Currencies: ECB and Comey hearing to decide on nest USD move?

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1 Rates: Downward potential Bunds on ECB meeting? Bunds gained significant ground in the run-up to today s ECB meeting, suggesting that the market reaction could be asymmetric with lower Bunds (higher rates) both in case of a hawkish surprise (our scenario; change forward guidance and risk assessment eco outlook) and in case of a more neutral ECB (via buy-the-rumour, sell-the-fact). Currencies: ECB and Comey hearing to decide on nest USD move? Today, the ECB may be slightly more hawkish in its policy assessment, but it likely won t be enough to trigger sustained EUR/USD gains beyond the /66 resistance. The outcome of the UK elections won t be available today, but market anticipation on a May victory might be slightly supportive for sterling. Calendar Headlines S&P Eurostoxx 50 Nikkei Oil US equities recovered from a mid-session dip and eventually closed with small gains. Overnight, most Asian stock markets show similar gains. Local eco data didn t impact trading. President Trump asked Comey for loyalty over the Russia thing. Comey said Trump had also urged him to drop any investigation related to former national security adviser Flynn having lied about talks with the Russian ambassador. China reported stronger-than-anticipated exports and imports for May despite falling commodity prices, suggesting the economy is holding up better than expected despite rising lending rates and a cooling property market. Oil prices were hit hard yesterday after data showed an unexpected rise in US petroleum stocks and a sharp turn lower for petrol and diesel use. Brent crude fell from $50/barrel to around $48/barrel, testing important support. Japan s economy grew at slower pace than initially estimated in Q1 (0.3% Q/Q), as an inventory rundown and weaker household spending took some of the shine off Japan s longest economic expansion since Turkey threw its weight behind its ally Qatar, fast-tracking plans to deploy extra Turkish troops to the emirate as Arab rivals cut transport links and supply lines. Today s eco calendar is mainly filled with events: the ECB meeting, UK elections and the Comey hearing. Eco data include US weekly jobless claims and final EMU GDP data. Ireland taps the bond market. CRB Gold 2 yr US 10 yr US 2yr DE 10 yr DE EUR/USD USD/JPY EUR/GBP P. 1

2 Rates Counting down to big events Core bonds lose modest ground ahead of ECB/Comey Key US yield support holds US yield -1d 2 1,31 0,00 5 1,75 0, ,18 0, ,84 0,02 DE yield -1d 2-0,72 0,01 5-0,45 0, ,27 0, ,13 0,01 Global core bonds traded uneventful yesterday and closed with some modest, insignificant losses. Rumours that the ECB will cut its inflation forecasts at today s policy meeting had no lasting effect. The eco calendar was empty on both sides of the Atlantic, but the OECD updated its global economic outlook. Especially the downward revision to US GDP growth in 2017 (2.1% from 2.3% in November) and 2018 (2.4% from 3%) caught the eye. European equity indices closed marginally lower, while US ones ended slightly higher. Oil fell sharply on inventory statistics, but the bond reaction was once more temporary. In a daily perspective, changes on the German yield curve ranged between +0.6 bps (2-yr) and +1.8 bps (5-yr). The US yield curve shifted 1.4 bps (2-yr) to 2.8 bps (10-yr) higher, steepening the curve. From a technical point of view, key support levels in the US 5-yr (1.69%), 10-yr (2.16%) and 30-yr (2.82%) yield remained under attack, but a sustained break lower didn t occur On intra-emu bond markets, 10-yr yield spread changes versus Germany were nearly flat with Italy underperforming (+3 bps) on fresh supply (new 30yr benchmark). ECB meeting to absorb all attention The ECB will keep its APP programme and rates unchanged. Will they revise the risk assessment of the growth outlook & the forward guidance and will the staff forecasts for inflation be lowered? The answer on these questions will determine the market reaction. As the market expects very little changes in these factors, the ECB may be a bit more hawkish than expected. On the risk assessment, we think the ECB has little choice, but to admit that risks are now balanced after ongoing strength of the economy. That looks to be discounted in markets. On the forward guidance, Mario Draghi recently downplayed the eventuality of important changes, but we don t exclude that the forward guidance will become more neutral. The reference to still lower rates and higher amount of purchases could be skipped. The sequence of the exit: first ending APP, than hiking rates, should be kept, but the guidance that rates will be kept at current of lower levels well past the end of the APP looks ready to become more data dependent (as ECB Praet suggested). So, the word well past might be cut too. The inflation outlook could also be interesting. Rumours suggested that headline inflation would be lowered to 1.5% for 2018/2019, but core inflation would be confirmed (1.8% for 2019). We finally expect the ECB to gain time by tasking the Committees to examine the outlook for the APP programme and report at the September meeting when the ECB should communicate its policy on purchases beyond T-Note future (black) and S&P (orange) (intraday): T-Note closes with modest losses in uneventful meeting. Eonia 1M/ 2yr forward dropped about 15 bps in past two weeks and now discounts about 20 bps rate hike by June 2019 P. 2

