Headlines. Friday, 30 September Rates: Risk aversion at the start of trading on new DB concerns?

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1 Rates: Risk aversion at the start of trading on new DB concerns? DB fell prey to another selling wave in US dealings yesterday, suggesting risk aversion at the start of European trading. That s positive for core bonds. The most important item on the eco calendar is US PCE inflation. Risks are on the upside of expectations, suggesting underperformance of US Treasuries as they would sharpen hawkish FOMC members rate hike call. Currencies: Dollar shows no clear trend post-opec Yesterday, the positive impact of the OPEC decision on global markets and the dollar evaporated soon. EUR/USD and USD/JPY continue to trade in well-known territory. Today, uncertainty on Deutsche bank might put EUR/USD and USD/JPY under (most) pressure. The sterling decline took a pause of late, but the picture for the UK currency remains fragile. 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 lost 0.93% (S&P) with health care, financials and utilities underperforming. Asian equities are lower too (except for China) but losses are contained and not bigger than on WS. UK consumer confidence jumped in September, from -7 to -1, its biggest monthly rise since June 2015 and regaining the ground lost after the Brexit decision in the June referendum, according to the Gfk survey. Mexico raised interest rates for the third time this year to 4.75% from 4.25% after the peso fell to record low last Monday, which caused inflation concerns at the central bank. The People s Bank of China (PBOC) conducted its biggest weekly cash withdrawals since July amid speculation it is seeking to ease bubbles in assets including bonds and property. Deutsche Bank came under renewed serious pressures during the US session after news agencies reported that about 10 hedge funds have moved to reduce their financial exposure. The stock fell about 6.5% in US trading. The Federal Reserve might be able to help the US economy in a future downturn if it could buy stocks and corporate bonds, Fed Chair Janet Yellen said on Thursday. The Czech central bank delayed the earliest possible end of its weak-crown policy until Q and at the same time confirmed it expected to refloat the crown in mid Today s eco calendar is busy with EMU CPI and unemployment and US PCE data, Michigan consumer sentiment and Chicago PMI. P. 1

2 Rates German bonds withstand higher oil prices quite well German bonds lost modestly ground, but US Treasuries rebounded later on renewed DB worries Greece and Portugal continue to outperform US yield -1d 2 0,7263-0, ,1008-0, ,5428-0, ,2666-0,0408 DE yield -1d 2-0,6980-0, ,5940-0, ,1170 0, ,4441 0,0181 EMU HICP inflation to be slightly up Upside risks US PCE deflators & Michigan consumer sentiment. Yesterday, German bonds lost some ground, but losses were contained given Wednesday s evening oil rebound. In late US trading, US Treasuries erased losses and eked out small gains on renewed, growing, anxiety about DB (which dragged equities down). EC confidence indicators improved more than expected, while German inflation printed in line with expectations. As usual, EMU eco data passed by unnoticed. US weekly claims printed once more at historically low levels. Simultaneously with the release, hawkish Fed governors George and Lockhart reiterated their call for a short term rate hike pulling US Treasuries marginally lower. Fed Powell on the contrary was dovish in his comments. Earlier on the day, Philly Fed Harker said that he wanted to raise rates sooner rather than later. In a daily perspective, the German yield curve bear steepens with yields 0.6 bps (2-yr) to 3.3 bps (30-yr) higher. The US yield curve bull steepened with yields 2.2 bps (2-yr) to 1.4 bps (30-yr) lower. On intra-emu bond markets, Ireland (-2 bps), Portugal (-4 bps) and Greece (-5 bps) outperform. The Greek economy minister hopes the approval of an omnibus bill earlier this week paves the way for a positive bailout review around Christmas, further debt relief and the inclusion of Greek government bonds in the ECB s PSPP-programme. Interesting calendar to end the week EMU HICP inflation is expected to have risen to 0.4% Y/Y in September from 0.2% Y/Y in August, while the core CPI is expected at 0.9% Y/Y in September from 0.8% Y/Y previously. Yesterday, Spain and Belgium reported slightly below consensus inflation data, even if the Spanish reading was the 1 st positive one since German inflation was in line with expectations. We see no reasons to distance us from consensus. The EMU unemployment rate is expected to drop to 10% (from 10.1%) in September, confirming the downtrend. In the US, Personal spending and income are expected to have grown a modest 0.2% M/M each in August. Earlier, retail sales were very weak in August (decline) and July. So, a modest increase (in services) is likely. The PCE and core PCE deflators are expected to have increased by 0.2% M/M each to be up respectively 0.9% Y/Y and 1.7% Y/Y, from 0.8% Y/Y and 1.6% Y/Y in July. We see some upside risks to the deflators, which might not go unnoticed. The final September Michigan consumer sentiment is expected little changed at 90. Given a strong Conference Board reading, we see risks to the upside of expectations. T-Note future (black) and S&P future (orange) intraday: Largely sideways trading until DB share was heavily sold DB (5-year, Xetra): Stock under pressure. Another 6.4% drop in US dealings yesterday) P. 2

