Rates: Italian credit spread returns above 300 bps Risk sentiment on stock markets and developments in Italy will probably remain today s main trading themes. Main EMU equity indices are sliding towards crucial support levels, while the Italian credit spread returns above 300 bps. Both factors provided a safe haven bid into the Bunds, outperforming US Treasuries. Currencies: Euro remains in the defensive, but losses remain modest Yesterday, the global risk-off context caused a classic correction on FX markets with EUR/USD, USD/JPY and EUR/JPY turning south. However, the correction developed in an orderly way. Today s drivers for FX trading might be similar to yesterday. Italy remains a wildcard. For now, there is no reason turn positive on the euro yet. Calendar Headlines US equity markets opened this week fairly good after turmoil on Asian and European markets yesterday. Nasdaq underperformed. Asian markets are mixed with China outperforming and Japan losing substantial ground. The IMF has revised its global economic outlook, citing rising trade tensions and a weakening of emerging markets. World economies will grow 3.7% this year and next, down from the 3.9% forecast in July. 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 The Pakistan finance ministry said the government will seek emergency financial assistance from the IMF to ease a growing liquidity crisis. The IMF commented that Pakistan has not yet formally approached them. US officials have warned China that President Trump will not engage in trade talks with President Xi Jinping at next month s G20 summit in Buenos Aires if China does not come up with a detailed list of concessions. Oil prices surged back up yesterday as Iranian crude sales dropped further in the run-up to the re-imposition of US sanctions. In the US, a hurricane is moving across the Gulf of Mexico, putting further stress on oil supply. Italy s Finance Minister Giovanni Tria will visit the Italian parliament today in an attempt to defend the government s fiscal targets. Opposition lawmakers already criticized the decision to borrow more and will grill him on the plan. Today s eco calendar US NFIB s Small Business Optimism and German trade data. Fed s Kaplan and Harper, ECB s Villeroy and BoE s Broadbent speak. Italian FM Tria defends the budget proposal in parliament. P. 1
Rates Italian credit spread back above 300 bps US yield -1d 2 2,89 0,00 5 3,07 0,00 10 3,23 0,00 30 3,43 0,00 DE yield -1d 2-0,54-0,03 5-0,07-0,04 10 0,53-0,04 30 1,16-0,02 US Treasury markets were closed in observance of Columbus Day. Risk sentiment and Italian developments set the tone for European dealings, pushing the German Bund higher. German yields declined by 2.2 bps (30-yr) to 4.4 bps (5 & 10-yr) with the belly outperforming the wings. Main European stock indices lost more than 1%. The German Dax is heading for a test of key support around 11726, which is 38% retracement from the 2016-2018 rally and neckline of the 2017-2018 head-and-shoulders formation. The Italian 10-yr yield passed the 3.5% mark for the first time since early 2014 as the EU and Italy are heading for a budget show-off with neither side ready to give in. The Italian- German 10-yr yield spread widened by 19 bps to 304 bps. Other peripherals suffered as well. The Greek spread added 18 bps and the Portuguese/Spanish ones increased by 7 bps. Asian stock markets are mixed overnight with China outperforming and Japan underperforming (yen strength). The IMF cut its global growth outlook by 0.2% this year and next to 3.7%, as flagged by Lagarde last week. The US Note future hovers near the sell-off lows. Today s eco calendar is rather thin with only US NFIB small business optimism which is forecasted to slightly come off its cycle top in September (108 from 108.8). Fed Kaplan, Fed Harker and ECB Villeroy are scheduled to speak, but we don t expect them to influence dealings. Yesterday s predominant themes will play today as well. Italian FM Tria defends the draft budget in Italian parliament. The deadlock between the EU and Italy remains and holds down Italian BTP s. Thursday s auction could be a litmus test for investor interests. Technical pictures of European equity markets become heavy, lining up for a test of key support as we approach the start of Q3 earnings season. Both factors suggests some additional safe haven flows with German Bunds outperforming US Treasuries. The US 10-yr yield broke key resistance earlier this month, suggesting more upward potential medium term. Next resistance levels are 3.32% and 3.79% which are the 50% and 62% retracement levels from the 2007-2016 decline. Af German Dax approaches key support (11726) Italian/German 10yr yield spreads rises back above 300 bps P. 2
