Wednesday, 14 January 2015
Rates: ECJ’s advice on OMT first of January event risks
Sentiment at the start of trading is risk-off with Asian equities and commodity prices under downward pressure. Later today,
the first of plenty January event risks will take place with the ECJ advocates-general advice on the legality of OMT. This risks
limiting the size and scope of QE which could further weigh on risk sentiment (widening spreads, supportive core bonds).
Currencies: Pause in USD(/JPY) decline short-lived as risk-on rally evaporates
Yesterday, a risk-on rebound temporary supported the dollar, especially against the euro. EUR/USD came very close to the
correction low. However, further oil/commodity declines reversed earlier equity- and USD gains with USD/JPY dropping
below 117. Will the risk-off trade continue to weigh on the dollar? Sterling withstood a low headline UK inflation figure.
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 failed to maintain early gains yesterday, dropping lower in the
second half of the session. The S&P fell for a third straight session led by
materials and energy shares. This morning, Asian shares show broad-based
losses as a poor outlook from the World Bank weighs on sentiment.
•
The World Bank lowered its global growth forecasts for both this year and next
primarily due to lower growth prospects in the euro area, Japan, Brazil and
Russia. The World Bank expects global growth to reach 3% this year, down from
3.4% expected in June, before picking up to 3.3% in 2016. The World Bank
warned the biggest threat is a normalisation of monetary policy in the US.
•
Copper prices tumbled this morning more than 6%, to their lowest level in 5.5
years. The copper price is following the trend in other commodity markets with
grim World Bank forecasts adding to the negative sentiment.
•
The cabinet of Japanese Prime Minister Abe has signed off on a record budget
for 2015 that should boost growth, but leaves tough choices on spending for the
future. The overall budget will increase by 0.5% as the ageing population drives
up welfare costs, while defence spending increases and interest costs rise.
•
The US pledged to provide $2 billion in new financial assistance for Ukraine
this year, following a similar move by the EU last week. The combined assistance
will however fall short of the $15B needed, according to the IMF.
•
Today, the eco calendar heats up with the US retail sales and euro zone
industrial production data. Bank of England Governor Carney testifies at the
Parliament’s select committee and the EU top court will give a non-binding
advice on the ECB’s OMT programme. JP Morgan and Wells Fargo will announce
Q4 earnings
P. 1
Wednesday, 14 January 2015
Rates
US 30-yr yield tests all-time low
Global core bonds stabilize near
highs
US 30-yr tests all-time lows
2
5
10
30
US yield
0,5168
1,3311
1,8691
2,4693
-1d
-0,0281
-0,0439
-0,0310
-0,0209
2
5
10
30
DE yield
-0,1210
-0,0060
0,4580
1,1580
-1d
-0,0030
-0,0040
-0,0190
-0,0180
ECJ advisor on OMT
Unlimited, pari passu and lines
between secondary and primary
purchases key questions
Global core bonds had a cautiously positive bias during the first European
trading hours as the oil price took another hit. However, as oil stabilized and
European equity markets surged, the topside in core bonds was protected. By
that time, the US 10-yr yield tested the October low (1.86%) while the US 30-yr
yield approached the all-time low (2.44%). As US dealers entered the market,
core bonds slid lower. NFIB small business optimism surged to the highest level
since 2006 and weighed on the Treasury market as well. Afterwards US equities
slid, but it couldn’t help Treasuries anymore. Daily yield declines were minimal
and amounted to less than 1 bp (apart from 30-yr that added 0.4 bps).
The EU Court of Justice (9h30) gets the advocates-general’s advice on whether
the ECB’s OMT programme overstepped the limits of the EU Treaty. The advice
is often followed by the court, but a final decision is not expected until mid2015. The advice, and later on the effective ruling, could affect the modulation
of ECB QE (expected Jan 22). The most contentious issues are whether OMT
purchases can be unlimited or not, whether the pari passu clause is legal or not
and finally whether the lines between primary (forbidden) and secondary
purchases of sovereign debt are sufficiently defined. If the ECJ formulates its
opinion, the German Court is not obliged to accept it. It will look whether there
is conformity with the German Constitution. In that respect, it is highly likely
that either the EU Treaty needs to be renegotiated or some adaptions will be
needed on the 3 points mentioned above before the German Court of Justice
considers it in line with the German Constitution. “Worst case scenario”, OMT
ends up being limited in size, limited to secondary market purchases and with
ECB seniority. That would seriously hollow Draghi’s “Dirty Harry” whatever it
takes statement. Any ECB QE would have the same features. This would not
undo QE of some of its positive features (diminish supply of available paper), but
it would be less forceful.
