Rates: Chinese President reaches out to US to unlock trade conflict Risk sentiment improved overnight after Chinese President XI Jinping called in favour of a more open Chinese economy and lowering import tariffs on eg vehicles. We hold a negative intraday bias for core bonds with heavy European & US supply also playing in their disadvantage. The consensus bar for US PPI doesn t seem that high (0.1% M/M). Currencies: US holds mixed picture as trade tensions ease FX trading was driven by global risk sentiment yesterday. This factor is still in play this morning after a constructive speech of Chinese President Xi Jinping. However, the impact on the dollar is modest and mixed. USD/JPY tries to regain the 107 barrier. EUR/USD is holding in the 1.23 area. Will US price data be strong enough to support more broad-based USD gains? Calendar Headlines US stock markets failed to hang on to positive intraday momentum, but still closed up to 0.5% higher (Nasdaq). Asian stock markets recovered initial weakness after Chinese president Xi Jinping s speech (>0.5%). Chinese President Xi Jinping promised to open the country's economy further and lower import tariffs on products including cars, in a speech seen as conciliatory amid rising trade tensions between China and the US. (Reuters) 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 While risks to growth can be assessed as being broadly balanced, the international trade environment may have added to the downside. Financial conditions have recently tightened, but remain very supportive, ECB Praet said. Dallas Fed Kaplan warned of potential damage to the US economy if the US/Chinese trade conflict won t get resolved soon even if it s too early to judge at this stage. He remains in favour of 2 more rate hikes this year. FBI agents searched the office, home and hotel room of President Trump s longtime lawyer Cohen as part of a probe by the US attorney s office which is coordinated with the office of special counsel Mueller. (WSJ) The CBO said that it expected the US budget deficit to swell to $804bn this year, some $242bn more than it projected last summer. The gap would expand to just over $1tn by 2020 (nearly 100% of GDP) (FT). Today s eco calendar contains US NFIB small business optimism and PPI data. ECB Nouy, Nowotny, Visco and Fed Kaplan are scheduled to speak. Austria, the Netherlands, Germany and the US tap the bond market. P. 1
Rates Xi Jingping dawns trade tensions US yield -1d 2 2,28 0,01 5 2,62 0,01 10 2,78 0,01 30 3,03-0,01 DE yield -1d 2-0,58 0,01 5-0,09 0,01 10 0,50 0,01 30 1,17 0,01 Yesterday, core bonds traded narrowly mixed during European dealings and followed US stock market sentiment in US trading. Volumes remained low amid an empty eco & event calendar. Main US equity indices initially recovered from Friday s weakness, but fainted into the close on reports that the FBI searched the home and office of President Trump s personal lawyer. Eventually, both the Bund and the US Note future closed nearly unchanged. German yields ended 0.6 bps to 1 bp higher. The US yield curve flattened with yield changes ranging between +1.1 bp (2-yr) and -0.6 bps (30-yr). 