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Thursday, 16 October 2014
Rates: Consolidation ahead?
Yesterday’s surreal trading session took nearly the whole German yield curve to uncharted waters. In the US, the intraday
damage was even bigger with yields at one stage over 30 bps lower. Markets recovered at the end of US trading though. A
ST exhaustion move? Or will the sell-off of equities continue and provide more impetus for bonds?
Currencies: Dollar shows cracks as US data fuel disinflation fears
The dollar was hit hard yesterday after US eco data missed expectations. Risk-off sentiment pushed US bond yields sharply
lower and deprived the dollar of highly needed interest rate support. Today’s eco data should be less negative for the US
currency, but will they be strong enough to stop the rout?
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 Equity markets were hit by a sell-off yesterday, but managed to recoup part
their losses in the final two hours of trading. The S&P closed 0.81% lower led by
financials. This morning, most Asian shares trade in negative territory, but losses
remain contained. Japanese stocks underperform, losing 2%.
•
The Fed’s Beige Book showed that US economic growth remained modest to
moderate in the period until the 6th of October, with employment continuing
to expand at about the same pace as reported in the previous Beige Book,
confirming that momentum in the US economy remains strong.
•
The US Treasury Department warned yesterday that Europe risks falling into a
downward spiral of falling wages and prices and said recent actions by the ECB
may not be enough to ward off deflation.
•
Chinese banks stepped up lending in September, issuing 857.2 billion yuan of
new loans, up from 702.5 billion in August, the People’s Bank of China said
today, which might be an indication that the recent easing in monetary policy is
encouraging banks to lend more.
•
The sell-off in the oil price continues with the Brent oil price currently trading at
$82.90/barrel, the lowest level in four years. Venezuela called for an emergency
OPEC meeting, ahead of the planned gathering scheduled on November 27.
•
Chinese foreign direct investments rebounded in September after falling
sharply in August, but year to date FDI still declined, for a third straight month.
The Commerce Ministry said it expects FDI to remain on a stable trend this year.
•
Today, the eco calendar remains interesting with the final reading of euro zone
HICP inflation for September, US jobless claims, US industrial production, the
Philly Fed index and NAHB housing market indicator. A series of central bankers
are scheduled to speak and the US earnings season comes into full swing
P. 1
Thursday, 16 October 2014
Rates
Panic in markets pushes core bond yields sharply lower
Panic in markets
Growth & deflation concerns
combined with liquidation of hedge
fund main elements
Core markets rocket higher,
especially in US, but US Treasuries
well off best intraday levels
2
5
10
30
US yield
0,3115
1,3058
2,0922
2,8954
-1d
-0,0683
-0,1622
-0,1333
-0,0779
2
5
10
30
DE yield
-0,0540
0,1120
0,7560
1,6520
-1d
-0,0080
-0,0350
-0,0860
-0,0780
Greek situation merits close
watching
Correction on peripheral “logic”
Wednesday’s trading had something surreal. We’ll start with the daily changes.
Hold on tight. The German yield curve bull flattened. The 2-yr yield lost 1 bp, the
5-yr yield shed 4.5 bps (< 0.10%), the 10-yr yield dipped by 8.3 bps (<0.75%) and
the 30-yr yield fell by 10.4 bps. Yields fell even lower during the session. Yields till
the 4-yr sector are now negative and yields from 3-yr to the very long end of the
curve recorded new all-time lows. In the US, the damage was intraday even bigger.
By the end, bonds were well off their best levels, but gains were still juicy. The US 2yr, 5-yr, 10-yr and 30-yr yields closed respectively 6, 9.7, 6.1 and 3.5 bps lower. The
US 30-yr yield at some point completely retraced last year’s up-leg on the back of
the tapering tantrum. The US 10-yr yield dropped below the 2%-mark, but closed at
2.13%.