T-Note future (orange) and S&P future (black) (intraday): Volatile
moves but little change in the end. r
Weak headline, but constructive
underlying US retail sales
Downside risks outdated EMU
production
US 30-year yield tests all-time lows. .
In December, US retail sales are forecast to have dropped by 0.1% M/M,
following strong gains in the previous two months. The drop in the headline
reading will be mainly due to lower gasoline prices, while also a vehicle sales
might have declined following very strong November sales. The underlying
picture should look significantly stronger.
P. 2
Wednesday, 14 January 2015
A robust Christmas shopping season probably supported underlying retail sales.
We have no reasons to expect a weaker outcome. In the euro area, industrial
production is forecast to come out flat. Earlier released national indicators were
quite poor with activity falling slightly in Germany, France, Spain (and Italy?). We
believe therefore that euro area production might show a limited decline.
R2
R1
BUND
S1
S2
157,67
157,26
156,96
156,1
154,58
-1d
0,1900
Today, the German Finanzagentur launches a new 10-yr Bund (€5B Feb2025).
In grey market trading, the Bund is 25.2 bps below MS offering no pick-up versus
the previous benchmark (1% Aug2024). From an absolute point of view, the
record low German yield isn’t enticing either. Overall, we expect a difficult
auctions which can only be saved by the fact that demand tends to be relatively
higher at the beginning of the year. In the US, the treasury continued with a
sloppy $21B 10-yr Note auction. The auction stopped a full bp above the 1:00
PM bidding deadline and the bid cover was slightly light (2.61 vs 2.71 average
last year). Bidding details showed an anaemic direct bid while the indirect and
dealer bids were ok. Today, the US treasury concludes with a $13B 30-yr Bond
auction.
Overnight, Asian equity markets trade in negative territory with a Japanese
underperformance on the back of a stronger yen. Overall weakness reflects
yesterday’s WS’s intraday crash (>1%). The oil price remains near the cycle
low and the US Note future is significantly higher. The risk-off climate
suggests a stronger opening for the Bund.
Today, the eco calendar is interesting on many fronts. Eco data include
(outdated) EMU Industrial Production and US retail sales. Eco data are
neutral for core bonds. The ECJ’s advocates-general advice on OMT (see
above) has the potential to drive markets. Negative advice on burden
sharing and open-ended buying can trigger risk-off sentiment (spread
widening, stronger Bund, weaker equities), as can further downside in
commodity prices (copper). Q4 earnings include two major US banks and
can again influence the bond market via equity sentiment. Finally, the Fed
releases its Beige Book which is expected to confirm the ongoing US
economic recovery. Event risks (non-binding expert opinion on OMT
(today), the ECB (Jan 22), the Greek election (Jan 25) and the FOMC (Jan
28)), limit upward potential in German/US yields. Sideways trading around
or even a test of the recent lows is more likely. If the ECB effectively walks
the QE talk, that might change. At previous QE-programmes by BoJ, BoE &
Fed, a significant buy-the-rumour, sell-the-fact occurred after the effective
announcement, as markets were hopeful it would help. Is this the case with
ECB QE? .
German Bund future: sideways trading around/test of the highs
ahead of multiple event risks?
US Note future: global sentiment overshadows upcoming
normalization process Fed
P. 3
Wednesday, 14 January 2015
Currencies
Risk-off rebound short-lived. USD(/JPY) turns south again
Tuesday’s trading pattern was
similar to Monday, with risk off still
keeping the dollar in the defensive.
R2
R1
EUR/USD
S1
S2
1,2252
1,1976
1,1791
1,1754
1,164
-1d
-0,0043
Commodity decline spooks
sentiment on risk and weighs on
the dollar (USD/JPY)
EUR/USD shows little rebound
momentum due to upcoming
event risk.
On Tuesday, there were again few data/headlines to guide currency trading. The
trading pattern was quite similar to Monday. Sentiment on risk was constructive,
especially in Europe. The dollar gained slightly even as core bond yields hardly rose.
