Currencies: USD gains only modestly after approval of Senate tax bill

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1 Monday, 04 December 2017 Rates: US political developments weigh on US Treasuries The US Note future loses ground this morning after the successful US Senate tax vote and the erroneous Flynn report. We expect the Bund to move back in its sideways range after the European opening. The eco calendar is empty today, but heats up later this week in the US with payrolls on Friday. Currencies: USD gains only modestly after approval of Senate tax bill US political headlines sent the dollar in a roller-coaster ride on Friday. This morning, markets react mostly positive to the approval of the US tax bill in the Senate. The approval could help to put a ST floor for the dollar. However, ongoing political noise might prevent a sustained USD rebound ahead of next week s Fed meeting. Calendar Headlines US stock markets closed 0.2% to 0.4% lower on Friday, nervously awaiting the outcome of the US Senate vote on tax reforms. Asian markets show a very mixed picture overnight, with daily changes ranging between -0.5% and +0.5%. US Senate Republicans narrowly approved the most sweeping rewrite of the US tax code in three decades, slashing the corporate tax rate and providing temporary tax-rate cuts for most Americans. Congressional GOP leaders hope to pass a two-week spending bill before the federal government runs out of money by Saturday, but resistance among conservative Republicans and some Democrats could derail their plans with little time to spare. Major central banks must ensure their efforts to gradually lift interest rates prove effective enough to cool some already "frothy" financial markets, the Bank for International Settlements (BIS) said in its latest report. 2yr DE 10 yr DE Britain and the EU are on the brink of sealing a Brexit divorce deal on Monday, as Theresa May travels to Brussels with potential solutions in sight for the two biggest political obstacles to opening trade talks. EUR/USD USD/JPY EUR/GBP A coalition of movements pushing for greater autonomy for Corsica looks likely to dominate a newly constituted assembly on the French Mediterranean island of Corsica, returns from the first round of voting show. Today s eco calendar is uneventful with EMU PPI data, the UK construction PMI and US factory orders. S&P Eurostoxx 50 Nikkei Oil CRB Gold 2 yr US 10 yr US P. 1

2 Rates Monday, 04 December 2017 US political uncertainty boosted core bonds on Friday Core bonds profit from US political uncertainty German 10-yr yield tests 0.3% support Global core bonds profited from safe haven flows on Friday in a risk-off environment. Uncertainty about the looming vote on tax reforms in the US Senate, but especially an ABC report stating that national security adviser Flynn prepared to testify that President Trump directed him to make contact with Russians triggered core bond gains. The (final) EMU manufacturing PMI and US manufacturing ISM both printed very strong, but didn t impact trading. US Senate eventually approved the tax plan after US close while the Flynn report was withdrawn yesterday as erroneous, weighing on US Treasuries this morning. US yield -1d 2 1,77-0,01 5 2,16-0, ,36-0, ,80-0,07 DE yield -1d 2-0,71-0,02 5-0,35-0, ,31-0, ,12-0,07 In a daily perspective, the German yield curve bull flattened with yields 2.1 bps (2-yr) to 7.3 bps (30-yr) lower. Technically, the German 10-yr yield tested 0.3% support, which is final support before this year s 0.2% sideways range bottom (see graph). The US yield curve shifted in similar fashion with yield changes ranging between -1.1 bp (2-yr) and -6.5 bps (30-yr). On intra-emu bond markets, 10-yr yield spread changes versus Germany narrowed up to 3 bps (Belgium) with peripheral bonds underperforming (Greece +6 bps; Portugal +7 bps; Spain & Italy +3 bps). Interesting US eco calendar this week Today s eco calendar isn t enticing with EMU PPI data and US factory orders. The US eco calendar becomes interesting though with the non-manufacturing ISM (tomorrow), ADP labour market report (Wednesday) and payrolls (Friday). The US economy and labour market are expected to show more signs of strength. The EMU eco calendar is far less interesting with only retail sales tomorrow. EMU bond supply is limited to Germany (Wednesday) and Spain/France (Thursday). Speeches by ECB board governor Mersch (Wednesday) and Draghi (Thursday) might draw some attention. Fed members enter their blackout period ahead of the December 13 policy meeting. The WSJ reports that the Richmond Fed is rumoured to have chosen Thomas Barkin, CRO at McKinsey, to fill the vacant seat as regional president. Af German Bund (black) & Dax (orange) intraday: Bunds profit from risk aversion German 10-yr yield tests 0.3% support, final technical hurdle before returning to lower bound sideways range (0.2%) P. 2

