Monday, 09 October 2017

P. 1

Rates: Core bonds prone for some consolidation/correction?

The absence of US investors and second tier eco calendar suggests a slow start to the trading week. A failed test of key yield resistance levels and the geopolitical context suggests that core bonds are prone for some consolidation/correction higher despite a rather heavy EMU/US supply calendar this week.

Currencies: Dollar fails to extend gains post payrolls

On Friday, the dollar temporary profited from a decline in the unemployment rate and higher wages, but the gains evaporated soon. Key technical USD resistance stayed out of reach. Today, the calendar is uneventful. USD trading will probably be order-driven. Geo-political risk remains a wildcard.

Calendar

• US stock markets recorded minor losses on Friday after a record-smashing

week. Most Asian stock markets are positively oriented overnight with China outperforming (catch-up move after last week’s holidays) and Japan closed.

• German Chancellor Merkel's Christian Democrats (CDU) reached a deal on migrant policy with her conservative Bavarian allies (CSU), removing a major obstacle to pursuing talks on a coalition with other parties.

• The US and Turkey each suspended visa services for citizens looking to visit the other country, a sharp escalation of a diplomatic spat that sent the lira down. EUR/TRY currently trades around 4.35, the highest level on record.

• Wolfgang Schäuble has warned that spiralling levels of global debt and liquidity present a major risk to the world economy, in his parting shot as Germany’s finance minister.

• The kiwi dollar (NZD/USD < 0.71) slumped to a four-month low after final election results showed the two main political parties are each in a position to form a viable coalition government.

• OPEC and other oil producers may need to take "some extraordinary measures" next year to rebalance the oil market, the OPEC secretary-general said. OPEC meets next on November 30 in Vienna.

• Today’s eco calendar is empty apart from German production data. US markets are closed for Columbus day. September Chinese Caixin PMI’s declined this morning (services from 52.4 to 51.4 and composite from 52.7 to 50.6).

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Monday, 09 October 2017

P. 2

US Treasuries key yield resistances hold (except 2-yr)

Global core bonds lost ground in the run-up and especially after a mixed US payrolls report. Markets shrugged off the very weak headcount number (-33K), but focussed on the unemployment decline (4.2%) and the surge in wages (0.5% M/M). US Treasuries sold off, but yield resistance at 2% (5-yr), 2.40% (10-yr) and 2.90/92% (30-yr) held. This triggered short coverage somewhat later, helped by rumours that North-Korea could launch another missile over the long US/Japanese weekend. US Treasuries (and Bunds) erased most of the intraday losses. In a daily perspective, the US curve slightly bear flattened with yield increases between 1.7 bps (2-yr) and 0.3 bps (30-yr). The market implied probability of a December rate hike increased further to 76.7%.German yields trade narrowly mixed, the curve a tad steeper and yield changes ranging from -0.5 (2-yr) to +0.5 bp (30-yr). On the intra-EMU bond market, calm reigned and 10-yr yield spreads were virtually unchanged.

US markets closed for Columbus Day Holiday

The US economic calendar is empty today. French business sentiment (BdF) and EMU Sentix investor sentiment are no market movers. Speeches of ECB Mersch and Lautenschlaeger are unlikely to bring much fuss either.

The EMU calendar remains unattractive, while the focus in the US is on Friday with September CPI (inflation), retail sales and October Michigan consumer confidence. Inflation likely increased, especially due to higher gasoline prices (a hurricane effect). We are especially looking to the core inflation, which in August showed signs of bottoming out after months of a steady decline in the inflation rate (Y/Y). Retail sales are expected very strong. Unit car sales rebounded and sales at gasoline station should have done well (price effect). However also core sales should have rebounded. We see no reasons why consumer sentiment should have declined from cycle highs. The combination of these results, if confirmed, would further galvanise expectations that the Fed will increase rates in December and more during 2018. Besides the US eco data on Friday, there is a lot of fresh supply (see below) that may weigh on bonds. Plenty central bank members speak. The crucial ECB meeting is coming closer and the debate inside the ECB on the APP may gradually come to conclusions. So, it is not excluded that more details on the direction of the meeting will be revealed (the Minutes released last week already gave indications). A number of Fed governors takes the stage, but the next meeting is not considered as important.

Rates

US yield -1d2 1,50 0,025 1,96 0,0110 2,36 0,0130 2,89 0,00

DE yield -1d2 -0,70 -0,015 -0,26 0,0010 0,46 0,0030 1,30 0,01

T-Note future (black) and S&P future (orange)(intraday): Sell-off after payrolls, but losses largely recouped (US T) as yield resistance holds

and long weekend kicks in

German 10-yr yield: Not only US yield resistances hold, also the 10-yr German yield cannot break above 0.5%

Af

Sell-off after US payrolls, but short covering followed

US curve bear flattens slightly

German yields narrowly mixed

Unattractive calendar today

Friday’s US data key

Will ECB start to manage expectations?

