Monday, 27 November 2017

P. 1

Rates: Slightly negative intraday bias

Today’s eco calendar is extremely thin. The start of the US supply operation is negative for US Treasuries while progress in German coalition talks could positively impact risk sentiment and weigh on the Bund. We expect trading to be technically insignificant and occur in tight ranges though given this week’s back-loaded eco calendar.

Currencies: EUR/USD clears 1.1880 resistance area

On Friday, EUR/USD cleared the 1.1880 resistance, reinforcing the ST upside momentum. Today, the eco calendar is thin. A cautious sentiment on risk recently weighted more on the dollar than on the euro. US eco data later this week will have to be strong to improve fortunes for the dollar short term.

Calendar

• US stock markets ended last week on a positive note, recording gains of around

0.25% in thin “Black Friday” dealings. Asian risk sentiment is negative overnight with China and Korea (Samsung) underperforming.

• Irish PM Varadkar is close to a deal with opposition leader Martin to avoid an election, the Sunday Times reported, ahead of Tuesday's no-confidence vote against his deputy.

• Leaders of German Chancellor Merkel's conservative party agreed to pursue a "grand coalition" with the Social Democrats (SPD) to break the political deadlock in Europe's biggest economy.

• China's industrial firms weathered a broad government crackdown on financial risks as profits continued to surge last month in a stabilising force for the world's 2nd biggest economy, which has started to cool slightly in recent months.

• Bank of Japan board member Suzuki says it’s possible for the central bank to make slight changes in its yield-curve control program when price growth approaches the 2% inflation target,

• S&P cut South Africa’s debt debt score to junk (BB+), while Moody’s also threatened to slash its ranking to the same level, raising the risk of a selloff from global indexes. USD/ZAR rose back above 14.

• Today’s eco calendar is thin with only US new home sales. The US Treasury starts its end-of-month refinancing operation with a $26bn 2-yr Note and a $34 bn 5-yr Note auction.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Monday, 27 November 2017

P. 2

Stuck in no man’s land

Global core bonds were stuck in no man’s land last week. The Bund and US Note future moved respectively in a 60-tick and a 16/32 sideways range. Traded volumes remained low with US trading desks thinly staffed because of Thanksgiving and Black Friday. The Bund initially lost ground Friday, but was already almost at the intraday low when the German IFO printed a very strong business climate indicator. Progress in German coalition talks (SPD backtracks on previous commitment to move to opposition) positively impacted risk sentiment, while the S&P closed at a new record high in thin US trading. Brent crude remained upwardly oriented and close to multi-year highs, betting on a significant OPEC oil production cut extension this week and contributing to Friday’s modest losses on core bond markets.

In a daily perspective, German yields shifted up to 1.9 bps higher (30-yr), bear steepening the curve. The US yield curve moved in similar fashion with yield changes varying between +1.9 bps (2-yr) and +2.5 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany widened up to 2 bps. There was no specific Irish underperformance even if the country entered a political crisis which could result in fresh elections.

Unexciting calendar to start the trading week

The US eco calendar contains October New Home sales. Sales are expected to have fallen 6.3% M/M, following a steep 19% gain to a cycle high in the previous month. Given last month’s outsized gain, we side with consensus for a moderate correction lower. There are no data of market interest in the euro area and no major central bank appearances.

The EMU eco calendar remains fairly thin, apart from November EMU inflation data (Thursday). Inflation is expected to have moderately increased to 1.6% Y/Y for the headline and 1% Y/Y for the core inflation following a surprisingly weak October inflation report (core inflation dropped back below 1% (0.9% Y/Y from 1.1% Y/Y). The unemployment rate is expected to have stabilized at 8.9% in October. A lower outcome is possible given strong labour market indicators. However, the next decline is more likely to be registered in November as the unemployment rate already dropped in September. The US eco calendar is busy with ISM (Friday), October spending & income (Thursday) and consumer confidence (Tuesday). The Fed Beige Book, Yellen’s testimony before the JEC (both on Wednesday) and Fed chair nominee Powell’s confirmation hearing (tomorrow) will get much attention too.

