Wednesday, 25 October 2017

P. 1

Rates: Test of US 10-yr yield resistance ongoing

Today’s eco calendar contains German Ifo and US durable goods orders. We expect their impact to be of intraday importance at best ahead of tomorrow’s ECB meeting. Technically, the US 5-yr yield moved sustainably north of 2% while the test of US 10-yr yield resistance (2.4%) is ongoing. A break ahead of the ECB seems difficult.

Currencies: Dollar struggles to extend gains even as core yields rise

The dollar showed again no clear trend yesterday as investors await the ECB decision. Today, IFO business sentiment and the US durable orders might have intraday significance for FX trading, but we don’t expect the major USD cross rates to break important technical levels. The recent sterling rebound had no strong legs as Brexit optimism fades again.

Calendar

• US big industry earnings dazzled, driving the Dow (+0.72%) to another record.

Other US indices only gained around 0.1%. Asian stock markets eke out small gains overnight. India outperformed after cabinet approved a $32 bn plan to recapitalise its state banks over the next two years.

• Politicians from four German parties seeking to form a first-of-its-kind coalition government agreed not to increase the country's debt load in order to fund sought-after tax cuts, subsidies and investments.

• The Chinese Communist party failed to designate a clear potential successor to its general secretary for the 1st time in a quarter-century, raising the possibility that Xi Jinping will attempt to remain in power well into the next decade.

• Australia’s core inflation unexpectedly slowed in the September quarter as electricity prices spiked by less than forecast. The currency dropped half a cent against the US dollar with AUD/USD heading to 0.77.

• The fault lines within the Republican Party cracked further as feuding between President Donald Trump and senators intensified within the US Capitol, and anti-establishment activists claimed political momentum outside of it.

• Today’s eco calendar contains Germen IFO investment sentiment, UK Q3 GDP, US durable goods orders and the rate decision by the Bank of Canada. Germany and the US supply the market.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Wednesday, 25 October 2017

P. 2

Core bonds sell off as fears of a hawkish ECB mount

Core bonds sold off and stayed under pressure throughout the session. The EMU PMI business confidence was a mixed bag with manufacturing stronger and services weaker-than-expected. Overall though, they suggest ongoing strong growth without building price pressures. US PMI’s were much better than expected in a catch-up move with the ISM’s. However, the PMI's weren't behind the bond selling. There was little fresh news, but yesterday’s sell-off might have been a resumption following the US Senate’s 2018 budget adoption. Jittery positioning for a more hawkish-than-expected ECB and a more hawkish composition of the FOMC played a role too. In this respect, headlines late in the session are exemplary. Trump had asked senators for their choice for the next chair and Senator Scott said Trump hadn’t announced a winner, but he thought John Taylor won. It pushed US Treasuries lower. At least investors don’t want to be long bonds ahead of these events. Interestingly, the US 10-yr yield extensively tests 2.4-2.42% resistance area, which if broken, opens the way for an extension towards 2.64%. The T-Note future set a new correction low at 124-18 and is now close to the key 124-14 July low. Other markets didn’t show similar directional moves.

In a daily perspective, the German yield curve bear steepened with yields between 2.1 bps (2-yr) and 4.4 bps (10-yr) higher. The US curve also steepened with yields increasing between 1.7 bps and 5.3 bps (10-yr). In the intra-EMU bond market, peripheral 10-yr yield spreads narrowed slightly (1 to 2 bps) with Greece outperforming (7 bps) and Italy underperforming (+1 bp).

German IFO and US durable orders eye-catchers

German IFO business confidence is expected to have stabilized in October. The headline index peaked in July at 116.1, the highest on record. A modest decline since was mainly due to a fall in the current assessment, while expectations remained just below the cycle peak. The German PMI dropped in October (services-related), suggesting downside risks to consensus. Levels remain sky-high, but a third consecutive decline usually signals that the index peaked with chances for a trend change. That would be relevant for the outlook for the euro area growth engine. US September durable orders are expected to have at +1% M/M following a 2% M/M increase in August. Excluding transportations, orders are expected at +0.5% M/M (similar to August). Capital goods sub-indices are expected to show modest gains after a strong August month. Risk for the headline figure is on the downside, but the core of the report should be ok.

