Wednesday, 15 October 2014 Rates: New all-time low for German 10-yr yield Another day, another contract high for the German Bund and US Note future. The German 10-yr yield even reached a new all-time low at 0.835%. We fear that today’s eco data won’t be able to live up to expectations. This could further underpin constructive sentiment on bond markets, unless equity markets manage to make a firm comeback. Currencies: Low UK inflation hammers sterling Yesterday, the most remarkable move in the currency market came from sterling. Cable dropped well below 1.60 and EUR/GBP trend higher after a low UK inflation figure. The dollar was still in consolidation modus. Today, the focus is on the US eco data and the Fed Beige book. The lack of interest rate support prevents a sustained USD rebound for now. 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 recovered early in yesterday’s session, but failed to safeguard their gains and eventually closed broadly unchanged. The S&P ended marginally higher, but well below the key 1904 level. This morning, Asian shares opened mixed, but gained some ground during the session. • Fitch Ratings placed France’s AA+ rating on watch negative yesterday, citing risks to growth and deficit reduction plans. Finance Minister Sapin reacted that weak economic growth and low inflation have undermined budget plans, but added that they won’t raise taxes of cut spending further to fill the gap. • China’s CPI inflation slowed more than expected in September, to 1.6% Y/Y, the lowest level since early 2010, due to poor domestic demand and low commodity prices. PPI dropped to -1.8% Y/Y from -1.2% Y/Y in August. • The Brent oil price ($85.33/barrel) continued its steep downtrend yesterday as the International Energy Agency reduced forecasts for growth in world oil demand this year and said it did not expect Opec to cut supply when they meet next month. The Brent oil price is now at its lowest level since 2010. • After market closure, Intel Corp reported better than expected third quarter earnings and gave an upbeat outlook for the fourth quarter. This morning, ASML results missed expectations, but the company confirmed its full year guidance and added that they see a solid start to 2015. • Today, the eco calendar heats up with US retail sales, the Empire State Manufacturing index, US PPI inflation and the UK jobless claims. The Fed will release its Beige Book, ECB President Draghi is scheduled to speak and the earnings seasons comes into full swing P. 1 Wednesday, 15 October 2014 Rates Bond rally continues unabatedly German curve bull flattens on ice age concerns Belly US curve outperforms as outlook for monetary policy is revised Greek bonds under pressure from political uncertainty 2 5 10 30 US yield 0,3798 1,468 2,2255 2,9733 -1d -0,0241 -0,0131 -0,0212 -0,0226 2 5 10 30 DE yield -0,0460 0,1470 0,8420 1,7300 -1d -0,0030 -0,0150 -0,0460 -0,0760 Bond repositioning for ice age continues On Tuesday, core bonds had another very strong run on the back of weak EMU eco data and lower than expected UK inflation. It nurtured expectations that growth will continue to disappoint and raised risks that the EMU may slide in a deflationary environment. The Bund set new highs, just north of the 151 handle. In after-closure trade, we even reached 151.19. The German 10-yr yield set a new alltime low at 0.835%. Other maturities remained slightly above record lows. The German curve bull flattened substantially with yields up to 7.8 bps lower. Similarly the US Note future eked out more gains and reached a new contract high as well. In yield terms, US Treasuries fell by up to 9.1 bps, the belly of the curve outperforming. The repositioning for official US rates to stay low for longer on the back of global growth and disinflation concerns still prevailed. In EMU bond markets, peripherals underperformed with 10-yr yield spreads 2 to 9 bps higher, on the back of weaker eco/inflation data. Greece underperformed sharply with spreads 36 bps wider on ongoing political uncertainty and talk about an early exit from bailout. Today, the