Currencies: USD/JPY extends risk-on rebound; EUR/USD going nowhere

Transcription

1 Rates: Bonds correct lower as risk-on rally continues Bonds got additional headwind from signs Italy may finalize its bank bailout plan and Spain and Portugal won t be fined. In the US an ugly 10 yr Note auction suggests the correction may not be over. Today s Bund auction will get attention, while we look out if the risk on rally shows signs of fatigue. Currencies: USD/JPY extends risk-on rebound; EUR/USD going nowhere USD/JPY rebounded north of 104 supported by the global risk on rally and by hopes on fiscal and monetary stimulus in Japan. EUR/USD is little changed. The global risk rally remains the key driver for USD trading. Sterling was squeezed aggressively higher after the announcement of Theresa May becoming PM. The focus now turns to the BoE policy decision. Calendar Headlines 2 yr US 10 yr US 2 yr EMU 10 yr EMU EUR/USD S&P Eurostoxx50 Nikkei Oil CRB Gold USD/JPY EUR/GBP US equities had a good run yesterday, confirming the break to new all time highs. They closed near the intra day highs and with gains of about 0.70%. The non cyclicals (telecom, consumer staples and utilities) underperformed. Energy, materials and financials outperformed. Asian equities go higher too, with Japan outperforming again on the back of a sharply weaker yen yesterday. Other bourses gains are minor to modest. Brent oil retreats slightly this morning ($48/barrel) following a mighty 4.8% rise yesterday as the OPEC expects more oil demand in 2017, which overwhelmed news about higher Saudi oil production. Fed Mester doesn t think the US economy needs more accommodation, but if needed she prefers QE above negative rates. She defended the Fed s cautious stance and still thinks a gradual upward path in rates is appropriate. Risks and uncertainties have increased, but delaying rates poses risks to financial stability. Fed Bullard said Brexit to have close to zero US impact, while Fed Mester said that the Brexit impact on US economy hinges on the dollar. Fitch said high yield bankruptcies are at a 6 year high. S&P said that rising euro scepticism in several countries and Brexit uncertainties give Italy bargaining power in its conflict with the EU on using taxpayers money and no bail ins for a bank bailout The eco calendar doesn t contain strong market movers. The Bank of Canada meets, while ECB Angeloni and Fed Kaplan speak. The Fed releases its Beige Book. China publishes its trade balances figures for June. P. 1

2 Rates Wednesday, 13 July 2016 Correction time in risk-on markets weighs on bonds Core bonds correct sharply in risk on rally Peripheral bond spreads narrow moderately US & German curves bear steepen US yield 1d 2 0,6812 0, ,0666 0, ,4896 0, ,214 0,0515 DE yield 1d 2 0,6760 0, ,5860 0, ,1050 0, ,4793 0,0826 Unattractive eco calendar Decline in EMU production Beige Book: initial effects Brexit visible? Fed Kaplan speaks Global core bonds corrected lower in a global risk on environment. Stronger payrolls, upcoming Japanese policy stimulation, the new UK PM, hopes on resolving Italian banking problems and an ugly 10 yr Note auction triggered the move. This week s price action suggests that investors have taken too much safe haven assets on board in the past weeks. Eco data played no role, while Fed governors were inconclusive in their views. In general, they seem to prefer to keep the wait and see modus beyond the July FOMC meeting. In a daily perspective, both the US and German yield curves continued to bear steepen. US yields increased by 3.5 bps (2 yr) to 8.4 bps (30 yr) while changes on the German yield curve ranged between +3 bps (2 yr) and bps (30 yr). Technically, the T Note future tested first support at , which if broken would deteriorate the bullish picture. The technical picture of the Bund is still unchanged (bullish), even as the two day correction was substantial. On intra EMU bond markets, 10 yr yield spreads versus Germany narrowed 5 to 6 bps in the periphery. Spain and Portugal probably won t be fined for breaching their duties regarding the fiscal deficits, while Italy may get some concessions on their banking bailout plan. Today: Thin eco calendar and Fed Beige Book The eco calendar is unattractive with the June US import prices and the outdated May euro area industrial production. The three biggest EMU countries already showed disappointing results so a negative figure of 0.8% M/M is expected. The Fed publishes its Beige Book, a preparatory document for the 27 July FOMC meeting. It describes the economy via anecdotal evidence recollected via the various Fed district banks. It usually paints a similar picture as the hard data, but sometimes it has new information. Now, for instance it may have information on the post Brexit behaviour of firms and consumers. So, while it is no strong market mover, it might have more impact on markets than usual. Dallas Fed Kaplan speaks. He urged before and after Brexit to be patient on policy changes. He expected a quite negative impact. At least now with US equities at new highs, financial conditions haven t worsened. The direct economic impact will be small too, given the small part of US trade with the UK. Nevertheless, we still think the Fed will stand put and wait for longer to examine the need to adjust policy. That s what we expect Kaplan to stand for. Yesterday, Bullard said Brexit had zero impact on the US economy, but he still stands with his expectation for 1 hike till end 2018, the softest position inside the FOMC. Cleveland Mester didn t explicitly plead for a rate hike, even if she is still leaning on that side, and may be more patient for longer. T Note future (black) & S&P future (orange) intraday: Risk on session with additionally an ugly 10 yr Note auction US 2 yr yield: quite pronounced rise, suggesting markets cautiously start thinking that pricing out Fed hike bets has gone too far. P. 2

