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Monday, 20 November 2017

P. 1

Rates: German politics and risk sentiment in focus

The failed German coalition talks are a short term positive for Bunds. Risk sentiment on stock markets will probably remain key for core bond trading. The German Dax is still in the “danger zone” between 12 900 and 13 000. Losing this technical area would suggest a more pronounced downward correction. The eco calendar is uneventful today.

Currencies: EUR declines on political uncertainty in Germany

Last week, the euro was more resilient than the dollar to global uncertainty. This morning, the euro suffered a setback as the German government negotiations collapsed. The jury is still out whether this will have a lasting impact on FX trading. Short-term, we assume that the topside in the euro has become better protected.

Calendar

• US stock markets ended the week on a weaker note, closing up to 0.4% lower.

Asian bourses cede ground overnight as well with China underperforming (-1%) as the PBOC tightened asset management rules.

• The protracted struggle to form a new German government under the leadership of Angela Merkel collapsed, plunging Europe’s biggest economy into political uncertainty and raising the prospect of new elections.

• UK PM May is expected to get the green light from ministers today to increase her Brexit “divorce bill” offer, narrowing the gap with the EU’s €60bn estimate in a bid to break the deadlock in talks with Brussels.

• China's central bank issued sweeping guidelines to tighten rules on asset management business, the latest step by Beijing to fend off systemic risks in the country's rampantly growing shadow banking sector.

• Special Counsel Mueller’s team investigating whether President Trump sought to obstruct a federal inquiry into connections between his presidential campaign and Russian operatives has now directed the Justice Department to turn over a broad array of documents, ABC News has learned.

• Republican hopes to pass a tax bill may hinge on whether to repeal the Obamacare rule that requires people to buy health insurance. Senator Collins said that would be "a problem," a sign that changes will be needed.

• Today’s eco calendar is extremely thin with only central bank speeches from ECB Nowotny, Lautenschlaeger, Draghi and Constancio.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP


P. 2

Bonds gained modest ground, flattening the curves

Global core bonds eked out some modest (German) to moderate (US) pre-weekend gains on Friday. Stocks failed to extend Thursday’s risk rebound and treaded water, while crude rebounded. The impact on core bonds was negligible and core bonds rose later on pre-weekend positioning. Eco calendars in EMU and US couldn’t lure investors into setting up directional trades with stronger US housing data unable to push US Treasuries lower. ECB president Draghi said that effects of past low inflation in wage formation should not be persistent, but his comments didn’t affect dealings with ECB policy tied for at least another 9 months.

In a daily perspective, the US yield curve flattened with yield changes ranging between +1.3 bp (2-yr) and -4.9 bps (30-yr). The German yield curve bull flattened with yields 0.6 bps (2-yr) to 2.5 bps (30-yr) lower. On intra-EMU bond markets, 10-yr yield spread changes versus Germany ranged between -1 bp and +3 bps (Spain) with Greece slightly underperforming (+4 bps).

Thin eco calendar to start the trading week

The eco calendar contains only US leading indicators, which is no market mover. The central bank calendar is better filled with appearances of ECB Nowotny and Lautenschlaeger, both hawks and dissenting against the open-ended prolongation of the bond purchases programme at the last ECB meeting. They are counterbalanced by appearances of the dovish ECB president Draghi and vice-president Constancio. The views of all speakers are well-known and unlikely to have evolved in past days. So, it is unlikely they will give markets fresh impetus.

Further out this week the eco calendar remains fairly thin and dominated by the US Thanksgiving holiday on Thursday and Black Friday. The US durables and the Minutes of the last FOMC meeting on Wednesday are the sole releases of interest. The EMU calendar is somewhat more interesting with consumer confidence on Wednesday, the preliminary PMI’s for November and the ECB Minutes of the last policy meeting on Thursday. Finally, the German IFO will get attention on Friday.

