Wednesday, 04 October 2017

P. 1

Rates: Profit taking ahead of Friday’s payrolls?

Stronger eco data could be countered by increased uncertainty over Catalonia, the next Fed chair and promised tax reforms. Adding the prolonged sell-off, it suggests that investors might take some profit on short positions ahead of Friday’s payrolls. The US Note future remains in a sell-on-upticks environment with proposed entry levels around 126.

Currencies: EUR/USD shows no clear trend on political issues in US and EMU

The dollar rally stalled yesterday. EUR/USD might continue a ST consolidation pattern as political issues in the US (nomination of successor for Yellen, tax reform) and in EMU (Catalonia) might prevent investors to take directional positions. The USD/JPY rally might also slow if the equity rally takes a breather.

Calendar

• WS (+ 0.3%) clocked a second straight day of record highs for each of its major

indices. Most Asian stock markets trade positive overnight with China still closed. The Japanese services PMI dropped to its weakest level in 11 months.

• Catalonia will declare independence “in a matter of days”, Catalan President Puigdemont was quoted as telling the BBC, a move that would defy Madrid and attempt to implement the directive of Sunday’s illegal referendum.

• Donald Trump said “you can say goodbye” to Puerto Rico’s debt. “They owe a lot of money to your friends on Wall Street and we’re going to have to wipe that out,” Mr Trump told a Fox interviewer. “You can say goodbye to that.”

• President Trump's aides have given him a final short list of recommended candidates to head the Fed, people familiar said. Janet Yellen, Gary Cohn, Kevin Warsh and current governor Jerome Powell are being considered.

• Auto sales hit their briskest monthly pace for the year, as Labor Day discounts, higher fleet sales and hurricane-related replacements restored momentum heading into the final months of the 2017.

• Boris Johnson has distanced himself from leadership speculation, claiming that “the cabinet is united” on PM May’s Brexit strategy. He laughed off what he called “potshots from behind” as an “occupational hazard in my line of work.”

• Today’s eco calendar heats up with September services PMI’s in EMU (final), the UK and the US (ISM). US ADP employment is also on the agenda while Germany holds a 10-yr Bund auction.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Wednesday, 04 October 2017

P. 2

Uneventful, low volume, trading session

Global core bonds traded with a downward bias yesterday until European noon in absence of key eco releases or event news. Sentiment turned for the better for core bonds as US traders entered dealings, but likely due to some repositioning (crowded short positions) as strong drivers remained missing. Volumes in the Bund were extremely low with German markets closed for Day of the Unity. Many investors remained also side-lined with key US eco releases in mind (US non-manufacturing ISM, ADP employment and payrolls). Yesterday’s moves had no technical implications. We remain in a sell-on-upticks environment in the Bund and especially the US Note future.

In a daily perspective, the German yield curve bear steepened with yields flat (2-yr) to 2 bps (30-yr) higher. Changes on the US yield curve varied between -0.9 bps (2-yr) and -1.8 bps (10-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany ranged between +2 bps (Spain) and -3 bps (Portugal).

Eco calendar remains thin

The EMU eco calendar only contains the final September PMI report. The PMI rose to 55.6 from 54.7 in August according to the preliminary report, suggesting buoyant activity in the sector. The preliminary report is almost never substantially revised. Therefore, it might go unnoticed. August EMU retail sales are expected unchanged at 2.6% Y/Y. We don’t forecast this figure as it is very volatile and sometimes erratic. The US September ADP employment survey is expected to show a net 135K gain of private sector jobs. That’s well below the 210K 3 month moving average. Markets discount a negative effect from the tropical storms. It is certainly a wildcard, but we aren’t sure that much impact will be seen in the ADP report. Whatever, any significant deviation of consensus will probably be ignored, due to uncertainty about the underlying trend. The ISM non-manufacturing business confidence is expected to have marginally increased to 55.5 in September from 55.3 in August. We see risks on the upside of consensus. July’s sharp dip lower was only recovered very partially in August and the headline index remains below its 12 month average. The Richmond services survey was stronger too and the manufacturing ISM improved sharply. Reasons enough to bet on the upside of expectations.

Rates

US yield -1d2 1,47 -0,015 1,91 -0,0210 2,32 -0,0230 2,86 -0,01

DE yield -1d2 -0,70 0,005 -0,28 0,0010 0,46 0,0130 1,30 0,02

Bund future (5 days): Despite intraday volatility, the Bund moved basically sideways trying to form a bottom.

German 10-yr yield closes in on the the 18 month’s high at about 0.60%.

Af

No technical relevant moves

US Treasuries outperform Bunds

EMU PMI to be confirmed

Upside risks Non-manufacturing ISM

ADP employment report wildcard due to tropical storms

Wednesday, 04 October 2017

P. 3

German Bund auction

The German Finanzagentur taps the on the run 10-yr Bund (€3B 0.5% Aug2027). Total bids averaged €4.07B at the previous 4 Bund auctions and we don’t expect much improvement today. The bond on offer didn’t cheapen in ASW spread terms, but trades rather cheap on the German curve.