What happened today and in past days cannot be simply explained by a couple of
bad US eco data. It seems that markets are embracing a very bearish view in
which growth missing and inflation downwardly oriented. Is the market losing its
confidence in monetary/fiscal policymakers to turn the tide? Of course, special
elements might have exacerbated the intraday volatility. There was talk of a
liquidation of big positions by some hedge funds, also in the oil sector. This
unsettles normal market functioning, also due to the decline of the capacity of
market makers to hold securities on their books (as recently highlighted by the
IMF).
For the first time in a long while, PIIGS spreads versus Germany suffered from riskoff sentiment and widened significantly: Ireland (+11 bps), Spain (+15 bps), Italy
(+21 bps), Portugal (+24 bps) and Greece (+108 bps). The correction of Italy and
Spain, while rather substantial isn’t source of concern for now, but that’s different
for Greece, where 10-yr yields are now approaching 8% on ongoing political
uncertainty and the government’s plan to exit its bailout plan (which might now be
off the table).
T-Note future (black) & S&P (orange) (intraday): Wild ride in
markets on growth/deflation concern, Ebola and importantly
distress selling by some big players
S&P: Ugly intraday price action which deepened correction to about
10%. However, end of day losses contained. Is time ripe for some
nervous consolidation.
Today, the eco calendar remains enticing. Euro zone HICP inflation for September
will most likely be confirmed at 0.3% Y/Y, down from 0.4% Y/Y in August. Core
inflation is forecast to be confirmed at 0.7% Y/Y, down from 0.9% Y/Y in August. We
have no reasons to distance ourselves from the consensus, although the risks,
P. 2
Thursday, 16 October 2014
if there are any, remain on the downside. In the US, industrial production is
forecast to have rebounded by 0.4% M/M in September, following a 0.1% M/M
drop in August. Hours worked in the sector picked up, which bodes well for activity.
We believe that also a rebound in vehicle production might support the headline
reading and see therefore risks for an upward surprise. The Philly Fed index is
forecast to have weakened slightly further in October, from 22.5 to 19.7, but will
probably remain at relatively robust levels. We believe that the risks might be for a
somewhat weaker outcome following the drop in the ISM reading. Also the NAHB
housing market index will be interesting. The market is looking for a stabilization at
the post-crisis high of 59, following four consecutive monthly gains. We believe that
the risks might be for even a slight pay-back .
R2
R1
BUND
S1
S2
153
152,49
151,69
150,63
150,13
-1d
-2,19
Overnight, most Asian equity markets trade slightly lower. Losses remain
contained in line with WS’s comeback yesterday. Japan is the big
underperformer (more than 2% losses) on the back of a stronger yen. The
US Note future trades with an upward bias.
Today, the eco calendar includes final EMU CPI data and multiple US
figures. Overall, we believe they will be mixed giving no strong indication
for trading though we wouldn’t be surprised that in current sentiment
negative surprises will easier make the headlines. Apart from the data,
several ECB and Fed speakers are scheduled. These are wildcards.
Especially Fed speakers could be interesting following SF Fed Williams
earlier this week (dovish) and the big disconnection between Fed dots
(1.375% policy rate end of 2015) and market expectations (1st rate hike
February 2016) regarding the Fed funds rate. Who will shift to who in the
following weeks? Finally, equity market sentiment remains key. Dark
expectations about the global economy/inflation and fears that monetary
policy reached its limits take investors hostage. European/US equities
crashed yesterday though WS’s late comeback could be an indication of
short term consolidation to come (US Note future also returned large part
of intraday gains). Nevertheless, we remain firmly below key support
(respectively 1904 S&P & 8900/9000 Dax) which means that the technical
picture of equities is still bearish. Any slowdown/consolidation in the
downward correction of equities, could be a signal for bonds to shrug off
some of the heavily overbought conditions. In that respect, yesterday’s
trading session could be something of an exhaustion move. If the sell-off
continues though, we will likely revisit yesterday’s highs/gradually move
to the intraday lows in yield terms (see above). The technical picture is
bullish for bonds.
German Bund future: another day, another high. Time to shrug off
overbought conditions?
US Note future: reversed large part of intraday gains. Exhaustion
move?