Monday, 09 October 2017

P. 3

Heavy EMU & US supply

This week’s scheduled EMU bond supply comes from Finland, Germany, the Netherlands, Portugal and Italy. The Finnish treasury starts tomorrow by tapping the on the run 5-yr RFGB (0% Apr 2022) for up to €1B. The Dutch debt agency launches a new 7-yr DSL (Jan2024) via Dutch direct auction. They aim to raise €5-7B. The Portuguese Treasury sells to on the run OT’s for a combined €1-1.25B (2.2% Oct2022 & 4.125% Apr2027). The German finanzagentur aims to raise €3B via tapping the on the run Bobl (0% Oct2022). On Thursday, the Italian debt agency ends this week’s supply. Lines and amounts on offer still need to be announced, but normally it will be the 3-, 7- and 30-yr BTP’s.

The US Treasury starts its mid-month refinancing operation on Wednesday with a $24B 3-yr Note and $20B 10-yr Note auctions. They conclude on Thursday with a $12B 30-yr Bond auction.

Core bonds prone for some consolidation/correction?

Most Asian stock markets trade positive overnight with China outperforming in a catch-up move after last week’s public holiday. Japan and the US are closed today, suggesting low-volume trading. We expect a neutral opening for the Bund.

The absence of US investors and second tier eco calendar suggests a slow start to the trading week. US yields ran into resistance after Friday’s payrolls, suggesting some short term consolidation. Upcoming supply is negative for core bonds, but not strong enough an argument to force breaks. A December rate hike is now almost completely discounted and also suggests that the sell-off is ripe for a pause. Adding the geopolitical context (North Korean treat, Catalan referendum, German coalition talks) and US/German stock markets at record levels (ready for some profit taking?) even suggest a small positive bias for core bonds in this back-loaded (key US eco data on Friday) week. Central bank comments are wildcard for trading.

Looking passed this week, we hold a sell-on-upticks strategy both in the US Note future (entry around 126) and the Bund (entry levels around 162).

R2 163,43 -1dR1 161,98BUND 161,12 -0,06S1 160,49S2 159,80

German Bund: Outperformance vs US Note future (European political risk?) to continue

US Note future: Almost completely retraced Summer rally. US 10y yield’s failed test of 2.4% suggests some ST consolidation

Monday, 09 October 2017

P. 4

EUR/USD no real test of the 1.1662 support after Friday’s US payrolls

USD/JPY rebound losing momentum

Dollar doesn’t profit from distorted US payrolls

September US payrolls were distorted by the hurricanes, resulting in a decline in September job growth. However, the lower unemployment rate (4.2%) and a rise in average hourly earnings suggested a further improvement in labour market conditions. US yields and the dollar rose temporary on Friday, but gains evaporated on rumours that North Korea was considering military action. Cautiousness prevailed ahead of the long weekend in the US. The dollar reversed the initial gains. EUR/USD closed the session at 1.1730. USD/JPY finished the week at 112.65. The dollar rally again failed to make any sustained progress.

Several Asian markets are closed this morning including Japan, Taiwan and Korea. Chinese markets show solid gains between 1% and 2% after reopening from the Golden week holidays. Political tensions remain in the headlines. Turkey and the US suspended visa services for visitors who intend to visit the other country. The incident hammered the Turkish lira, but the impact on global markets is limited. The same is true regarding ongoing tensions on North Korea. USD/JPY trades in the 112.60 area and EUR/USD around 1.1735, little changed from Friday’s close. Political uncertainty in New-Zealand persists and continues to pressure the kiwi dollar. NZD/USD trades in the 0.7075 area.

US markets are closed for Columbus day. In the EMU only the French business sentiment survey (BdF) and the Sentix investor sentiment survey are released, which are no market movers. Later this week, the EMU calendar remains unattractive. In the US the focus is on Friday when the September CPI (inflation), retail sales and October Michigan consumer confidence will be released. Inflation likely increased. We are especially looking to the core inflation, which showed signs of bottoming out in August. Retail sales are expected strong and we see few reasons why consumer sentiment should have declined from cycle highs. This combination, if confirmed, could galvanise expectations that the Fed will increase rates in December and during 2018. Central bank speakers are again plentiful. The crucial ECB meeting is coming closer and the debate inside the ECB on the APP may gradually come to conclusions. So, it is possible that more details will be revealed (eg last week’s Minutes. Today, USD trading will probably be order driven and technical in nature. (Geo)political risk is a wildcard (North Korea, Turkey, Catalonia). Recently, the euro showed quite some resilience against this kind of event risk.