Profit taking ahead of Friday’s payrolls?

Most Asian stock markets trade positive overnight after yesterday’s new closing highs for the main US indices. The dollar and US rates are downwardly oriented after a shortlist for the next Fed chair circulated via Trump aides. They include Yellen, Warsh, Cohn and Powell. According to the bookies, Warsh and Powell are frontrunners. Catalan President Puigdemont told BBC that the region’s independence would only be “a matter of days”, making another U-turn after yesterday’s suggestions to be open for dialogue. We expect the Bund to open somewhat higher while Spanish assets could face new selling pressure.

Today’s eco calendar heats up in the US with ADP employment and non-manufacturing ISM. Data might start being distorted by the Hurricanes, but the Fed clearly flagged that they would look through short term disappointments. Therefore, any downward surprise shouldn’t affect markets much. Risks for the US non-manufacturing ISM are nevertheless on the upside of expectations. Stronger eco data could be countered by increased uncertainty over Catalonia, the next Fed chair and promised tax reforms. Adding the prolonged sell-off, it suggests that investors might take some profit on short positions ahead of Friday’s payrolls.

After the FOMC meeting, we concluded that US Treasuries re-entered a sell-on-upticks phase as the Fed confirmed its view on 2017/2018 interest rate policy. A December rate hike isn’t fully discounted yet (70%). Entry levels around 126 could be interesting. We hold a sell-on-upticks view in the Bund as well as the ECB’s normalisation process slowly takes off and as speculation on the future of APP will rise in the run-up to the October 26 ECB policy meeting.

R2 163,43 -1dR1 161,98BUND 161,22 -0,10S1 160,49S2 159,80

German Bund: Downtrend is not broken, but outperformance vs US Note future (European political risk?)

US Note future: heading for full retracement of Summer rally. Sell-on-upticks with entry levels around 126.

Wednesday, 04 October 2017

P. 4

EUR/USD downtrend slows as political issues on both sides of the

Atlantic keep investors sidelined

USD/JPY rebound to slow if risk rally takes a breather?

Dollar rally takes a breather

Yesterday, the dollar rally took a breather, awaiting more guidance from key eco data (including the US payrolls) later this week. A series of pending political issues in the US were also a slightly USD negative. EUR/USD made a cautious intraday rebound and closed the day at 1.1744. USD/JPY hovered in the 113 area for most of the day, but finally dropped below the big figure even as major US equity indices continue to set new all-time record levels.

Overnight, Asian equities ex-Australia continue their uptrend. The Japan services PMI dropped from 51.6 to 51.00 in September, indicating modest growth in the sector. However, it didn’t hurt the yen. The dollar declined slightly further as the political debate on a successor for Fed’s Yellen intensifies. There are rumours that chances of Fed member Powell, also on the shortlist, are growing. USD/JPY dropped to the mid 112 area. In the same vein, EUR/USD settled again in the upper half of the 1.17 big figure.

Today, the EMU calendar contains the final PMI. The preliminary reading rose to 55.6 from 54.7, suggesting buoyant activity in the sector. Any revision is usually limited and with little impact on markets. The US calendar is more interesting. The ADP employment report is expected to show a modest net 135K gain of private sector jobs. Markets discount an negative effect from the tropical storms. Any significant deviation of consensus will probably be ignored. The ISM non-manufacturing business confidence is expected to have marginally increased to 55.5 from 55.3 in August, but risks are firmly on the upside of expectations.

The eco data (US non-manufacturing ISM) might be USD supportive. However, there is also political noise on both sides of the Atlantic. Tensions in Catalonia remain high as the region might declare independence within days. For now, Catalonia was hardly a factor for the euro, but this might change. In the US, investors look for more clarity on the nomination of a successor for Yellen and on the tax reform. However, Investors are unlikely to big directional bets ahead of the payrolls (Friday). EUR/USD might hover in the 1.1696/1.1833 ST consolidation pattern. A more cautious risk sentiment after the recent equity rally might block the topside in USD/JPY.

Currencies

R2 1,2225 -1dR1 1,2167EUR/USD 1,1744 0,0011S1 1,1662S2 1,1311

Dollar takes a breather, awaiting key political and economic news

Dollar ceded slightly ground on debate about the replacement of Yellen

US ADP and non-manufacturing ISM potential market movers.

Political issues in the US and Europe remains the wildcards

Wednesday, 04 October 2017

P. 5

EUR/GBP nears 0.89 resistance area .

The positive sterling momentum ebbed recently and this continued yesterday. EUR/GBP rebounded further off the key 0.8742/75 support. The UK construction PMI suggested a contraction in the sector. Coming on the heels of a softer manufacturing PMI on Monday, it was a sterling negative. The BoE also warned for potential disruptions in clearing activity after Brexit and on financing of UK corporations via European banks. EUR/GBP closed the session at 0.8871. Cable still set another ST correction low intraday and finished at 1.3237.