3 R d R1 168,86 BUND 166,66 0,7900 S1 165,68 S2 163,61 Heavy bond supply Wednesday, 13 July 2016 Today s EMU bond supply is heavy with Germany, Italy and Portugal tapping the market. The German Finanzagentur launches a new on the run 10 yr Bund ( 5B 0% Aug2026). Grey market trading suggests that the bond will be launched with a 3.5 bps pick up over the previous benchmark (0.5% Feb2026). That corresponds with a 7 bps pick up in yield terms and both are rather generous. However, in absolute terms this will probably become the first ever German 10 yr yield auction with a negative auction yield. Therefore we don t expect big demand. Total bids averaged only 4.17B at the previous 4 auctions which means the auction will likely be not completely subscribed. The Portuguese treasury taps the on the run 7 yr PGB (2.2% Oct2022) and 10 yr PGB (2.875% Jul2026) for a combined B. Both bonds cheapened in ASW spread terms going into the auction and the Oct2022 PGB is cheap on the Portuguese curve. We expect good demand. The Italian treasury taps the on the run 3 yr BTP ( 1.5 2B 0.1% Apr2019), 7 yr BTP ( 2 2.5B 0.95% Mar2023), 15 yr BTP ( B 1.65% Mar2032) and 20 yr BTP ( B 2.25% Sep2036). The 3 yr BTP trades normal on the curve while the other BTP s are expensive. In combination with uncertainty about the outcome of the Italian bank bailout deal, this could hamper demand. The US Treasury continued its refinancing operation with an ugly $20B 10 yr Note auction. The auction stopped with a large tail and the bid cover (2.23) was the smallest for a 10 yr Note auction since March Bidding details showed very little demand all around. Today, the US Treasury ends its refinancing operation with a $12B 30 yr Bond auction. Today: Risk sentiment key for trading Overnight, Asian equity indices trade positive with Japan outperforming on the back of yen weakness the past two sessions. The US Note future bounced off first minor support ( ) suggesting a slightly stronger opening for the Bund as well. First similar support in the Bund is further away around Other risk indicators also suggest that risk sentiment is less buoyant than the previous two days. Today s eco calendar contains only second tier data. The Fed s Beige Book (see above) is a wildcard for trading. Heavy EMU and US bond supply is negative for bonds. Overall, we think that risk sentiment will guide trading. Can equity markets prolong their rally? The technical pictures of the Bund and US Note future remain bullish even as core bond markets are expensive. Partial profit taking on longs could continue especially in the US following Friday s payrolls report. German Bund: Improving risk sentiment could cap topside short term. Heading to 1 st support at US Note future: Testing first support P. 3