10-yr yield spread changes vs Germany were small, ranging between -2 bps and +1 bp. Risk sentiment improved significantly overnight with Asian stock markets overturning losses into gains, the US Note future ceding ground and USD/JPY back above 107. Chinese President Xi Jinping s market-friendly speech at the Baoa forum marked the turnaround. He heralded a more open Chinese economy and lowering import tariffs on eg vehicles. Simultaneously, US President Trump expressed optimism that the US will probably reach a trade deal with China. We expect a weaker opening for the Bund. Today s eco calendar contains only contains US NFIB small business optimism and PPI data. The latter could be important for trading now that the sky seems to be cleared between the US and China, at least in the short run. Markets could be vulnerable to higher readings (0.1% M/M & 2.9% Y/Y) in this risk-on setting. Heavy European and US supply also plays in the disadvantage of core bonds. Central bank speeches are wildcards. Overall, we have a negative intraday bias for the US Note future and the Bund with a likely US underperformance. The German 10-yr yield reached the levels we ve put forward (0.46%/0.48%) after losing 0.6% support in the wake of the ECB meeting. We think that the slide went far enough against the background of the ECB slowly turning the corner and embracing policy normalization. We turn neutral going forward. The US 10-yr yield lost its upward momentum mid-march. The trade-related correction lower on US stock markets, pulled long term yields down as well. We argued before though that a full-blown trade war might eventually result in higher US yields if China reallocates its FX reserves away from US Treasuries. We favour sideways action, roughly between 2.7% and 2.9%. Af German 10-yr yield: end to correction lower? We favour sideways action going forward, staying above 0.46%/0.48% US Note future (intraday, this week): overnight losses as risk sentiment improves after Xi Jinping speech P. 2
Currencies US shows mixed picture as trade tensions ease R2 1,2598-1d R1 1,2555 EUR/USD 1,2321 0,0040 S1 1,2165 S2 1,2055 R2 0,9307-1d R1 0,9033 EUR/GBP 0,8719 0,0004 S1 0,8690 S2 0,8657 The (often diffuse) narrative on the US China-trade conflict continued driving FX yesterday. USD swings were modest initially. Later, (US) equities rebounded as markets anticipated a constructive speech of Chinese President Xi Jinping. The risk-on sentiment supported USD/JPY, EUR/JPY and EUR/USD. Cautiously positive comments from ECB members were also euro supportive. Risk sentiment deteriorated later on as the FBI started an investigation against president Trump s personal lawyer, Michael Cohen. US equities returned most intraday gains and the issue weighed on the dollar. USD/JPY closed the session at 106.77. EUR/USD ended the day near the session top at 1.2321. Chinese president Xi Jinping kept a positive, open tone on trade in a keynote speech at the Boao forum overnight. Asian equities and US equity futures rebounded and so did USD/JPY. The pair tries again to regain the 107 barrier. The gain of the dollar against the euro remains very limited. EUR/USD is holding north of 1.23. Markets will today look out for the reaction of the US to the speech of Xi Jinping. US NFIB small business confidence and PPI price data will be published. Headline PPI is expected to rise 0.1% M/M and 2.9% Y/Y. Of late, the trade war overshadowed US data as driver for FX trading. Still, the data might resurface as a driver for trading. The bar of the consensus for the PPI (0.1% M/M) is not that high. We are keen to see the USD reaction in case of a positive surprise. Of late, we had the impression that USD/JPY became a bit more sensitive to good news (both data and risk-on). The picture for EUR/USD remains more diffuse. Last week, EUR/USD drifted gradually lower in the 1.2476/1.2155 ST consolidation pattern. A sustained break of this range bottom will probably remain difficult as long as Fed rate hike expectations are clouded uncertainty on trade. Sterling trading was still driven by technical considerations yesterday. EUR/GBP held a tight range close to, but mostly slightly north of 0.87. BRC retail sales were OK overnight. Combined with a positive risk-sentiment, this might be slightly sterling positive in a daily perspective. Sterling sentiment wasn t too bad of late. We maintain the working hypothesis though that really high profile news on Brexit or from the data is needed for EUR/GBP to break the 0.8650 support area. USD (trade-weighted) holding within ST consolidation pattern. Will easing trade tensions support US currency? EUR/GBP: holding near the bottom of the established consolidation pattern P. 3
