Rates: Risk rebound and higher oil prices weigh on core bonds Core bonds sell off this morning as US President Trump and Chinese President Xi reached a 90-day trade truce to settle differences. Oil prices surge ahead of Thursday s OPEC meeting. The risk rebound, higher oil prices and strong expected US eco data (manufacturing ISM) are expected to weigh further on core bonds today. Fed speakers are wildcards. Currencies: risk-rebound might support EUR/USD, at least temporary This morning, the dollar returns part of Friday s gain, as the safe haven bid is easing in the wake constructive China-US trade developments. The positive context should also be EUR/USD supportive. However, it will be interesting to see whether any EUR/USD rebound will have stronger legs than last week s post-powell rebound. Calendar Headlines US stock markets closed Friday s session with solid gains (+0.75%). Asian bourses opened firmly in green this morning, as investors welcome the ceasefire between China and the US. Chinese indices outperform. US president Trump and Chinese president Xi Jinping agreed to a temporary ceasefire, as Trump suspended his decision to raise the tariff rate on $200bn of Chinese imports starting from 2019. Both parties will now continue negotiations. 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 Spanish PM Sanchez s Socialist party suffered a setback in the regional election in Andalusia, as it only won 33 seats compared to 45 at the 2015 elections. The anti-immigrant and far right Vox party won seats (12) for the first time. Oil prices jumped 5% higher over the weekend as Russia and Saudi Arabia agreed to extend their deal into 2019 to manage the oil market (OPEC+) and Canada s largest oil producing province (Alberta) ordered large output cuts. China s Caixin Manufacturing PMI printed 50.2 in November, the highest reading since August. The index is up from 50.1 last month and beating consensus expectations of 50.1. French president Emmanuel Macron held an emergency meeting with his ministers yesterday as the president faces a political crisis due to protests/riots against the high energy prices in Paris and other French cities. Today s economic calendar contains the November US manufacturing ISM and UK manufacturing PMI. Numerous Fed heavyweights speak today, including Fed Vice Chairman Clarida. P. 1
Rates Risk rebound and higher oil prices weigh on bonds US yield -1d 2 2,79-0,02 5 2,88-0,03 10 2,99-0,04 30 3,33-0,03 DE yield -1d 2-0,60 0,00 5-0,27-0,01 10 0,31-0,01 30 0,99-0,01 Global core bonds drifted higher last Friday ahead of the meeting between US President Trump and Chinese President Xi Jinping on the sidelines of the G20- meeting in Buenos Aires. US Treasuries outperformed German Bunds in a suspicious leap higher in the final US trading hour. Core EMU inflation unexpectedly slowed from 1.1% Y/Y to 1% Y/Y, undermining ECB President Draghi s rhetoric that wage pressure, the EMU economy s strong performance since 2015 and the effects of the ECB s very easy monetary will trigger a vigorous uptick in underlying inflation. US yields declined by 2.2 bps (2-yr) to 4.3 bps (10-yr) on a daily basis. The German yield curve flattened with yield differences ranging between +0.1 bp (2-yr) and -1.1 bp (30-yr). 10-yr yield spreads changes vs Germany ended nearly unchanged. Asian stock markets gain more than 1% this morning with China (+3%) outperforming. The Xi-Trump meeting delivered a 90-day truce (until March 1) in which the US won t add tariffs and China pledged to buy more US products. Both sides will continue negotiations on more structural issues. Brent crude rises from $60/barrel to $62/barrel. Saudi Arabia and Russia are likely to push for production cuts at Thursday s OPEC meeting while Canada s largest oil producing providence, Alberta, ordered an unprecedented oil output cut. US Treasuries sold off significantly this morning with a weaker opening for the Bund expected as well. Regional Spanish election (Andalusia) show a significant setback for PM Sanchez Socialists which could lose control for the first time in 36 years. They weaken Sanchez minority federal government, with rumours already circulating of snap elections if he fails to pass a national budget. We don t expect Spanish underperformance on peripheral markets at this stage, but closely monitor the situation. Today s eco calendar contains the US manufacturing ISM. Consensus expects a stabilization around 57.5 following two consecutive significant drops. We see risks on the upside of expectations. Positive risk sentiment, good US eco data and higher oil prices point to weaker core bonds today. Heavyweight Fed governors Clarida, Quarles, Brainard and Williams are all scheduled to speak and serve as wildcards. We argued before that market expectations shifted in a too dovish way following last week s overly interpreted Powell remarks. Rate markets anticipate only 1 hike next year compared to the median of the Fed s September dots (3). A US 10-yr yield bounces off 3% mark on improved risk sentiment and higher oil prices Brent crude rallies away from $60/barrel anticipating a production cut agreement at Thursday s OPEC meeting P. 2