eco calendar is interesting with the US retail sales, the NY Empire State manufacturing index and US PPI inflation. In the euro zone, the eco calendar is thin ahead of tomorrow’s CPI inflation data. ECB’s Draghi is scheduled to speak and the Fed will release its Beige Book. On the supply front, Germany (Schatz) and Sweden (Bonds) will tap the market. Bund future (orange) & S&P (black) (intraday): Bund higher when equities drop and higher when equities rise. Weak eco and inflation data drivers of bonds Risks for downward surprises US core retail sales, NY Fed survey and PPI In recent days, we highlighted the change in technical pictures of the Dax & S&P. Yesterday, it was Brent that dropped below major support, accelerating the steep decline. . After picking up in August, US retail sales are forecast to have dropped slightly in September, which if confirmed would be the first decline in eight months. The consensus is looking for a 0.1% M/M drop, due to a decline in volatile motor vehicles and lower gasoline station sales. As a result, the control group is forecast to show decent 0.4% M/M rise. We believe however that the underlying picture might be somewhat weaker after the strong series of data recently and as consumer sentiment weakened in September. Also interesting will be the first regional business confidence indicators for October. The Empire State index is forecast to drop from 27.54 to 20.95 in October, after reaching a 5-yr high. The manufacturing ISM weakened already in September and therefore we believe that also the Empire State index might fall back with even a downward surprise not excluded P. 2 Wednesday, 15 October 2014 due to the volatility in the data. Also US PPI inflation data will be interesting, especially after almost all inflation data surprised on the downside recently. In September, US PPI inflation is forecast to have stabilized (1.8% Y/Y), but surprises might be on the downside. R2 R1 BUND S1 S2 151,83 151,19 150,95 150,05 149,45 -1d 0,54 The German Finanzagentur taps the on the run 2-yr Schatz (€4B 0% Sep2016). The amount on offer is relatively low and we expect the auction to go well. Schatz auctions tend to be the best German auctions even despite negative yields. The bond traded stable in ASW spread terms going into the auction. Fitch placed France’s AA+ rating on “Rating Watch Negative”. Under new EU regulation, the publication of sovereign reviews is subject to restrictions and must take place according to a published calendar. Fitch uses an exception to deviate from this calendar because they believe that there is a material change in the creditworthiness of the issuer. Fitch will now seek to resolve the RWN at the next scheduled review (Dec 12). The absence of a material improvement in the projected trajectory of public debt dynamics and a weakening growth outlook will likely lead to a downgrade of the ratings by one notch. Last Friday, S&P lowered the outlook on the French AA rating from stable to negative. On intra-EMU bond markets, French bonds could underperform today. Overnight, most Asian equity markets trade in positive territory. Chinese inflation was lower than expected and the Bank of Korea cut interest rates by 25 bps to 2%. The oil price fell below key support to $85/barrel. The US Note future trades with a downward bias, suggesting that the Bund might open somewhat lower compared to the last after-trade price in the US. Today, the eco calendar includes US empire manufacturing, retail sales and PPI data. Risks are for a lower outcome, which could strengthen fears about the global economic outlook (positive for bonds). Apart from the eco data, ECB Draghi speeches twice. These are wildcards but we don’t expect much of them given his comments this weekend and the topics of the conferences (statistics and cultural days). The Fed’s Beige book is often less relevant for markets though we think that it could still confirm the overall positive picture of the US economy. Finally, equity market sentiment remains important. Both the S&P and Dax consolidated yesterday, but