Calendar Tuesday, 10 April Consensus Previous US 12:00 NFIB Small Business Optimism (Mar) 107.0 107.6 14:30 PPI Final Demand MoM / YoY (Mar) 0.1%/2.9% 0.2%/2.8% 14:30 PPI Ex Food and Energy MoM / YoY (Mar) 0.2%/2.6% 0.2%/2.5% 14:30 PPI Ex Food, Energy, Trade MoM / YoY (Mar) 0.2%/-- 0.4%/2.7% 16:00 Wholesale Trade Sales MoM (Feb) -- -1.1% 16:00 Wholesale Inventories MoM (Feb F) 0.8% 1.1% UK 01:01 BRC Sales Like-For-Like YoY (Mar) A: 1.4% 0.6% France 08:45 Industrial Production MoM / YoY (Feb) 1.4%/4.3% -2.0%/1.2% 08:45 Manufacturing Production MoM / YoY (Feb) 0.7%/4.3% -1.1%/3.3% Italy 10:00 Industrial Production MoM / WDA YoY (Feb) 0.8%/4.7% -1.9%/4.0% China 10APR-15APR Money Supply M2 YoY (Mar) 8.9% 8.8% 10APR-15APR Aggregate Financing CNY (Mar) 1800.0b 1173.6b 10APR-15APR New Yuan Loans CNY (Mar) 1175.5b 839.3b Norway 08:00 CPI MoM / YoY (Mar) 0.6%/2.4% 0.9%/2.2% 08:00 CPI Underlying MoM / YoY (Mar) 0.6%/1.4% 0.8%/1.4% Events Speech Chinese President Xi Jinping 09:30 ECB's Nouy Speaks in Ljubljana 09:45 ECB's Nowotny Speaks in London 10:30 Fed's Kaplan Speaks in Beijing 11:15 Austria to Sell 0.75% 2028 & 4.15% 2037 Bonds 11:30 Netherlands to Sell Up to 2.5bn 0% 2024 Bonds 11:30 Germany to Sell 500mn 0.1% I/L 2026 Bonds 17:30 ECB s Visco Speaks at Book Presentation in Rome 19:00 US to Sell $30bn 3-yr Notes P. 4
10-year Close -1d 2-year Close -1d Stocks Close -1d US 2,78 0,01 US 2,28 0,01 DOW 23979,1 46,34 DE 0,50 0,01 DE -0,58 0,01 NASDAQ 6950,344 35,23 BE 0,79 0,01 BE -0,53 0,00 NIKKEI 21794,32 116,06 UK 1,41 0,01 UK 0,88 0,02 DAX 12261,75 20,48 JP 0,03-0,01 JP -0,15-0,01 DJ euro-50 3414,85 6,75 IRS EUR USD GBP EUR -1d -2d USD -1d -2d 3y 0,03 2,67 1,26 Eonia -0,3660 0,0020 5y 0,36 2,73 1,39 Euribor-1-0,3720 0,0000 Libor-1 1,8971 0,0000 10y 0,96 2,81 1,55 Euribor-3-0,3290 0,0000 Libor-3 2,3375 0,0000 Euribor-6-0,2700 0,0000 Libor-6 2,4722 0,0000 Currencies Close -1d Currencies Close -1d Commodities Close -1d EUR/USD 1,2321 0,0040 EUR/JPY 131,54 0,22 CRB 194,97 2,72 USD/JPY 106,77-0,16 EUR/GBP 0,8719 0,0004 Gold 1340,10 4,00 GBP/USD 1,4131 0,0039 EUR/CHF 1,1780 0,0001 Brent 68,65 1,54 AUD/USD 0,7697 0,0013 EUR/SEK 10,2979-0,0073 USD/CAD 1,2697-0,0085 EUR/NOK 9,5923-0,0236 If you no longer wish to receive this mail, please contact us: kbcmarketresearch@kbc.be to unsubscribe Contacts Brussels Research (KBC) Global Sales Force Mathias van der Jeugt +32 2 417 51 94 Brussels Peter Wuyts +32 2 417 32 35 Corporate Desk +32 2 417 45 82 Institutional Desk +32 2 417 46 25 Dublin Research France +32 2 417 32 65 Austin Hughes +353 1 664 6889 London +44 207 256 4848 Shawn Britton +353 1 664 6892 Singapore +65 533 34 10 Prague Research (CSOB) Jan Cermak +420 2 6135 3578 Prague +420 2 6135 3535 Jan Bures +420 2 6135 3574 Petr Baca +420 2 6135 3570 Bratislava Research (CSOB) Marek Gabris +421 2 5966 8809 Bratislava +421 2 5966 8820 Budapest Research David Nemeth +36 1 328 9989 Budapest +36 1 328 99 85 ALL OUR REPORTS ARE AVAILABLE VIA OUR KBC RESEARCH APP (iphone, ipad, Android) This non exhaustive information is based on short term forecasts for expected developments 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. 5