Wednesday, 08 October 2014
Rates: Approaching key support in yield terms
Global core bonds remained underpinned by the slaughter on equity markets. Both the German and US 10-yr yields
approach key support which we expect to hold, at least in the short term. Today, the FOMC Minutes might give us more
insight on the Fed policy debate about the exit strategy. Can it temporarily pause the bull run?
Currencies: Dollar correction already slowing?
Yesterday, a global risk-off sentiment kept the dollar in de defensive. The US currency touched a minor short-term
correction low against the euro and the yen. However, the losses were still contained. Today, the focus for USD trading will
be on equities and on the Minutes from the September Fed meeting.
Calendar
Headlines
S&P
Eurostoxx50
Nikkei
Oil
CRB
Gold
2 yr US
10 yr US
2 yr EMU
10 yr EMU
EUR/USD
USD/JPY
EUR/GBP













•
US Equities ended 1.50% lower yesterday as concerns on global growth
mounted, especially in Europe. This morning, most Asian shares trade in
negative territory. Chinese stocks reopened slightly higher after being closed
for one week due to national holidays.
•
Late yesterday, Belgian negotiators reached an agreement to form a four-party
coalition government, nearly five months after general elections took place. The
centre-right government will be led by the head of the francophone MR party,
Charles Michel, which is the only French-speaking party in the coalition
government.
•
China’s HSBC services PMI pulled back in September, to 53.5 from a 17-month
high in August as new business cooled, adding to signs of a slowdown in the
world’s second-largest economy.
•
Protests in Hong Kong calmed significantly yesterday after activist leaders
agreed to talks with the government on Friday, which will focus on the basis for
political development, the government said.
•
Brent crude oil prices ($90.90/barrel) dropped to fresh lows this morning as
weak demand and poor forecasts weighed on prices. The US Energy Information
Administration cut its forecasts for global oil-demand growth and oil prices in
2015.
•
Today, the eco calendar remains razor-thin with only Spanish production and
house transactions. The Fed will release the minutes of its latest FOMC
meeting and after market, the Q3 earnings season starts with results of Alcoa
P. 1
Wednesday, 08 October 2014
Rates
US Treasuries rally on IMF forecasts
and technicals
German bonds surprisingly
underperform
Peripheral bonds mirror German
bond developments
Greece continues to underperform
2
5
10
30
US yield
0,5159
1,6531
2,3695
3,0695
-1d
-0,0238
-0,0345
-0,0465
-0,0538
US Treasuries rally on IMF forecasts
and technical
German bonds surprisingly
underperform, also due to technical?
2
5
10
30
DE yield
-0,0570
0,1520
0,9030
1,7960
-1d
0,0130
0,0020
0,0030
0,0110
Yesterday’s trading was again relatively calm until the IMF sounded downbeat
in its global growth forecast and warned for recession risk in the euro area.
Equities came under new selling pressure while core bonds found support and
rallied. This time, the US outperformed Germany. This might sound a bit odd, as
the IMF sharply downgraded European 2015 GDP forecast and upgraded the US
one. Anyway, the downgrading of European growth shouldn’t have surprised
anyone. Whatever, besides the overall downbeat tone and the subsequent
sharp fall in equities, US Treasuries profited from technical buying, as the 10-yr
yield fell below 2.40/38%. The 30-yr yield fell even to the lowest level since May
2013. The US 3-yr Note auction went well, but couldn’t avoid some
underperformance versus the longer-dated Treasuries. German bonds may
have been hampered by the approached, but not tested, contract high, but not
tested and by the 10-yr yield all-time low of 0.866%. In a daily perspective US
yields fell by 7-8 bps from the 5-yr outwards and by 2.8 bps at the 2-yr. German
yields were unchanged (belly) to 0.5/1 bps higher at the wings.
Minneapolis Fed Kocherlakota, an ultra-dove, sees no reasons to drop the
“considerable time” pledge to keep rates at current levels unchanged after QE
ends. Falling unemployment is for him no reason to raise rates (“raising rates in
2015 would be inappropriate”), while he wants to see inflation 1-2 yr back at 2%.