Rates

US yield -1d2 1,58 0,025 2,04 0,0510 2,42 0,0530 2,93 0,05

DE yield -1d2 -0,71 0,025 -0,26 0,0410 0,48 0,0430 1,34 0,04

T-Note future (black) & S&P (orange) (intraday): Sell off temporarily interrupted during US session

German 10-yr approaches the 0.50% previous range top and first resistance. A break would push the yield to the year high at 0.6%.

Aff

Some downside risks for the IFO

Core bonds sell-off without fresh news

Curves bear steepen

ECB jitters and Fed composition underlying themes

Wednesday, 25 October 2017

P. 3

Germany and the US tap the market

The German Finanzagentur holds a 10-yr Bund auction (€3 bn 0.5% Aug2027). Total bids at the previous 4 Bund auction averaged only €3.59 bn and we don’t expect much improvement today.

The US Treasury started its end-of-month refinancing operation with a mixed $26 bn 2-yr Note auction. The auction stopped with a small tail and the bid cover was rather light compared with recent 2-yr Note auctions. Bidding details were mixed. An unusually large direct bid was offset by a relatively little weaker indirect bid. The US Treasury continues its refinancing today with a $15 bn 2-yr FRN auction and a $34 bn 5-yr Note auction. The WI of the latter currently trades around 2.05%.

Test of US 10-yr yield resistance (2.4%) ongoing

Most Asian stock markets eke out small gains overnight though risk sentiment is deteriorating towards the end of the session. The US Note future stabilizes, suggesting a neutral opening for the Bund.

Today’s eco calendar contains German Ifo and US durable goods orders. We expect their impact to be of intraday importance at best ahead of tomorrow’s ECB meeting. Investors are possibly too complacent about a 9-month extension, ignoring the risk of a shorter lifetime for APP, leaving Bund longs extremely vulnerable. Risk sentiment on stock markets is a wildcard for trading. Despite yesterday’s resistance, we think that equities remain prone for a more sustained correction lower. The internal bickering inside the GOP (Republicans) could be reason to turn more cautious. Fed President Trump is expected to announce the new Fed chair in the near future. It is probably a run-off between Powell and Taylor. Nominating Powell will have no impact on trading given the continuity of current policy. Nominating Taylor will probably cause a hawkish repositioning (negative US Treasuries).

Technically, the German Bund trades sideways since this Summer’s rally ended early September. The US Note future nearly completely retraced the Summer move with the US 5-yr yield moving above the 2% mark and the US 10-yr yield testing 2.4% resistance. Progress in the US tax reform debate boosted the reflation trade while speculation on a Taylor nomination increases. We don’t front run on a break higher ahead of tomorrow’s ECB meeting, but hold our bias for higher rates going into year-end (2.64%).

R2 163,43 -1dR1 162,19BUND 161,11 -0,57S1 160,49S2 159,80

German Bund: Counting down to ECB meeting.

US Note future: near contract low as US 10-yr yield tests 2.4% resistance

Wednesday, 25 October 2017

P. 4

EUR/USD: holding within established ranges going into ECB meeting

USD/JPY running into resistance ahead of key resistance

Dollar rebound stalls even as core yields rise

Trading in the major USD cross rates showed again no consistent trading pattern yesterday. An initial decline of EUR/USD was blocked after mixed, but still strong EMU PMI’s. A further rise in US and EMU yields supported the likes of USD/JPY and EUR/JPY as investors continue to look forward to the ECB policy decision later this week. EUR/USD closed the session at 1.1761. USD/JPY finished at 113.90.

