Friday, 17 October 2014
Rates: Profit taking ahead of the weekend if equities recover?
After a failed test of the high, the Bund shrugged off heavily overbought conditions. Sentiment on equity markets/risk
remains the most important trading factor for today. A speech by Fed chairwomen Yellen is a wildcard. Yesterday, a first Fed
governor called to delay the end of QE.
Currencies: USD hardly profits from good US eco data as risk-off trade slows
Yesterday, EUR/USD was temporary under pressure as intra-EMU spreads widened. However, the dollar also wasn’t in great
shape, despite strong US eco data. USD/JPY tries to build a bottom. EUR/USD settles in the 1.28 area. EUR/GBP succeeded a
nice downward correction after a rejected test op the topside on Wednesday.
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 reversed early losses yesterday to end the session flat. The S&P
closed marginally up led by a rebound in energy and materials shares. In Asia
this morning, sentiment weakened during the session. Most Asian shares trade
lower led by Japanese stocks. Chinese shares erased their gains on signs that the
trading link between Shanghai and Hong Kong will be delayed.
•
Russia is taking the European Union to court over sanctions imposed on some
of its biggest companies, the FT reports. The state oil company Rosneft and
Arkady Rotenberg have both launched legal challenges to the sanctions.
•
German Chancellor Merkel said yesterday that all member states must accept
in full the strengthened EU fiscal rules, raising tensions with France and Italy,
just one day after they submitted budgets to Brussels that challenge those
limits.
•
After dropping to new lows, Brent crude oil prices ($86.30/barrel) edged up
yesterday as risk-off sentiment eased, supported by stronger US eco data and
lower than expected US inventory data.
•
After the close in the US yesterday, Google’s third quarter earnings missed
expectations due to slower growth in advertising, heavy spending and a higher
tax bill.
•
Today, the eco calendar contains the US housing starts and building permits and
University of Michigan consumer confidence. ECB’s Coeure, Constancio,
Nowotny and Weidmann are scheduled to speak and also Fed Chairwoman
Yellen will take the stage
P. 1
Friday, 17 October 2014
Rates
Panic in markets subsides
Core bonds gave back part of
previous gains
Greek bonds remained under
pressure
2
5
10
30
US yield
0,3353
1,3605
2,134
2,9222
-1d
0,0238
0,0547
0,0418
0,0268
2
5
10
30
DE yield
-0,0420
0,1570
0,8190
1,6790
-1d
0,0120
0,0450
0,0630
0,0270
Thin eco calendar
Fed Yellen speaks
On Thursday, the session had two faces. Initially equities and credit spread
products (especially peripherals) were heavily hit, a continuation of the past riskoff sessions. The Spanish bond auction went bad and Greek concerns grew. Core
bonds tested highs (German 10-yr yield 0.72%). However, the tide turned around
noon. Equities found a bottom and rose very gradually higher while the sharp selloff in the peripheral bond stopped. Various factors contributed to the turnaround.
First, oversold conditions in equity markets and overbought ones in the core bond
markets. Second, the EU released a statement on Greece, pledging that it will do
whatever is necessary for Greece to regain the confidence of investors. The Greek
10-yr yield stopped its surge higher a tad below 9%. The ECB also raised the amount
of loans available to Greek banks by around €10B and adjusted haircuts on Greek
government bonds. Later in the session, riskier markets got help from strong US eco
data, even if the immediate post-publication reaction was modest. Finally, St-Louis
Fed Bullard suggested that the Fed may delay the end of its QE programme (that
normally should be finished at the October FOMC) and wait for more evidence on
inflation and growth. So, US equities managed to close the session virtually
unchanged. German 10-year yields rose by 1 (2-yr) to 6.4 bps (10-yr) and US yields
by 1.8 to 3.6 basis points (bull flattening). Peripheral and semi-core 10-yr bonds
trimmed the spread widening to less than 10 bps. The Greek 10-yr yield spread still
widened by 104 bps (8.96% yield) suggesting that announced measures didn’t ease
all concerns.
Today, in the US, the housing starts and permits and Michigan consumer
confidence will be released. ECB’s Constancio and Nowotny are scheduled to speak
as well as Fed Chairwoman Yellen and the ECB will announce the amount of LTRO
repayments.
Bund future (black) & Dax (orange) (intraday): Risk off correction
continued in the morning session, but the tide turned more positive
on risk later on.
Upside risks housing starts & permits
Downside risk Michigan consumer
confidence
10-yr German Spanish yield spread: Sharp widening in the morning,
but almost completely reversed in the afternoon.
Recently, both US housing starts and permits have been very volatile, showing huge
month on month swings. The underlying trend remains positive, although the
recovery has slowed substantially, we believe that the risks are for an upward
surprise. The first estimate of University of Michigan consumer confidence for
October is forecast to show a limited weakening in sentiment.. Risks might tilt to
the downside.
P. 2
Friday, 17 October 2014
R2
R1
BUND
S1
S2
153
152,49
151,15
150,63
150,21
-1d
-0,54
St. Louis Fed Bullard said yesterday that the Fed should consider delaying the end
of its QE-programme to halt a decline in inflation expectations. The US 5yr5yr
inflation swap fell from around 3% this summer to 2.61% currently. This indicator
stood around 2.5%/2.6% when the Fed launched QE-2, operation Twist and QE-3.