He sees inflation remaining soft in 2015 (PCE inflation only back to 2% in 2018)
and called the Fed’s communication on the 2% inflation goal vague and pleaded
for making the 2% goal symmetrical. NY Fed Dudley, another dove, who is close
to the majority within the FOMC, called the mid 2015 expectation for a lift-off
of rates “reasonable”. Dudley sees significantly underutilization in job market
and expects stronger dollar and weak global growth to limit upside US growth
surprises. He also added that inflation may rise slower than forecast. No
important systemic risks. Concluding, the ultra-doves sharpen their arguments
to keep policy soft, while earlier the hawks did the same for their views. That’s a
sign that the FOMC is indeed entering a period in which important policy
decisions need to be taken. The comments of Dudley are most important. They
suggest that inside the FOMC a consensus to start raising rates towards mid2015 is growing; but also that (at first) the path of rate increases might be very
gradual. Today’s publication of the minutes of the last FOMC meeting should
show this divergence of opinion between doves and hawks. The FOMC kept its
forward guidance (“considerable period of time”) and still mentioned
“underutilization” of labour market resources. Both will have been debated
intensively. For the possible market reaction on the Minutes, see lower.
T-Note future (black) & S&P (orange): Strong performance
Treasuries in risk-off environment
Dax nears key support level around 9000/8900. Sustained break
would end a three year bull run that brought the Dax from 5000 to
10 000 level.
P. 2
Wednesday, 08 October 2014
R2
R1
BUND
S1
S2
150,49
150,42
150,22
149,66
147,63
-1d
0,02
The German Finanzagentur taps the on the run 5-yr Bobl (€4B 0.25% Oct2019).
The auction should be no problem as the amount on offer is relatively low. Total
bids averaged €5.12B at this year’s previous Bobl auctions with the Bundesbank
retaining 15.36% for secondary market operations. The bond didn’t cheapen in
ASW spread terms going into the auction but trades relatively cheap in the 5-yr
sector of the German yield curve. The Portuguese debt agency taps the off the
run 10-yr PGB (4.8% Jun2020) for €0.75-1B. The bond cheapened slightly in the
run-up to the auction. The 5yr sector of the Portuguese curve looks relatively
rich compared with the 10-yr sector The US Treasury starts its mid-month
refinancing operation with a good $27B 3-yr Note auction. The auction stopped
below the 1:00 PM bid side with the highest bid cover (3.42) since February. Buy
side demand was average with a decent Indirect bid and slightly weak Direct bid.
Today, the treasury auctions a $21B 10-yr Note. The WI trades around 2.365%.
Overnight, Asian equities are lower though losses are contained given
Europe/WS’s slaughter yesterday. China outperforms after returning from a
week-long holiday despite a drop in the HSBC Services PMI (54.1 to 53.5).
The US Note future is modestly lower.
Today, the release of the FOMC Minutes in late US trading is the key
event. We pay attention on two topics in particular: (too low) inflation and
changing forward guidance. Attention to the former is a positive for bonds,
attention to the latter a negative. A third point of interest is whether or not
the hawkish Fed dots reflect a slightly more hawkish tone around the
discussion table. Overall, we believe risks for the outcome are balanced
though given the market positioning (dovish), especially a hawkish surprise
will leave traces on markets. Ahead of the Minutes, technical factors and
sentiment on equity markets are the main drivers for bond markets.
Technically, the US Note future tested 125 support on the back of stronger
US payrolls. The test failed and the Note future moved towards the
contract high on the back of deteriorating risk sentiment on equity
markets. For the Bund, the technical picture remains bullish. Apart from
weak equities, deteriorating inflation expectations and the prospect of full
blown QE underpin the market. Both the US (2.30%) and German 10-yr
yield (0.86%) approach key support. We expect that these levels will be
tested but don’t have reasons to expect a break lower short term.
Bund future (Dec contract): Bullish picture remains intact.
US Note future (Dec contract): failed test of 125 support following
strong payrolls
P. 3
Wednesday, 08 October 2014
Currencies
R2
R1
EUR/USD
S1
S2
1,2816
1,2699
1,2633
1,2500
1,2466
-1d
0,0015
Dollar extends correction against
the yen and, to a lesser extent,
against the euro
Dollar correction bottoming out in
Asia this morning
Eco calendar remains thin
Dollar will look for guidance from
equities and from the Fed minutes
USD correction slowing?
Yesterday, there were again few important eco data in the EMU or in the US.
Risk-off sentiment and ongoing low bond yields prevented a comeback of the
dollar. USD/JPY remained under pressure and drifted even temporary below
the 108 barrier. Initially, the losses of the dollar against the euro were more
moderate, but finally EUR/USD touched also a minor correction top in the high
1.26 area late in the US trading session.
Overnight, Asian equities opened with substantial losses (Main China is the
exception to the rule as bourses reopen after the holiday period), but some calm
returned when the opening losses were digested. The dollar touched yet
another minor new correction low against the euro and the yen early in Asia.
