Rates: Risk sentiment will set the tone in absence of US investors US markets are closed for Labour Day, suggesting low volume trading especially given the thin calendar. Development in emerging markets could set the tone for risk sentiment today. Italian BTP s could undo some of last week s losses as rating agency Fitch didn t pull the trigger on the BBB rating (yet). Currencies: Dollar gains a few ticks as trade uncertainty persists The dollar regained some ground on Friday after president Trump again made aggressive comments on the trade relations between the US and its trading partners including China, the EU and Canada. Trade remains a key issue for FX trading in the first half of the week. Last week s short-squeeze in sterling looks like easing. Calendar Headlines 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 US stock markets closed Friday s session with small gains, with the exception of the Dow (-0.09%). Today, US markets are closed (Labour Day). Asian markets opened in red this morning with China underperforming. The US and Canada failed to reach an agreement on Friday for Canada to rejoin Nafta. Negotiators announced a five-day break in negotiations. President Trump repeated that there is no political necessity to keep Canada in the deal. EU s top brexit negotiator Barnier said he strongly opposes key parts of May s proposals for a future trade deal. He added that 80% of negotiations are done and a solution for the Irish border is the key remaining element. Brazil s electoral court decided that the imprisoned Lula da Silva is banned from running for President in October. The ex-president and country s most popular politician was sentenced to 12 years in prison for corruption in April. Rating agency Fitch has changed Italy s credit outlook from stable to negative, but kept its long-term credit rating at BBB. The agency said the fiscal plans of the new government risk a degree of fiscal loosening. US President Trump has announced he will skip two major summits in Asia in November. The move raises concerns about the US reliability as a counterweight to China in Asia Pacific. Today s eco calendar is skinny, with US markets closed (Labour Day). In the UK and EMU, the August manufacturing PMI s will be published. P. 1
Rates Fitch didn t pull the trigger on Italy s rating (yet) US yield -1d 2 2,63-0,02 5 2,74-0,01 10 2,86 0,01 30 3,02 0,02 DE yield -1d 2-0,61-0,01 5-0,23-0,01 10 0,33-0,02 30 1,01-0,01 Global core bonds ended last week on positive note. A downleg in the final US trading hour (mirror image of equity boost) explains the US Note future s underperformance against the Bund. German yields shed 0.5 bps (2-yr) to 2 bps (10-yr). The US yield curve steepened with yield changes ranging between -2.3 bps (2-yr) and +1.6 bps (30-yr). Overall trading conditions were thin ahead of the long weekend in the US. Markets are closed today for Labour Day. 10-yr yield spread changes vs Germany widened up to 2 bps with Italy (+4 bps) and Greece (+5 bps) underperforming. BTP s faced selling pressure last week. The Italian/German 10-yr yield spread tested the post-election high (290 bps) ahead of this weekend s rating decision by Fitch. The firm eventually decided to cut the outlook on the BBB rating from stable to negative, but refrain from cutting it further. The expectation of a loose fiscal policy and its potential adverse impact on debt-to-gdp is the main reason. Moody s also await the September budget and public finance targets to resolve its negative credit watch on Italy s Baa2-rating. We expect some short term relieve rally in BTP s today as the worst possible outcome (Fitch downgrade) was avoided, at least for now. Asian stock markets lose ground overnight with China underperforming. The Caixin Chinese manufacturing PMI slipped slightly in August (50.6 from 50.8), conflicting with last week s increase in the official PMI. The US/Canadian trade talks remain fruitless so far. The US Note future stabilizes while the yen outperforms on FX markets. Risk aversion at the start of dealings could benefit the Bund. Today s eco calendar is empty apart from a non-monetary policy related speech by ECB Mersch and the final EMU manufacturing PMI. Traded volumes will be low with US markets closed. Risk sentiment will probably set the tone for trading. In this respect, we keep a close eye on EM with Turkish inflation data, the release of Argentina s new fiscal plan and the reaction of BRL to the court ruling that imprisoned Lula da Silva, who was leading in the polls, can t run for office. A new sell-off in EM FX can further enhance safe haven flows into core bonds. We start the week with an upward intraday bias. Later this week, attention turns to US eco data (ISM s, ADP, payrolls), Fed speakers and heavy EMU bond supply. Technically, the German 10-yr yield s march higher within the 0.3%-0.5% sideways range grinded to a halt. The US 10-yr yield rejected a test of 2.8% support and is also firmly within the establish range (2.8%-3%). We advise to play the range. Af German 10-yr yield: 0.3%-0.5% sideways range Italian (black) and Spanish (orange) 10y yield spreads vs Germany: some short term relief for BTP s as Fitch didn t pull the trigger (yet)? P. 2