Overnight, Asian equity indices trade with moderate to decent gains. Japan underperforms. Risk sentiment has currently little impact on the dollar. EUR/USD is trading in well-known territory in the 1.1760 area. USD/JPY is also holding near yesterday’s level (high 113 area). Australia Q3 CPI rose less than expected and pushed the Aussie dollar more than half a big figure lower (AUD/USD 0.7720). A sustained break below 0.7733 would deteriorate the short-term picture.

Today, the October German IFO business confidence is expected to have stabilized. The German PMI dropped in October (due to the services sector) suggesting some downside risk to the IFO. That shouldn’t be too awful, as the level remains sky-high. Even so, a third consecutive decline would be a warning signal. In the US, the durable orders are expected to have risen by 1% M/M following a 2% M/M increase in August. The risk for the headline figure is on the downside, but the core of the report should be ok. US new home sales fell unexpectedly sharply in August (the impact of the hurricanes) Another (small) decline is expected.

The impact of the data on the EUR/USD or on other major USD cross rates might be modest as investors have plenty of other issues on the radar. We don’t expect the IFO to be negative for the euro in case of a small miss. Yesterday, the euro was well bid after mixed PMI’s. Investors apparently don’t like to be positioned euro short going into tomorrow’s ECB meeting.. A decent US durable orders report might be slightly USD supportive, but it won’t trigger a break beyond important resistances. Spain, the nomination of the next head of the Fed and the political debate on the US tax reform remain wildcards. We also keep an eye at the equity indices. Some kind of fatigue on the long rally might weigh on USD/JPY and even on USD/EUR.

Currencies

R2 1,2225 -1dR1 1,2167EUR/USD 1,1761 0,0012S1 1,1662S2 1,1311

EUR/USD in wait-and-see modus ahead of ECB

USD/JPY and EUR/JPY profit from higher core yields

Dollar shows no clear trend overnight

Aussie dollar tumbles on softer than expected Q3 CPI data

Dollar fails to extend rebound

Euro in wait-and-see modus ahead of the ECB.

Will slowdown of risk rally weigh on the dollar?

Wednesday, 25 October 2017

P. 5

From a technical point of view, EUR/USD dropped below the 1.1823/ 1.2070 consolidation pattern, but there was no sustained follow-through price action, which was disappointing for EUR/USD bears. We maintain a cautious sell-on upticks bias. The pair needs to drop below 1.1670/62 to give comfort to EUR/USD bears. The USD/JPY momentum was positive in September. The pair regained 110.67/95 resistance, a short-term positive. The 114.49 correction top is the next resistance. Sentiment improved further last week, but we still assume that a break beyond 114.49 will be difficult. This week’s failed return above 114 confirms this view.

GBP rebound already aborted

Yesterday, sterling erased part of the post-EU summit gains. The exchange of words between EU and UK officials turned more constructive, even without any concrete progress in the negotiations. UK officials also felt that an agreement on a transition period is unlikely until there is sufficient progress on the nature of the future EU-UK trade relationship. This scenario leaves UK businesses in uncertainty as the Brexit negotiations drag on. EUR/GBP rebounded off the sub-0.89 recent lows and closed the session at 0.8956. Cable also ceded ground and finished the session at 1.3134.

Today, the first estimate of the UK Q3 GDP will be published. Growth is expected similar to that of the second quarter at 0.3% Q/Q and 1.5% Y/Y. We have no good reason to take a different view from the consensus. A weak figure or an unfavourable composition of growth will add to the markets’ conviction that the room for the BoE to raise rates beyond a sole rate hike in November is very limited. It also looks that the EU and UK have returned to their tough Brexit positions, despite a more constructive tone at the EU summit last week. In this context we see little upside for sterling.

EUR/GBP staged a strong uptrend from April till late August and set a top at 0.9307. Rising UK inflation and the BoE preparing markets for a November rate hike triggered a sterling rebound, but it has run its course. EUR/GBP supports at 0.8743 and 0.8652 proved too difficult to break. The recent rebound above 0.89 improved the ST technical picture of EUR/GBP, but for now there were no convincing follow-through gains. EUR/GBP 0.9026 is 50% retracement of the recent countermove.