However, as was the case for equities, the dollar finally showed some tentative
signs of a ST bottoming out. Overnight, Fed’s Kocherlakota and Dudley indicated
that a strong dollar could weigh on growth and inflation. In this respect, it could
be an additional factor to delay raising rates. The dollar was under pressure at
the time of the comments, but that was due to equity weakness at that time,
more than anything else.
Today, the calendar in Europe and the US is again very thin. So, the focus will
again be on global equity market sentiment/sentiment on risk. The jury is still
out, but we look out whether the recent correction might slow. If so, it could
help to put a floor for core bond yields and for the dollar. After the close of the
European markets, the Fed will publish the minutes of the September FOMC
meeting. After the meeting, the Fed speak was rather soft as it maintained the
‘considerable period’ quote in the statement. At the same time the forecasts
from the individual Fed members (the dots) showed a higher rate path than the
market currently discounts. The debate on the Fed communication after the
asset purchases are finished at the next meeting will probably continue. We
don’t have a strong view on how the debate evolves. It might be slightly
hawkish/supportive for the dollar.
USD/JPY: correction, off the 110 area continues
EUR/USD: correction stalls ahead of 1.27 barrier
From a technical point of view, USD/JPY extended its rally after the break of the
105.44 resistance and came close to the key 110.66 resistance. US eco strength
and expectations that the normalization of Fed policy nears, supports the dollar.
The yen remains on the defensive as markets see a decent chance of more BOJ
easing down the road. We have a positive view on USD/JPY. There is no reason
to row against the tide, but short-term the pair is in correction modus.
P. 4
Wednesday, 08 October 2014
The reaction of USD/JPY (and of US bond yields) after the payrolls also suggests
that the topside in USD/JPY might be a bit difficult short-term. Some more
sideways trading in the 108/110 area might be on the cards short-term
Technical picture EUR/USD
deteriorated by drop below 1.2662.
R2
R1
EUR/GBP
S1
S2
0,8006
0,7890
0,7860
0,7755
0,7693
-1d
0,0013
Sterling cross rates show some intraday
volatility, but no clear trend
The technical picture of EUR/USD deteriorated further after the break below
the key 1.2662 support level (Nov 2012 low). The down-move after the
payrolls confirmed the break. We have a LT negative bias on EUR/USD, but
recently, we were a bit surprised by the fast pace of the EUR/USD decline. The
trend is intact, but the price action earlier this week indicated that the market
was positioned too much long USD. It might take time for the pair to work
through oversold conditions. The 1.2043/1.1877 support is the next LT target.
Sustained trading north of the 1.27 area might be an indication that some longer
consolidation could be on the cards.
Sterling stays in the defensive
On Tuesday there was still no clear trading pattern in Cable or in EUR/GBP. Both
cross rates were still mainly driven by the gyrations in the euro and/or the
dollar, rather than by sterling specific issues. The UK production data (except for
the revisions of the previous months) were very close to expectations and
largely ignored. In a rather volatile trading session, cable was slightly higher as
the dollar remained in the defensive. EUR/GBP closed little changed in the
0.7870 area.
Overnight, the dollar tries to regain some ground and EUR/USD underperforms
cable in this move. EUR/GBP is trading slightly lower in the 0.7865 area. The
BRC shop prices declined further from -1.6% Y.Y to -1.8% Y/Y.
At the start of trading, the Halifax house prices will be published. A moderate
rise (0.2%M M/M and 9.6% J/J) is expected. Of late, there were some tentative
signs of a slowdown in UK housing prices. Another negative surprise might
weigh slightly on sterling. Later today, we see again no high profile news to
guide sterling trading. Over the previous days, in the same setting the sterling
cross rate were at the mercy of the price swings in the euro and the dollar. This
morning, the euro looks more vulnerable than sterling, but confirmation is
needed.
Nearing the key 0.07755 support slows
the decline of EUR/GBP.
Strategy. Of late, we indicated that it might be difficult for EUR/GBP to break the
key 0.7755 support. After the recent rebound of sterling and the soft comments
from the BoE minutes, investors are pondering the chances for further sterling
gains. The focus for sterling trading should now return to the economic
fundamentals and to the guidance from the BoE on policy normalization We
wait for a more pronounced uptick to reconsider EUR/GBP shorts.
