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
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+421 2 5966 8820
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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