Wednesday, 24 January 2018 Rates: More outperformance of US Note future vs Bund? Short covering in an oversold US Treasury market started after US yields failed to pierce through key resistance levels after the end of the government shutdown. The correction can continue today, causing more outperformance of the US Note future vs the Bund. Another strong batch of EMU PMI s could weigh on the Bund from the EMU side. Currencies: USD is fighting an uphill battle The dollar couldn t profit from the end of the US government shutdown. Any USD up-tick was again used to offload USD longs with USD/JPY taking the lead. Investors also don t want to be positioned short euro/long dollar going into tomorrow s ECB meeting. Will Draghi be able to change fortunes for the euro? 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 ended marginally higher with Nasdaq outperforming, receiving a strong boost from Netflix. Asian risk sentiment is more mixed overnight with Japan underperforming on yen strength. The Senate confirmed Jerome Powell to become the 16th chairman of the Federal Reserve, clearing the way for a new leader likely to continue raising interest rates to keep the nation s economic expansion on track. Japan s exports to China and Asia hit record levels as shipments rose for a 13th straight month in December and manufacturing growth hit a four-year high in January, pointing to an economy that powered through Q4 and into 2018. China s Ministry of Commerce condemned the US tariffs, calling them a misuse of trade measures, and said it hopes Washington will show restraint in imposing trade restrictions. Robert Mueller wants to question Trump about firing former FBI Director Comey and removing Flynn as national security adviser, a person familiar said, indicating the probe is intensifying its focus on possible obstruction of justice. Eleven countries aiming to forge an Asia-Pacific trade pact after the United States pulled out of an earlier version will sign an agreement in Chile in March, Japan's economy minister said, in a big win for Tokyo. Today s eco calendar contains EMU PMI s, the UK labour market report and US existing home sales. The US Treasury continues its refinancing operation with 2YR FRN and a 5-YR Note auctions. P. 1
Rates Wednesday, 24 January 2018 More outperformance of US Note future vs Bund? US yield -1d 2 2,04-0,02 5 2,42-0,04 10 2,61-0,04 30 2,90-0,02 DE yield -1d 2-0,59 0,02 5-0,14 0,01 10 0,56-0,01 30 1,30-0,01 Global core bonds corrected higher yesterday with US Treasuries outperforming German Bunds. The move was mainly technically inspired. The newly approved short term funding bill triggered a test of key resistance levels in US yields (eg 2.42% for 5-yr and 2.63%/2.64% for 10-yr), but a sustained break didn t occur and caused some return action. The German yield curve flattened at the end of the day with yield changes ranging between +1.6 bps (2-yr) and -0.9 bps (30-yr). A weak 2-yr German Schatz auction also contributed to the front end s underperformance. US yields shed 1.8 bps (30-yr) to 3.7 bps (10-yr) yesterday. The US s 2-yr Note auction drew very strong demand. On intra-emu bond markets, 10-yr yield spread changes versus Germany narrowed up to 3 bps with Greece outperforming (-6 bps). Most Asian stock markets trade positive overnight with Japan underperforming on yen strength. The US Note future trades off the overnight highs, suggesting a neutral opening for the Bund. Brent crude trades a tad below $70/barrel. Today s eco calendar is interesting with EMU PMI s. A very modest correction from elevated levels is expected. We don t expect a big setback given strong EMU growth momentum. European indicators are expected to remain near multiyear highs as proven by yesterday s EC consumer confidence and German ZEW. In a daily perspective, strong PMI s can cause more underperformance of the Bund against the US Note future even with tomorrow s ECB meeting on the agenda. The ECB probably won t change its forward guidance yet. ECB president Draghi will try to downplay early ECB exit speculation, but we don t think that it will send German/European yields much lower. A return, if any, from the German 10-yr yield towards 0.5% could be used as an opportunity to enter new Bund short positions. Strong global growth, rising inflation expectations and the global push to monetary normalization are bearish factors for bonds medium term. The failed attempts of US yields to break above key resistance levels are a second reason to expect some outperformance of US Treasuries. In a short term perspective, some profit taking in an oversold Treasury market is likely. From a technical point of view, we also argue that corrections lower in the 10-yr yield (eg towards 2.5%) could be used to position for higher rates. Af German 10-yr yield: consolidation ahead of ECB meeting US 10-yr yield can t sustain above 2.63%/2.64% resistance. Short term correction time? P. 2
