Headlines. Wednesday, 12 October Rates: US rates at key levels. Currencies: EUR/USD decline continues. Sterling again in stormy conditions

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1 Rates: US rates at key levels Hawkish FOMC Minutes, upcoming US supply and a potential higher oil price (talks between OPEC and non-members on a production cut) could be able to push US yields finally above key resistance levels. The US 5-yr yield (1.27%), 10-yr yield (1.75%) and 30-yr yield (2.5%) are on the verge of a break which would deteriorate the technical picture of US Treasuries. Currencies: EUR/USD decline continues. Sterling again in stormy conditions Yesterday, USD/EUR was again supported by Fed speculation and rising interest rate differentials. Today, the focus is on the Fed Minutes from the September meeting. A hawkish tone might keep the dollar well supported. Sterling was again hit hard yesterday, but tensions eased overnight as PM May allowed a debate in Parliament on the Brexit procedure. 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 had a bad day, losing more than 1% on variety of reasons as bad Alcoa results, a strengthening dollar and fears for higher rates. Asian equities are under modest pressure overnight, but losses are smaller than on WS yesterday. US real GDP growth is likely to be well below historical norms, plausibly between 1.5%-1.75% per year, once the economy fully recovers from the most recent recession, according to a San Francisco Fed paper released yesterday. UK PM Theresa May has accepted that Parliament should be allowed to vote on her plan for taking Britain out of the EU, but asked to leave her space to negotiate. Tomorrow, High Court starts a case examining whether the PM can trigger art 50 without parliamentary consent. OPEC will hold talks with non-member oil producers today in a bid to hammer out the details of a global production cap for at least 6 months with Russian support. Crude is a bit higher overnight ($52.5/barrel for the Brent) after falling yesterday, as are other commodities. Global regulators will give banks time to adjust to potential increases in capital requirements when tougher accounting rules are introduced in 2018, the committee said in a consultation paper on the new requirements. BASF Q3 profit dropped 5.4% to 1.5 billion, but still beat estimates and reaffirmed full year guidance in preliminary results. Full earnings are due October 27. Today, most attention will go to the September FOMC Minutes. Earlier there speeches of Fed s George (hawk) & Dudley (dove). ECB s Mersch and Coeure speak too. The EMU publishes August production data. P. 1

2 Rates Bunds regain some ground, while US yields go higher US curve bear steepens German curve bull flattens US yield -1d 2 0,8786 0, ,3141 0, ,778 0, ,5107 0,0216 DE yield -1d 2-0,6660-0, ,4830 0, ,0320-0, ,6597-0,0387 Upside risks to EMU production Fed George & Dudley and ECB Mersch & Coeure speak Yesterday, following a seven day losing streak, German Bunds tried to move higher and succeeded in a second attempt during the US session. It allowed the Bund to eke out a modest 30 ticks gains, closing at The German yield curve bull flattened with yields 0.4 bp (2-yr) to 5.1 bps (30-yr) lower. US Treasury cash bonds opened sharply lower and closed with yields 3.5 (2-yr) to 5.1 bps (30-yr) higher, bear steepening the curve. However, it was in fact a catching up move after the cash market closure on Monday. The T-Note future, which traded Monday, moved in a 8/32 narrow range, closing little changed at Oil moved sideways below Monday s close, but made one distinct move lower at the time the Bund moved up. US equities lost heavy ground throughout the main part of the session, maybe on a stronger dollar, Alcoa s weak results and fears about a rate increase. Overall, it had little impact on US Treasuries. Eco data were second tier and unable to move markets. On intra- EMU bond markets, 10-yr yield spread changes versus Germany are close to unchanged (+1-to-2 bps) with Portugal (-4 bps) slightly outperforming. Eco calendar remains thin: FOMC Minutes key event In the US, the JOLT job openings will bring us a more complete picture of developments in the labour market. However, it concerns August data, while Friday s US payrolls, were September figures and are thus no strong market mover. In EMU, August production is expected to have rebounded strongly (1.5% M/M, 1.5% Y/Y) following a weak July (-1.1% M/M, -0.5% Y/Y). As production jumped sharply higher (and much higher than expected) in Germany, France, Italy and Spain, we see upside risks for the euro area too. Given the place and subject of the speech of Fed George and Dudley, we don t expect market moving comments. Anyway, George s views are well known (dissenter in favour of rate hike), while Dudley sides with the majority and wants to take more time before tightening policy. Of course, if he, very unlikely, would suggest a November rate increase, it would be big news. ECB Mersch spoke already yesterday, emphasizing that fiscal policy must play a larger role and calling deflation risks very low. He saw no signs of a real estate bubble but added the ECB should consider side-effects of its policy. The US Minutes of the September FOMC meeting might be interesting. It was a close call with an unusual three dissenters. How big was the real dissent? Markets will look for hints how the debate took place and whether the rate increase may indeed come in December or (unlikely November), as the dot plot suggests. Bund future (orange) and oil (black) intraday: drop of oil in mid US session helps Bund close with modest gains for the first time in eight sessions. USD/MNX: Peso, the US presidential election needle, continue to gain as Trump lags in the polls amid GOP infighting P. 2

