Thursday, 03 October 2019

P. 1

Rates: August recession trade is back

German Bunds remarkably failed to gain ground in yesterday’s risk-off session which resembled August recession fear trading. US Treasuries hugely outperformed, bull steepening the curve, betting on the prospect of more Fed assistance. Downside risks to today’s US non-manufacturing ISM suggest more of the same.

Currencies: Will US ISM further undermine the dollar?

Uncertainty on the US economy and a global risk-off sentiment weighed on the dollar yesterday as the US currency lost substantial interest rate support. Even so, the technical picture of EUR/USD hasn’t changed in a profound way yet. A poor US non-manufacturing ISM might intensify the USD correction. USD/JPY looks most vulnerable.

Calendar

• Wall Street extended its post-ISM decline yesterday. The Dow Jones

underperformed, tumbling 1.86%. Asian equities also trade in negative territory. Japan underperforms (-2%).

• The US will impose 25% tariffs on $7.5bn of a variety of European goods. The move comes after the WTO ruled in favour of the US in the case over illegal aircraft subsidies to Airbus.

• Democratic presidential candidate Bernie Sanders postpones all campaign events “until further notice”. Sanders got hospitalized yesterday for an artery blockage and underwent surgery.

• The EU is set to rule over how Polish courts should deal with “abusive clauses” in the foreign-currency loans that Polish banks issued years ago. The ruling may trigger costs up to 60 bn zloty for the sector.

• PM Johnson will present his new Brexit plan to Parliament today. Johnson is optimistic the plan will get enough support. The EU meanwhile welcomed some concessions in the proposal but said some aspects in it are still unacceptable.

• Greek demonstrators marched through the streets of Athens yesterday to protest against the government’s labor market reforms. PM Mitsotakis plans a.o. to change some ground rules on how strikes can be declared.

• In today’s economic calendar we’ll focus on the US non-manufacturing ISM (September). Retail sales, PPI and final PMI’s are due in the euro zone. A slew of central bankers (Fed, ECB, BoE) are scheduled to speak.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Thursday, 03 October 2019

P. 2

August trades are back

Global core bonds ended mixed yesterday with Bunds remarkably unable to profit from a global selling wave on stock markets. US Treasuries hugely outperformed flat Bunds. Advise by top German economic institutes to give up the black zero (and engage to fiscal stimulus) and the knowledge that the ECB, unlike the Fed, is out of ammo to counter feared eco weakness, might have played a role. We’d be careful though to take it as a given that the Bund will remain unmoved during further stock market corrections south. Yesterday’s sentiment resembled the August recession fear period. Tuesday’s weakness on WS, triggered by another weak manufacturing ISM, spilled over to Asia and Europe (up to -3%!) with US stock markets (-1.5%) again taking over. The S&P 500 lost first support with 2822 and especially 2722 now on the radar. We didn’t get more worrisome news yesterday with the September US ADP employment report printing near consensus. The US yield curve bull steepened for a second session straight with yields losing 6.8 bps (2-yr) to 0.5 bps (30-yr). Heavyweight NY Fed governor Williams said that the US economy looks good from the rearview mirror, but that clouds are stacking up in front of it. German yields increased by 0.4 bps (2-yr) to 2.5 bps (10-yr). 10-yr yield spread changes vs Germany ended nearly unchanged with Italy (+3 bps) underperforming.

Asian stock markets lose up to 1% with Japan (-2%) underperforming. The Bund and US Note future record marginal gains. News flow is thin. The Times reports that the EU could grant another Brexit delay even if the letter making a request for an extension beyond October 31 is not signed by the PM. It might become base scenario as the “take it or leave it” deal proposed by UK PM Johnson wasn’t really positively welcomed by the EU.

Today’s eco calendar contains US weekly jobless claims, but especially the September non-manufacturing ISM. Consensus expects another strong reading (55 from 56.4) which we deem unrealistic. Downside risks imply that the risk-off correction has further to go. It will be interpreted as a sign that weakness in the export-oriented manufacturing sector is spreading to the key domestic US services sector. That’s a bond friendly outcome. Speeches by voting Fed-governors Evans and Quarles are wildcards for trading.

