Rates: Haemorrhage on bond markets US Treasuries were hit by a quadruple whammy yesterday. More extremely strong US eco data turned out to be the straw that broke the camel s back. Add higher oil prices, technical yield breaks at the long end of the US yield curve and a hawkish Fed governor Powell and you have a recipe for disaster for core bonds. We expect the repositioning to continue. Currencies: Dollar jumps on strong US data, higher US yields and hawkish Powell Yesterday morning, it looked that the euro would get some respite as tension on Italy eased a bit. However, at the end of the day, dollar strength was the name of the game. Strong US eco data and Fed s Powell signaling more policy tightening pushed EUR/USD below 1.15 support. The dollar is again in the drivers seat. Calendar Headlines US equity markets gained on Wednesday with all major indices closing in green, despite losing ground in final trading hours on higher yields. Asian markets and US equity futures trade in negative territory this morning. US Treasuries fell hard after strong US eco data and Fed chairman Powell saying he was very happy with the remarkably positive US economy. Mid-and longterm US yields broke through important resistance levels. S&P Eurostoxx 50 Nikkei Oil CRB Gold 2 yr US 10 yr US 2yr DE 10 yr DE EUR/USD USD/JPY EUR/GBP Ireland has expressed its support for UK PM May s plan for an all-uk customs union with the EU, to avoid a hard border in Ireland in case of no deal. Although Barnier already rejected, the Irish support is boosting hope. Russia and Saudi Arabia struck a private deal in September to raise oil output to cool down rising price and informed the US about it. The deal underlines how both countries are deciding oil output bilaterally, instead of consulting OPEC. US Secretary of State Mike Pompeo is optimistic that his meeting in North-Korea this weekend would bring progress toward a new and second summit between US President Trump and his North Korean counterpart Kim Jong Un. US Senate Majority Leader McConell has set up a procedural vote on Brett Kavanaugh s Supreme Court nomination. If this procedural vote succeeds, Kavanaugh could be confirmed as Supreme Court judge this weekend. Today s eco calendar is poorly filled. In the US we have Initial Jobless Claims. For the EMU we have no eco data, but ECB s Nowotny, Hansson and Nouy speak. Spain and France tap the bond market. P. 1
Rates Thursday, 04 October 2018 Haemorrhage on (US) bond markets US yield -1d 2 2,87 0,06 5 3,08 0,09 10 3,18 0,12 30 3,38 0,12 DE yield -1d 2-0,53 0,03 5-0,09 0,05 10 0,48 0,05 30 1,09 0,03 Global core bonds crashed yesterday with US Treasuries underperforming German Bunds. The US Note future took a quadruple whammy. An exceptionally strong US non-manufacturing ISM followed on the heels of a good ADP employment report and delivered the first hit. A new rally in oil prices, taking Brent crude from $84.5/barrel to $86.5/barrel, added downward pressure on core bonds. Key technical breaks at the long end of the US yield curve (10-yr: 3.12%; 30-yr: 3.26%) accelerated the selling. Fed governor Powell landed the final blow in a very optimistic speech on the US economy. The expansion can continue for quite some time, wages are gradually increasing, the Fed is still a long way from neutral rates and might in the end go past neutral settings. Traded volumes were very high yesterday, adding to the importance of technical breaks. The US yield curve bear steepened with yields 6.1 bps (2-yr) to 11.9 bps (10-yr & 30-yr) higher. The 2- and 5-yr yield reached the highest levels since 2008, the 10-yr yield since mid-2011 and the 30-yr yield since mid-2014. The US 10-yr real rate moved above 1% for the first time since March 2011. German yields added 3 bps (2-yr) to 5.3 bps (10-yr). Italy outperformed on peripheral bond markets (-19 bps) after Italian PM Conte indicated to lower the draft budget deficit for 2020 and 2021 to 2.1% of GDP and 1.8% of GDP respectively (coming from 2.4%). We don t think that this is sufficient to bridge the divide with the EU and won t buy into any short term BTP rally. Asian stock markets and US equity futures took a scare from the significant rise in global yields. Japan outperforms on the back of a weaker yen. The US Note future tumbles further. We expect a significantly lower opening for the Bund. Today s eco calendar only contains US weekly jobless claims, Spanish/French supply and speeches by some ECB members (Hansson, Nouy, Nowotny). Moves on bond markets will be key. We don t think that sell-off/repositioning is already over. Peripheral spreads will probably be effected as well (widening). Next resistance levels in the US 10-yr yield are 3.32% and 3.79% which are the 50% and 62% retracement levels from the 2007-2016 decline. The German 10- yr yield is expected to settle back above the 0.50% mark, opening the way towards 0.80%. Af US 10-yr yield (LT): end of 30-yr downtrend?! US 10-yr yield (YTD): breaks above key technical support P. 2