R2 0,9415 -1dR1 0,9307EUR/GBP 0,8956 0,0054S1 0,8743S2 0,8657

EUR/GBP: holding tight ranges, but bottom looks well protected

GBP/USD: drifting south, but no break of key support levels yethed range

Wednesday, 25 October 2017

P. 6

Wednesday, 25 Oct. Consensus Previous US 14:30 Durable Goods Orders (Sep P) 1% 2.0% 14:30 Durables Ex Transportation (Sep P) 0.5% 0.5% 14:30 Cap Goods Orders Nondef Ex Air (Sep P) 0.3% 1.1% 14:30 Cap Goods Ship Nondef Ex Air (Sep P) 0.1% 1.1% 15:00 FHFA House Price Index MoM (Aug) 0.4% 0.2% 16:00 New Home Sales / MoM (Sep) 554k/-1.1% 560k/-3.4% Canada 16:00 Bank of Canada Rate Decision 1.00% 1.00% UK 10:30 UK Finance Loans for Housing (Sep) 41800-- 41807 10:30 GDP QoQ / YoY (3Q A) 0.3%/1.5% 0.3%/1.5% 10:30 Index of Services MoM & 3M/3M (Aug) 0.3%/0.4% -0.2%/0.5% Germany 10:00 IFO Business Climate (Oct) 115.1 115.2 10:00 IFO Expectations (Oct) 107.3 107.4 10:00 IFO Current Assessment (Oct) 123.5 123.6 Italy 10:00 Industrial Orders MoM / NSA YoY (Aug) --/-- 0.2%/10.1% Spain 09:00 PPI MoM / YoY (Sep) --/-- -0.1%/3.2% Events Q3 Earnings Coca Cola (12:55), Boeing (13:30),… 11:30 Germany to Sell €3 bn 0.5% 2027 Bonds 17:30 & 19:00 US to Sell $15 bn 2-yr Floating Rate Notes & $34 bn 5-yr Notes

Calendar

Wednesday, 25 October 2017

P. 7

10-year Close -1d 2-year td -1d Stocks Close -1dUS 2,42 0,05 US 1,58 0,02 DOW 23441,76 167,80DE 0,48 0,04 DE -0,71 0,02 NASDAQ 6598,43 11,60BE 0,72 0,04 BE -0,57 0,01 NIKKEI 21707,62 -97,55UK 1,36 0,04 UK 0,47 0,03 DAX 13013,19 10,05

JP 0,07 0,00 JP -0,14 -0,01 DJ euro-50 3610,69 1,82

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0,05 1,95 0,93 Eonia -0,3610 0,00105y 0,25 2,12 1,09 Euribor-1 -0,3720 0,0010 Libor-1 1,2379 0,000010y 0,91 2,40 1,38 Euribor-3 -0,3300 -0,0010 Libor-3 1,3674 0,0000

Euribor-6 -0,2740 0,0000 Libor-6 1,5608 0,0000

Currencies Close -1d Currencies Close -1d Commodities Close -1d

EUR/USD 1,1761 0,0012 EUR/JPY 133,96 0,68 CRB 185,82 1,11USD/JPY 113,9 0,47 EUR/GBP 0,8956 0,0054 Gold 1278,30 -2,60GBP/USD 1,3134 -0,0064 EUR/CHF 1,1656 0,0083 Brent 58,33 0,96AUD/USD 0,7776 -0,0031 EUR/SEK 9,6673 0,0323USD/CAD 1,2675 0,0028 EUR/NOK 9,4152 0,0130

Brussels Research (KBC) Global Sales Force Piet Lammens +32 2 417 59 41 Brussels Peter Wuyts +32 2 417 32 35 Corporate Desk +32 2 417 45 82 Mathias van der Jeugt +32 2 417 51 94 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.

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