Technically, the German 10-yr yield and US 10-yr yield both rebounded away from August lows following ECB/Fed September policy meetings. Both fell short of really testing first resistance levels, respectively at -0.41% and 1.94%. Going forward, we expect range trading with August lows protecting the downside (German 10y: -0.73%; US 10y: 1.43%).

Rates

US yield -1d2 1.55 -0.085 1.43 -0.0510 1.64 -0.0330 2.09 -0.02

DE yield -1d2 -0.77 0.005 -0.77 0.0010 -0.56 0.0130 -0.04 0.01

A

US S&P 500 tests first support. Break implies return to low 2800-area. Low 2700-area is key

US 10-yr yield: sideways range between 1.43% and 1.94%. Bond friendly bias with key eco data looming

Thursday, 03 October 2019

P. 3

EUR/USD: rebounds modestly on overall USD correction .

EUR/GBP: markets/sterling awaits fate of new UK Brexit proposal.

Will ISM trigger further USD selling?

EUR/USD initially returned part of Tuesday’s post-ISM gain yesterday. It was merely euro weakness. At the same time, USD/JPY held a downward bias, too. US ADP private job growth (137k) was close to expectations, but the August figure was downwardly revised. The impact on trading was limited, but US yields still declined more than EMU ones, putting the dollar in the defensive. The WTO allowed the US to impose tariffs on EU goods in a dispute on Aircraft subsidies, accelerating the risk-off move. On FX markets, the dollar declined further. EUR/USD finished at 1.0959 (from 1.0933). USD/JPY closed 107.15 (from 107.75).

Overnight, Asian equities show losses of up to 2.0%, joining yesterday’s sell-off in Europe and on WS. (US) yields hover near yesterday’s lows, but with no meaningful further decline (yet). The dollar also stabilizes after yesterday’s correction. EUR/USD trades near 1.0955. USD/JPY is holding in the low 117 area. This morning, European (equity) markets will look for a new equilibrium in the wake rising trade tensions between the US and Europe. However, the focus will soon turn to the US non-manufacturing ISM. Markets expect a modest decline from 56.4 to a still lofty 55.0. Given recent soft (US) data, markets will look for indications that manufacturing recession is further affecting domestic growth. A poor ISM will raise expectations that the Fed will ‘be obliged’ to cut rates further. Price action earlier this week suggests that the dollar is losing some shine. Especially USD/JPY looks vulnerable. The case for further euro gains is less outspoken. Even so, we assume EUR/USD will at least partially track a broader USD correction. From a technical point of view, the EUR/USD downtrend was well in place but shows tentative signs of easing. High-profile negative US news is probably still needed to reverse the USD uptrend. An incoming trendline at 1.1040 remains our first reference. EUR/USD 1.0864 (76% retr.) and 1.0778 (gap April 2017) are next supports. UK PM Johnson at the Conservative party Congress highlighted a new Brexit proposal yesterday, with amendments to the Irish backstop clause. The reaction of sterling was limited as it was unclear whether the proposal could be the basis for further talks with the EU. Aside from the next episode in the Brexit sage, we also keep an eye at the UK services PMI. Indications on further EU-UK negotiations might ease recent GBP correction but we remain caution