Rates

US yield -1d2 1,74 0,025 2,08 0,0210 2,34 0,0230 2,76 0,02

DE yield -1d2 -0,70 0,005 -0,33 0,0010 0,36 0,0130 1,20 0,02

German Bund (intraday, 5 days): Sideways trading last week

Brent crude maintains upward momentum going into this week’s OPEC meeting, expecting an extension of production cuts

Aff

Dull trading session

Curves bear steepen on Friday, after flattening earlier in the week

Unattractive calendar today, but busy US calendar later on this week

Monday, 27 November 2017

P. 3

US and Italy tap market this week

The US Treasury starts its end-of-month refinancing operation with two auctions today: a $26 bn 2-yr Note auction and a $34 bn 5-yr Note auction. The WI’s trade currently around 1.76% and 2.08% respectively. The Treasury concludes tomorrow with a $28 bn 7-yr Note auction. Because month-end falls on Thursday, and US Treasury allows at least one day between the auctions and settlements, the timing of this month’s auctions has been pulled forward.

This week’s scheduled EMU bond supply is extremely thin with only Italy tapping the market today (inflation-linked and zero-coupon) and on Wednesday (floating rate and 10-yr BTP €1.25-1.75 bn 2.05% Aug2027).

Slightly negative intraday bias

Asian stock markets lose slightly ground this morning with China and South Korea (Samsung) underperforming (-1%). The US Note future and Brent crude trade flat, suggesting a neutral opening for the Bund.

Today’s eco calendar is extremely thin. The start of the US supply operation is negative for US Treasuries while progress in German coalition talks could positively impact risk sentiment and weigh on the Bund. We expect trading be technically insignificant and occur in tight ranges though given this week’s back-loaded eco calendar. On intra-EMU bond markets, Irish bonds could be sensitive to political developments as tomorrow’s motion of no-confidence risks collapsing the government.

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 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 162,84 -0,20S1 161,91S2 160,24

German Bund: sideways trading range between 160.24 and 163.63. Sell around upper bound

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

Monday, 27 November 2017

P. 4

EUR/USD regains the 1.1880

USD/JPY: tests of downside continues. Jury is still out.

EUR/USD holds north of 1.19

On Friday, the trend of euro resilience and USD softness continued. The euro was supported by a strong Ifo business confidence. Even so, USD weakness prevailed. A positive risk sentiment and neutral set-up in the interest rate markets were not enough to stop the bleeding for the US currency. EUR/USD regained the 1.1880 resistance and closed the session at 1.1933 (from 1.1881). USD/JPY performed better. The pair closed the session with a marginal gain at 111.53 (from 111.22).

Overnight, sentiment on Asian markets gradually tuned negative. China and south Korea are taking the lead in the correction. Japanese equities reversed an opening gain into a small losses. The correction looks primarily profit taking after recent rally. USD/JPY more or less copied the intraday price action on Japanese equity markets. An initial up-tick was reversed. USD/JPY trades again in the 111.45 area. EUR/USD trades near Friday’s closing level (1.1925 area).

Today, US New Home sales are expected to have fallen 6.3% M/M, following a steep 19% gain in the previous month.. Later this week, the EMU inflation is expected to have increased to 1.6% Y/Y for the headline and 1% Y/Y for the core inflation. The US eco calendar is busy with ISM (Friday), October spending & income (Thursday) and consumer confidence (Tuesday). The Fed Beige Book, Yellen’s testimony before the JEC (both on Wednesday) and Fed chair nominee Powell’s confirmation hearing (tomorrow) will get much attention too.

Today, sentiment on risk and technical considerations will be the key drivers for USD trading. It is unsure whether the cautious sentiment in Asia will spill-over into European or US markets. Even so, a less buoyant risk sentiment recently seldom supported the dollar. Markets will also look forward to this week’s US eco data and events. US data will probably have to surprise on the upside to change fortunes for the dollar. This is a possibility, but no certainty. The confirmation hearing of Fed’s Powell is a wild card. German coalition talks might be a slightly positive for the euro. Last week, the dollar came under additional pressure as markets questioned the Fed’s rate hake intentions beyond December. These doubts finally propelled EUR/USD beyond the 1.1880 resistance. We still see a good chance that the Fed will realize its 2018 intentions, but there is no trigger to change sentiment on the dollar now. Last week we advocated stop-loss protection in case of a break of EUR/USD beyond 1.1880. As this has happened, there is no reason yet to row against the USD negative tide ST.

Currencies

R2 1,2225 -1dR1 1,2092EUR/USD 1,1933 0,0082S1 1,1554S2 1,1331

Asian equities extend gains

Dollar struggles

EUR/USD clears 1.1880 resistance

Risk sentiment to dominate FX trading

Markets look forward to US data/events later this week

Dollar holds near recent lows

Monday, 27 November 2017

P. 5

From a technical point of view, EUR/USD set a post-ECB low mid-November, but regained since intermediate resistance at 1.1690/1.1837. On Friday, the pair also regained the 1.1880 MT correction top. This break opens the way for a full retracement to the 1.2092 top. The USD/JPY momentum was positive in October, but deteriorated this month. Last week, USD/JPY dropped below the 111.65 neckline. There was no aggressive follow-through selling, but if the break is confirmed, it would make the picture outright USD negative.