P. 3
Thursday, 16 October 2014
Currencies
R2
R1
EUR/USD
S1
S2
1,2995
1,2886
1,2796
1,2606
1,2501
-1d
0,0143
Risk-off repositioning roils the
dollar.
USD decline slows overnight
The eco calendar today looks less
USD negative than was the case
yesterday.
Is it enough to stop the USD decline?
Dollar massively losing interest rate support
On Tuesday, the euro was hit by poor data from the EMU and UK/Norway.
Yesterday, the dollar faced a similar experience. US data including retail sales
and PPI inflation missed the consensus by a substantial margin. Disinflation
fears returned to the US and haunted the dollar. EUR/USD jumped beyond the
1.2791 resistance. USD/JPY fell (temporary) in a black hole and touched bids in
the low 105 area, before rebounding.
Overnight, the performance of most Asian equities indices is constructive.
Mainland China shows even some moderate gains. Yesterday’s setback of
USD/JPY weighs on Japanese equities (-2.0 % +), even as USD/JPY is off
yesterday’s intraday lows. The dollar remains also week against the euro.
EUR/USD is again north of 1.28, even as US equities regained a substantial part
of the intraday losses late in the US trading session. Of course, with the US 2year yield below 0.3%, the dollar lost a big part of its interest rate support.
Later today, the final August EMU CPI is expected unchanged from the advance
reading (0.3% J/J). A confirmation is likely, but a downward revision to 0.2%
could trigger renewed turmoil, this time on the euro side of the equation. We
also keep an eye on the peripheral spreads. Yesterday, there was a substantial
blow-out of Greek, Portuguese and to a lesser extent Italian spreads. For now,
this didn’t stop the rebound of EUR/USD due to the global dollar sell-off and
the unwinding of euro funded carry trades. However, more spread widening
could turn the focus back to Europe. Regarding the US, the data the risks
should be more balanced. Jobless claims are expected to remain low. Industrial
production is expected to grow 0.4% M/M, but we see upside risks. For the
Philly Fed business outlook and the NAHB housing index, we see slight downside
risks. Will today’s data be good enough to prevent a further spreading of panic?
Was yesterday’s mini-crash a short term exhaustion move? The jury is still out.
As mentioned earlier, we keep a close eye on the US 2-year yield. If the rout
halts, it should slow the decline of the dollar, especially against the euro. We
want to reinstall EUR/USD shorts, but are reluctant to already rush in.
EUR/USD: returns north of 1.28 resistance
From a technical point of view, USD/JPY came close to the key 110.66
resistance, but the rally finally 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
P. 4
Thursday, 16 October 2014
The reaction of USD/JPY (and of US bond yields) after the payrolls and after the
Fed Minutes also suggests that the topside in USD/JPY is difficult short-term.
Risk-off sentiment is a short-term negative, too. We stay on the side-lines 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
0,8018
0,7900
0,7850
-1d
0,0070
Dollar decline spills over into EUR/GBP
price action
EUR/GBP returns (temporary?) north
of 0.80.
EUR/GBP: sterling regains 0.80 mark
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 and yesterday, 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.
Yesterday’s break 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 returns north of 0.80
Contrary to the inflation data on Tuesday, the UK labour market report had no
clear message for sterling trading and was unable to kick-start a directional
move of sterling. Later in the session, the focus turned to the dollar. The dollar
was sold aggressively after poor US eco data. In this move EUR/USD again
outperformed cable, pushing EUR/GBP to a new short-term reaction high
north of 0.8000.
Today, there are no important eco data on the calendar in the UK. Of late
sentiment on sterling was already fragile and this week’s UK data confirmed the
sterling negative sentiment. A rebound in EUR/USD also pushed EUR/GBP higher
of late. If the EUR/USD rebound peters out, this could cap the topside in
EUR/GBP, too. For now, this hypothesis still needs confirmation.
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 in
no hurry as sterling momentum stays fragile. The breach above 0.79 is a further
short-term negative for sterling.
