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Friday, 24 October 2014
Rates: Stronger EMU PMI’s and risk-on sentiment weigh on core bonds
German bonds fell on a stronger PMI, but weaker details may have contained the decline. US Treasuries fell moderately on
stronger equity sentiment. Has US-German 10-yr yield spread bottomed? Today, a New York Ebola case and upcoming
AQR/Stress test results may favour safe haven bonds. However, can Bund recapture uptrendline at 150.61?
Currencies: USD rebound rally to take a breather
Yesterday, the dollar stayed well bid as global sentiment on risk was constructive. USD/JPY returned north of 108. EUR/USD
traded rather stable despite a better than expected EMU PMI. This morning, sentiment on risk is less buoyant. This might
weigh on the dollar. Sterling traders will look out for the first estimate of the UK Q3 GDP.
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 closed with more than 1% gains. Towards the end of the session,
rumours of an Ebola case in New York weighed though. This morning, most
Asian shares trade slightly positive. Gains are limited by the Ebola case and
weaker Chinese property prices.
•
A doctor who had returned to NYC recently after treating Ebola patients in
West Africa tested positive for the virus on Thursday, officials said, setting up a
new front in the nation’s attempt to control the spread of the deadly disease.
•
Chinese new home prices fell across the country in September, underscoring
fears over the growth of the world's second biggest economy. Prices fell in 69 of
70 cities in September from the previous month.
•
South Korea’s growth picked up last quarter (0.9% Q/Q) on public spending and
revived consumption, a boost to President Park Geun Hye as policy makers try to
spur the economy with fiscal and monetary stimulus.
•
BASF, the world’s biggest chemical maker, cut 2015 profit targets by more than
expected , signalling weaker demand for basic and specialty chemicals. EBITDA
will probably be €10-12B next year, compared to a previous forecast of €14B.
•
Today, the eco calendar is thin with UK Q3 GDP and US New home sales. EU
Leaders continue their two-day Summit in Brussels. On Sunday, the ECB
releases the results of the Asset Quality Review
P. 1
Friday, 24 October 2014
Rates
Strong EMU business sentiment push core bonds lower
Bonds lose modest (Germany) to
moderate (US) ground
German curve steepens
US 5-yr underperforms on curve
2
5
10
30
2
5
10
30
US yield
0,3782
1,4699
2,2499
3,0305
DE yield
-0,0400
0,1730
0,9050
1,7980
-1d
0,0119
0,0439
0,0388
0,0456
-1d
0,0020
0,0370
0,0520
0,0510
On Thursday, better than expected EMU PMI’s and the ongoing equity rally on
an improvement of risk sentiment weighed on core bonds. The downleg once
again lacked panache though, maybe as weaker details took the shine of a
promising rebound in headline business confidence in the manufacturing
sector. In a daily perspective , the German yield curve bear steepened. Yield
changes ranged between flat and +3.9 bps. The US Treasuries had somewhat
more difficulties to limit the losses and underperformed with yields 2.8 bps (30yr) to 6.7 bps (5-yr) higher. A new Ebola case in NY was revealed in late trading,
pushing equities off the highs and allowing Treasuries to bottom. It set the
scene for a rebound of US Treasuries in Asian overnight trading.
After yesterday’s PMI’s, the euro zone eco calendar is less enticing today with
only some national data and the EMU Q2 government deficit figures. In the US,
the new home sales are on the agenda, while the UK will publish the first
estimate of Q3 GDP. EU leaders will continue their Summit and markets will
also look forward to the results of the asset quality review/stress tests of the
banking sector, which will be published on Sunday. In the US, new home sales
rose sharply in August, by 18% M/M to a new cyclical high of 504 000. After the
exceptional jump in August, a drop by 6.8% M/M is expected, to 470 000. Due to
strong volatility in the data, we believe that even a bigger drop is not excluded.
Nevertheless, we expect the upward trend in home sales to remain in place. In
the UK, growth is forecast to have remained exceptionally strong in Q3. The
consensus is looking for an increase by 0.7% Q/Q (3% Y/Y), following a 0.9% Q/Q
(3.2% Y/Y) in Q2. We see risks for a weaker outcome.
T Note future (black) & S&P future (orange) (intraday):EMU PMI
surprise and risk-on shows up in a near perfect inverse relationship.
US/German 10-year yield spread narrowed quite sharply in past
month as market expectations on US changed drastically. We
suspect the spread narrowing is over now. .
The EU leaders reached an important agreement on cutting greenhouse gas
emissions by 40% (from 1990 levels) in 2030. The goal will be reviewed after
the UN Paris conference next year. Eastern countries get compensations to help
modernize their industry. To win over Portugal and Spain, Europe’s electrical
grid shall be better connected, allowing countries to export 15% of their
generational capacity by 2030. Member states also agreed that 27% of Europe’s
energy should come from renewables by 2030. The agreement showed that the
EU is still able to make progress on the political front.
