3.45% Jul2066). The amount on offer still needs to be determined. Side-lined ahead of central bankers and US eco data? Asian stock markets trade mixed currently with China outperforming (+0.25%) and Japan underperforming (-1%). The US Note future has a small upward bias suggesting a stronger opening for the Bund as well. Today s eco calendar remains uninspiring. We expect trading to be sentiment-driven and technical in nature. The downward equity correction hasn t run its course yet, but failed to support core bonds last week. Investors might decide to stay side-lined ahead of key US eco data later this week (CPI and retail sales on Wednesday) and with an avalanche of central bankers scheduled to speak (including Draghi, Carney, Yellen and Kuroda tomorrow). The stand-off between US House and Senate Republicans on tax reforms is a wildcard for trading. We have a longer term US Treasury negative bias and would short the Note future for return action towards the low. Also for the Bund we favour a sell-on-upticks (around ), targeting Support levels in yield terms played their role (German 5y: -0.4%, 10y: 0.3%). Underlying growth momentum remains very strong in EMU and warrants higher (LT) rates. With ECB policy cemented for another year, this should result in a steeper EMU yield curve. German Bund: Return action towards driven by strong underlying growth momentum? US Note future: Headling for test of support or will eco data interfere later this week? P. 3

4 Currencies USD to trade cautiously ahead of key US eco data Calm returned after Thursday s uptick in volatility Dollar traded little changed to marginally lower Dollar off Friday s lows, but no indication of a sustained rally Aussie dollar largely ignores political uncertainty Global markets calmed down on Friday after Thursday s uptick in volatility. There were only second tier eco data. Changes in interest rate differentials were very small. If anything they widened marginally in favour of the dollar, but the US currency remained slightly in the defensive. EUR/USD remained within the established short-term trading range. The pair closed the session at (from ). USD/JPY finished the day little changed at Asian equities are trading mixed overnight. Chinese indices outperform. Most other indices show small losses with Japan again underperforming. The risk-off sentiment in Japan doesn t yield to any sustained gains for the yen. USD/JPY still trades in the mid 113 area. The dollar was slightly better bid early in the session, but there is no clear trend. EUR/USD trades in the area. The Aussie dollar took a hesitant start as PM Turnbull s government lost its majority, but AUD/USD soon returned to the mid 0.76 area. Today, there are not important data in the EMU or in the US. ECB s Constancio and Nowotny are scheduled to speak, but we don t expect their appearances to have a big impact on (FX) markets. So, global sentiment and technical considerations will set the tone for euro and USD trading today. Eco calendar remains thin Dollar struggles to prevent further losses R2 1,188-1d R1 1,169 EUR/USD 1,1665 0,0023 S1 1,1511 S2 1,1331 Equities show no clear trend. Last week, core bond yields maintained an upward bias despite an up-tick in volatility on the equity markets. In the end, the dollar lost slightly ground, but EUR/USD and USD/JPY didn t break any technically important levels. Uncertainty, on the US tax bill remains a potential negative for the dollar. Later this week the focus will return to a series of important eco data, including the US CPI and retail sales on Wednesday. Both data series are expected rather soft after a strong reading last month. A December Fed rate hike is almost fully discounted. We don t expect the Fed to change course even if the data are soft. Even so, weaker than expected data might create some doubts on the interest rate markets and maybe even more for the dollar. We start the week with a neutral/cautious bias on the dollar as we think that the US currency is vulnerable to some further losses if this week s eco data disappoint. We don t expect any USD setback to go very far though. EUR/USD: holding within established range. Focus on Wednesday s US eco data USD/JPY: off recent top, but no clear trend P. 4