Rates

US yield -1d2 1,72 0,015 2,04 -0,0110 2,34 -0,0330 2,76 -0,05

DE yield -1d2 -0,71 -0,015 -0,35 -0,0110 0,36 -0,0230 1,24 -0,02

T-Note future (black) & S&P future (orange) (intraday): Uneventful session dominated by curve flattening and weaker equities

US 2y/10y yield spread: Curve continues to flatten (spread narrowing) as short term yields rise and longer term yields decline modestly

Bull flattening yield curves

Many ECB speakers, but little impact expected


P. 3

Low amount of EMU bond supply

This week’s scheduled EMU bond supply is low with only Slovakia (today), Finland (tomorrow) and Germany (Wednesday) tapping the market. Belgium cancelled its planned (and final) auction for today on the back of reduced funding requirements. As such, total OLO issuance for this year will amount to €35.55 bn. The Slovak debt agency taps two bonds today (0.625% May2026 & 1.875% Mar2037). The Finnish treasury taps the on the run 10-yr RFGB (0.5% Sep2027) for up to €1 bn tomorrow. The German Finanzagentur holds a 30-yr Bund auction on Wednesday (€1 bn 1.25% Aug2048).

German politics and risk sentiment in focus

Most Asian stock markets lose ground this morning in line with WS on Friday evening. China underperforms after the PBOC announced tighter asset management rules. The US Note future trades with a positive bias while the euro loses ground following the FDP’s withdrawal out of German coalition talks. New elections become a possibility and are expected to cause a stronger opening for the Bund.

Today’s eco calendar is uneventful. The failed German coalition talks are a short term positive for Bunds. Risk sentiment on stock markets will probably remain key for core bond trading. The German Dax is still in the “danger zone” between 12 900 and 13 000. Losing this technical area would suggest a more pronounced downward correction. Later this week, EMU eco data will play first fiddle. US trading is expected to slow down to a trickle this week. There are hardly any eco data, trading volumes will be lower than usual because of Thanksgiving (Thursday) and Black Friday and US Congress holds its recess possibly putting the US tax reform debate on hold. Speeches by European central bankers (see above) are a wildcard, but normally no market mover.

Technically, US Treasuries will probably trade in the 124-06 to 125-25 range going forward. This corresponds with a 2.3%-2.47% band in yield terms. The US curve flattening continues with investors putting themselves slowly in line with FOMC projections. The trading range for the Bund going forward is between 160.24 and 163.43. Any moves towards the topsides of the ranges could be used to put up short positions.

R2 165,18 -1dR1 163,43BUND 163,05 0,16S1 161,91S2 160,24

German Bund: sideways trading range between 160.24 and 163.63

US Note future: trading band between 124-06 and 125-25?


P. 4

EUR/USD: Will uncertainty on Germany break the euro positive

momentum ?

USD/JPY: downside pressure persists. 111.65 next support

German political crisis to weigh on the euro?

On Friday, sentiment on risk remained fragile and the dollar struggled to prevent further losses. Diffuse news from the progress on the US tax bill and from the investigation into the Russia links of the Trump campaign kept investors in a wait-and-see modus. Strong US housing data couldn’t provide a lasting support for the US currency either. EUR/USD held near the 1.18 level for most of the session and closed the day at 1.1790. USD/JPY experienced stronger headwinds and tested the 112 area. (close at 112.10).

Overnight, risk sentiment in Asia remains negative. Most regional indices are trading down. China underperforms as the Chinese regulator proposed new measure to curb risk in some parts of the financial sector. Japanese trade data were strong, but close to expectations and had no big impact. The collapse of the German coalition talks filters through into market sentiment. EUR/USD dropped from the 1.18 area and trades currently in the 1.1740 area. For now, USD/JPY suffers no further losses. The pair holds in the 112 area.

