Tuesday, 14 October 2014 Rates: sentiment on equity markets remains key We keep a close eye on the equity markets with both the German Dax and US S&P 500 below key necklines of bearish multiple/double top formations. Weakness on equity markets remains a driver for core bonds. Can the sell-off halt today as the US Q3 earnings session kicks off for real? Currencies: risk-off rally keeps USD in the defensive The dollar stayed under moderate pressure as the US equity sell-off continued. USD/JPY dropped temporary below the 107 level. Will the sell-off of risk assets slow down today and provide a bottom for the dollar? Soft UK CPI data might continue to weigh on sterling. 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 • In a holiday-thinned trading session, US Equities suffered further losses yesterday. Weakness was led by energy and materials, while also health care shares came under pressure on fears of Ebola spreading. The S&P dropped 1.65% and fell below a very important support level at 1904. • This morning, Asian shares try to shrug off Wall Street’s losses, with most indices trading slightly higher. Reopening after the long weekend, the Nikkei underperforms, losing 2.38% as the yen is strengthening again. • According to the FT, Catalan President Artur Mas is on the verge of calling off the independence referendum planned for November in a press confidence today, in a bid to avoid an all-out clash with the government in Madrid. • Brent crude oil prices ($88.19/barrel) dropped further yesterday and are hovering around the lows of 2012 after Saudi Arabia and Kuwait suggested they are unlikely to cut output soon. • Inflation expectations in the euro zone dropped further over the previous days with the ECB’s closely-watched 5yr 5yr forward falling to new lows around 1.82%, suggesting that the ECB is losing credibility in its fight against too low inflation. • Today, the eco calendar contains UK CPI inflation data, EMU industrial production, German ZEW indicator and US NFIB small business confidence. EU Finance Ministers meet in Luxembourg. In the US, the Q3 earnings season heats up with results of JP Morgan, Wells Fargo, Citigroup and Intel (aft mkt). P. 1 Tuesday, 14 October 2014 Rates Modest losses for core bonds, as initially calm returned to equities US equities tank in late session Successful BTP auction 2 5 10 30 US yield 0,4039 1,4811 2,2467 2,9959 -1d -0,0240 -0,0555 -0,0390 -0,0181 2 5 10 30 DE yield -0,0430 0,1620 0,8880 1,8060 -1d 0,0120 0,0200 0,0150 0,0400 Weak EMU production data Downside risks ZEW and NIFB sentiment Calm returns to bond markets, not to equity markets Yesterday, German bonds lost some ground, as the sentiment on risk initially improved. Trading was thin in the absence of US bond investors (Columbus market holiday) and amid an empty eco calendar. During the US equity session (Wall Street remained open), the selling resumed and Wall Street closed an ugly 1.65% (S&P) down, a technically highly relevant move. It surprisingly didn’t affect Bund trading anymore. In a daily perspective, German yields were up to 2 bps higher, the 30-yr slightly underperforming. US yields dropped in overnight Asian trading by 2-5 bps. The 30-year yield trades below 3%. IntraEMU bond trading was rather uneventful too. France shrugged off the rating outlook downgrade by S&P, while Finnish bonds ignored the loss of the AAA rating (S&P). BTPs digested the fresh supply without problems (see below). The eco calendar heats up today with the euro zone industrial production data, the German ZEW indicator and US NFIB small business confidence. EU Finance Ministers meet in Luxembourg and the US earnings season heats up with results of JP Morgan, Johnson & Johnson, Wells Fargo, Citigroup, Intel… After increasing by 1.0% M/M in July, euro zone industrial production is forecast to have weakened again in August. The consensus is looking for a quite strong 1.6% M/M decline, mainly due to very poor data from Germany (-4.0% M/M). Other national production data were more mixed, but we see no reasons for an upward surprise. In Germany, the ZEW indicator is forecast to extend its downward trend in October. In September, the ZEW index weakened only marginally, from 8.6 to 6.9, but a more significant drop is expected for October, to zero. We continue to see risks for a downward surprise after very poor eco data from Germany in recent weeks and as the ECB’s measures were unable to boost sentiment. In the US, NFIB small business confidence is expected to remain little changed in September. The consensus is looking for a drop from 96.1 to 95.9, but after the weakening in the manufacturing and nonmanufacturing ISM, we see risks for a weakening in NIFB small business sentiment too. Bund future (black) & Dax (orange) (intra-day): Bunds lower in morning session as equities find their