3 US political developments weigh on US Treasuries R2 165,18-1d R1 163,92 BUND 163,29 1,08 S1 161,91 S2 160,24 Asian stock markets show a mixed picture overnight with regional differences ranging between -0.5% and +0.5%. The US Note future loses ground after the successful US Senate tax vote and the erroneous Flynn report. Brent crude remains near the highs around $63.5/barrel. We expect a lower opening for the Bund, returning back in the sideways range. Today s eco calendar is uneventful. Developments on the US political scene are positive for risk sentiment and negative for core bonds. We add some caution though as the overnight move in US Treasuries remains thus far limited to a one-off repositioning in the opening. The US eco calendar turns more interesting later this week. Especially Friday s payrolls have market moving potential. Investors are slowly preparing for the final big event of the year, next week s FOMC meeting with an updated dot plot. We expect the Fed to stick to its 3 rate hike projections next year. Technically, US Treasuries will probably trade in the to range going forward (March 2018 contract!). This corresponds with a 2.3%- 2.47% band in yield terms. The German Bund set a new contract high, but this needs to be confirmed by a drop of the German 10-yr yield below 0.3%. We don t anticipate such move and would even suggest putting short positions around current levels. German Bund: New contract high, but break needs to be confirmed with move of German 10y yield below 0.3%. US Note future (March contract!): sideways ahead of key Fed meeting next week. How will the 2018 dot plot look like?! P. 3

4 Currencies Dollar cautiously higher on Tax bill approval Dollar faced conflicting drivers on Friday resulting in some sharp intraday swings In the end changes in the major USD cross rates were modest Asian equities traded mixed after the Senate tax bill approval USD gains remains modest, too R2 1,2225-1d R1 1,2092 EUR/USD 1,1896-0,0008 S1 1,1554 S2 1,1331 Eco calendar is thin today Focus remains on US politics Later this week, the data might be USD constructive, but a big directional move is unlikely before the Fed The dollar initially held up well on Friday even as sentiment in Europe was outright risk-off. The dollar rebounded further early in US dealings, but fell off a cliff on headlines that Michael Flynn admitted to have lied to the FBI on contacts with Russia, potentially resulting in further trouble for the US president. The decline was short-lived as the debate on the Tax bill in the US Senate made progress. USD/JPY closed the session at (from ). EUR/USD finished the session at (from on Thursday). Asian equity markets trade mixed this morning after the approval of the Tax bill in the US Senate. Investors remain cautious as the House of Representatives and the Senate still have to the make a reconciliation on their two proposals. US yields are modestly higher and so is the dollar. USD/JPY profits most and trades in the high 112 area. Japanese equities underperform despite the rise of USD/JPY. EUR/USD trades in the area, within the range that reigned for most of last week. Ongoing noise on the Russia investigation against aides of President Trump might prevent a bigger positive reaction to the Senate Tax bill. The eco calendar is thin today. EMU PPI is no market mover. US factory orders will be published, but the cyclical component of the report (durable orders) is already available. Any FX reaction should only be of intraday significance, at best. The reaction of global markets to the US tax bill will be an important driver for USD-trading. At the same time, there will remain plenty of political noise from the US (fall-out from the investigation on contacts of Trump s aides/campaign team with Russia; solution for the debt ceiling). The US calendar is interesting later this week with the non-manufacturing ISM, ADP labour market report and payrolls. We expect the US eco data to confirm the positive drive in the economy. The dollar showed a mixed picture last week, rebounding against the yen but holding relatively soft against the euro. Even after the approval of the Tax bill, this pattern apparently continues. Markets are still looking forward for the Fed s rate hike intentions in This week s US eco data might be USDsupportive, but we don t expect a really big directional move ahead of next week s Fed policy decision/statement. EUR/USD: rally aborted, but no clear correction signal USD/JPY: return higher in the established range P. 4