3 Key session for US rate markets?! R d R1 166,36 BUND 163,7-0,2800 S1 163,31 S2 163 Overnight, most Asian stock markets lose ground in line with WS yesterday evening. Brent crude trades stable, while the US Note future even is under downward pressure, giving no clear signal for the Bund opening. Today s eco calendar contains outdated EMU production data and important FOMC Minutes. Comments by NY Fed Dudley are a wildcard for trading. Several Fed governors already indicated how close September s call was not to hike rates. A hawkish flavor in the Minutes could bring the outside chance of a November rate hike back in play (current market implied probability: 17%) and trigger more repositioning. That could push US rates through key resistance levels (5-yr: 1.27%, 10-yr: 1.75%, 30-yr: 2.50%) and the US Note future below key support ( area). Upcoming US supply is also a negative for US Treasuries. The mid-month refinancing operation starts today exceptionally with a $24B 3-yr Note auction and a $20B 10-yr Note auction. Currently, the WI of the 3-yr trades around 1.04% while the WI of the 10-yr sits around 1.78%. A meeting between OPEC and non-member oil producers is a wildcard as they try to hammer out details of a global production cap. If talks evolve constructively, it could also weigh on core bonds via higher oil prices. Bund sentiment remains negative with the contract heading for a test of the range bottom at 163. Rumours about the end of an era of unprecedented monetary easing will become run-of-the-mill in the run-up to the October/December ECB meetings especially as Draghi indicated that the ECB will hit its inflation target by early 2019 the latest. That caps the topside in the Bund market and can cause some taper panic, bear steepening European yield curves. German Bund: heading for test of the range bottom on fears that the end of the ECB s easing cycle is near US Note future: Break of key support today on hawkish FOMC Minutes? P. 3

4 Currencies EUR/USD dropps below first support area EUR/USD declined further as Fed rate speculation persists On Tuesday, USD trading was mostly technically in nature. However interest rate differentials play also a role. 2-year interest rate differentials between the US and Germany reached a minor new cycle top, forcing a mini break in EUR/USD. The pair dropped below the /04 area and closed the session at USD/JPY failed to extend its gains. Selling pressure from EUR/JPY and a decline of US equities blocked the topside in this cross rate. USD/JPY finished the day at (from on Monday). Modest risk-off sentiment in Asia EUR/USD remains under pressure USD/JPY holds in the mid 103 area. R2 1,1366-1d R1 1,1279 EUR/USD 1, ,0090 S1 1,0952 S2 1,0913 Overnight, most Asian equities are trading in the red, but losses are mostly modest given the decline of US equities yesterday. The trade-weighted dollar trades slightly off yesterday s top, but is holding strong. BOJ s Kuroda and Board member Harada maintain their pledge that the BOJ has still room the ease policy further. However, there is no indication that the BOJ it will use these options right now to reach the inflation target quickly. The comments suggest the BOJ is slightly less aggressive in reaching the inflation target. The impact of the headlines on the yen is limited. USD/JPY trades stable in the mid 103 area despite a cautious risk-off sentiment. The PBOC weakened again the reference rate of the yuan. Dollar strength gives the PBOC room to allow a further depreciation of the yuan. The onshore yuan trades little changed at The decline of the euro against the dollar continues with EUR/USD trading in the area. So, the support is under heavy strain. Fed Minutes are probably the key driver for USD trading. EUR/USD tests a second intermediate support Today, there are again only second tier data in the US (JOLT job openings) and in Europe (August production). EMU production might be fairly strong, but we don t expect a lasting impact on the single currency. Fed s George and Dudley will speak but their position is well-know. The US Minutes of the September FOMC meeting might be interesting. The outcome of the meeting was a close call with an unusual three dissenters. Markets will look for hints how the debate took place and whether the rate increase may come in December or (unlikely November), as the dot plot suggests. A hawkish tone in the minutes might keep the dollar well supported. EUR/USD clears intermediate support USD/JPY: no real test of range top despite overall USD Last week, the picture for EUR/USD was a bit diffuse as higher US yields were counterbalanced by a rise in European yields due to ECB tapering speculation. P. 4