3 Ireland concludes scheduled supply R2 166,40-1d R1 165,93 BUND 164,8-0,02 S1 161,68 S2 160,17 The Irish Treasury taps the on the run 10-yr IGB (1% May2026) and 30-yr IGB (2% Feb2045) for a combined 1B. Bonds on offer traded stable in ASW spread terms going into the auction and sit normal on the Irish curve. We expect a plain vanilla auction. Key ECB meeting: downward potential Bunds? Overnight, Asian stock markets trade slightly positive, digesting mixed local eco data (see headlines). Prepared remarks from former FBI-director Comey confirm that President Trump tried to influence him on several issues. They don t reveal much info and suggest that today s hearing could be a nonevent. The US Note future trades with a minor downward bias, but we expect a neutral opening for the Bund. The calendar contains a very important ECB meeting today. We expect the central bank to change its forward guidance (drop reference to potentially lower rates) and remove downside risks to its growth scenario. This would cause a hawkish market reaction (Bunds lower) as latest inflation readings and ECB talk (including Draghi) caused investors to scale down bets with regard to first steps in the policy normalization process. Bunds gained significant ground in the run-up to the meeting, suggesting that the market reaction could be asymmetric with lower Bunds (higher rates) both in case of a hawkish surprise (our scenario) and in case of a more neutral ECB (via buy-the-rumour, sell-the-fact). From a technical point of view, there s no real support in the new Bund contract ahead of UK general elections could influence trading via risk sentiment, but results are only expected tomorrow morning. US yields intensively tested key support on the US 5-yr (1.69%), 10-yr (2.17%) and 30-yr (2.82%) tenors earlier this week, but show tentative signs of bottoming out in the run-up to next week s Fed meeting.. German Bund (September contract!!): ECB normalization expectations lowered to a minimum. Room for profit taking? US Note future (September contract!!!): minor new highs as US 10-yr yield tests key support (2.16%). Break currently avoided. P. 3

4 Currencies ECB and Comey to decide on next USD move? Dollar Soft Draghi rebounds comments slightly ahead cap of super EUR/USD Thursday topside Dollar stays off the recent lows, but no sustained further gains ahead of key events scheduled later today. R2 1,1428-1d R1 1,13 EUR/USD 1,1268 0,0004 S1 1,0839 S2 1,0778 ECB policy statement and Comey hearing to decide on next directional USD move. Yesterday, the dollar first traded in the defensive as investors pondered the impact of today s key events, including the Comey testimony, the ECB policy statement and the UK elections. Risk sentiment improved later on and avoided more USD losses. Later in the session, rumours on a softer ECB inflation forecast triggered a modest setback of the euro. EUR/USD finished the session at USD/JPY closed at , supported by a good close on US equity markets. Overnight, Asian equities are trading with modest gains. Eco data are mixed. Japan Q1 GDP was revised sharply lower confirming that the BOJ will continue its accommodating policy. The impact on the yen is neglible. USD/JPY tested the 110 barrier this morning, but returned to area as the equity momentum eases. The China May trade surplus narrowed. Exports (15.5% Y/Y) and even more imports (14.8% Y/Y vs 8.3% Y/Y ) were higher than expected. The import data suggest ongoing good growth in Q2. This is often a positive for the Aussie dollar, but not today. AUD/USD stabilizes in the area after this week s rebound. EUR/USD also trades little changed in the area. Today, the focus will be the ECB press conference and the Comey hearing. The first indications of the outcome of the UK election will only come after the market closure. For an in depth analysis of the ECB see the fixed income part of this report. Interest rate markets are positioned for limited/no change in the ECB s guidance. So, any indication of a step direction exit non-conventional policy might push EMU yields higher. At the same time, the euro had a good run of late (reduced political risk & USD softness). So, the positioning in the FX market might be different from that in the interest rate markets. In our working hypothesis, the ECB will move to balanced eco risks. The forward guidance might be slightly less easy. The big work might be postponed to September. Nuances will decide on the EUR/USD reaction, but we tend to believe that the ECB has to be quite hawkish to inspire a next EUR/USD up-leg. The Comey testimony is a wildcard, but we assume that it won t bring really big trouble for Trump. Such a scenario might be modestly USD supportive. Several other combinations of events are possible, but for now we assume that it will be difficult for EUR/USD to move sustainably above /66. EUR/USD near key resistance ahead of key events USD/JPY drops below the 110 level. The range bottom is i th d P. 4

