Friday, 17 October 2014
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 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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