P. 2
Friday, 24 October 2014
As such, it is confidence-building. However, that should now also become visible
in economic policy domain too. The economic and employment situation will
figure on the agenda today during the euro Summit. Mario Draghi will introduce
the subject. Officially, the government finances are not on the agenda.
R2
R1
BUND
S1
S2
152,49
150,61
150,26
149,91
147,63
-1d
-2,01
Today, rating agency Fitch could review the Spanish and Italian ratings. Spain
and Italy are both rated BBB+ (stable outlook). No changes are expected. Both
countries are already rated higher by Fitch than by Moody’s or S&P. On top, we
believe that chances are rather low that we still get an update from Fitch.
Generally, S&P and Fitch releases updates on Friday morning, while Moody’s
tends to wait until after the closure of US markets.
Overnight, most Asian equity markets trade positive. Gains are relatively
small compared to Europe or WS. One possible explanation might be late
WS weakness because of the NY Ebola case. Another one is the further
decline in Chinese property prices (September data). South Korean Q3 GDP
growth was in line with expectations (0.9% Q/Q; 3.2% Y/Y) but irrelevant to
trading. Finally, EU leaders agreed to LT climate targets but we don’t think
that it will influence the start of European dealings. A huge profit warning
by BASF is a negative for German equities and positive for the Bund.
Overnight, the US Note future trades modestly higher, suggesting a better
opening for the Bund as well.
Today, the eco calendar is thin with second tier national data in EMU and
US New home sales. Q3 GDP data in the UK might impact global markets in
case of a significant deviation from consensus (0.7% Q/Q). Especially a
downward surprise won’t go by unnoticed given recent fears of a global
economic cool down. Sentiment on equity markets is the second factor to
guide bond trading. Core bonds profit from weak equity markets whereas
this relationship isn’t very strong in the opposite direction (eg yesterday
German 10-yr yield +3 bps while DAX +1.2%). On intra-EMU bond markets,
volatility increased as well of late. Risk-off sessions trigger large corrections
higher. Cautiousness is warranted. Finally, this weekend’s release of the
ECB stress test (AQR) could be slightly positive for core bonds if investors
position for this event risk.
Technically, the German Bund closed below the uptrend line since June. If
the break is confirmed, it is a first indication that the bull run slows. A
sustained drop below 149.91 would change the ST technical picture to
neutral. For the US Note future, attention could already start shifting to
next week’s FOMC meeting (slower trading).
German Bund future: drop below uptrendline first indication that
bull run slows. Break below 149.91 changes ST picture to neutral
US Note future: Countdown to the Fed started?
P. 3
Friday, 24 October 2014
Currencies
EUR/USD decline slows
Dollar rallied on positive risk
sentiment, but rebound slows;
R2
R1
EUR/USD
S1
S2
1,2886
1,2840
1,2656
1,2606
1,2501
-1d
0,0011
Ebola fears cap dollar rebound
Global sentiment might be slightly
negative for the dollar today
AQR is a factor of uncertainty in
Europe.
Yesterday, trading in the major currency cross rates was driven by conflicting
signals. The data in both the US and Europe were supportive for the local
currency. USD/JPY was the outright winner and returned to the 108 area. The
decline in EUR/USD slowed as the EMU PMI’s were better than expected. At
the same time, the dollar was resilient, too. The US data were OK and the rise
in equities and yields was (slightly) supportive, too. EUR/USD settled in the
1.2650 area.
Overnight, sentiment on risk turned more cautious as a doctor tested positive
for Ebola in New York. An official report in China showed that property prices
declined in 69 of the 70 cities monitored in the survey. Asian equities trade
mixed. Japan outperforms on yesterday’s rebound in USD/JPY even as the pair is
off the highs. It returned to the 108 area. EUR/USD trades stable in the 1.2650
area.
Today, the calendar is thin with only second tier eco data scheduled for release
in the EMU. The UK GDP (expected at 0.7% Q/Q) might have some impact on
sentiment in Europe. A weaker than expected figure might suggest more dismal
news from the region. However, we don’t expect a big fall out on the euro. In
the US, new home sales are expected to decline 6.8% M/M after a spectacular
rise of 18.0% the previous month. Currency markets probably won’t draw firm
conclusions from such a volatile figure.
So, global sentiment on risk, Ebola fears and anticipation on the outcome of
the ECB AQR/stress test will set probably set the tone for trading. Going into
the start of trading in Europe, sentiment on risk is turning less optimistic and
bond yields are slightly lower. This might be a slightly negative for the dollar,
especially for USD/JPY. The AQR is some kind of a binary risk from a market
point of view. We think that the outcome of the process should be positive over
time. However, it is difficult/useless to preposition for the event, especially in
the currency market.
To conclude. We start the day with a cautious bias for USD/JPY. For EUR/USD
more sideways trading in the 1.26 big figure might be on the cards. In a longer
term perspective, we maintain a sell on upticks approach. However, some more
consolidation might be on the cards going into next week’s Fed meeting.
USD/JPY rebound running into resistance?