4 Currencies USD/JPY rebounds above 104. EUR/USD going nowhere UISD/JPY extends risk on rally to trade north of 104 No clear trend for EUR/USD R2 1,1428 1d R1 1,1189 EUR/USD 1,1063 0,0022 S1 1,0913 S2 1,0822 Asian equities show modest gains USD/JPY rally slows PBOC slows the decline of the yuan EUR/USD trades stable Eco calendar is again thin today EUR/USD is holding a tight range despite risk on USD/JPY rebound to slow in line with global equity performance? On Tuesday, the global risk on rally continued. USD/JPY again profited the most as the yen weakened due to expectations of further Japanese fiscal and monetary easing. EUR/USD moved north of 1.11, but couldn t sustain as the risk on sentiment and higher core bond yields fail to give clear direction. EUR/USD closed the session virtually unchanged at USD/JPY finished with a nice gain at (from ). This morning, Asian equities still moved higher, but the gains are modest (up to 1% gain for Japan) and off the intraday highs. So, does USD/JPY. The pair is changing hands just north of the 104 big figure. The PBOC fixed the yuan rate slightly stronger at USD/CNY (from ). The off shore yuan also strengthened as interbank rates in Hong Kong jump to the highest level since February. The move might be linked to the PBOC reducing liquidity to slow the recent yuan decline. Commodities show a mixed picture but copper rallied; The Aussie dollar holds near the recent highs (AUD/USD 0.76). EUR/USD is again little changed in the area, despite yesterday s rise in core bond yields. Today, the eco calendar contains only second tier eco data. At the time of the open of the European markets, the Chines trade data might get some attention. Late in the session, the Fed beige Book, preparing the July 27 meeting, might get some attention. Investors will be keen to see whether there is already any anecdotic evidence of a Brexit fall out on the US economy. Some Brexit related caution might be slightly negative for the dollar, but we don t expect too much concrete evidence. So, the global risk on context will still be the key factor for trading. How much further has this global easy money/stimulus rally to go? We expect the rally to lose gradually momentum even as some pending issues (fine of excessive budget deficit of Spain and Portugal, Italian bank recapitalisation plan) will probably be solved without high profile tensions within the EMU. So, unless core bond yields rebound further and the US European interest rate differential widen, we expect EUR/USD to hold near recent levels. USD/JPY had a nice run on Monday and Tuesday. The jury is still out, but we think the easiest gains for this cross rate might be over is the key line in the sand. Of course, this level is still some distance away. EUR/USD still trading sideways despite risk on USD/JPY rebound to slow Until now, the global risk on context and even a strong US payrolls report didn t provide clear guidance for EUR/USD trading. The pair holds a tight range P. 4

5 in the 1.10/1.11 area. For now, there is no trigger to change this pattern. At some point, uncertainty on the Brexit process and on other institutional factors might return to the forefront as a negative for the euro. However at this stage it is no important issue. After the Brexit vote, we assumed that EUR/USD would enter a sell on upticks market as new pockets of uncertainty might pop up. The post Brexit intraday top (1.1189) is a first short term tough resistance. First support comes in at (24 June low) and (March low). USD/JPY is well bid on the hope for more fiscal stimulus and for ongoing easy monetary conditions. USD/JPY made a nice rebound off the post Brexit lows. The pair cleared a first resistance at the Some further risk on gains are possible, but we expect the 105/ area to remain tough resistance. R2 0,8627 1d R1 0,8484 EUR/GBP 0,8317 0,0155 S1 0,83 S2 0,7994 Sterling succeeds impressive rebound/short-squeeze Monday s sterling rebound accelerated yesterday in Asia. Theresa May becoming the new UK prime Minister as soon as today was still slightly supportive for sterling. It doesn t solve any key issues in the EU/UK negotiations, but it at least diminish uncertainty. In addition, the global risk on context triggered a short squeeze in the likes of USD/JPY but also in GBP/JPY, supporting the UK currency across the board. Cable was squeezed north of 1.30 in Asia and a new up leg started in the European session. The global risk on rally and, to a lesser extent, a rebound of oil triggered an impressive sterling rebound. EUR/GBP closed the session at (from ). The sterling short squeeze also triggered impressive gains for cable. The pair closed the session at (from ). This morning, the sterling comeback continues, albeit at a slower pace. Cable trades north of EUR/GBP dropped to the low 0.83 area. There are no important UK data today. Theresa May takes office as UK Prime Minister. She is expected to take a gradual, orderly approach for the EU Brexit negotiations. This might have supported the sterling short squeeze. However, the focus will turn to tomorrow s BoE policy decision. The BoE is expected to cut the policy rate by 25 basis points and BoE s Carney will probably keep the door open for further stimulus if the Brexit risks the BoE pre announced would materialize further down the road. In this context, we remain cautious to jump on the recent sterling rebound. An easing of the global risk on rally might also slow any sustained sterling rebound. EUR/GBP is the next high profile resistance on the charts is a first important support. EUR/GBP: impressive sterling rebound GBP/USD: sterling captured by aggressive short squeeze P. 5