Currencies USD remains in the defensive R2 1,2643-1d R1 1,2335 EUR/USD 1,2299 0,0037 S1 1,1713 S2 1,1554 R2 0,9307-1d R1 0,9033 EUR/GBP 0,8785 0,0018 S1 0,8690 S2 0,8657 Dollar sentiment eroded again yesterday. The (temporary) solution of the government shutdown didn t help the USD. EMU eco data were strong, but no big factor for the EUR/USD rise. Broad-based USD softness prevailed. US yields failed to stay above key resistance levels and eased slightly. USD/JPY s price action was telling. Yen weakness after soft BOJ comments was soon undone and used to reduce USD exposure. USD/JPY dropped from 111+ levels to close the session at 110.31. EUR/USD revisited 1.23 and closed the session at 1.2299. Overnight, Asian equities mostly trade with modest gains. Japanese trade data were ok with imports (14.9% Y/Y) rising faster than exports (9.3%), indicating a healthy economic context. Japanese equities underperform, suffering from a further rise of the yen. Yesterday s USD decline continues. USD/JPY dropped below the 110 barrier. EUR/USD set a minor new top in 1.2335 area. AUD/USD tries to sustain north of 0.80. EMU PMI s are expected to ease slightly after last month s peak levels. The US Markit PMI s and existing home sales will only be of intraday significance. Global factors (comments on US tariffs in Davos), US interest rate markets and a positioning in the run-up to the ECB meeting will drive USD trading. The ST term trend is clearly USD negative. Investors are cautious on euro short positions going into the ECB meeting. Draghi will probably maintain a soft tone and warn on the impact of a strong euro to reach the inflation target. Whatever the outcome of tomorrow s ECB meeting, we look for signs of a pause on the recent euro rally. Global Picture: the dollar is in the defensive as markets prepare for a change in policy from central banks outside the US. This propelled EUR/USD despite a huge interest rate differential in favour of the dollar. The USD decline slowed last week, but the trend remains in place for now. A return below previous resistance at 1.2092 is needed to call off the ST alert for the dollar. EUR/USD 1.2598 (62% retracement) is next important resistance on the charts. Sterling s rebound slowed yesterday despite constructive UK eco data. EUR/GBP settled in the upper half of the 0.87 big figure. Cable was well bid near 1.40 on USD weakness. Today, UK labour market data will be published. The report showed tentative signs of a loss of momentum in job creation last month. Weekly earnings are expect stable at 2.3% Y/Y. Another soft report might slow the recent performance of sterling. EUR/GBP is drifting lower in the 0.8928/0.8692 consolidation range. We keep the view that the EUR/GBP 0.87 area is a tough support. EUR/USD: testing cycle top ahead of the ECB meeting EUR/GBP: UK labour market data to slow GBP rebound? P. 3
Calendar Wednesday, 24 January Consensus Previous US 15:45 Markit US Composite PMI (Jan P) -- 54.1 15:45 Markit US Services PMI (Jan P) 55.0 53.7 15:45 Markit US Manufacturing PMI (Jan P) 54.2 55.1 16:00 Existing Home Sales & MoM(Dec) 5.70m/-1.9% 5.81m/5.6% Japan 00:50 Trade Balance Adjusted (Dec) A: 86.8b 289.6b 00:50 Exports YoY / Imports YoY (Dec) A:9.3%/14.9% 16.2%/17.2% 01:30 Nikkei Japan PMI Mfg (Jan P) A: 54.4 54.0 UK 10:30 Claimant Count Rate (Dec) -- 2.3% 10:30 Jobless Claims Change (Dec) -- 5.9k 10:30 Average Weekly Earnings 3M/YoY (Nov) 2.5% 2.5% 10:30 Weekly Earnings ex Bonus 3M/YoY (Nov) 2.3% 2.3% 10:30 ILO Unemployment Rate 3Mths (Nov) 4.3% 4.3% 10:30 Employment Change 3M/3M (Nov) -10k -56k EMU 10:00 Markit Eurozone Manufacturing PMI (Jan P) 60.3 60.6 10:00 Markit Eurozone Services PMI (Jan P) 56.4 56.6 10:00 Markit Eurozone Composite PMI (Jan P) 57.9 58.1 Germany 09:30 Markit/BME Germany Manufacturing PMI (Jan P) 63.0 63.3 09:30 Markit Germany Services PMI (Jan P) 55.5 55.8 09:30 Markit/BME Germany Composite PMI (Jan P) 58.5 58.9 France 09:00 Markit France Manufacturing PMI (Jan P) 58.6 58.8 09:00 Markit France Services PMI (Jan P) 58.9 59.1 09:00 Markit France Composite PMI (Jan P) 59.2 59.6 Spain 09:00 PPI MoM / YoY (Dec) --/-- 0.5%/3.1% Events Q4 Earnings Novartis, GE (Dur-mkt), Ford (23:30), 00:30 Fed s Evans Makes Introductory Remarks 17:30 & 19:00 US to Sell $15bn 2-yr FRN & $34bn 5-yr Notes P. 4
10-year Close -1d 2-year Close -1d Stocks Close -1d US 2,61-0,04 US 2,04-0,02 DOW 26210,81-3,79 DE 0,56-0,01 DE -0,59 0,02 NASDAQ 7460,289 52,26 BE 0,70 0,00 BE -0,50 0,00 NIKKEI 23940,78-183,37 UK 1,35-0,01 UK 0,57 0,00 DAX 13559,6 95,91 JP 0,08 0,01 JP -0,13 0,01 DJ euro-50 3672,29 7,01 IRS EUR USD GBP EUR -1d -2d USD -1d -2d 3y 0,04 2,36 1,00 Eonia -0,3630 0,0000 5y 0,38 2,48 1,18 Euribor-1-0,3690 0,0000 Libor-1 1,5601 0,0000 10y 0,97 2,64 1,44 Euribor-3-0,3280 0,0000 Libor-3 1,7413 0,0000 Euribor-6-0,2760 0,0010 Libor-6 1,9255 0,0000 Currencies Close -1d Currencies Close -1d Commodities Close -1d EUR/USD 1,2299 0,0037 EUR/JPY 135,66-0,35 CRB 196,94 0,72 USD/JPY 110,31-0,61 EUR/GBP 0,8785 0,0018 Gold 1341,70 4,80 GBP/USD 1,4 0,0013 EUR/CHF 1,1778-0,0015 Brent 69,96 0,93 AUD/USD 0,8-0,0017 EUR/SEK 9,848 0,0150 USD/CAD 1,2419-0,0025 EUR/NOK 9,6216-0,0096 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