composure. Later on sideways Bund trading despite steep fall S&P (not on chart)t Following Dax last Friday, the S&P dropped below previous low, painting bearish double top on charts. End uptrend? Given special trading conditions yesterday, confirmation is needed today. P. 2 Tuesday, 14 October 2014 R2 R1 BUND S1 S2 151 150,78 150,41 149,97 149,45 -1d -0,21 The Dutch debt agency taps the on the run 3-yr DSL (0.5% Apr2017) for €3.5B. In the run-up to the auction, the bond cheapened around 2 bps in ASW spread terms. The bonds also trades relatively cheap at the 2016-2019 part of the Dutch curve, which should be supportive for the auction. The risk off climate is a positive for better credits. Overall, we expect a plain vanilla outcome. So far, the Netherlands completed around 90% of this year’s funding need. The ECB holds its weekly MRO tender. Last week, 139 banks asked for €84.3B of liquidity. Since the low take-up at the first TLTRO, allotted amounts at the MRO’s remained rather low as well. Tonight we’ll report on the outcome and implications for eonia and excess liquidity (currently €122B). Eonia still has negative fixings. Overnight, most Asian equity markets trade with small gains (Japan underperforms) despite yesterday’s horrible finish on WS. The S&P 500 shed 1.65% with the index below the 1905 neckline of a large double top. If this break is confirmed, it would definitively change the technical picture and open the path for correction towards 1800. The German Dax closed higher yesterday, but failed to regain similar (previous) key support (8900/9000 area; neckline multiple top formation). Reuters quoted Saudi officials saying that they will accept oil prices down to $80/barrel for as long a year or two. The oil price is currently testing key support around $88/barrel (2012 low). In Spain, Arthur Mas called off the controversial independence referendum planned for November. This could be marginally supportive for Spanish bonds. The US Note future is off yesterday’s highs this morning, but given yesterday’s extremely thin trading condition (Columbus Day) we won’t draw conclusions from it for the Bund opening. Today, the eco calendar includes IP data in EMU and German Zew. Risks for both are for a lower outcome, which could strengthen fears about the global economic outlook (positive for bonds). For the IP that shouldn’t surprise given weakness in national numbers. In the US, NFIB business optimism might be lower than expected as well. Apart from the eco data, the earnings season really kicks off with amongst others several US financials. These could impact equity market sentiment which is an important driver for bond markets of late. Any slowdown in the downward correction of equities (which thus arrived at key levels), could stabilize bonds at best (ie 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. Bund future (Dec contract): Bullish picture remains intact with a test of the contract high US Note future: new contract high in thin trading conditions. Confirmation today? P. 3 Tuesday, 14 October 2014 Currencies R2 R1 EUR/USD S1 S2 1,2901 1,2791 1,2721 1,2606 1,2501 -1d 0,0051 USD/JPY drops (temporary) below 107 EUR/USD drifting higher in consolidation pattern Risk-off trade to slow today? Eco calendar probably provides a mixed picture for USD trading. Earnings are a wildcard Risk-off sentiment keeps the dollar in the defensive After the sell-off of risky assets last week, there was no sign that the storm had past, especially not for US equities, even as a lot of traders enjoyed a holiday for Columbus Day. Initially, the negative fall-out of (US) equity performance on core bond yields and on the dollar was limited, but a forceful selling wave still hit the dollar after the close of the US equity markets. USD/JPY dropped below the 106 barrier. EUR/USD spiked above the 1.2750 area. The correction top of 1.2791 stayed out of reach. Overnight, there are tentative signs that the risk-off trade is petering out. Asian equities show moderate gains (Japan is an exception, but had some negative catching up to do after yesterday’s holiday). The tentative slowdown in the selloff of risky assets also gives the dollar some downside protection. USD/JPY tries to regain the 107 mark. EUR/USD is drifting south in the 1.27 big figure. Later today, the eco calendar is moderately interesting. In Europe, the ZEW investor confidence and the EMU industrial production data will be released. It is difficult to expect good news from these indicators. If the reaction on the equity markets stays limited, it would be an indication that the risk-off trade is slowing. Of late, the reaction of the dollar to the risk-off trade was a bit ambiguous. However, if calm returns and if core bond yields bottom out, this might be a positive for the dollar. In the US, NFIB small business confidence will