Bullard is the first Fed governor to publically call for an extension of QE. His
comments are quite remarkable as the Fed governor also confirmed his view of a
first rate hike in Q1 2015. A pause in purchases would be a “low cost move that we
could make, because purchases are already at a low level – it would buy us a little bit
of optionality, a little bit of ability to take a more aggressive stance if we had to.”.
His comments had an intraday price impact (especially equity and currency market).
We closely monitor speeches from other governors for more clues ahead of the Oct
29 Fed-meeting
Today, rating agency Moody’s might review the Spanish rating. Spain is currently
rated Baa2 with a positive outlook. A one-notch increase would bring the rating in
line with Fitch’s BBB+ rating (stable outlook). S&P rates Spain BBB (stable outlook).
An upgrade would be marginally supportive for Spain.
Overnight, Asian equity markets are mixed with China and Japan
underperforming. Yesterday evening, WS managed to regain opening losses.
There is no headline news and the Note future is upwardly oriented.
Today, the eco calendar is thin with US housing data and Michigan confidence.
We forecast a mixed outcome which would be irrelevant to trading. ECB
speakers are plenty with Coeure, Constancio, Nowotny and Weidman but the
big wildcard for today is a speech by Fed chairwoman Yellen. Will she voice
confidence in the recovery of US labour market or voice concern about the
inflation outlook? What about the disconnect between the Fed’s rate
projections (1.375% policy rate at end 2015) and market expectations (1st rate
hike in Feb2016)? Is the Fed on the eve of changing its forward guidance?...
Apart from these items, equity market sentiment remains key. Dark
expectations about the global economy/inflation and fears that monetary
policy reached its limits took investors hostage this week. European/US equities
suffered but yesterday we had some first signs of consolidation. Any
slowdown/consolidation in the downward correction of equities, could be a
signal for bonds to further shrug off overbought conditions. Ahead of the
weekend, profit taking is likely. In that respect, Wednesday’s trading session
could have been something of an exhaustion move. If the sell-off on equity
markets continues though, we will likely revisit contract highs/gradually move
to the intraday lows in yield terms (see above). The technical picture is bullish
for bonds.
German Bund future: more correction/profit taking ahead of the
weekend?
US Note future: Volatility remains high, uptrend intact. Time for
some profit taking?
P. 3
Friday, 17 October 2014
Currencies
Dollar decline slows
R2
R1
EUR/USD
S1
S2
1,2995
1,2886
1,2802
1,2606
1,2501
-1d
0,0005
Dollar hardly profits from good US
eco data as global risk-off trade
calms down
The jury is still out whether the riskoff trade has finished
The eco calendar is rather thin today
Fed’s Yellen speech is a wildcard
The ‘rollercoaster’ ride for EUR/USD continued yesterday. On Tuesday, the euro
was hammered by poor regional data. On Wednesday, the dollar was hit by a
similar set of disappointing price and activity data. Yesterday, the focus turned
again to the euro. Widening intra-EMUU credit spreads pushed EUR/USD
temporary below the 1.28 level. (Currency) trading was some kind of erratic in
nature. The price pattern in USD/JPY is a bit more logical. The pair more or less
follows the usual risk-on/risk-off pattern. Strong US eco data had only a very
limited impact on USD trading.
Yesterday in the US, the storm in the equity markets calmed down. USD/JPY tries to
build a bottom and is changing hands in the low 106 area this morning. EUR/USD
settled in the 1.28 area. So far, the easing of tensions doesn’t help the dollar against
the euro. Fed Bullard said yesterday that the Fed should consider delaying the end
of asset purchases to stop a decline in inflation expectations. This soft Fed talk
probably weighs on the dollar. Despite signs of stabilisation in the US yesterday
evening, many Asian equity indices show losses. So, the jury is still out whether
the risk-off trade is ending.
Today, several ECB members will speak, while in the US, the housing starts &
permits and Michigan consumer confidence will be published. Housing data are
notoriously volatile. For the Michigan confidence, we see downside risks to the
consensus. Looking at the price action yesterday, there could be an asymmetrical
risk. Strong data were ignored by the dollar. Poor data might still add to global
nervousness and reduce interest rate support for the dollar. This applies in the first
place for USD/JPY. For EUR/USD, the picture is a bit more mixed. Weakness in
Europe is blamed as the major source of global uncertainty and tensions in the EMU
bond markets might be a negative for the euro, too. That said, a big downside leap
in EUR/USD is unlikely at this stage. There is still another wildcard left for USDtrading. Fed ‘s Yellen will speak on inequality in Boston. Will she feel the need to
give markets some guidance in the current storm? As mentioned earlier this week,
we continue to monitor short-term US yields. Will the dollar regain interest rate
support when tensions ease? The 2-year US bond yield is off the lows, but at 0.33%,
is still very low giving little support for the dollar. (It was almost 60 bps three weeks
ago).For now, we expect more erratic, sideways trading in EUR/USD. For USD/JPY
we are not convinced that a sold bottom is already in place.
