Headlines. Friday, 10 June Rates: New all-time lows. Currencies: Dollar rebounds in choppy trade. Calendar

Transcription

1 Rates: New all-time lows 10-yr yields reached new all-time lows in the UK, Germany and Japan. Core bond sentiment remains positive, but we re entering overbought conditions. Today s eco calendar remains uninspiring with some ECB speeches and Michigan consumer confidence. Currencies: Dollar rebounds in choppy trade Yesterday, trading in the major currency cross rates was driven by conflicting, diffuse factors. In the end, the dollar rebounded against the euro and prevented further losses against the yen. Today more technical trading might be in store as the eco calendar is thin and as investors ponder the impact of several upcoming event risks. 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 ended slightly lower yesterday as the stronger dollar and higher oil prices weighed. The S&P (-0.17%) dropped for the first time in four sessions. This morning, most Asian shares trade lower too in the absence of Chinese investors. Japanese yields dropped to new lows this morning with the 10yr JGB yield at record low levels, just above -0.15% and the 15yr yield turning negative for the first time ever. Rating agency Fitch warned this morning that the profitability of Japanese banks is pressured by multiple headwinds like the central bank s negative rate policy, increased foreign-currency funding costs and the lowgrowth operating environment. Crude oil prices ended yesterday their 3-day uptrend, with the Brent falling below $52/barrel, as the stronger US dollar weighed. EIA data showed that inventories declined further and demand for crude rose at the start of the summer driving season. After months of wrangling, the US House approved yesterday legislation to stem Puerto Rico s escalating debt crisis, establishing a process to handle the largest municipal-debt workout in US history. European policymakers are postponing new standards for banks to set aside cash as a cushion against the risk of certain swap trades going bad, a spokeswoman said, as they won t meet the September deadline for completing collateral standards on swaps that aren t routed through clearinghouses. Today, the eco calendar contains the French and Italian production data and US University of Michigan consumer confidence. ECB s Constancio, Weidmann and Lane speak at the Bundesbank s Spring Conference. P. 1

2 Rates Core bonds advance in technical-inspired trading New low for German, UK and Japanese 10-yr yields Curves bull flatten Peripheral spreads stable US yield -1d 2 0,771 0, ,2123 0, ,6782-0, ,4799-0,0111 Yesterday, core bonds remained well bid, but US Treasuries attempt to break key yield support failed, at least for the 5s and 10s. The 30-yr US yield closed slightly below 2.50% key support, but the test is ongoing. The 30-yr US bond auction went well. We also mention new lows for the UK 10-yr Gilt yield (1.22%; helped by Brexit fears?) and a new all-time low (at %) for the 10- yr Japanese yield. German bonds did well too, as also the 10-yr yield set a new all-time yield low at 2.3 bps, but they couldn t hold on to their best levels of the day. There was no headline news nor eco data behind the strong performance of the core bonds, but weaker European equities (less so in the US) and a correction in oil and many other commodities were bond-positive. In a daily perspective, the US yield curve flattened with yield changes between -0.8 (2-yr) and -2.1 bps (30-yr). The German yield curve bull flattened too with yields up to 5.3 bps lower (30-yr). On intra-emu bond markets, 10-yr peripheral yield spreads versus Germany barely budged. One more session with an unattractive calendar Upside risks Michigan consumer confidence DE yield -1d 2-0,5350 0, ,4140 0, ,0330-0, ,6268-0,0441 The eco calendar contains only some national production data in the euro area and the first estimate of US University of Michigan consumer confidence for June. Following better than expected German production data, we look out whether also French and Italian production rebounds in April, starting the second quarter on a strong note. In the US, University of Michigan consumer confidence showed a strong rebound in May, although the final reading reversed part of the initial uptick. For June, the consensus is looking for a limited drop, from 94.7 to We believe however that the risks remain for an upward surprise, as stocks markets are again close to the highs and also the weekly Bloomberg indicator improved recently. US-Ger German Bund (black) & Brent oil (orange): Relationship Bund and oil quite loose. Japanese 10-yr yield drops further into negativre territory. ECB governors speak in Frankfurt ECB Weidmann, Constancio and Lane are scheduled to speak at the Bundesbank conference on Monetary, Financial and Fiscal stability. This is an interesting theme discussed at an interesting place (Bundesbank). So we will be closely listening to their views. Recently ECB Smets and Nowotny suggested that the ECB policy is working and that no new measures will be needed. Markets ignored these comments. P. 2