EUR/GBP extends ST rebound

Sterling was captured in technical, order-driven trading Friday. EUR/GBP rebounded further north of the 0.89 big figure supported by the rise of EUR/USD. Cable profited from an overall weak dollar. Bank of England member Silvana Tenreyro repeated that two more interest-rate increases will probably be needed to get inflation back to target, but Brexit can change the BoE policy response. UK PM May met several EU leaders in Brussels, but there was no indication that a breakthrough in the negotiations is imminent. EUR/GBP finished the week at 0.89 trades near 0.8947. Cable closed hat 1.3337.

There are no eco data in the UK today. BoE’s Haldane speaks in Birmingham, but we don’t expect him to bring much news on monetary policy. Talks between the UK and the EU are in the last straight line to deliver a text that might convince the EU leaders to move to a next step in the Brexit negotiation. It looks that the issue of the Irish border might be a hard nut to crack. Whether or not the EU summit will be able to give the green light for further negotiations remains a binary risk. So, we don’t expect GBP investors to place big directional bets until there is clarity on this issues. The day-to-day momentum remains slightly EUR/GBP positive.

MT view/technical picture. A BoE driven sterling rebound ran into resistance early this month. Sterling declined again as markets anticipated that the rate cycle would be very gradual and limited. Brexit headlines cause day-to-day gyrations. EUR/GBP trades in a 0.8733/0.9033 consolidation range. We changed our ST bias on EUR/GBP from positive to neutral two weeks ago. The 0.9015/33 area might be tough to break short-term.

R2 0,9307 -1dR1 0,9033EUR/GBP 0,8947 0,0042S1 0,8743S2 0,8657

EUR/GBP: moving higher in the established consolidation pattern

GBP/USD: Cable tests top MT sideways range

Monday, 27 November 2017

P. 6

Monday, 27 November Consensus Previous US 16:00 New Home Sales / MoM (Oct) 625k/-6.3% 667k/18.9% Japan 00:50 PPI Services YoY (Oct) 0.9% 0.9% China 02:30 Industrial Profits YoY (Oct) -- 27.7% Germany 27NOV-03DEC Retail Sales MoM / YoY (Oct) 0.3%/2.7% 0.5%/4.1% 27NOV-28NOV Import Price Index MoM / YoY (Oct) 0.4%/2.5% 0.9%/3.0% Italy 10:00 Manufacturing Sentiment (Nov) 111.8 111 10:00 Consumer confidence (=nov) 116.5 116.1 Sweden 09:30 Household Lending YoY (Oct) -- 7.1% Events 11:00 Italy to Sell inflation-linked and €2B zero-coupon 2019 bonds 11:00 Lithuania sells 2020 bonds 19:00 US to Sell $26 bn 2-yr Notes and $34 bn 5-yr Notes

10-year Close -1d 2-year td -1d Stocks Close -1dUS 2,34 0,02 US 1,74 0,02 DOW 23557,99 31,81DE 0,36 0,01 DE -0,70 0,00 NASDAQ 6889,16 21,80BE 0,59 0,02 BE -0,58 0,01 NIKKEI 22495,99 -54,86UK 1,25 0,00 UK 0,46 0,00 DAX 13059,84 51,29

JP 0,04 0,01 JP -0,16 0,01 DJ euro-50 3581,23 9,16

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0,06 2,02 0,93 Eonia -0,3590 0,00005y 0,22 2,13 1,07 Euribor-1 -0,3720 0,0000 Libor-1 1,3376 0,008910y 0,82 2,34 1,32 Euribor-3 -0,3290 0,0000 Libor-3 1,4676 0,0056

Euribor-6 -0,2720 -0,0010 Libor-6 1,6539 0,0018

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

EUR/USD 1,1933 0,0082 EUR/JPY 133,08 1,28 CRB 192,22 0,61USD/JPY 111,53 0,31 EUR/GBP 0,8947 0,0042 Gold 1291,80 -5,00GBP/USD 1,3337 0,0028 EUR/CHF 1,1689 0,0053 Brent 63,86 0,31AUD/USD 0,7617 -0,0008 EUR/SEK 9,8771 0,0447USD/CAD 1,2712 -0,0001 EUR/NOK 9,7007 0,0576

Calendar

Monday, 27 November 2017

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

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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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