USD/JPY: Looking for a bottom?
EUR/USD: downside looks still quite difficult for now
P. 4
Friday, 17 October 2014
From a technical point of view, USD/JPY came close to the 110.66 resistance, but
the rally ran into resistance. The difference in monetary policy between the US and
Japan should be supportive for USD/JPY longer term. However, short-term the pair
is in correction modus. The reaction of USD/JPY (and of US bond yields) after the
payrolls and after the Fed Minutes suggests that the topside in USD/JPY is difficult
short-term. Risk-off sentiment is a short-term negative, too. We stay on the sidelines and wait for signs of a bottoming out.
LT downtrend remains in place.
Short-term correction regains first
significant resistance at 1.2791
R2
R1
EUR/GBP
S1
S2
0,8153
0,8066
0,7958
0,7900
0,7850
-1d
-0,0060
Sterling fighting back after recent
weakness
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. The
trend is intact, but the price action since the middle of 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 return above
1.2791 is an additional sign of short-term USD weakness. A re-break above 1.2995
would be really significant and suggest a real loss of momentum in the longstanding
EUR/USD downtrend. This is not our preferred scenario, but in this high-volatile
environment, caution is warranted.
EUR/GBP declines after rejected test of the topside
Yesterday, sterling trading was still driven by non-UK factors and technical
considerations. Wednesday’s rejected test of the topside in EUR/GBP blocked the
upside in this cross rate too. Peripheral spread widening was a negative for the
euro across the board. EUR/GBP returned below the 0.80 mark. The 0.7750/0.8066
range continues to hold. Cable initially held a ‘tight range’ mostly in the upper half
of the 1.59 big figure, but found a good bid later in the session. The pair even tested
the 1.61 barrier overnight.
Today, there are again no important eco data on the calendar in the UK. So, more
technical trading can be expected. Earlier this week, sentiment on sterling was
fragile and lower than expected UK inflation weighed too. However, the rejected
test of the EUR/GBP topside on Wednesday and yesterday’s follow-through price
action suggests that sentiment on sterling has improved. The 0.7755/0.8066
consolidation range looks well in place. We look to sell into strength for return
action lower in this range.
EUR/GBP: nice correction
Cable tries to build a bottom
P. 5
Friday, 17 October 2014
Calendar
Friday, 17 October
US
14:30
14:30
15:55
Canada
14:30
14:30
EMU
08:00
11:00
12:00
Italy
11:00
Events
US
DE
BE
UK
JP
IRS
3y
5y
10y
Currencies
EUR/USD
USD/JPY
GBP/USD
AUD/USD
USD/CAD
Previous
Housing Starts Total/MoM (Sep)
Building Permits Total/MoM (Sep)
Univ. of Michigan Confidence (Oct P)
1008K/5.4%
1030K/2.7%
84.0
956K/-14.4%
998K
84.6
CPI MoM YoY (Sep)
CPI Core MoM YoY (Sep)
0.0% / 2.0%
0.1% / 2.0%
0.0% / 2.1%
0.5% / 2.1%
EU27 New Car Registrations (Sep)
Construction Output MoM YoY (Aug)
GDP Statistics After ESA 2010 Adoption
A 6.4%
---
2.1%
0.0% / 0.4%
--
Current Account Balance (Aug)
--
6816M
General Electric (bef mkt), Bank of New York (12:30), Morgan Stanley (13:15)
Announce Q3 Earnings
ECB’s Coeure Speaks on What have we Learned from the Crisis in Riga
ECB's Constancio Speaks on Banking Beyond Banks in Frankfurt
ECB's Nowotny Speaks at Gewinn Messe in Vienna
ECB’s Weidmann Speaks on Reforms for Recovery and Resilience in Riga
ECB Announces 3-Year LTRO Repayment
Fed's Yellen Speaks at Boston Fed Conference on Inequality
08:45
09:45
10:00
11:00
12:00
14:30
10-year
Consensus
td
2,13
0,82
1,21
2,12
0,47
- 1d
0,04
0,04
0,13
0,18
-0,02
EUR
0,291
0,469
1,076
USD (3M)
0,968
1,541
2,270
1,2804
106,24
1,6083
0,8742
1,1251
- 1d
0,0007
0,01
0,0128
-0,0033
-0,0020
GBP
1,282
1,640
2,181
2 -year
US
DE
BE
UK
JP
td
0,34
-0,04
0,02
0,59
0,05
- 1d
0,02
0,01
0,04
0,07
-0,02
DOW
16117
ermissioned
NASDAQ
NIKKEI
14533
DAX
8582,9
DJ euro-50
2875
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
135,97
0,7958
1,207
9,1613
8,3872
STOCKS
- 1d
16117,24
#VALUE!
14532,51
8582,90
2874,65
td
-0,012
0,51
0,56
0,69
-1d
-0,001
0,51
0,56
0,69
CRB
- 1d Commoditie
0,03
272,6943
-0,0061
- 1d
1,39
0,0002
-0,02
0,00
GOLD
1240,7
1,24
BRENT
86,33
3,35
P. 6
Friday, 17 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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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