Currencies

R2 1,2225 -1dR1 1,2167EUR/USD 1,1730 0,0019S1 1,1662S2 1,1311

Dollar fails to maintain post-payrolls up-trick

Trading takes slow start of the new week

USD little changed

Turkish lira hammered on political tensions

Eco calendar is thin today

USD trading expected to be order driven

(Geo)political risk remains a wildcard

Monday, 09 October 2017

P. 5

From a technical point of view, EUR/USD dropped below the 1.1823/ 1.2070 consolidation pattern. The USD rebound develops very slowly, but the pair holds below the 1.1823 previous range bottom. Higher US yields are needed to support additional USD gains. Next support in EUR/USD comes in at 1.1662, while 1.1423 marks the 38% retracement from the 2017 rally. EUR/USD is captured in a cautious sell-on-upticks pattern. The USD/JPY momentum was constructive of late, but for an important part due to yen weakness. USD sentiment recently improved though. USD/JPY regained 110.67/95 (previous resistance), a short-term positive. The 114.49 correction top is the next important resistance. The rally lost momentum last week. So a break beyond 114.49 probably is not evident.

Sterling sell-off to slow temporary?

Sterling remained in the defensive on Friday even as there was no high profile negative news. Lingering uncertainty on the political fate of PM May and the lasting stalemate in the Brexit negotiations continued to haunt the UK currency. Sterling especially remained under pressure against the euro. EUR/GBP closed the session at 0.8981 (from 0.8927). Cable regained slightly ground as the dollar couldn’t maintain the post-payroll uptick. The pair closed the session at 1.3066 (from 1.3119).

Sterling trades slightly higher in thin Asian trading this morning. BRC indicated that consumer spending probably declined again in September. BRC also warned on further price rises. On the UK political scene, it looks that UK PM May can stay in place at least for now. In a statement, she tried to put the ball in the camp of the EU. The declining risk of May resigning might be a temporary positive for sterling, or at least slow the recent decline. However, much more is needed for a sustained sterling comeback.

EUR/GBP staged a strong uptrend since April to set a top at 0.9307 late August. UK price data amended the dynamics and hawkish BoE comments reinforced a sterling rebound. Medium term, we maintain a EUR/GBP buy-on-dips approach as we expect the mix of euro strength and sterling softness to persist. The prospect of (limited) withdrawal of BOE stimulus triggered a good sterling countermove. However, this rebound has apparently run its course. EUR/GBP supports at 0.8743 and 0.8652 are probably difficult to break. We look to buy EUR/GBP on dips. Last week’s rebound above the 0.89 area improved the ST technical picture of EUR/GBP. EUR/GBP 0.9026 is the 50% retracement of the recent countermove.

R2 0,9415 -1dR1 0,9307EUR/GBP 0,8981 0,0054S1 0,8743S2 0,8657

EUR/GBP extends rally north of 0.89

GBP/USD: decline to slow, at least temporary?

Monday, 09 October 2017

P. 6

Monday, 9 October Consensus Previous EMU 10:30 Sentix Investor Confidence (Oct) 28.5 28.2 Germany 08:00 Industrial Production SA MoM / WDA YoY (Aug) 0.9%/2.9% 0.0%/4.0% France 08:30 Bank of France Ind. Sentiment (Sep) 105 104 China 03:45 Caixin China PMI Composite (Sep) A 51.4 52.4 03:45 Caixin China PMI Services (Sep) A 50.6 52.7 Events US markets closed for Columbus Day 09:45 ECB Mersch speaks in Milan at banking conference 10:00 Bank of Portugal Governor Costa Speaks at Conference in Lisbon 15:00 Euro area Finance Ministers discuss European stability 18:00 ECB Lautensclaeger speaks in Stuttgart

10-year Close -1d 2-year td -1d Stocks Close -1dUS 2,36 0,01 US 1,50 0,02 DOW 22773,67 -1,72DE 0,46 0,00 DE -0,70 -0,01 NASDAQ 6590,18 4,82BE 0,73 0,01 BE -0,53 0,00 NIKKEI 20690,71 0,00UK 1,36 -0,02 UK 0,43 -0,04 DAX 12955,94 -12,11

JP 0,06 0,00 JP -0,14 0,00 DJ euro-50 3603,32 -10,22

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0,03 1,89 0,90 Eonia -0,3590 0,00005y 0,26 2,04 1,07 Euribor-1 -0,3730 -0,0010 Libor-1 1,2350 -0,002810y 0,91 2,31 1,40 Euribor-3 -0,3290 0,0000 Libor-3 1,3503 0,0017

Euribor-6 -0,2730 -0,0010 Libor-6 1,5188 0,0053

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

EUR/USD 1,1730 0,0019 EUR/JPY 132,16 0,03 CRB 180,95 -1,99USD/JPY 112,65 -0,17 EUR/GBP 0,8981 0,0054 Gold 1274,90 1,70GBP/USD 1,3066 -0,0053 EUR/CHF 1,1486 0,0029 Brent 55,62 -1,38AUD/USD 0,7767 -0,0028 EUR/SEK 9,5249 -0,0094USD/CAD 1,2529 -0,0036 EUR/NOK 9,3772 0,0017

Calendar

Monday, 09 October 2017

P. 7

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

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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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