6 Calendar Wednesday, 13 July Consensus Previous US 13:00 MBA Mortgage Applications 14.2% 14:30 Import Price Index MoM / YoY (Jun) 0.5%/ 4.6% 1.4%/ 5.0% Canada 16:00 Bank of Canada Rate Decision 0.50% 0.50% Japan 06:30 Industrial Production MoM / YoY (May F) A: 2.6%/ 0.4% 2.3%/ 0.1% 06:30 Capacity Utilization MoM (May) A: 2.4% 1.0% China Trade balance (Jun) $45.65B $$49.98B Exports YoY / Exports YoY CNY (Jun) 5%/0.3% 4.1%/1.2% Imports YoY / Imports YoY CNY (Jun) 6.2%/ 1.2% 0.4%/5.1% EMU 11:00 Industrial Production SA MoM / WDA YoY (May) 0.8%/1.3% 1.1%/2.0% France 08:45 CPI EU Harmonized MoM / YoY (Jun F) 0.2%/0.3% 0.2%/0.3% Italy 10:00 CPI EU Harmonized YoY (Jun F) 0.3% 0.3% Events 03:30 Fed s Mester Speaks at Australian Business Economists Luncheon 10:30 Bank of England Credit Conditions & Bank Liabilities Surveys 11:00 Italian BTP auction (0.1% 2019, 0.95% 2023, 1.65% 2032 & 2.25% 2036) 11:30 Portuguese OT auction (2.2% 2022 & 2.875% 2026) 11:30 German Bund auction (0% Aug2026) 15:00 Fed's Kaplan Speaks to World Affairs Council of Houston 16:30 ECB's Angeloni participates in panel discussion in Frankfurt 19:00 US $12B 30 yr Bond auction 20:00 U.S. Federal Reserve Releases Beige Book P. 6

7 Contacts Wednesday, 13 July year td 1d 2 year td 1d STOCKS 1d US 1,49 0,04 US 0,68 0,02 DOW ,67 DE 0,11 0,05 DE 0,68 0,01 NASDAQ or Exch NQI #VALUE! BE 0,21 0,03 BE 0,59 0,04 NIKKEI ,43 UK 0,81 0,05 UK 0,16 0,02 DAX 9964, ,07 JP 0,28 0,00 JP 0,36 0,00 DJ euro ,44 USD td 1d IRS EUR USD (3M) GBP EUR 1d 2d Eonia EUR 0,324 0,002 3y 0,233 0,897 0,522 Euribor 1 0,37 0,00 Libor 1 USD 0,45 0,45 5y 0,151 1,036 0,617 Euribor 3 0,29 0,00 Libor 3 USD 0,50 0,50 10y 0,325 1,349 0,935 Euribor 6 0,19 0,00 Libor 6 USD 0,59 0,59 Currencies 1d Currencies 1d Commoditie CRB GOLD BRENT EUR/USD 1,1063 0,0022 EUR/JPY 115,35 0,86 190, ,3 47,91 USD/JPY 104,29 1,00 EUR/GBP 0,8317 0,0155 1d 3,52 16,50 1,45 GBP/USD 1,3294 0,0212 EUR/CHF 1,0924 0,0035 AUD/USD 0,7588 0,0007 EUR/SEK 9,4581 0,02 USD/CAD 1,3068 0,0021 EUR/NOK 9,3469 0,04 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 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