Today, the UK services PMI will be published and UK PM May will give a key speech at the Conservative Party meeting. The services PMI is expected to stabilize at 53.2. Another negative surprise will fuel market expectations that the room for the BoE to raise rates is limited. We don’t expect too much from the speech of PM May . Her party is divided on the Brexit strategy and she probably will avoid to give concessions to Europe that will angry the grass root anti-EU party base. The noise on Brexit remain a modest sterling negative. Political uncertainty on Catalonia is a negative for the euro. Even so, we think that the downside in EUR/GBP is becoming ever better protected.

EUR/GBP made an impressive uptrend since April to set a top at 0.9307 late August. UK price data amended the dynamics and hawkish BoE comments reinforced a sterling rebound. Medium term, we maintain a EUR/GBP buy-on-dips approach as we expect the mix of euro strength and sterling softness to persist. The prospect of (limited) withdrawal of BOE stimulus triggered a good sterling countermove. However, this rebound has apparently run its course EUR/GBP supports at 0.8743 and 0.8652 are probably difficult to break. We look to buy EUR/GBP on dips. A sustained rebound above the 0.89 area would improve the ST technical picture of EUR/GBP.

R2 0,9415 -1dR1 0,9307EUR/GBP 0,8871 0,0033S1 0,8743S2 0,8657

EUR/GBP: downside support becomes more solid

GBP/USD: USD strength AND GBP-softness

Wednesday, 04 October 2017

P. 6

Wednesday, 4 October Consensus Previous US 14:15 ADP Employment Change (Sep) 135k 237k 15:45 Markit US Services PMI (Sep F) 55.1 55.1 15:45 Markit US Composite PMI (Sep F) -- 54.6 16:00 ISM Non-Manf. Composite (Sep) 55.5 55.3 Japan 02:30 Nikkei Japan PMI Services (Sep) A 51 51.6 02:30 Nikkei Japan PMI Composite (Sep) A 51.7 51.9 UK 01:01 BRC Shop Price Index YoY (Sep) A -0.1% -0.3% 10:30 Markit/CIPS UK Services PMI (Sep) 53.2 53.2 10:30 Markit/CIPS UK Composite PMI (Sep) 53.8 54.0 EMU 10:00 Markit Eurozone Services PMI (Sep F) 55.6 55.6 10:00 Markit Eurozone Composite PMI (Sep F) 56.7 56.7 11:00 Retail Sales MoM / YoY (Aug) 0.3%/2.6% -0.3%/2.6% Germany 09:55 Markit Germany Services PMI (Sep F) 55.6 55.6 09:55 Markit/BME Germany Composite PMI (Sep F) 57.8 57.8 France 09:50 Markit France Services PMI (Sep F) 57.1 57.1 09:50 Markit France Composite PMI (Sep F) 57.2 57.2 Italy 09:45 Markit/ADACI Italy Services PMI (Sep) 55.0 55.1 09:45 Markit/ADACI Italy Composite PMI (Sep) 55.9 55.8 Spain 09:15 Markit Spain Services PMI (Sep) 55.5 56.0 09:15 Markit Spain Composite PMI (Sep) 55.1 55.3 Sweden 08:30 Swedbank/Silf PMI Services (Sep) -- 55.4 Events 11:30 Germany to Sell €3B 0.5% 2027 Bonds 21:15 Yellen Gives Welcoming Remarks at Community Banking Event (No Q&A)

Calendar

Wednesday, 04 October 2017

P. 7

10-year Close -1d 2-year td -1d Stocks Close -1dUS 2,32 -0,02 US 1,47 -0,01 DOW 22641,67 84,07DE 0,46 0,01 DE -0,70 0,00 NASDAQ 6531,714 15,00BE 0,73 0,01 BE -0,53 0,00 NIKKEI 20626,66 12,59UK 1,35 0,02 UK 0,45 0,02 DAX 12902,65 0,00

JP 0,06 -0,02 JP -0,14 -0,03 DJ euro-50 3605,73 3,04

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0,05 1,84 0,92 Eonia -0,3560 0,00005y 0,25 2,00 1,09 Euribor-1 -0,3730 0,0000 Libor-1 1,2333 0,000010y 0,91 2,28 1,40 Euribor-3 -0,3300 -0,0010 Libor-3 1,3356 0,0000

Euribor-6 -0,2730 -0,0010 Libor-6 1,5093 0,0000

Currencies Close -1d Currencies Close -1d Commodities Close -1d

EUR/USD 1,1744 0,0011 EUR/JPY 132,53 0,22 CRB 180,90 -0,01USD/JPY 112,85 0,08 EUR/GBP 0,8871 0,0033 Gold 1274,60 -1,20GBP/USD 1,3237 -0,0039 EUR/CHF 1,1435 -0,0002 Brent 56,00 -0,12AUD/USD 0,7836 0,0009 EUR/SEK 9,5564 -0,0290USD/CAD 1,2487 -0,0021 EUR/NOK 9,3731 -0,0131

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