3 Spanish Socialist rebel against leader Sanchez R2 166,55-1d R1 166,27 BUND 166,06-0,2300 S1 164,29 S2 163 The Spanish Socialists (PSOE) 38-member party committee is torn apart. Yesterday, 17 members resigned collectively in order to try to oust leader Sanchez who opposes joining a coalition government, but also doesn t want to abstain to solve the political deadlock. Earlier, two other members already resigned while one member passed away giving the rebels a 50% +1 majority. The coordinated move was aimed to pressure Sanchez to resign, but he said that he would stay and try to get a new mandate at an extraordinary PSOE congress next month. The leadership struggle could eventually lead to a party split. Spain has until October 31 to form a government and avoid a third general election. Recent developments suggest that uncertainty isn t over and that the sky isn t cleared yet for Spanish government bond markets. New concerns over DB, new risk aversion? Overnight, most Asian stock markets lose ground in line with WS yesterday. Japan underperforms (-1.25%) on the back of a stronger yen and disappointing Japanese eco data. Risk sentiment deteriorated on mounting concerns about DB. The US Note future trades with a small upward bias while Brent crude loses some ground. These factors suggest a somewhat higher opening for the Bund. Today s eco calendar contains EMU and US inflation data, US personal income & spending data, Chicago PMI and final figure of Michigan consumer confidence. Markets will probably keep a close eye to US inflation data. Risks are on the upside of expectations, giving hawks within the FOMC more ammunition to defend their rate hike call. Comments in the wake of the September FOMC meeting show a sharper divide between Washington and regional chiefs. Apart from the inflation data, risk sentiment (DB) and the evolution of Brent crude will guide trading. Europe still needs to react to the new concerns, which could give the Bund an intraday positive bias. Outperformance vs US Treasuries can be expected in case of higher PCE. Technically, the Bund broke above the upper bound of the post-brexit trading range ( ). If this break is confirmed by a move of the German 10-yr yield below -0.20%, it s definitely a bullish sign for the Bund. For now, the break below -0.20% didn t occur though with the German 10-yr yield at -0.14%. A test is nevertheless likely, especially if risk sentiment deteriorates again, meaning that the Bund has more upward potential in the meantime. The trading range for the US Note future is expected to be to , at least until the first week of October (ISM s/payrolls) or until Washingtonbased Fed governors change the tone of their public comments (Oct 14, Yellen speech). German Bund: Break above upper bound sideways trend channel needs to be confirmed by drop below -0.20% German 10yr yield US Note future: Downside better protected short term after dovish FOMC P. 3