5 From a technical point of view, EUR/USD dropped below /62 support, but subsequent follow-through price action occurred very slow. Still the pair dropped to a new post-ecb low on Tuesday last week. A sustained break would confirm that the recent EUR/USD uptrend is broken. EUR/USD (38% retracement of 2017 rise) is the next downside target on the charts. A sustained return north of , would question recent cautious downside momentum. Next resistance stands at /80. USD/JPY s momentum was positive in past months. The pair regained /95 resistance and tested the MT range top, but the attempt failed. A sustained break would improve the technicals. We remain cautious to preposition for further USD/JPY gains. Last week s price action remained unconvincing despite a solid interest rate support. R2 0,9307-1d R1 0,9033 EUR/GBP 0,8841-0,0014 S1 0,8743 S2 0,8657 Political uncertainty weighs again on sterling Sterling sentiment improved on Friday. The sterling glass was again half full. The UK trade deficit narrowed more than expected, supported by good export growth. At the same time, UK September production data were very strong (0.7% M/M vs 0.3% expected). Friday s data don t change the overall picture on the UK economy, but they give some counterweight to other disappointing eco data of late. Markets concluded that it remains possible to start negotiations on the future relationship after the December EU summit. EUR/GBP closed the session at (from ). Cable finished at (from ). During the weekend, the Sunday Times reported that 40 conservative MP s agreed to sign a no confidence vote against PM May. A new fight on the leadership in the conservative party and pressure to make progress on the Brexit negotiations before the December EU summit are weighing on sterling. EUR/GBP trades again in the high 0.88 area this morning. Today, there are no important data, but the UK calendar is well filled later this week starting with the CPI tomorrow. The CPI is expected to have gone north of 3.0% in October. Even so, we doubt the data to be of much support for sterling as long as the political context isn t cleared out. We maintain an cautious upward bias for EUR/GBP. MT technical: Sterling rebounded in September as the BoE prepared markets for a rate hike. This rebound ran into resistance as markets anticipated that any rate hikes would be very gradual and limited. This view was confirmed at this month s BoE policy meeting. EUR/GBP currently trades in a / consolidation range. A downside test of this range was rejected. We maintain the view that the support area will be tough to break in a sustainable way. A EUR/GBP buy-on-dips approach is favoured. EUR/GBP /33 is the first important resistance. EUR/GBP: political uncertainty to reaccelerate GBP-selling GBP/USD: Cable holds sideways consolidation pattern, but downside might again come under pressure P. 5

6 Calendar Monday, 13 November Consensus Previous Japan 00:50 PPI MoM / YoY (Oct) A: 0.3%/3.4% 0.2%/3.0% China 13NOV-15NOV Money Supply M2 YoY (Oct) 9.2% 9.2% 13NOV-15NOV Money Supply M1 YoY (Oct) 13.7% 14.0% 13NOV-15NOV Money Supply M0 YoY (Oct) 7.0% 7.2% 13NOV-18NOV Foreign Direct Investment YoY CNY (Oct) % Germany 08:00 Wholesale Price Index MoM / YoY (Oct) --/-- 0.6%/3.4% Belgium 10NOV-20NOV Budget Balance YTD (Oct) A: b b Sweden 08:00 PES Unemployment Rate (Oct) % Events 01:10 Fed's Harker Speaks in Tokyo on Balance Sheet Unwind 10:00 ECB's Constancio Speaks in Frankfurt 11:00 Italy to Sell 0.2% 2020, 1.45% 2024 and 2.45% 2033 BTP s 17:00 ECB's Nowotny Speaks at Vienna University 18:45 BOJ Governor Kuroda scheduled to speak in Zurich 10-year Close -1d 2-year td -1d Stocks Close -1d US 2,40 0,06 US 1,65 0,02 DOW 23422,21-39,73 DE 0,41 0,04 DE -0,75 0,01 NASDAQ 6750,939 0,89 BE 0,64 0,02 BE -0,62 0,00 NIKKEI 22380,99-300,43 UK 1,34 0,08 UK 0,49 0,01 DAX 13127,47-55,09 JP 0,05 0,01 JP -0,16 0,02 DJ euro ,76-18,74 IRS EUR USD GBP EUR -1d -2d USD -1d -2d 3y -0,07 1,96 0,94 Eonia -0,3570-0,0020 5y 0,22 2,12 1,11 Euribor-1-0,3710 0,0000 Libor-1 1,2461 0, y 0,88 2,38 1,39 Euribor-3-0,3290 0,0000 Libor-3 1,4129 0,0000 Euribor-6-0,2750 0,0010 Libor-6 1,6146 0,0022 Currencies Close -1d Currencies Close -1d Commodities Close -1d EUR/USD 1,1665 0,0023 EUR/JPY 132,39 0,29 CRB 191,65-0,22 USD/JPY 113,53 0,06 EUR/GBP 0,8841-0,0014 Gold 1274,20-13,30 GBP/USD 1,3196 0,0051 EUR/CHF 1,1618 0,0047 Brent 63,52-0,41 AUD/USD 0,7661-0,0019 EUR/SEK 9,7433-0,0101 USD/CAD 1,2682-0,0001 EUR/NOK 9,4877 0,0209 P. 6

7 Contacts Brussels Research (KBC) Global Sales Force Piet Lammens Brussels Peter Wuyts Corporate Desk Mathias van der Jeugt Institutional Desk Dublin Research France Austin Hughes London Shawn Britton Singapore 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 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. P. 7