Cable: from sterling weakness to dollar weakness
P. 5
Thursday, 16 October 2014
Calendar
Thursday, 16 October
US
14:30
14:30
15:15
15:15
15:45
16:00
16:00
22:00
22:00
China
04:00
04:01
04:01
EMU
11:00
11:00
11:00
Italy
10:00
Norway
10:00
Events
US
US
DE
BE
UK
JP
IRS
3y
5y
10y
Currencies
EUR/USD
USD/JPY
GBP/USD
AUD/USD
USD/CAD
Previous
Initial Jobless Claims (Oct 11)
Continuing Claims (Oct 4)
Industrial Production MoM (Sep)
Capacity Utilization (Sep)
Bloomberg Consumer Comfort (Oct 12)
Philadelphia Fed Business Outlook (Oct)
NAHB Housing Market Index (Oct)
Net Long-term TIC Flows (Aug)
Total Net TIC Flows (Aug)
290K
2380K
0.4%
79.0%
-19.7
59
---
287K
2381K
-0.1%
78.8%
36.8
22.5
59
-$18.6B
$57.7B
Foreign Direct Investments (Sep)
New Yuan Loans (Sep)
Money Supply M1/M2 YoY (Sep)
A 1.9%
A 857.2B
A 4.8%/12.9%
-14.0%
702.5B
5.7%/12.8%
Trade Balance SA (Aug)
CPI MoM YoY (Sep)
CPI Core YoY (Sep F)
13.3B
0.4% / 0.3%
0.7%
12.2B
0.1% / -0.7%
Trade Balance Total (Aug)
--
6857M
Existing Homes QoQ (3Q)
--
3.8%
Philip Morris (13:00), Goldman Sachs (13:30), Schlumberger (aft mkt), Google (aft
mkt) Announce Q3 Earnings
ECB's Weidmann Speaks at OMFIF Meeting in Frankfurt
ECB’s Coene Speaks at conference on total factor productivity in Brussels
Fed's Plosser Speaks on the Economic Outlook in Pennsylvania
Fed's Lockhart to Speak on Workforce Development at Rutgers
ECB's Visco Speaks at OMFIF Meeting on The Stabilization of the Euro Area
Fed's Kocherlakota Speaks on Monetary Policy in Montana
Fed's Bullard Speaks on U.S. Demographics in Washington
BoE’s Cunliffe Speaks at BBA Annual Conference in London
Obligacion Auction (€2.5-3.5B 2.75% Oct2024 & 5.15% Oct2028)
OAT (€6.5-7.5B 4.25% Oct2017, 1% Nov2018 & 0.5% Nov2019) & OATi, OATei (€1-1.5B
2.1% Jul2023 OATi, 1.85% Jul2027, 0.7% Jul2023 OATei) Auction
Announces Details of 30Yr TIPS Auction
09:15
14:00
15:00
15:00
16:00
19:00
19:00
Spain
France
10-year
Consensus
td
2,09
0,78
1,08
1,94
0,49
- 1d
-0,13
-0,06
-0,05
-0,20
0,00
EUR
0,257
0,417
1,008
USD (3M)
0,917
1,483
2,225
1,2797
106,235
1,5955
0,8776
1,1271
- 1d
0,0144
-1,11
0,0042
0,0041
-0,0058
GBP
1,120
1,449
2,047
US
DE
BE
UK
JP
2 -year
td
0,31
-0,05
-0,01
0,52
0,06
- 1d
-0,07
-0,01
0,00
-0,06
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
135,93
0,8018
1,2068
9,1842
8,3890
16142
ermissioned
14738
8571,95
2893
- 1d
16141,74
#VALUE!
14738,38
8571,95
2892,55
td
-0,011
0,51
0,56
0,69
-1d
0,015
0,51
0,56
0,69
- 1d Commoditie
CRB
0,12
271,3092
0,0069
- 1d
-2,59
-0,0004
0,02
0,07
GOLD
1239,46
13,56
STOCKS
BRENT
82,98
-2,30
P. 6
Thursday, 16 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
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Institutional Desk
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London
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Singapore
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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