Currencies EUR/USD in the defensive, but losses stay modest R2 1,2155-1d R1 1,1996 EUR/USD 1,1492-0,0032 S1 1,1510 S2 1,1448 R2 0,91-1d R1 0,9052 EUR/GBP 0,8778-0,0001 S1 0,8628 S2 0,8548 Yesterday, a selling wave of Chinese assets (including the yuan) set the tone for global trading. In Europe, the rift between the Italy and the EU on the country s budget proposal continued. BTP s ceded further ground, widening intra-emu spreads. There were also some negative spill-over effects on the euro. In a classic risk-off move, EUR/USD, EUR/JPY and USD/JPY all turned back south. However, the move still developed in an orderly way and major cross rates didn t break any important technical references yet. EUR/USD finished the session at 1.1492 (from 1.1524). USD/JPY also drifted further away from the 114+ levels reached last week. The pair closed the session at 113.23. This morning, sentiment on Asian markets remains fragile. The sell-off of Chinese equities slows and so does the decline of the yuan (and some other regional currencies like, the IDR/INR). Yen strength translated in a further underperformance of Japanese equity markets. EUR/USD hovers in a tight range close to, mostly slightly below 1.15. USD/JPY settled near 113. Today, the eco calendar is thin, containing mainly second tier eco data including the NFIB small business confidence. The index is expected to ease slightly from last month s record level. However, we don t expect a big impact on broad USD trading. Italy remains a wildcard as Fin Min Tria will defend budget before Parliament. For now, we don t expected the government to adapt a softer tone yet. This is no good news for risk sentiment on European markets. However, quite some bad news should already be discounted. Yesterday, the euro also reacted in a very modest way to broader (EU and non-eu driven) market tensions. Over the previous days, we had a cautious yet positive USD bias as EUR/USD struggled not the fall below the 1.15 support area. We maintain that view. Admittedly the damage for EUR/USD was limited of late, but we don t see a trigger to already become positive on the euro. Yesterday, sterling trading was mostly technical in nature. Last week s sterling short squeeze slowed. Some sobering comments from UK policy makers on Brexit maybe tempered the positive sterling sentiment. Overnight BRC retail sales came out soft. Over the previous days sterling regained some ground as markets hoped that the UK and the EU were coming closer to some kind of Brexit deal. There are no really concrete signs yet. We stay neutral on sterling and expected EUR/GBP to look for a new ST equilibrium until there is hard news on Brexit. EUR/USD: holding near recent lows, but downside pressure remains modest even as uncertainty on Italy persists EUR/GBP: sterling maintains recent gains, awaiting further progress on Brexit P. 3
Calendar Tuesday, 9 October Consensus Previous US 12:00 NFIB Small Business Optimism (Sep) 108.3 108.8 Japan 07:00 Eco Watchers Survey Outlook SA (Sep) 51.3A 51.4 07:00 Eco Watchers Survey Current SA (Sep) 48.6A 48.7 UK 01:01 BRC Sales Like-For-Like YoY (Sep) -0.2%A 0.2% Germany 08:00 Trade Balance (Aug) 16.2b 16.5b 08:00 Current Account Balance (Aug) -- 15.3b 08:00 Imports/Exports SA MoM (Aug) -0.1%/0.4% 2.8%/-0.8%R Norway 08:00 GDP/GDP Mainland (MoM) (Aug) --/0.2% -0.2%/0.2% Events 10:45 Riksbank's Ingves Gives Speech in Bangkok 11:30 Germany to Sell EUR500 Mln 0.1% I/L 2026 Bonds 14:00 Fed s Kaplan Speaks to Economic Club of New York 15:30 ECB's Francois Villeroy de Galhau speaks in Paris 16:35 BoE s Broadbent testifies to Parliament 19:00 Fed's Harker Speaks on Importance of Education to the Economy 10-year Close -1d 2-year Close -1d Stocks Close -1d US 3,23 0,00 US 2,89 0,00 DOW 26486,78 39,73 DE 0,53-0,04 DE -0,54-0,03 NASDAQ 7735,949-52,50 BE 0,89-0,03 BE -0,47-0,03 NIKKEI 23469,39-314,33 UK 1,67-0,05 UK 0,88-0,04 DAX 11947,16-164,74 JP 0,16 0,00 JP -0,11 0,00 DJ euro-50 3309,72-35,79 IRS EUR USD GBP EUR -1d -2d USD -1d -2d 3y 0,10 3,15 1,34 Eonia -0,3650-0,0030 5y 0,45 3,17 1,52 Euribor-1-0,3710 0,0000 Libor-1 2,2767 0,0000 10y 1,06 3,26 1,75 Euribor-3-0,3180 0,0000 Libor-3 2,4081 0,0000 Euribor-6-0,2670 0,0000 Libor-6 2,6229 0,0000 Currencies Close -1d Currencies Close -1d Commodities Close -1d EUR/USD 1,1492-0,0032 EUR/JPY 130,12-0,88 CRB 199,76 0,72 USD/JPY 113,23-0,49 EUR/GBP 0,8778-0,0001 Gold 1188,60-17,00 GBP/USD 1,309-0,0030 EUR/CHF 1,1405-0,0032 Brent 83,91-0,25 AUD/USD 0,7078 0,0026 EUR/SEK 10,4415-0,0052 USD/CAD 1,2965 0,0026 EUR/NOK 9,5105-0,0069 P. 4
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