remained below key support (respectively 1904 & 8900/9000). Any further slowdown/consolidation in the downward correction of equities, could stabilize bonds at best (i.e. sideways trading for Bund between 148 & 150.50) while a continuation of the sell-off could propel both the Bund and the US Note future to new highs. German 10-yr yield YTD: downtrend remains firmly intact with a new record low yesterday (0.835%) US Note future: doji-like candlestick yesterday? Today higher opening but downwardly oriented. Close below 127 would be a short term trend reversal signal. P. 3 Wednesday, 15 October 2014 Currencies Deflation fears and poor data keep the euro under pressure R2 R1 EUR/USD S1 S2 1,2901 1,2791 1,2653 1,2606 1,2501 -1d -0,0068 Risk off trade slows Eco calendar looks dollar negative, but how much bad news is already discounted? Earnings remain a wildcard Dollar weak, euro weaker… Yesterday, the news flow was euro negative. Low inflation in the UK and in Sweden, a poor ZEW investor confidence and weak EMU production data all weighed on the euro. EUR/USD dropped to the mid 1.26 area. Euro weakness rather than dollar strength was the name of the game. The dollar tried to regain the 107 level against yen as the equity sell-off slowed down. Overnight, Asian equities show moderate gains, even as the price action in the US was disappointing. China price data, PPI and CPI, both came out slightly below the consensus respectively at -1.8% Y/Y and 1.6% Y/Y. So, Chinese authorities have a good reason to continue their policy of selective stimulus of the economy. EUR/USD is little changed in the 1.2640 area. USD/JPY is in slightly better shape, changing hands in the 107.25 area. Yesterday evening, Fitch put the AA+ rating of France on Rating Watch Negative. For now, this had no big impact on the single currency. Later today, the focus will be on the US, with the retail sales, the Empire manufacturing survey and the PPI scheduled for release. We put the risk on the downside of consensus for the three indicators. Such an outcome could fuel market fears that the US economy might also be affected by a disinflationary slowdown, as is the case in many other countries. If so, markets will remain cautious to anticipate an ‘early’ normalisation of the Fed policy. In this respect, markets will also keep a close look at the Fed beige Book. The tone of the Beige book might still be constructive. All in all, we don’t see much data support for the dollar. At the same time, (interest rate) markets have already discounted a lot of negative news. For now, markets also didn’t react much to a first set of decent earnings data in the US. If bond yields would bottom out, it could also improve the dollar sentiment. For now, this is nothing more than a hypothesis. For EUR/USD we expect further consolidation in the 1.25/1.28 sideways range. Despite risks from today’s data for the dollar, we still assume that the topside in EUR/USD is well protected. The picture for USD/JPY remains very fragile, but we also look out for a tentative bottoming out process. For the performance of the dollar overall we keep a very close eye at the 2-year US bond yield. How far will its rout go? USD/JPY: struggling to prevent further losses EUR/USD: consolidation in the 1.2500/1.2800 range P. 4 Wednesday, 15 October 2014 The technical picture of EUR/USD deteriorated after the break below the key 1.2662 support level (Nov 2012 low). 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 last week suggests that the market was too 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. The 1.2791 correction top is a first (tough?) resistance. We expect some more consolidation in the 1.2501/1.2791 range. Within this range a sell-on-upticks approach is preferred. LT downtrend remains in place. ST consolidation R2 R1 EUR/GBP S1 S2 0,8066 0,8010 0,7948 0,7850 0,7755 -1d 0,0031 Decline in UK inflation hammers sterling Will labour market data bring more negative news for sterling? EUR/GBP regains the 0.79 level Weak (USD), weaker (Euro), weakest (sterling)! Of late, sterling