Today, the eco calendar is thin, except for the US leading indicators, no market mover. Several ECB members including Nowotny, Lautenschlaeger (hawks), Draghi and vice-president Constancio (doves), will speak at different occasions. The views of all speakers are well-known. Further out this week, the eco calendar remains thin and dominated by the US Thanksgiving holiday on Thursday and Black Friday. The US durables and the Minutes of the last FOMC meeting on Wednesday are the sole releases of interest. In EMU, the calendar is somewhat more interesting with the preliminary PMI’s for November and the ECB Minutes of the last policy meeting on Thursday and the German IFO on Friday.

Asian markets opened with a risk-off bias this morning. European investors will ponder the potential impact from the collapse of the German government negotiations. Last week, the dollar was more sensitive to global risk aversion than the euro. Given the developments in Germany, the balance between the euro and dollar might turn more neutral or even tilt to the disadvantage of the euro. In this respect, we keep a close eye on the price action in the EUR/JPY cross rate. The pair is currently testing the key 131.40 support. A sustained break of this support area, combined with a more protracted risk-off sentiment might weigh on EUR/USD and, to a lesser extent on USD/JPY. We start the week with cautiously negative bias on the euro.

Currencies

R2 1,2092 -1dR1 1,188EUR/USD 1,1790 0,0020S1 1,1554S2 1,1331

Asian equities trade down

Euro decline as German coalition talks collapse

Dollar remained in the defensive

USD/JPY declined to the 112 area.

Eco calendar is thin

Sentiment on risk/German politics to set the tone for FX trading


P. 5

From a technical point of view, EUR/USD set a new post-ECB low two weeks ago, but the move petered out. EUR/USD last week regained intermediate resistance at 1.1690/1.1837, but the 1.1880 MT correction top was left intact. A break above the latter would suggest a full retracement to the 1.2092 correction top. We don’t preposition for such a scenario unless real negative news from the US pops up. On the downside, the 1.1554 reaction low remains the first important reference, but it is still far away. A further downside correction within the 1.1554/1.1880 range is favoured. The USD/JPY’s momentum was positive in October, but deteriorated this month. The pair tested the 114.49 MT range top, but the attempt failed. Recent price action was unconvincing despite a solid US interest rate support. Last week’s drop below the 112.96 support reinforces the downside pressure. 111.65 is the next key support. A break would turn the picture outright USD negative.

EUR/GBP: topside test again rejected

Earlier last week, markets saw rising chances of a potential positive development in the Brexit negotiations. On Friday, sentiment was less constructive as UK Brexit Minister Davis indicated that it was now up to the EU to do concessions. The news flow from the Gothenburg EU meeting /summit also didn’t suggest that big Brexit progress could be in the making. PM May and EU’s Tusk finally came to an obvious conclusion: There is more work to be done! EUR/GBP jumped back north from the low 0.89 area to the 0.8960 area late in the morning session. The pair closed the session at 0.8923. Cable dropped from the 1.3250/60 area to the 1.3170 are, but rebound later in the session. The pair closed the session at 1.3215 and holds the established sideways consolidation pattern.

There are no important eco data in the UK today. BoE deputy governor Dave Ramsden speaks at King’s College in London. However, we don’t expect BoE talk to change the outlook for the sterling going forward. EUR/GBP declined on the negative headlines from Germany overnight. At the same time, there are press rumours that the UK is considering to raise the amount it is prepared to pay for the Brexit divorce. ST, these developments might be positive for sterling and negative for the euro. In a longer term perspective , a political stalemate in Germany probably also won’t make the Brexit process easier. However, in a day-to-day perspective, euro softness due to the uncertainty on Germany will probably prevail as a driver for EUR/GBP trading.

MT technical: Recently, the BoE driven sterling rebound ran into resistance and sterling declined again as markets anticipated that any rate cycle would be very gradual and limited. EUR/GBP trades in a 0.8733/0.9033 consolidation range. Last week, the EUR/GBP rebound ran into resistance just ahead of the 0.9033 range top. We changed our ST bias on EUR/GBP from positive to neutral last week. The 0.9015/33 area might be tough to break short-term.