3 US- However, if more governors start talking in that sense markets will start speculating on the end of QE in March 2017 and reduce chances of a prolongation of the programme (or the tapering). Probably it is still too early for such discussions which may more likely start in earnest after the Summer when inflation should have started to move higher. R2 166,63-1d R1 164,81 BUND 164,71 0,1600 S1 163,06 S2 161,46 US Treasury ends refinancing operation The US Treasury ended its mid-month refinancing operation with a strong $12B 30-yr Bond auction. The auction stopped easily through the 1:00 PM bid side with a good auction bid cover (2.42). Bidding details showed that indirect bidders once again led the way. Especially the size of the direct bid was small. The auction followed a tepid 3-yr Note and a robust 10-yr Note auction earlier this week. More of the same? Overnight, Asian equity markets lose slightly ground with Japan and Australia underperforming. The oil price and US Note future are barely changed, suggesting a neutral opening for the Bund. News flow is thin. Today s eco calendar remains uninspiring with only Michigan consumer confidence and some ECB speeches (see above). The former are second tier, the latter normally won t give new insights one week after the previous ECB meeting. We expect technical and sentiment-driven trading. The German 10-yr yield reached another minor new all-time low yesterday (0.023%). From current levels, it s only a small step to test the 0% boundary, even though we re no fan of Bunds at such lofty levels. This week s price action suggests that the upside in core bonds isn t exhausted yet, though we re entering overbought conditions. The US Note future tests the upper bound of the sideways range ( to ) following the payrolls miss. A June rate hike is now off the table, but we think it s probably only delayed to September. We think it is too early to start selling US Treasuries and are in no hurry to do so. This will change if US eco data print again stronger or Fed officials signal enhanced chances of such a move. It won t happen today though. German Bund (Sept. contract!!): New high. German 10-yr yield sets record low. Closing in on 0% US Note future (September contract!!): June rate hike bets dashed after horrible June payrolls & Yellen speech P. 3

4 Currencies USD rebounds in choppy trading EUR/USD reverses uptrend. Dollar decline also slows in other cross rates R2 1,1616-1d R1 1,1447 EUR/USD 1,1299-0,0098 S1 1,1243 S2 1,1058 Today, the eco calendar is again thin Is the dollar ready for a further rebound? On Thursday, trading in the major US cross rates was technical, sometimes even erratic in nature. The overall decline of the dollar halted. Cross currency spill-over effects triggered a repositioning in several individual cross rates. The decline of USD/JPY pushed EUR/JPY below the 2016 low at This break caused also a downside reversal in EUR/USD. EUR/USD closed the session at (from ). USD/JPY regained part of the earlier losses later the session as US equities performed rather well. The pair ended the day at (from on Wednesday). So, in the end USD resilience was the name of the game rather than anything else. Overnight, Asian equities trade again in negative territory even as the dollar is in better shape. Japanese equities underperform as USD/JPY struggles to stay above the 107 big figure. Mainland China markets are still closed. The rebound of the dollar also weighs on the commodity complex. AUD/USD is drifting back lower in the 0.74 big figure. Yesterday, the decline of EUR/USD was at least partially driven by the sell-off in EUR/JPY. This morning, it is more outright USD strength that is pushing EUR/USD below the 1.13 barrier. The eco calendar remains quite thin today with only some national production data in the euro area and the first estimate of US University of Michigan consumer confidence for June. ECB s Weidmann, Constancio and Lane are scheduled to speak. The University of Michigan consumer confidence showed a strong rebound in May, although the final reading reversed part of the initial uptick. For June, the consensus is looking for a limited drop, from 94.7 to We believe however that the risks remain for an upward surprise as stocks markets are again close to the highs and also the weekly Bloomberg indicator improved recently. A positive US consumer confidence might be slightly supportive for the dollar. However, we think that USD trading will still be driven by technical consideration and global market developments. Yesterday, the it was not easy to explain the downside reversal in EUR/USD (see higher). So, the question is which theme will prevail today. we stay neutral on EUR/USD, as couldn t identify the driver behind yesterday s correction. Or is Brexit uncertainty gradually becoming a negative factor for EUR/USD, too? For USD/JPY, we maintain the view that the upside will be difficult as there is still plenty of event risk. EUR/USD: declines of the recent high in technical trade USD/JPY: struggles to prevent further losses P. 4