Currencies US data, US yields and Powell propel the dollar. R2 1,2155-1d R1 1,1996 EUR/USD 1,1478-0,0070 S1 1,1510 S2 1,1448 R2 0,91-1d R1 0,9052 EUR/GBP 0,8870-0,0028 S1 0,8628 S2 0,8548 Yesterday, EUR/USD showed some interesting intraday swings. The pair spiked early in the session driven by an Italian concession to limit the budget deficit (2% in 2021), but the move couldn t be sustained even as there was no additional negative news on Italy. During the day, the dollar gained momentum. The ADP labour report was strong. The US non-manufacturing ISM reached a cycle high and oil prices started a new up-leg after the US inventory data. US yields jumped above key technical levels, supporting the dollar. Last but not least, in a speech late in the day, Fed s Powell confirmed its optimistic view on the economy and said that policy rate could go past neutral. The Powell comments pushed EUR/USD beyond the 1.15 support, closing at 1.1478. USD/JPY finally cleared the 114 mark to close the day at 114.53. Overnight, most Asian equity markets are hurt by the rise in (US) yields and by the stronger dollar, with Japan and Australia the exception to the rule. Several EM currencies remain under pressure. EUR/USD hovers in the 1.1470 area. USD/JPY maintains yesterday s gain, but a potential risk-off context hampers a further decline of the yen. Today, the eco calendar only contains second tier eco data including the US jobless claims. Markets will ponder the meaning of the overnight movements and look forward to tomorrow s US payrolls report. Yesterday, it looked that easing tensions on Italy might give the euro some breathing space. However, at the end of the day, dollar strength was the name of the game. The EUR/USD breaking below 1.15 opens the way to the 1.13 area (2018 low). If the rise in yields would trigger a risk-off move, it will probably also favour the dollar over the euro. We also keep an eye at the impact of higher yields on intra-emu spreads! A widening could complicate the picture for European markets. So, for now there is no reason to try to catch the falling EUR/USD knife. Yesterday, the focus for sterling trading was on PM May s speech at the Conservative Party meeting May focused on domestic issues. Her analysis on Brexit remained at a general level but implicitly, she maintained the Chequers approach. EUR/GBP decline below the 0.89 level, but we assume it was mainly EUR/USD driven. Today, there are few UK data. Markets will look for signs of progress in the negotiations as the political noise of the Conservative party meeting is behind us. We keep a neutral bias on sterling in a day-to-day perspective. EUR/USD: dollar jumps higher on strong US eco data and as Powell signals further tightening EUR/GBP: sterling gains slightly ground after PM s speech, but global conditions dominate trading P. 3
Calendar Thursday, 4 October Consensus Previous US 13:30 Challenger Job Cuts YoY (Sep) -- 13.7% 14:30 Initial Jobless Claims 215k 214k 14:30 Continuing Claims 1665k 1661k 16:00 Durable Goods Orders (Aug F) 4.5% 4.5% Events 08:20 ECB s Hansson speaks on 2019 outlook for Estionia and euro area 11:30 ECB's Nouy Speaks at Conference in Vienna 13:15 BIS General Manager Carstens Speaks in Zurich 15:30 ECB's Nowotny Speaks at Conference in Vienna 10:00 Bank of Finland Press Conference on Monetary Policy 10:30 Spain to Sell Bonds 10:50 France to Sell Bonds 15:15 Fed's Quarles Speaks About Trends in Community Banks 10-year Close -1d 2-year Close -1d Stocks Close -1d US 3,18 0,12 US 2,87 0,06 DOW 26828,39 54,45 DE 0,48 0,05 DE -0,53 0,03 NASDAQ 8025,085 25,54 BE 0,84 0,03 BE -0,44 0,03 NIKKEI 23975,62-135,34 UK 1,58 0,05 UK 0,84 0,04 DAX 12287,58 0,00 JP 0,16 0,02 JP -0,11 0,01 DJ euro-50 3405,48 16,49 IRS EUR USD GBP EUR -1d -2d USD -1d -2d 3y 0,08 3,12 1,28 Eonia -0,3650 0,0000 5y 0,43 3,16 1,44 Euribor-1-0,3710 0,0000 Libor-1 2,2739 0,0000 10y 1,01 3,23 1,67 Euribor-3-0,3180 0,0000 Libor-3 2,4075 0,0000 Euribor-6-0,2670 0,0010 Libor-6 2,6070 0,0000 Currencies Close -1d Currencies Close -1d Commodities Close -1d EUR/USD 1,1478-0,0070 EUR/JPY 131,46 0,23 CRB 201,23 1,26 USD/JPY 114,53 0,88 EUR/GBP 0,8870-0,0028 Gold 1202,90-4,10 GBP/USD 1,294-0,0039 EUR/CHF 1,1390 0,0027 Brent 86,29 1,49 AUD/USD 0,7103-0,0085 EUR/SEK 10,3933-0,0088 USD/CAD 1,2868 0,0045 EUR/NOK 9,4442 0,0051 P. 4
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