5 Technical picture The USD/JPY rally ran into resistance in early May. A mini sell-off pushed the pair below the previous top (112.20), making the short-term picture negative. The post-payrolls USD and the break below 110 made the picture further negative. Return action lower in the / range remains possible. Earlier in May, EUR/USD failed to break below the / support (gap). Poor US data and US political upheaval propelled EUR/USD north of the range top. The pair initially reached a short-term correction top at There was a minor break after Friday s disappointing US payrolls, but for now there are no sustained follow-through gains. The Trump top/correction top at / is next resistance. USD sentiment will have to be quite negative to clear this hurdle short-term. A return below would indicate that the upside momentum has eased. R2 0,8854-1d R1 0,8787 EUR/GBP 0,8691-0,0033 S1 0,8383 S2 0,8314 Sterling regains slightly ground ahead of the election Sterling was in consolidation modus yesterday. Trading in the major sterling cross rates was confined to relatively tight ranges given the magnitude of the upcoming event risk. Cable held a tight range around, but mostly slightly north of 1.29 suggesting a tentative sterling positive momentum. The same applies to EUR/GBP. The pair dropped below the 0.87 mark. This was primarily a euro correction on the ECB s inflation rumours, but in a second degree also because of a better bid for sterling. EUR/GBP closed the session at Cable finished the day at Today, sterling traders will look out for the outcome of the Parliamentary elections. The first indications on the outcome will only be available after the close of the markets. If markets, for one reason or another, would anticipate for a scenario of May reaching a (slightly ) bigger majority, it should be slightly supportive for sterling. In this context, a break of EUR/GBP beyond the recent top might become difficult. First resistance comes in the /88 area. EUR/GBP is a first minor support. A sustained return below the EUR/GBP 0.86 would suggest that the worst is over for sterling. EUR/GBP: most of the bad news for sterling discounted? GBP/USD: 1.30 again within reach P. 5

6 Calendar Thursday, 8 June Consensus Previous US 14:30 Initial Jobless Claims 240K 248k 14:30 Continuing Claims 1920K 1915k Japan 01:50 GDP SA QoQ / Annualized SA QoQ (1Q F) A 0.3%/1% 0.5%/2.2% 01:50 BoP Current Account Adjusted (Apr) A b b 01:50 Bank Lending Incl Trusts YoY / Ex-Trusts (May) A 3.2%-/3.3% 3.0%/3.0% 07:00 Eco Watchers Survey Current SA (May) :00 Eco Watchers Survey Outlook SA (May) China Trade Balance CNY (May) A b b Imports YoY CNY (May) A 22.1% 18.6% Exports YoY CNY (May) A 15.5% 14.3% Trade Balance (May) A $40.81b $38.03b CH - 08JUN-18JUN Foreign Direct Investment YoY CNY (May) % UK 01:01 RICS House Price Balance (May) A 17% 22% EMU 11:00 Gross Fix Cap QoQ (1Q) 0.8% 0.6% 11:00 Govt Expend QoQ (1Q) 0.4% 0.4% 11:00 Household Cons QoQ (1Q) 0.4% 0.4% 11:00 GDP SA QoQ / YoY (1Q F) 0.5%/1.7% 0.5%/1.7% 13:45 ECB Main Refinancing Rate 0.000% 0.000% 13:45 ECB Marginal Lending Facility 0.250% 0.250% 13:45 ECB Deposit Facility Rate % % 13:45 ECB Asset Purchase Target (Jun) EU60b EU60b Germany 08:00 Industrial Production SA MoM / WDA YoY (Apr) 0.5%/2.1% -0.4%/1.9% Norway 08:00 Industrial Production MoM / WDA YoY (Apr) --/ %/1.0% Spain 09:00 INE House Price Index QoQ / YoY (1Q) --/-- 0.4%/4.5% Events 11:30 Ireland to Sell Bonds (1% 2026 & 2% 2045) 14:30 ECB President Mario Draghi Holds Press Conference P. 6

7 10-year td -1d 2-year td -1d Stocks td -1d US 2,18 0,02 US 1,31 0,00 DOW 21173,69 37,46 DE 0,27 0,02 DE -0,72 0,01 NASDAQ 6297,38 22,32 BE 0,63 0,02 BE -0,58 0,01 NIKKEI 19909,26-75,36 UK 1,00 0,02 UK 0,11 0,02 DAX 12672,49-17,63 JP 0,07 0,02 JP -0,09 0,02 DJ euro ,84-5,34 IRS EUR USD GBP EUR -1d -2d USD td -1d 3y -0,08 1,65 0,58 Eonia -0,3620-0,0040 5y 0,16 1,83 0,74 Euribor-1-0,3710 0,0000 Libor-1 1,0887 0, y 0,76 2,14 1,09 Euribor-3-0,3290 0,0000 Libor-3 1,2190-0,0006 Euribor-6-0,2590-0,0020 Libor-6 1,4171-0,0011 Currencies td -1d Currencies td -1d Commodities td -1d EUR/USD 1,1268 0,0004 EUR/JPY 123,38 0,04 CRB 175,61-2,47 USD/JPY 109,49-0,01 EUR/GBP 0,8691-0,0033 Gold 1291,10-3,70 GBP/USD 1,2964 0,0053 EUR/CHF 1,0863 0,0011 Brent 48,51-1,46 AUD/USD 0,7552 0,0013 EUR/SEK 9,7769 0,0106 USD/CAD 1,3506 0,0048 EUR/NOK 9,539 0,0038 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