trading was mostly driven by global factors, but yesterday the UK data finally came to the forefront. UK CPI inflation dropped more than expected in September to 1.2%Y/Y. Core inflation declined from 1.9%Y/Y to 1.5% Y/Y. So, the BoE can take time to implement its policy normalisation. Sterling lost ground against the euro and the dollar. Especially cable was hit hard and set a new cycle low in the 1.59 area. EUR/GBP extended its gradual uptrend despite poor EMU eco data. Today, sterling traders will get another piece of key economic information with the UK labour market report. The unemployment rate and employment data are expected to improve further, but expectations of wage growth remain moderate. We see a risk for slightly less buoyant activity data. If so, it could prologue the sterling correction. Over the previous months, low wage growth already weighted on sterling and this probably won’t change today. Sentiment on sterling is fragile and we don’t see a reason to row against the tide at this stage. Strategy. Of late, we indicated that it might be difficult for EUR/GBP to break the key 0.7755 support. After the 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 look for a more pronounced uptick to reconsider EUR/GBP shorts. However, for now we are not in a hurry as sterling momentum stays fragile. The breach above 0.79 is a further short-term negative for sterling. EUR/GBP: sterling ceding ground against a weak euro Cable: hammered after lower than expected UK inflation P. 5 Wednesday, 15 October 2014 Calendar Wednesday, 15 October US 13:00 14:30 14:30 14:30 14:30 14:30 14:30 16:00 Japan 06:30 06:30 08:00 China 03:30 03:30 UK 10:30 10:30 10:30 10:30 Germany 08:00 Italy 11:00 Spain Consensus Previous MBA Mortgage Applications (Oct 10) Empire Manufacturing (Oct) Retail Sales Advance MoM (Sep) Retail Sales Ex Auto and Gas (Sep) Retail Sales Control Group (Sep) PPI Final Demand MoM YoY (Sep) PPI Ex Food and Energy MoM (Sep) Business Inventories (Aug) -20.25 -0.1% 0.4% 0.4% 0.1% / 1.8% 0.1% / 1.7% 0.4% 3.8% 27.54 0.6% 0.5% 0.4% 0.0% / 1.8% 0.1% / 1.8% 0.4% Industrial Production MoM YoY (Aug F) Capacity Utilization MoM (Aug) Machine Tool Orders YoY (Sep F) A -1.9%/-3.3% -1.5% / -2.9% A -1.7% -0.8% A 34.7% 34.8% PPI YoY (Sep) CPI YoY (Sep) A -1.8% A 1.6% -1.2% 2.0% Claimant Count Rate (Sep) Jobless Claims Change (Sep) Average Weekly Earnings 3M/YoY (Aug) ILO Unemployment Rate 3Mths (Aug) 2.8% -35.0K 0.7% 6.1% 2.9% -37.2K 0.6% 6.2% CPI EU Harmonized MoM YoY (Sep F) A 0.0% / 0.8% 0.0% / 0.8% Deficit to GDP YTD (2Q) -- 6.6% Current Account Balance (Jul) Trade Balance (Aug) --- 0.5B -1826.7M Trade Balance (Sep) -- 22.4B Norway Events ASML (07:00), SKF (08:00), Blackrock (bef mkt), Bank of America (13:00), American Express (aft mkt), eBay (aft mkt) Announce Q3 Earnings ECB's Draghi Holds Introductory Speech at Statistics Conference in Frankfurt ECB's Nouy Concluding Remarks in Frankfurt BoE’s Weale Speaks about Benchmark Rate ECB's Draghi Speaks at OpeningEvent of Cultural Days by ECB in Frankfurt U.S. Federal Reserve Releases Beige Book Bond Auction (SEK1.75B 3.5% Jun2022 & SEK1.75B 2.5% May2025) Schatz Auction (€4.0B Sep2016) 09:00 17:30 19:00 20:00 20:00 Sweden Germany 10-year US DE BE UK JP IRS 3y 5y 10y Currencies EUR/USD USD/JPY GBP/USD AUD/USD USD/CAD td 2,23 0,84 1,13 2,13 0,49 - 1d 0,00 0,00 0,00 0,00 0,00 EUR 0,262 0,442 1,058 USD (3M) 1,048 1,641 2,351 1,2648 107,37 1,591 0,8730 1,1332 - 1d -0,0006 0,02 -0,0003 -0,0005 0,0003 GBP 1,291 1,662 2,217 US DE BE UK JP 2 -year td 0,38 -0,05 0,00 0,60 0,06 - 1d 0,00 0,00 0,00 0,02 0,00 DOW NASDAQ NIKKEI DAX DJ euro-50 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 135,75 0,7946 1,2072 9,1719 8,3210 STOCKS 16315 ermissioned 15074 8825,21 3001 - 1d 16315,19 #VALUE! 15073,52 8825,21 3000,99 td -0,026 0,51 0,56 0,69 -1d 0 0,51 0,56 0,69 CRB 273,8999 0,00 GOLD 1226,5 0,60 - 1d Commoditie -0,06 -0,0003 - 1d 0,0000 0,00 0,00 BRENT 85,37 0,09 P. 6 Wednesday, 15 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
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