EUR/USD: decline slows
P. 4
Friday, 24 October 2014
LT downtrend remains in place.
Renewed bullish ST dollar picture if
EUR/USD below 1.25
R2
R1
EUR/GBP
S1
S2
0,8153
0,8066
0,7888
0,7850
0,7755
-1d
0,0011
UK Q3 GDP key factor for sterling
trading today
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 over the last two weeks suggests that
the market was too long USD. In the meantime, dollar overbought conditions
have been worked off. The 1.2043/1.1877 support is the next LT target, but a
drop below 1.25 is needed before the picture becomes again dollar bullish ST. 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 though.
EUR/GBP downtrend shows signs of fatigue
Yesterday, EUR/GBP was affected by conflicting signals. A better than expected
EMU PMI and poor UK retail sales propelled EUR/GBP to the 0.7915 area early in
the session. However, the pair returned most of the early gains as EUR/USD
reversed the post-PMI rebound later in the session. This move dragged EUR/GBP
lower, too. Cable dropped temporary lower after the UK retail sales. The 1.60
barrier was under test, but the test was rejected.
Today, the first estimate of the Q3 UK GDP will be published. The consensus
expects again good growth at 0.7% Q/Q and 3.0% Y/Y. We see some downside
risks . If it materialises, so, it would be negative for sterling. Less buoyant
growth will be important input for the November BoE meeting.
Of late, we had a sell-on upticks approach for EUR/GBP. We maintain the view
that the trend in EUR/GBP stays downward longer term. Short-term, the trend
shows some signs of fatigue. The 0.7850/0.7755 is a tough support short-term.
We take a more neutral approach on the EUR/GBP cross rate short-term.
EUR/GBP: 0.7850 area is strong support
Cable struggles to stay above 1.60
P. 5
Friday, 24 October 2014
Calendar
Friday, 24 October
US
16:00
UK
10:30
EMU
11:00
Germany
08:00
France
18:00
18:00
Italy
10:00
11:00
12:00
Belgium
15:00
Spain
09:00
Events
10:20
12:00
26 October (12:00)
10-year
US
DE
BE
UK
JP
IRS
3y
5y
10y
Currencies
EUR/USD
USD/JPY
GBP/USD
AUD/USD
USD/CAD
Consensus
Previous
New Home Sales Total/MoM (Sep)
470K / -6.8%
504K / 18.0%
GDP QoQ YoY (3Q A)
0.7% / 3.0%
0.9% / 3.2%
Government Deficit (Q2)
--
--
GfK Consumer Confidence (Nov)
8.0
8.3
Total Jobseekers (Sep)
Jobseekers Net Change (Sep)
3419.0k
5.9
3413.3k
-11.1
Retail Sales MoM YoY (Aug)
Hourly Wages MoM YoY (Sep)
Consumer Confidence Index (Oct)
--101.0
-0.1% / -1.5%
0.0% / 1.1%
102.0
Business Confidence (Oct)
-7.9
-7.2
PPI MoM YoY (Sep)
--
-0.1% / -0.6%
EU Leaders Continue Summit in Brussels
BASF (07:00), Volvo (07:20), Proctor & Gamble (be mkt), Ford Motor Co (13:00)
Announce Q3 Earnings
ECB's Praet Speaks on Structural Changes in the Banking Sector in Milan
ECB Announces 3-Year LTRO Repayment
ECB to Announce Results of Asset Quality Review
td
2,25
0,91
1,23
2,25
0,47
- 1d
0,04
0,05
0,01
0,05
-0,01
EUR
0,291
0,491
1,145
USD (3M)
1,019
1,632
2,372
1,2656
107,97
1,6037
0,8764
1,1215
- 1d
0,0011
0,74
-0,0016
0,0003
-0,0036
GBP
1,371
1,773
2,312
2 -year
US
DE
BE
UK
JP
td
0,38
-0,04
0,02
0,60
0,03
- 1d
0,01
0,00
0,00
-0,05
-0,01
EUR
Euribor-1
Euribor-3
Euribor-6
-1d
0,01
0,08
0,19
-2d
0,00
0,00
0,00
Currencies
EUR/JPY
EUR/GBP
EUR/CHF
EUR/SEK
EUR/NOK
136,59
0,7889
1,2063
9,1821
8,3162
STOCKS
DOW
16678
ermissioned
NASDAQ
NIKKEI
15285
DAX
9047,31
DJ euro-50
3044
USD
Eonia EUR
Libor-1 USD
Libor-3 USD
Libor-6 USD
- 1d
16677,90
#VALUE!
15285,30
9047,31
3044,30
td
0,014
0,50
0,55
0,68
-1d
-0,003
0,50
0,55
0,68
- 1d Commoditie
CRB
1,02
270,3511
0,0014
- 1d
0,00
-0,0001
-0,02
-0,05
GOLD
1230,89
-12,91
BRENT
86,52
1,72
P. 6
Friday, 24 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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London
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Singapore
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+420 2 6135 3570
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+420 2 6135 3535
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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