5 EUR/USD tested/dropped temporary below the support before the payrolls, but the report was not strong enough to trigger a sustained further USD rally. Even so, the downside of the dollar remained well protected as the market implied probability of a Fed rate hike remains at relatively high levels (around 60%) and rises slightly further. The ECB tapering debate in theory makes USD gains against the euro less easy, but we doubt that the ECB will announce an aggressive tapering of its asset buying anytime soon. The break of the support improves the short-term picture for the dollar. The July/June lows (1.0952/13) are the next downside target on the charts. For now, there is no reason to row against EUR/USD negative tide. A rise in US/European yields weakened the yen of late. USD/JPY came within reach of resistance, but a real test didn t occur. A soft payrolls report pushed the pair back lower in the 99.01/ trading range. We stay cautious on sustained USD/JPY gains beyond the resistance especially as global volatility/uncertainty might intensify. Sterling remains in stormy weather R2 0,9415-1d R1 0,9142 EUR/GBP 0,8998-0,0033 S1 0,8725 S2 0,8333 On Tuesday, sterling trading was initially technically in nature. There was no consistent story for sterling trading. The gradual decline of EUR/USD dragged EUR/GBP lower. Cable initially declined at the same time, but rebounded temporary in the afternoon. However, the big moves in sterling occurred later in US dealings. Overall USD strength and a growing global risk-off sentiment triggered a new sell-off in cable. The pair touched an intraday low just below 1.21 and close the session at (from ). The sell-off in cable also propelled EUR/GBP despite EUR/USD weakness. The pair finished the session at (from ). Overnight the fortunes for sterling changed. The UK currency rebounds on reports that UK PM May will accept the UK parliament to vote on the Government Brexit plans. Markets might see this as easing the risks for a hard Brexit. However, it is still early days to draw firm conclusions. A squeeze on a market that was aggressively positioned sterling short probably also played a role. Later today, there are no important eco data on the agenda in the UK. So, the focus will stay on the political debate. At this stage, it is far from sure that the debate in Parliament will make things less complex. A pause on the recent sterling sell-off is possible, but we assume that it is much too early to call a bottom for sterling, especially if global uncertainty/volatility would rise further. We continue to avoid sterling long exposure as long as the debate on a hard Brexit persists/intensifies. EUR/GBP: overnight reversal on May comments, but too early to call a bottom GBP/USD: off the multi-year low, but picture remains fragile P. 5

6 Calendar Wednesday, 12 October Consensus Previous US 13:00 MBA Mortgage Applications (Oct 7) % 16:00 JOLTS Job Openings (Aug) Japan 01:50 Machine Orders MoM YoY (Aug) A-2.2%/ % / 5.2% 08:00 Machine Tool Orders YoY (Sep P) % EMU 11:00 Industrial Production MoM YoY (Aug) 1.5% / 1.5% -1.1%/-0.5% France 08:45 CPI EU Harmonized MoM YoY (Sep F) -0.2%/0.5% % / 0.5% 08:45 CPI MoM YoY (Sep F) -0.2%/0.4% -0.2%/ 0.4% Events ECB's Coeure Speaks at EU Parliament Committee in Brussels 14:00 Fed's Dudley Speaks at Fireside Chat in Albany 15:40 Fed's George Speaks at Chicago Fed's Payments Conference 15:50 Bank of England Bond-Buying Operation Results 20:00 US Fed Releases Minutes from Sept FOMC Meeting 22:00 ECB's Mersch Speaks in Cambridge, MA on monetary policy in EMU & US US 3Yr & 10Yr Notes Auction ($24B & $20B) 10-year td - 1d 2 -year td - 1d STOCKS - 1d US 1,78 0,01 US 0,88 0,01 DOW ,66 DE 0,03-0,02 DE -0,67 0,00 NASDAQ for Exch - NQI #VALUE! BE 0,28-0,02 BE -0,63 0,00 NIKKEI ,28 UK 0,99-0,03 UK 0,19-0,01 DAX 10577, ,16 JP -0,06-0,01 JP -0,25 0,00 DJ euro ,69 USD td -1d IRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,348-0,003 3y -0,175 1,178 0,572 Euribor-1-0,37 0,00 Libor-1 USD 0,27 0,27 5y -0,065 1,311 0,666 Euribor-3-0,31 0,00 Libor-3 USD 0,40 0,40 10y 0,415 1,602 0,996 Euribor-6-0,20 0,00 Libor-6 USD 0,55 0,55 Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENT EUR/USD 1, ,0093 EUR/JPY 114,29-1,38 190, , ,65 USD/JPY 103,6-0,37 EUR/GBP 0,8998-0,0036-1d 1,96-3,05-0,40 GBP/USD 1,226-0,0055 EUR/CHF 1,0915-0,0029 AUD/USD 0,7575 0,0018 EUR/SEK 9,7378 0,10 USD/CAD 1,3221 0,0029 EUR/NOK 9,0308 0,02 P. 6

7 Contacts 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