4 Currencies Dollar reaction to OPEC production cut subdued Post-OPEC rally stalls soon USD-bid evaporated as Deutsche Bank came again in the spotlights On Thursday, higher core bond yields in the wake of the OPEC production cut were slightly supportive for the dollar. The US eco data were good but any positive impact was soon undone. Later in US dealings, negative headlines on Deutsche Bank reactivated the risk-off trade. USD/JPY closed the session at (compared to ). EUR/USD tried a rebound during the US morning session. However, the negative headlines on Deutsche Bank triggered an intraday reversal with EUR/USD returning to the low 1.12 area. The pair closed the session at , little changed from EUR/USD and USD/JPY show no clear trend as financial tensions are again in the spotlights R2 1,1366-1d R1 1,1327 EUR/USD 1,1219-0,0008 S1 1,1123 S2 1,1046 Overnight, uncertainty on Deutsche Bank weighs on Asian equities. Regional indices cede up to 1.5%. Chinese indices outperform. T Despite the global riskoff, there was a strange temporary rebound of USD/JPY. The pair jumped to just below yesterday s top. Order-driven, end of quarter repositioning was said to be behind the move. Even so, the move was soon reversed. The pair trades again in the area, close to the opening levels. The impact on EUR/USD remains limited, even as the focus is on Deutsche Bank and on the European financial sector. The pair is holding stable in the /20 area. EUR/USD holding tight ranges, despite rising financial stress USD/JPY: off recent low, but picture remains fragile Plenty of eco data on the agenda US PCE deflators have most potential to move the dollar. Financial tensions to take center stage Regarding today s data, EMU HICP inflation is expected to have risen to 0.4% Y/Y in September from 0.2% Y/Y in August. The core CPI is expected at 0.9% Y/Y 0.8% Y/Y previously. We see no reasons to take a different view from the consensus.. In the US, Personal spending and income are expected to have grown a modest 0.2% M/M each in August. A modest increase (in services) is likely. The PCE and core PCE deflators are expected to have increased by 0.2% M/M each to be up 0.9% Y/Y and 1.7% Y/Y, up from 0.8% Y/Y and 1.6% Y/Y in July. We see upside risks to the deflators, which might not go unnoticed. Yesterday, the market focus was on the impact of the OPEC decision. Today, financial stress in Europe (DB) will be a dominant factor. Of late, EUR/USD was little affected by data or headline news. Even so, we assume that financial stress might cause some kind of standard risk-off trade with EUR/USD, USD/JPY and EUR/JPY under (modest) pressure in a daily perspective. A the same time, the US data (PCE deflators) might be slightly USD supportive. In a risk-off context, USD/EUR might profit more than USD/JPY. P. 4

5 EUR/USD tested the support before the Fed, but the test was rejected as the Fed stayed in wait-and-see modus. The Fed decision hasn t changed the broader picture for EUR/USD. Markets look out whether the data support the case for a December rate hike. Swings in December rate hike expectations will probably be the driver for USD trading. The dollar might lose slightly further ground short-term, but as long as the market implied probability of a Fed rate hike remains at current levels, the downside of the dollar looks well protected. We prefer more range trading in the / band and a sell-on-upticks approach. USD/JPY remains in the defensive after the BOJ meeting. We stay cautious on USD/JPY long exposure. However, the 99.54/99.02 area will remain a strong support is the first main resistance. We expect the established 99.89/ range to hold, but downside risks have grown post BOJ/Fed. R2 0,8815-1d R1 0,8725 EUR/GBP 0,8654 0,0030 S1 0,8344 S2 0,8251 Sterling pause short-lived For the second consecutive day, sterling trading was order-driven. Even so, underlying sentiment remained fragile. The UK lending data were not too bad. Especially consumer credit is holding reasonable strong. Even so, the data had very little impact on sterling trading. The UK currency also didn t really profit from the higher oil price or the constructive risk sentiment. EUR/GBP initially hovered sideways in the lower half of the 0.86 big figure, but succeeded some intraday gains on a temporary rise of EUR/USD and as sentiment on risk deteriorated. End of month sterling selling maybe played a role too. The pair closed the session at (from ). Cable showed a gradual intraday downtrend. Initially it was mostly USD strength. Later GBP weakness prevailed. The pair closed the session at (from ). Overnight, the GfK consumer confidence was again stronger than expected at - 1 from -7 (-5 expected). It doesn t help sterling much as global uncertainty is weighing on the UK currency. Later today, Nationwide house prices, the final Q2 GDP and the Q2 current account will be published. We expect the data to have only a very limited impact on sterling trading, at best. Global sentiment will probably set the tone for sterling trading. Risk-off, especially if it is due to financial stability concerns, is portably a negative for sterling. So, we put the risks for sterling to stay in the defensive today. Over the previous days, we suggested that a pause in the Brexit-related decline of sterling could be on the cards. This pause might nog last really long if global sentiment would deteriorate further. Both EUR/GBP and cable came close to important technical barriers at respectively and / These levels might provide support for sterling short-term. The fear for a hard Brexit might still resurface. In this context, we don t expect any GBP rebound to go far. A sell sterling on upticks approach remains preferred. EUR/GBP: test of post-brexit top rejected, but no sustained sterling rebound. GBP/USD: consolidation, but cable still struggles not to fall further below 1.30 P. 5