be published. A small setback from 96.1 to 95.8 is expected. We see a downside risk. If so, it would be no good news for the dollar, especially not as the Fed is softening it stance on policy normalisation in case growth slows. (Currency) markets usually only react to the NFIB in case of a substantial surprise. Today, the US earnings season starts in earnest , with several US banks and Intel publishing results. Will corporates counterbalance the current market fear on global growth? The market reaction will also affect market expectations on the pace of the Fed normalisation process and thus on the dollar. In a day-to-day perspective, the global picture for USD trading hasn’t change. USD/JPY is still fighting an uphill battle. The dollar is also under moderate pressure against the euro, but the correction top at 1.2791 stays in place. We maintain the working hypothesis that this level might hold, but confirmation is still needed. In this respect we keep a close eye at the short-term US yields. Will the US 2-year yield drop further below 0.40% ? USD/JPY: 107 mark under test EUR/USD: consolidation in the 1.2500/1.2800 range P. 4 Tuesday, 14 October 2014 LT downtrend remains in place. ST consolidation R2 R1 EUR/GBP S1 S2 0,8066 0,8010 0,7917 0,7850 0,7755 -1d 0,0055 Will UK inflation data provide the BoE an excuse to delay policy normalization? EUR/GBP: tries to regain 0.79 EUR/GBP tries to regain the 0.79 level 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. Will UK inflation put sterling further under pressure? On Monday, trading in the sterling cross rates was again driven by global factors as there was little news from the UK. BoE’s Carney in a speech kept a soft tone, but said nothing really new. The late session rebound in EUR/USD also propelled EUR/GBP above 0.79. Cable was also temporary affected by this dollar sell-off, but the rebound was quickly reversed. Overnight, BRC like-for-like retail sales were weak. The impact on sterling trading was limited. By the publication of the report, the short-term setback of cable was already finished. Today, the UK inflation/price data will be published. Headline and core inflation are both expected to decline slightly to 1.4% Y/Y and 1.8% Y/Y. In a British context, this is already a low level, but a downside surprise is not excluded. If so, it might signal that the BoE can also take its time to start policy normalisation. Such a scenario would allow some further correction of sterling. Cable: consolidation in the 1.60/62 area 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. P. 5 Tuesday, 14 October 2014 Calendar Tuesday, 14 October US 13:30 Japan 01:50 01:50 UK 01:01 10:30 10:30 10:30 10:30 10:30 10:30 EMU 11:00 11:00 Germany 11:00 11:00 France 08:45 08:45 Italy 10:00 10:30 Belgium 15:00 Spain 09:00 Sweden 09:30 09:30 Events US DE BE UK JP IRS 3y 5y 10y Currencies EUR/USD USD/JPY GBP/USD AUD/USD USD/CAD Previous NFIB Small Business Optimism (Sep) 95.8 96.1 PPI MoM YoY (Sep) Money Stock M2/M3 YoY (Sep) A -0.1%/3.5% A 3.0% / 2.5% -0.2% / 3.9% 3.0% / 2.4% BRC Sales Like-For-Like YoY (Sep) CPI MoM YoY (Sep) CPI Core YoY (Sep) PPI Input NSA MoM YoY (Sep) PPI Output NSA MoM YoY (Sep) PPI Output Core NSA MoM YoY (Sep) ONS House Price YoY (Aug) A -2.1% 0.2% / 1.4% 1.8% -0.5% / -6.7% -0.1% / -0.3% 0.0% / 0.9% -- 1.3% 0.4% / 1.5% 1.9% -0.6% / -7.2% -0.1% / -0.3% 0.1% / 0.9% 11.7% ZEW Survey Expectations (Oct) Industrial Production MoM YoY (Aug) --1.6% / -0.9% 14.2 1.0% / 2.2% ZEW Survey Current Situation (Oct) ZEW Survey Expectations (Oct) 15.0 0.0 25.4 6.9 Current Account Balance (Aug) CPI EU Harmonized MoM YoY (Sep) --0.3% / 0.4% -2.2B 0.5% / 0.5% CPI EU Harmonized YoY (Sep F) General Government Debt (Aug) -0.2% -- -0.2% 2168.6B Trade Balance (Aug) -- 137.8M CPI EU Harmonised MoM YoY (Sep) 1.0% / -0.3% 0.1% / -0.3% CPI MoM YoY (Sep) CPI CPIF MoM YoY (Sep) 0.5% / -0.1% 0.5% / 0.6% -0.1% / -0.2% 0.0% / 0.5% JP Morgan (13:00), Johnson & Johnson (13:45), Wells Fargo (14:00), Citigroup (14:00), Intel (aft mkt) Announce Q3 Earnings EU Finance Ministers Meet in Luxembourg 09:00 10-year Consensus td 2,25 0,89 1,18 2,17 0,50 - 1d -0,04 0,02 0,01 -0,06 -0,01 EUR 0,271 0,461 1,103 USD (3M) 1,068 1,650 2,351 1,27165 107,135 1,606 0,8779 1,1216 - 1d 0,0044 -0,15 -0,0057 0,0056 0,0018 GBP 1,338 1,714 2,256 US DE BE UK JP 2 -year td 0,40 -0,05 0,01 0,62 0,07 - 1d -0,02 0,01 0,01 -0,08 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 136,18 0,7917 1,2085 9,0702 8,2412 STOCKS 16321 ermissioned 14937 8812,43 2998 - 1d 16321,07 #VALUE! 14936,51 8812,43 2998,32 td -0,018 0,51 0,56 0,70 -1d -0,012 0,51 0,56 0,70 CRB 276,721 1,12 GOLD 1234,4 0,00 - 1d Commoditie 0,22 0,0065 - 1d 0,0009 -0,07 0,01 BRENT 88,26 -0,69 P. 6 Tuesday, 14 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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