EUR/USD came very close to the1.1754 correction low. USD/JPY traded mostly
sideways in the mid 118 area. Later in US dealings, equities succumbed again to a
further decline in the oil price. The risk-off trade returned. EUR/USD was little
changed in the high 1.17 area. USD/JPY nosedived and closed the session at 117. 93.
Overnight, the risk-off trade continues with most major equity indices trading in the
red. Oil and other commodities, especially copper, are under pressure and reinforce
the risk-off trade. US equity futures point to further losses. Japanese equities
underperform and this complex triggers a new USD/JPY sell-off. The pair is testing
levels below 117. The decline of the dollar against the euro stays fairly limited.
EUR/USD is changing hands in the 1.1790 area. The decline in commodities is
putting the likes of the AUD under renewed pressure. The AUD/USD correction low
in the 0.8035 area is again coming on the radar.
Today, there are again few important eco data in Europe, except for the EMU
November production data. A poor figure is expected, but we don’t expect this
report to be key for EUR/USD trading. Markets will keep a close eye on the EU court
advice on OMT. This might have consequences for the structure of a new ECB QE
programme. An advice with significant restrictions might raise further questions on
the effectiveness of QE and will be negative for sentiment on risk. The impact on the
euro is far from evident. We think that there is no good reason, except for some
short-term technical repositioning (short-squeeze) to see a sustained rebound of
the euro. However, with volatility rising, never say never… In the US, the December
retail sales will be reported. The headline sales are expected negative (-0.1%) due to
lower oil prices. However, underlying measures are expected rather strong. We side
with the consensus, but a negative surprise might further weigh on risk sentiment
and on the dollar, especially on USD/JPY. Markets will also keep a very close look at
the results from JP Morgan and Wells Fargo. Expectations are sharply downsized of
late. However, the market reaction can be nervous. The ongoing rout in oil and
other commodities remains an issue too. In a day-to-day perspective, the odds for
the dollar look rather poor, especially for USD/JPY. Of course yesterday’s intraday
price action illustrated that sentiment can change very quickly.
EUR/USD holding within reach of the recent lows
USD/JPY: pause short-lived, decline resumes
P. 4
Wednesday, 14 January 2015
EUR/USD breaks below key 1.1877
support and tests 1.1754 intermediate
support. 1.1640 (Nov 2005 low) is the
next high profile support
Strategy. We keep our euro negative bias, even as the single currency has already
recorded substantial losses of late and is in oversold territory. The 1.1877 level
(2010 low) is broken and the intermediate support at 1.1754 is under test. The
1.1640 level (Nov 2005 low) is the next reference on the charts. A sell-on upticks
approach remains preferred. A technical rebound/short squeeze is always possible,
but we don’t expect it to go far as long as uncertainty on Greece and the details of
QE reigns. The 1.2252 correction top is our short-term line in the sand. A return
above this level would question the short-term EUR/USD downtrend. For USD/JPY,
we maintain a cautious stance. Decent US eco data should be a dollar positive over
time. However, a fragile risk sentiment and low core bond yields weigh on USD/JPY
and EUR/JPY short-term. We wait for a signs of bottoming out, which we don’t see
at all at this stage.
Sterling resists sharp decline in headline inflation
Sterling doesn’t decline on decline in
headline inflation.
R2
R1
EUR/GBP
S1
S2
0,8007
0,7874
0,7773
0,7741
0,7693
-1d
-0,0035
Yesterday, UK headline CPI dropped more than expected to 0.5% Y/Y. Core inflation
however rose from 1.2% Y/Y to 1.3% Y/Y. The low headline inflation eases pressure
on the BoE to raise rates in the near future. But at the same time, BoE governor
Carney in an interview repeated that the BoE still expects to normalize interest
rates in the foreseeable future. Sterling declined slightly after the publication of the
CPI, but soon reversed these post-CPI losses. The rebound was reinforced by
Carney’s interview with the BBC. Cable changed hands in the 1.5160 area at the
close. EUR/GBP even dropped below the 0.7790 recent low in lockstep with
EUR/USD and closed the session at 0.7766. So, sterling stays away from the recent
lows.
There are no important eco data in the UK today. BoE governor Carney will testify
before a Parliament committee on financial stability, but markets will look out for
quotes related to monetary policy. Yesterday in an interview Carney was not overly
GBP shows more signs of bottoming out. dovish, given the low inflation data and kept the door open for a gradual rate
increase in a not-that-distant future. Over the previous days, sterling finally found a
EUR/GBP nears key 0.7741 support
bottom. The UK currency is becoming better supported, especially against the euro.