Currencies

R2 1.1533 -1dR1 1.1448EUR/USD 1.0933 0.0034S1 1.0864S2 1.0778

R2 0.93067 -1dR1 0.91EUR/GBP 0.8886 0.0018S1 0.8500S2 0.8314

Thursday, 03 October 2019

P. 4

Thursday, 3 October Consensus Previous US 13:30 Challenger Job Cuts YoY (Sep) -- 39.00% 14:30 Initial Jobless Claims 215k 213k 14:30 Continuing Claims 1654k 1650k 16:00 ISM Non-Manufacturing Index (Sep) 55.0 56.4 16:00 Cap Goods Ship Nondef Ex Air (Aug F) -- -- UK 10:30 Markit/CIPS UK Services PMI (Sep) 50.3 50.6 10:30 Markit/CIPS UK Composite PMI (Sep) 50 50.2 EMU 10:00 Markit Eurozone Services PMI (Sep F) 52 52 10:00 Markit Eurozone Composite PMI (Sep F) 50.4 50.4 11:00 PPI MoM/YoY (Aug) -0.30%/-0.40% 0.20%/0.20% 11:00 Retail Sales MoM/YoY (Aug) 0.30%/2.00% -0.60%/2.20% Sweden 08:30 Swedbank/Silf PMI Services (Sep) -- 54.1 08:30 Swedbank/Silf PMI Composite (Sep) -- 53.6 Events 08:45 Fed's Evans Speaks at Central Banking Conference in Madrid (voter) 09:45 ECB's Guindos, Fed's Evans Speak in Madrid 10:00 SSM Enria Speaks in Vienna 10:00 ECB’s Rehn Press Briefing on Economic Outlook, Monetary Policy 10:45 Spain to Sell Bonds 10:50 France to Sell Bonds 16:00 BOE's Tenreyro Speaks on Panel in Washington 14:30 Fed's Quarles Speaks at Banking Conference in Brussels (voter) 18:10 Fed's Mester takes Part in a Panel Discussion on Inflation (non-voter) 19:00 Fed's Kaplan Speaks at Community Forum in Houston (non-voter)

Calendar

Thursday, 03 October 2019

P. 5

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 1.64 -0.03 US 1.55 -0.08 DOW 26573.04 -343.79DE -0.56 0.01 DE -0.77 0.00 NASDAQ 7908.685 -90.65BE -0.24 0.01 BE -0.68 -0.01 NIKKEI 21778.61 -106.63UK 0.47 -0.02 UK 0.34 -0.03 DAX 12263.83 -164.25

JP -0.16 -0.02 JP -0.30 -0.02 DJ euro-50 3518.25 -51.20

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0.46 1.49 0.64 Eonia -0.4640 -0.01305y -0.41 1.46 0.60 Euribor-1 -0.4670 -0.0100 Libor-1 2.0109 -0.004710y -0.15 1.54 0.65 Euribor-3 -0.4280 -0.0100 Libor-3 2.0886 0.0035

Euribor-6 -0.3870 -0.0010 Libor-6 2.0565 0.0009

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

EUR/USD 1.0933 0.0034 EUR/JPY 117.79 -0.01 CRB 174.09 0.15USD/JPY 107.75 -0.33 EUR/GBP 0.8886 0.0018 Gold 1489.00 16.10GBP/USD 1.2302 0.0013 EUR/CHF 1.0859 -0.0016 Brent 58.89 -0.36AUD/USD 0.6704 -0.0046 EUR/SEK 10.7996 0.0748USD/CAD 1.3221 -0.0020 EUR/NOK 9.9776 0.0629

If you no longer wish to receive this mail, please contact us: “kbcmarketresearch@kbc.be ‘ to unsubscribe

Brussels Research (KBC) Global Sales Force Mathias Van der Jeugt +32 2 417 51 94 Corporate Desk(Brussels) +32 2 417 45 82 Peter Wuyts +32 2 417 32 35 Institutional Desk(Brussels) +32 2 417 46 25 Mathias Janssens +32 2 417 51 95 CBC Desk (Brussels) +32 2 547 19 19 Dieter Lapeire +32 2 417 25 47 France +32 2 417 32 65 Dublin Research London +44 207 256 4848 Austin Hughes +353 1 664 6889 Singapore +65 533 34 10 Shawn Britton +353 1 664 6892 Prague Research (CSOB) Prague +420 2 6135 3535 Jan Cermak +420 2 6135 3578

Jan Bures +420 2 6135 3574 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.

Contacts