R2 0,9307 -1dR1 0,9033EUR/GBP 0,8923 0,0002S1 0,8743S2 0,8657

EUR/GBP: topside test rejected. Room for a further technical rebound of sterling?

GBP/USD: Cable holds sideways consolidation pattern.


P. 6

Monday, 20 November Consensus Previous Japan 00:50 Trade Balance Adjusted (Oct) A ¥322.9b R ¥266.6b 00:50 Exports YoY / Imports YoY (Oct) 14%/18.9% 14.1%/12.1% Germany 08:00 PPI MoM / YoY (Oct) 0.3%/2.7% 0.3%/3.1% Events 12:45 ECB's Nowotny Speaks at C.Bank Conference on European eco integration 13:15 ECB's Lautenschlaeger Speaks at IIF CRO-Forum in Frankfurt on European integration 13:30 Governors of Central European C.Banks on Panel on European integration 15:00 & 17:00 ECB's President Draghi attends hearing in parliament/speaks in Brussels on ESRB 15:15 ECB's Constancio at Panel ECB conference “Public debt, fiscal policy & EMU deepening

10-year Close -1d 2-year td -1d Stocks Close -1dUS 2,34 -0,03 US 1,72 0,01 DOW 23358,24 -100,12DE 0,36 -0,02 DE -0,71 -0,01 NASDAQ 6782,791 -10,50BE 0,58 -0,01 BE -0,62 -0,02 NIKKEI 22261,76 -135,04UK 1,29 -0,01 UK 0,48 -0,02 DAX 12993,73 -53,49

JP 0,04 0,00 JP -0,20 0,00 DJ euro-50 3547,46 -17,34

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0,08 1,99 0,92 Eonia -0,3590 -0,00105y 0,20 2,12 1,09 Euribor-1 -0,3730 -0,0010 Libor-1 1,2872 0,004510y 0,83 2,34 1,35 Euribor-3 -0,3290 0,0000 Libor-3 1,4407 0,0050

Euribor-6 -0,2740 0,0010 Libor-6 1,6321 0,0004

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

EUR/USD 1,1790 0,0020 EUR/JPY 132,17 -0,90 CRB 190,39 2,14USD/JPY 112,1 -0,96 EUR/GBP 0,8923 0,0002 Gold 1296,50 18,30GBP/USD 1,3215 0,0020 EUR/CHF 1,1659 -0,0041 Brent 62,72 1,36AUD/USD 0,7564 -0,0024 EUR/SEK 9,9328 0,0477USD/CAD 1,2763 0,0006 EUR/NOK 9,7162 0,0529

Calendar


P. 7

Brussels Research (KBC) Global Sales Force Piet Lammens +32 2 417 59 41 Brussels Peter Wuyts +32 2 417 32 35 Corporate Desk +32 2 417 45 82 Mathias van der Jeugt +32 2 417 51 94 Institutional Desk +32 2 417 46 25 Dublin Research France +32 2 417 32 65 Austin Hughes +353 1 664 6889 London +44 207 256 4848 Shawn Britton +353 1 664 6892 Singapore +65 533 34 10 Prague Research (CSOB) Jan Cermak +420 2 6135 3578 Prague +420 2 6135 3535 Jan Bures +420 2 6135 3574 Petr Baca +420 2 6135 3570 Bratislava Research (CSOB) Marek Gabris +421 2 5966 8809 Bratislava +421 2 5966 8820 Budapest Research David Nemeth +36 1 328 9989 Budapest +36 1 328 99 85

ALL OUR REPORTS ARE AVAILABLE VIA OUR KBC RESEARCH APP (iPhone, iPad, Android) This non exhaustive information is based on short term forecasts for expected developments

This non-exhaustive information is based on short-term forecasts for expected developments 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.

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