Of late, EUR/GBP hardly joined the broader decline of EUR/USD. At the same time,
we still assumed that uncertainty on Greece and QE will continue to cap the topside
of EUR/GBP too. We hand/maintain a sell-on-upticks strategy for EUR/GBP, on more
pronounced upticks e.g. in the 0.7875/0.7900 area. A sustained break below the
0.7741 support would deteriorate the short-term picture of EUR/GBP. The sell-off in
cable finally slows. We look out whether the recent low holds. If so, further profit
taking/short squeeze on the recent sell-off is possible, but a further decline in
EUR/USD would prevent a protracted move.
EUR/GBP: nearing key support
Cable looking for a bottom
P. 5
Wednesday, 14 January 2015
Calendar
Wednesday, 14 January
US
13:00
14:30
14:30
14:30
14:30
16:00
Japan
00:50
00:50
07:00
EMU
11:00
France
08:45
08:45
Italy
10:00
10:30
Events
US
DE
BE
UK
JP
IRS
3y
5y
10y
Currencies
EUR/USD
USD/JPY
GBP/USD
AUD/USD
USD/CAD
Previous
MBA Mortgage Applications
Retail Sales Advance MoM (Dec)
Retail Sales Ex Auto and Gas (Dec)
Retail Sales Control Group (Dec)
Import Price Index MoM YoY (Dec)
Business Inventories (Nov)
--0.1%
0.5%
0.4%
-2.7% / -5.2%
0.2%
11.1%
0.7%
0.6%
0.6%
-1.5% / -2.3%
0.2%
Money Stock M2 YoY (Dec)
Money Stock M3 YoY (Dec)
Machine Tool Orders YoY (Dec P)
A 3.6%
A 2.9%
A 33.8%
3.6%
2.9%
36.6%
Industrial Production MoM YoY (Nov)
0.0% / -0.7%
0.1% / 0.7%
Current Account Balance (Nov)
CPI EU Harmonized MoM YoY (Dec)
-0.0% / 0.0%
-0.9B
-0.2% / 0.4%
CPI EU Harmonized YoY (Dec F)
General Government Debt (Nov)
-0.1%
--
-0.1%
2157.5B
JP Morgan (13:00), Wells Fargo (14:00) Announce Q4 Earnings
EU Top Court Gives Non-Binding Advice on ECB's OMT Mechanism
Fed's Plosser Speaks on the Economy in Philadelphia
BoE’s Carney Testifies at Parliament’s Treasury Select Committee on Stability Report
US Federal Reserve Releases Beige Book
Bund Auction (€5B Feb2025) (11:30)
Bond Auction (SEK1.75B 3.5% Jun2022 & SEK1.75B 2.5% May2025)
30Yr Bond Auction ($13B) (19:00)
09:30
14:00
15:15
20:00
Germany
Sweden
US
10-year
Consensus
td
1,87
0,46
0,69
1,58
0,26
- 1d
-0,03
-0,02
-0,02
0,01
-0,01
EUR
0,201
0,329
0,729
USD (3M)
1,038
1,451
1,961
1,17915
117,18
1,5167
0,8095
1,1994
- 1d
-0,0049
-1,35
0,0011
-0,0072
0,0043
GBP
1,021
1,282
1,654
2 -year
US
DE
BE
UK
JP
td
0,52
-0,12
-0,08
0,36
-0,02
- 1d
-0,03
0,00
-0,02
0,02
0,00
DOW
17614
NASDAQ for Exch - NQI
NIKKEI
16796
DAX
9941
DJ euro-50
3134
EUR
Euribor-1
Euribor-3
Euribor-6
-1d
0,01
0,07
0,17
-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
138,14
0,7772
1,2009
9,5264
9,1580
STOCKS
- 1d Commoditie
-2,16
-0,0039
- 1d
0,0002
-0,03
0,00
- 1d
17613,68
#VALUE!
16795,96
9941,00
3133,86
td
-0,069
0,50
0,56
0,68
-1d
-0,006
0,50
0,56
0,68
CRB
219,699
-1,13
GOLD
1231,4
-4,43
BRENT
45,88
0,00
P. 6
Wednesday, 14 January 2015
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