Currencies Dollar succeeds cautious risk-off rebound R2 1,2155-1d R1 1,1996 EUR/USD 1,1602-0,0069 S1 1,1510 S2 1,1448 R2 0,9033-1d R1 0,8968 EUR/GBP 0,8955-0,0016 S1 0,8628 S2 0,8548 On Friday, global (FX) markets tried to assess the consequences of the latest harsh trade comments from US president Trump against the EU and China. Initially, EUR/USD held up well, but finally returned south, amongst other on a softer than expected EMU CPI (2.0% Y/Y). The pair even dropped temporarily below the 1.16 mark as European investors were cautious going into the weekend. EUR/USD closed the session at 1.1602. Gains of the yen were very modest. USD/JPY closed the session little changed at 111.03. A late session comeback of US equities reversed earlier yen gains. This morning, a broad riskoff sentiment reigns on most Asian equity markets. Uncertainty on EM/on several EM currencies persists. The dollar remains in the driver s seat on FX markets. The trade-weighted USD (DXY) regained the 95 mark. EUR/USD hovers in the low 1.16 area. USD/JPY is losing a few ticks (110.5 area). Later day, US markets are closed in observance of the Labour Day holiday. In EMU, the final manufacturing PMI is expected to confirm a modest further slide to 54.6. Investors will continue to keep a close eye at all kinds of comments for president Trump and other US policy makers on the US global trade policy (Canada, China tariffs, EU). The risk of a further escalation in the China-US trade conflict will probably cause equity investors outside the US to hold a cautious approach. This might be slightly USD supportive. The USD reversed an early August rebound in the second half of the month, but the USD decline slowed last week. The EUR/USD rebound was blocked in the low 1.17 area. Eco fundamentals and uncertainty on trade are in theory USD supportive. Of late, the USD performance was not impressive. Even so, we assume that a EUR/USD break beyond 1.1791/1.1850 might be difficult as long as trade tensions persist. We start the week we a cautious negative bias on EUR/USD. Last week, sterling enjoyed a technical short squeeze after a protracted slide. Question is whether there is much further upside for sterling if there is no real progress in the brexit negotations. Comments this weekend at least suggest that there remains a lot of discord on Brexit both within the UK and between the EU and the UK. EUR/GBP already returned to the high 0.89 area this morning. We still assume a that break of EUR/GBP below 0.8850 is difficult unless there is real progress on Brexit. The GBP rebound/short-squeeze maybe has run its course. USD (trade-weighted-dxy): dollar succeeds cautious rebound as uncertainty on trade persists EUR/GBP: has the sterling rebound/short-squeeze run its course? P. 3
Calendar Monday, 3 September Consensus Previous US US markets closed in observance of Labor Day Holiday Japan 01:50 Capital Spending YoY (2Q) 12.8%A 3.4% 02:30 Nikkei Japan PMI Mfg (Aug F) 52.5A 52.5 UK 10:30 Markit UK PMI Manufacturing SA (Aug) 53.9 54.0 EMU 10:00 Markit Eurozone Manufacturing PMI (Aug F) -- 54.6 Italy 09:45 Markit/ADACI Italy Manufacturing PMI (Aug) 51.2 51.5 China 03:45 Caixin China PMI Mfg (Aug) 50.6A 50.8 Events 08:30 & 11:20 ECB s Mersch Speaks in Paris P. 4
10-year Close -1d 2-year Close -1d Stocks Close -1d US 2,86 0,01 US 2,63-0,02 DOW 25964,82-22,10 DE 0,33-0,02 DE -0,61-0,01 NASDAQ 8109,537 21,17 BE 0,70-0,01 BE -0,50 0,00 NIKKEI 22726,71-138,44 UK 1,43-0,03 UK 0,73-0,01 DAX 12364,06-130,18 JP 0,12 0,01 JP -0,11 0,01 DJ euro-50 3392,9-38,09 IRS EUR USD GBP EUR -1d -2d USD -1d -2d 3y -0,01 2,86 1,21 Eonia -0,3420 0,0170 5y 0,28 2,88 1,35 Euribor-1-0,3690 0,0010 Libor-1 2,1138 0,0100 10y 0,87 2,93 1,54 Euribor-3-0,3190 0,0000 Libor-3 2,3208-0,0005 Euribor-6-0,2680 0,0000 Libor-6 2,5356 0,0018 Currencies Close -1d Currencies Close -1d Commodities Close -1d EUR/USD 1,1602-0,0069 EUR/JPY 128,84-0,67 CRB 192,96 0,15 USD/JPY 111,03 0,05 EUR/GBP 0,8955-0,0016 Gold 1206,70 1,70 GBP/USD 1,296-0,0049 EUR/CHF 1,1242-0,0068 Brent 77,64-0,38 AUD/USD 0,7189-0,0074 EUR/SEK 10,6032-0,0391 USD/CAD 1,304 0,0057 EUR/NOK 9,7301 0,0038 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