EUR/GBP: test of 0.7755 rejected for now
Cable: rebounds above 1.60 due to dollar weakness rather than GBP stren
P. 5
Wednesday, 08 October 2014
Calendar
Wednesday, 8 October
US
13:00
Japan
01:50
01:50
06:30
07:00
China
03:45
UK
01:01
France
08:30
Spain
09:00
09:00
Events
US
DE
BE
UK
JP
IRS
3y
5y
10y
Currencies
EUR/USD
USD/JPY
GBP/USD
AUD/USD
USD/CAD
Previous
MBA Mortgage Applications (Oct 3)
--
-0.2%
BoP Current Account Adjusted (Aug)
Trade Balance BoP Basis (Aug)
Bankruptcies YoY (Sep)
Eco Watchers Survey Current /Outlook (Sep)
A ¥130.8B
A -¥831.8B
A 0.85%
A 47.4 / 48.7
¥99.3B
-¥828.1B
-11.23%
47.4 / 50.4
HSBC Services PMI (Sep)
A 53.5
54.1
BRC Shop Price Index YoY (Sep)
A -1.8%
-1.6%
Bank of France Bus. Sentiment (Sep)
97
97
Industrial Output SA YoY (Aug)
House transactions YoY (Aug)
0.9%
--
0.8%
10.7%
Start of the Q3 US Earnings Season with Alcoa (after market)
European Leaders Meet in Milan to Discuss Labour Market
Bank of Japan's Monthly Economic Report for October
Fed’s Evans Speaks on the Economic Outlook in Wisconsin
Fed Releases Minutes from Sept. 16-17 FOMC Meeting
Bobl Auction (€4.0B 0.25% Oct2019)
Bond Auction (€0.75-1B 4.8% Jun2020)
Bond Auction (2% Jun2064 & 1.25% Jun2024)
10Yr Notes Auction ($21B)
07:00
14:30
20:00
Germany
Portugal
Switzerland
US
10-year
Consensus
td
2,37
0,90
1,18
2,28
0,51
- 1d
-0,05
0,00
0,01
-0,06
-0,01
EUR
0,254
0,449
1,118
USD (3M)
1,223
1,822
2,509
1,2631
108,44
1,6068
0,8772
1,1178
- 1d
0,0007
-0,14
-0,0010
-0,0003
0,0018
GBP
1,461
1,850
2,357
US
DE
BE
UK
JP
2 -year
td
0,52
-0,06
0,00
0,74
0,07
- 1d
-0,02
0,01
0,01
-0,03
-0,01
DOW
16719
NASDAQ
ermissioned
NIKKEI
15596
DAX
9086,21
DJ euro-50
3082
EUR
Euribor-1
Euribor-3
Euribor-6
-1d
0,01
0,08
0,18
-2d
0,00
0,00
0,00
USD
Eonia EUR
Libor-1 USD
Libor-3 USD
Libor-6 USD
Currencies
EUR/JPY
EUR/GBP
EUR/CHF
EUR/SEK
EUR/NOK
136,93
0,7859
1,2116
9,1067
8,1850
STOCKS
- 1d
16719,39
#VALUE!
15595,98
9086,21
3082,10
td
-0,033
0,51
0,56
0,71
-1d
-0,019
0,51
0,56
0,71
- 1d Commoditie
CRB
-0,09
279,9803
0,0012
- 1d
-0,26
-0,0008
0,02
0,00
GOLD
1213,9
9,29
BRENT
90,95
-1,74
P. 6
Wednesday, 08 October 2014
Contacts
Brussels Research (KBC)
Piet Lammens
Peter Wuyts
Joke Mertens
Mathias van der Jeugt
Dublin Research
Austin Hughes
Shawn Britton
Prague Research (CSOB)
Jan Cermak
Jan Bures
Petr Baca
Bratislava Research (CSOB)
Marek Gabris
Budapest Research
David Nemeth
Global Sales Force
Brussels
Corporate Desk
Institutional Desk
France
London
Frankfurt
Singapore
+32 2 417 45 82
+32 2 417 46 25
+32 2 417 32 65
+44 207 256 4848
+49 69 756 19372
+65 533 34 10
+420 2 6135 3578
+420 2 6135 3574
+420 2 6135 3570
Prague
+420 2 6135 3535
+421 2 5966 8809
Bratislava
+421 2 5966 8820
+36 1 328 9989
Budapest
+36 1 328 99 85
+32 2 417 59 41
+32 2 417 32 35
+32 2 417 30 59
+32 2 417 51 94
+353 1 664 6889
+353 1 664 6892
ALL OUR REPORTS ARE AVAILABLE ON WWW.KBCCORPORATES.COM/RESEARCH
This
non exhaustive
is based
short developments
term forecasts
for expected
developments
This non-exhaustive
informationinformation
is based on short-term
forecasts on
for expected
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. 7