6 Calendar Friday, 30 September Consensus Previous US 14:30 Personal Income (Aug) 0.2% 0.4% 14:30 Personal Spending (Aug) 0.1% 0.3% 14:30 PCE Deflator MoM / YoY (Aug) 0.2%/0.9% 0.0%/0.8% 14:30 PCE Core MoM / YoY (Aug) 0.2%/1.7% 0.1%/1.6% 15:45 Chicago Purchasing Manager (Sep) :00 U. of Mich. Sentiment (Sep F) Canada 14:30 GDP MoM / YoY (Jul) 0.3% / 1.0% 0.6%/1.1% China 03:45 Caixin China PMI Mfg (Sep) A Japan 01:30 Jobless Rate (Aug) A 3.1% 3.0% 01:30 Job-To-Applicant Ratio (Aug) A :30 Overall Household Spending YoY (Aug) A -4.6% -0.5% 01:30 Natl CPI YoY (Aug) A -0.5% -0.4% 01:30 Natl CPI Ex Fresh Food YoY (Aug) A -0.5% -0.5% 01:30 Tokyo CPI YoY (Sep) A -0.5% -0.5% 01:30 Tokyo CPI Ex-Fresh Food YoY (Sep) A -0.45% -0.4% 01:50 Industrial Production MoM / YoY (Aug P) A 1.5%/4.6% -0.4%/-4.2% 06:00 Vehicle Production YoY (Aug) A 8.8% -4.1% 07:00 Housing Starts YoY (Aug) A 2.5% 8.9% 07:00 Annualized Housing Starts (Aug) A 0.956m 1.005m 07:00 Construction Orders YoY (Aug) A 13.8% -10.9% 07:00 Natl CPI Ex Fresh Food, Energy YoY (Aug) A 0.4% 0.5% UK 01:01 GfK Consumer Confidence (Sep) A :01 Lloyds Business Barometer (Sep) A :00 Nationwide House Price Index (Sep) 0.3% / 5.0% 0.6% / 5.6% 10:30 GDP QoQ / YoY (2Q F) 0.6%/2.2% 0.6%/2.2% EMU 11:00 Unemployment Rate (Aug) 10.0% 10.1% 11:00 CPI Estimate YoY (Sep) 0.4% -- 11:00 CPI Core YoY (Sep A) 0.9% 0.8% Germany 08:00 Retail Sales MoM / YoY (Aug) -0.2%/1.8% 0.6%/-1.5% France 08:45 CPI EU Harmonized MoM / YoY (Sep P) -0.3% / 0.5% 0.3%/0.4% 08:45 Consumer Spending MoM / YoY (Aug) 0.5% / 0.9% -0.2%/0.5% Italy 10:00 Unemployment Rate (Aug P) 11.4% 11.4% 11:00 CPI EU Harmonized MoM / YoY (Sep P) 1.9%/0.1% 0.0%/-0.1% Belgium 11:00 Unemployment Rate (Aug) % Norway 10:00 Unemployment Rate (Sep) 2.9% 3.1% Events 19:00 Fed s Kaplan Speaks in Dallas P. 6

7 Contacts 10-year td - 1d 2 -year td - 1d STOCKS - 1d US 1,54-0,04 US 0,73-0,04 DOW ,45 DE -0,12 0,02 DE -0,70 0,00 NASDAQ for Exch - NQI #VALUE! BE 0,12 0,00 BE -0,63 0,00 NIKKEI ,84 UK 0,72 0,04 UK 0,04-0,05 DAX 10405, ,54 JP -0,08 0,01 JP -0,28-0,01 DJ euro ,58 USD td -1d IRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,343 0,003 3y -0,232 1,020 0,428 Euribor-1-0,37 0,00 Libor-1 USD 0,27 0,27 5y -0,172 1,120 0,486 Euribor-3-0,30 0,00 Libor-3 USD 0,38 0,38 10y 0,243 1,391 0,747 Euribor-6-0,20 0,00 Libor-6 USD 0,53 0,53 Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENT EUR/USD 1,1219-0,0008 EUR/JPY 113,36-0,71 185, ,86 USD/JPY 101,08-0,53 EUR/GBP 0,8654 0,0030-1d 2,72 1,55 0,15 GBP/USD 1,2956-0,0059 EUR/CHF 1,0832-0,0070 AUD/USD 0,7626-0,0057 EUR/SEK 9,6166 0,01 USD/CAD 1,3151 0,0072 EUR/NOK 9,0311 0,02 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