5 Technically, the dollar rebounded in May on more hawkish Fed comments/minutes that opened the door for a possible June rate hike. Our basic scenario was (and still is) that the US economy is strong enough to allow the Fed to implement two rate hikes this year. However Friday s payrolls postponed a rate hike and triggered a repositioning lower of the dollar. We expect some consolidation in EUR/USD, as markets take time to assess the timing of the next Fed rate hike. Brexit is a wildcard for EUR/USD trading. A global USD rally blocked the downside of USD/JPY early May. The pair started a steady rebound. The high 111 area was a strong resistance, but a real test didn t occur. The pair was already off the recent highs before the payrolls and the decline accelerated after the release. With the Fed rate hike probability declining and global sentiment weakening, any rebound of USD/JPY should be short-lived. R2 0,8117-1d R1 0,7947 EUR/GBP 0,7818-0,0035 S1 0,772 S2 0,7526 Sterling looking for new referendum polls Yesterday, sterling trading showed also a diffuse picture. The UK currency lost moderately ground against the dollar, but rebounded against the euro. As was the case in several other cross rates, technical considerations and cross-currency spill-over effects were at work. Mid-morning, the UK trade balance data were less negative than expected. EUR/GBP declined after the publication of the report. However, the move was probably more due to the decline of EUR/USD rather than a reaction to this volatile UK data series. EUR/GBP drifted south throughout most of the day and closed the session at (from ). Cable finished the session at (from ). Today, only the UK April construction output data will be published, but it won t affect sterling trading. Investors will look out for new polls on the EU referendum and for the political debate as it develops this weekend. This week, sterling digested mixed signals. There was not clear directional trend in EUR/GBP, but rising volatility measures indicate that market stress is still high. We expect sterling to remain in the defensive as the campaign on the EUreferendum intensifies. The break above was a first indication of further deteriorating sterling sentiment. We maintain a sterling negative bias EUR/GBP: sterling holding stable as vols spike higher GBP/USD: no clear trend as USD weakness and sterling weakness balance each other P. 5

6 Calendar Friday, 10 June Consensus Previous US 16:00 U. of Mich. Sentiment (Jun P) :00 U. of Mich. 1 Yr Inflation (Jun P) % 16:00 U. of Mich Yr Inflation (Jun P) % 20:00 Monthly Budget Statement (May) -$56b -- Canada 14:30 Net Change in Employment (May) 1.8k -2.1k 14:30 Unemployment Rate (May) 7.2% 7.1% Japan 01:50 PPI MoM YoY (May)A A0.2%/-4.2% -0.3%/-4.2% 06:30 Tertiary Industry Index MoM (Apr) A 1.4% -0.7% UK 10:30 Construction Output SA MoM YoY (Apr) 1.4%/-4.8% -3.6%/-4.5% Germany 08:00 Wholesale Price Index MoM YoY (May) A.9%/-2.3% 0.3% / 2.7% 08:00 CPI MoM YoY (May F) A 0.3%/0.1% 0.3% / 0.1% 08:00 CPI EU Harmonized MoM YoY (May F) A 0.4%/0.0% 0.4% / 0.0% France 08:45 Industrial Production MoM YoY (Apr) 0.4%/1.0% -0.3%/-0.8% 08:45 Manufacturing Production MoM (Apr) 0.8%/0.9% -0.9%/-1.1% Italy 10:00 Industrial Production MoM YoY (Apr) 0.3%/1.0% 0.0% / 0.5% Norway 10:00 CPI MoM YoY (May) 0.1% / 3.1% 0.3% / 3.2% 10:00 CPI Underlying MoM YoY (May) 0.2% / 3.1% 0.4% / 3.3% Sweden 09:30 Average House Prices (May) m Events 09:00 ECB's Weidmann Speaks in Eltville am Rhine 14:15 ECB's Constancio, Lane Speak in Eltville am Rhine P. 6

7 Contacts 10-year td - 1d 2 -year td - 1d STOCKS - 1d US 1,68 0,00 US 0,77 0,01 DOW ,19 DE 0,03-0,01 DE -0,54 0,00 NASDAQ for Exch - NQI #VALUE! BE 0,43-0,01 BE -0,45 0,01 NIKKEI ,36 UK 1,24-0,01 UK 0,38 0,01 DAX 10088, ,87 JP -0,15-0,03 JP -0,28-0,02 DJ euro ,03 USD td -1d IRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,331 0,006 3y -0,141 0,985 0,802 Euribor-1-0,35 0,00 Libor-1 USD 0,51 0,51 5y -0,019 1,160 0,940 Euribor-3-0,26 0,00 Libor-3 USD 0,58 0,58 10y 0,475 1,534 1,306 Euribor-6-0,16 0,00 Libor-6 USD 0,72 0,72 Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENT EUR/USD 1, ,0098 EUR/JPY 121,01-0,65 195, ,21 51,6 USD/JPY 107,11 0,35 EUR/GBP 0,7817-0,0036-1d -0,71 4,41-1,14 GBP/USD 1,4447-0,0058 EUR/CHF 1,0898-0,0027 AUD/USD 0,7411-0,0051 EUR/SEK 9,2536 0,01 USD/CAD 1,2727 0,0045 EUR/NOK 9,2257 0,00 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