5 EUR/USD might continue last week consolidation pattern. Unless in case of high profile negative news from the US (or negative risk sentiment) we see no reason for EUR/USD to rise beyond the /1.20 area. USD/JPY s momentum looks a bit more constructive, but the rebound might slow if it isn t supported by developments on other markets. From a technical point of view: EUR/USD set a post-ecb low mid-november, but dollar momentum wasn t strong enough. EUR/USD regained the MT correction top, opening the way for a full retracement to the top. A return below would signal that the rebound in EUR/USD is aborted. For now, there is no clear technical signal. The USD/JPY momentum deteriorated early November. USD/JPY dropped below the neckline, but there was no aggressive follow-through selling. Last week, the pair even succeeded a nice rebound, calling off the downside alert. The pair again hovers in the / consolidation range. We amend our ST bias on the pair from negative to neutral. Brussels meeting to set tone for Sterling trading R2 0,9307-1d R1 0,9033 EUR/GBP 0,8829 0,0027 S1 0,8743 S2 0,8657 Sterling trading showed no clear trend Friday. The issue of the Irish border proves to be a hard nut to crack to make progress in the Brexit negotiations. Sterling lost slightly ground against the euro and the dollar. EUR/GBP hovered mostly in the lower half of the 0.88 big figure and finished the day at Cable traded with a negative bias even as dollar volatility was also visible in this cross rate. The pair closed the session at The UK November manufacturing PMI printed at a very strong 58.2 (from 56.6, 56.5 was expected), but the report had no lasting impact on sterling trading. The UK construction PMI will be published today. However, the focus of sterling traders will be on Brussels as UK PM May meets with EU s Juncker. The EU initially set this meeting as the deadline to meet the UK propositions on the separation. However, for now it looks that a final agreement is still too far off. Signals on the progress this weekend were mixed. If there remain substantial obstacles today, sterling might cede some ground short-term. 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. EUR/GBP trades in a / consolidation range. Brexit headlines cause day-to-day gyrations. We changed our ST bias on EUR/GBP from positive to neutral mid-november. The /33 area might be tough to break short-term. In case of more positive news on Brexit, return action to the (or below) level is possible ST. EUR/GBP: decline slows as investors want positive news on Brexit GBP/USD: rally slows P. 5

6 Calendar Monday, 4 December Consensus Previous US 16:00 Factory Orders (Oct) -0.4% 1.4% 16:00 Factory Orders Ex Trans (Oct) % 16:00 Durable Goods Orders (Oct F) -1.0% -1.2% Japan 00:50 Monetary Base YoY (Nov) A: 13.2% 14.5% 06:00 Consumer Confidence Index (Nov) A: UK 10:30 Markit/CIPS UK Construction PMI (Nov) EMU 10:30 Sentix Investor Confidence (Dec) :00 PPI MoM / YoY (Oct) 0.3%/2.6% 0.6%/2.9% Spain 09:00 Unemployment MoM Net ('000s) (Nov) year Close -1d 2-year td -1d Stocks Close -1d US 2,36-0,05 US 1,77-0,01 DOW 24231,59-40,76 DE 0,31-0,06 DE -0,71-0,02 NASDAQ 6847,586-26,39 BE 0,48-0,09 BE -0,60-0,02 NIKKEI 22707,16-111,87 UK 1,23-0,10 UK 0,48-0,04 DAX 12861,49-162,49 JP 0,04 0,01 JP -0,15 0,00 DJ euro ,55-42,38 IRS EUR USD GBP EUR -1d -2d USD -1d -2d 3y -0,07 2,06 0,94 Eonia -0,2910-0,0500 5y 0,20 2,17 1,09 Euribor-1-0,3690 0,0020 Libor-1 1,3794 0, y 0,79 2,36 1,32 Euribor-3-0,3260 0,0030 Libor-3 1,4946 0,0072 Euribor-6-0,2710 0,0010 Libor-6 1,6743 0,0062 Currencies Close -1d Currencies Close -1d Commodities Close -1d EUR/USD 1,1896-0,0008 EUR/JPY 133,46-0,50 CRB 190,69 1,51 USD/JPY 112,17-0,37 EUR/GBP 0,8829 0,0027 Gold 1282,30 5,60 GBP/USD 1,3477-0,0048 EUR/CHF 1,1614-0,0095 Brent 63,73 1,10 AUD/USD 0,7613 0,0047 EUR/SEK 9,9364-0,0356 USD/CAD 1,2685-0,0212 EUR/NOK 9,854-0,0490 P. 6

7 Contacts Monday, 04 December 2017 Brussels Research (KBC) Global Sales Force Mathias van der Jeugt Brussels Peter Wuyts Corporate Desk 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