Currencies Risk trade to support EUR/USD, at least temporary R2 1,1815-1d R1 1,1621 EUR/USD 1,1317-0,0076 S1 1,1187 S2 1,1119 R2 0,8997-1d R1 0,894 EUR/GBP 0,8874-0,0035 S1 0,8700 S2 0,862 The USD traded with an upward bias on Friday. The post-powell correction had run its course. Investors were reluctant to take risky assets on board ahead of the Trump-Xi meeting on Saturday, providing a modest safe haven bid for the dollar. A strong Chicago PMI was also USD-supportive. On the euro side of the story, a contraction in the Q3 Italian GDP and a soft EMU core inflation were tentative euro negatives. EUR/USD closed the session at 1.1317 (from 1.1393). A modest USD/JPY intraday gain evaporated later. The pair closed at 113.57 (from 113.48). On Saturday, US president Trump and Chinese president Xi Jinping agreed to halt the race to higher tariffs and to intensify talks to solve the trade dispute. The improved US China sentiment triggered a risk rally in Asia this morning. At the same time, oil rebounds on growing signs that Saudi- Arabia and Russia might agree on action to stop the recent oil price decline. The trade-weighted dollar is easing below the 97 mark. The likes of the Aussie dollar (AUD/USD 0.7360) outperform. The yuan also profits (USD/CNY below 6.91). The gain in EUR/USD (1.1360 area) is more modest. USD/JPY (113.50) also doesn t profit from the risk on trade. Today, the final Nov EMU PMI s and the US manufacturing ISM will be published. Several Fed Members will also give their view going into the December policy meeting. Last but not least, we are keen to see the degree of conviction in the post G20 equity rebound. In theory, a risk rebound in combination with rising oil prices should be USD negative. At the same time, US yields might rise, too. A potential negative risk factor/obstacle for the US economy and for the Fed normalisation process is easing. We start the week with a cautious positive bias for EUR/USD. However, last week s post- Powell reaction in mind, we are not convinced that the move will have strong legs. For now, we assume the 1.15/1.1621 range top wil remain a tough nut to crack short-term. In technical trade, EUR/GBP initially hovered in the 0.89 area on Friday. Some sterling shortcovering going into the weekend caused the pair to close at 0.8874. This week, the political noise in the run-up to next week s Brexit vote will continue to dominate sterling trading. Today, the UK government might come under pressure to publish the legal advice supporting the Brexit bill. One can expect LT investors to stay sidelined as long as the binary Brexit risk persists. We maintain a cautious approach on sterling. EUR/USD: Risk-on sentiment to open the way for a test higher? EUR/GBP: uncertainty for sterling persists as UK prepares for Brexit vote P. 3
Calendar Monday, 3 December Consensus Previous US 16:00 Construction Spending MoM (Oct) 0.4% 0.0% 16:00 ISM Manufacturing (Nov) 57.5 57.7 16:00 ISM Employment (Nov) -- 56.8 16:00 ISM Prices Paid (Nov) 70.0 71.6 16:00 ISM New Orders (Nov) -- 57.4 Canada 15:30 Markit Canada Manufacturing PMI (Nov) -- 53.9 Japan 00:50 Capital Spending YoY (3Q) 4.5%A 12.8% China 02:45 Caixin China PMI Mfg (Nov) 50.2 50.1 UK 10:30 Markit UK PMI Manufacturing SA (Nov) 51.7 51.1 EMU 10:00 Markit Eurozone Manufacturing PMI (Nov F) 51.5 51.5 Germany 09:55 Markit/BME Germany Manufacturing PMI (Nov F) 51.6 51.6 France 09:50 Markit France Manufacturing PMI (Nov F) 50.7 50.7 Italy 09:45 Markit/ADACI Italy Manufacturing PMI (Nov) 48.9 49.2 Spain 09:15 Markit Spain Manufacturing PMI (Nov) 51.5 51.8 Norway 09:00 DNB/NIMA PMI Manufacturing (Nov) 56.0 56.0 Sweden 08:30 Swedbank/Silf PMI Manufacturing (Nov) 54.5 55.0 Events 12:30 Fed Vice Chairman Clarida Interviewed on Bloomberg TV & Radio 14:00 Fed s Quarles speaks at Council on Foreign Relations in NYC 15:15 Williams Speaks at a NY Conference on Treasury Market 16:00 Brainard Gives Keynote at NY Fed s Treasury Market Conference 19:00 Fed s Kaplan Speaks at Community Forum in Laredo, Texas P. 4
10-year Close -1d 2-year Close -1d Stocks Close -1d US 2,99-0,04 US 2,79-0,02 DOW 25538,46 199,62 DE 0,31-0,01 DE -0,60 0,00 NASDAQ 7330,537 57,45 BE 0,76-0,01 BE -0,55-0,01 NIKKEI 22574,76 223,70 UK 1,36 0,00 UK 0,78 0,01 DAX 11257,24-40,99 JP 0,08-0,01 JP -0,13 0,00 DJ euro-50 3173,13-1,03 IRS EUR USD GBP EUR -1d -2d USD -1d -2d 3y -0,02 2,96 1,25 Eonia -0,3490 0,0140 5y 0,28 2,96 1,36 Euribor-1-0,3680 0,0000 Libor-1 2,3469-0,0023 10y 0,88 3,04 1,56 Euribor-3-0,3160 0,0000 Libor-3 2,7361-0,0020 Euribor-6-0,2510 0,0020 Libor-6 2,8946 0,0094 Currencies Close -1d Currencies Close -1d Commodities Close -1d EUR/USD 1,1317-0,0076 EUR/JPY 128,44-0,85 CRB 181,74-0,58 USD/JPY 113,57 0,09 EUR/GBP 0,8874-0,0035 Gold 1226,00-4,40 GBP/USD 1,2749-0,0042 EUR/CHF 1,1309-0,0037 Brent 59,46-0,45 AUD/USD 0,7306-0,0013 EUR/SEK 10,3025-0,0291 USD/CAD 1,3292 0,0010 EUR/NOK 9,7556 0,0317 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 Corporate Desk(Brussels) +32 2 417 45 82 Peter Wuyts +32 2 417 32 35 Institutional Desk(Brussels) +32 2 417 46 25 Mathias Janssens +32 2 417 51 95 CBC Desk (Brussels) +32 2 547 19 19 Dieter Lapeire +32 2 417 25 47 France +32 2 417 32 65 Dublin Research London +44 207 256 4848 Austin Hughes +353 1 664 6889 Singapore +65 533 34 10 Shawn Britton +353 1 664 6892 Prague Research (CSOB) Prague +420 2 6135 3535 Jan Cermak +420 2 6135 3578 Jan Bures +420 2 6135 3574 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