Friday, 18 January 2019

P. 1

Rates: Eco data vs risk sentiment

A WSJ article suggested that the US pondered dropping Chinese tariffs. Risk sentiment improved, even if the headlines were later denied by a US Treasury official. Downside risks to US eco data and caution going into the long weekend hang in the balance with stronger stock markets. We have an upward bias for core bonds with outperformance of US Treasuries.

Currencies: dollar shows mixed picture. EUR/USD to bottom out?

The dollar gained against the yen yesterday, but showed no clear trend against the euro as risk sentiment remained constructive. Easing tensions on global trade and a continuation of the risk rebound might be slightly euro supportive. Sterling extends its rebound as markets see a growing chance of Brexit to be delayed despite current political stalemate.

Calendar

• US equity markets gained up to 0.75% yesterday as new trade optimism

supported risk sentiment. Most Asian equities opened in green, with Chinese and Japanese indices outperforming.

• US Treasury Secretary Mnuchin is said striving for easing Chinese tariffs, while US Trade rep. Lighthizer is more reserved about the idea. The Treasury department later denied the news, but it moved financial markets anyway.

• US President Trump cancelled the US delegation’s trip to the World Economic Forum in Davos, as the partial government shutdown continues. He also blocked Democrat House Speaker Pelosi’s trip overseas in a sign of rising tensions.

• A top North Korean delegation travels to Washington today for talks with US Secretary of State Pompeo and possibly with US President Trump. The meeting aims at paving the way for a second US-North Korea nuclear summit.

• Norway's Prime Minister Erna Solberg secured a centre-right majority government by adding the small CDP to her minority three-party coalition. It’s the first conservative-led government in Norway in over three decades.

• Japanese consumer inflation (Y/Y) dropped in December to 0.7%, a seven-month low and down from 0.9% a month before, as household spending is further cooling. The data comes ahead of next week’s Bank of Japan meeting.

• Today’s US economic calendar contains Industrial Production for December and the University of Michigan consumer confidence for January. Fed’s Williams and Harker speak. December UK retail sales feature on the agenda as well.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Friday, 18 January 2019

P. 2

US Treasuries take double hit

Global core bonds lost ground yesterday. US Treasuries underperformed German Bunds. The US Note future took a first blow after stronger than expected US eco data, even if they were second tier (weekly jobless claims & Philly Fed Business Outlook). The second hit came after the WSJ reported that the US was debating to ease China trade tariffs to hasten a trade deal. The news pushed US stock markets to recovery highs, but a US Treasury official rapidly denied the headlines. US yields added 0.3 bps (30-yr) to 3.4 bps (5-yr) on a daily basis. The German yield curve shifted 1 bp (30-yr) to 2 bps (5-yr) higher. 10-yr yield spread changes vs Germany ended broadly unchanged with Spain, Greece and Portugal (-3 bps to -5 bps) outperforming.

Most Asian stock markets record gains this morning with China outperforming. The WSJ article, although denied, lifts spirits ahead of Chine vice PM Liu He’s top-level visit to Washington to pick up trade negotiations. The Japanese yen loses ground, but core bonds are steady. We expect an upbeat European opening.

The eco calendar contains US December industrial production and January University of Michigan consumer confidence. We see downside risks for the former after a weak ISM for the manufacturing sector and also for the latter, linked to the partial government shutdown. Taking into account that investors generally prefer to err on the safer side going into a long weekend (US Monday closed; Martin Luther King Day), explains our upward bias for today with an outperformance of US Treasuries against German Bunds. The improved risk sentiment is in the other part of the balance and could limit gains. Fed Williams and Harker are scheduled to speak, but shouldn’t bring new insights. Washington-based Fed governor Quarles sounded upbeat on the US economy yesterday.

Technically, the German 10-yr yield bounced off 0.15% support, but the picture didn’t change yet. Therefore, the 10-yr yield needs to clear the 0.31% hurdle. The US 10-yr yield lost the 2.75%-2.8% area by the end of last year. This zone now works as resistance in a trading band floored by 2.5%. In both Germany and the US, we think that sufficient bad news is discounted at current levels. Policy normalization expectations in the US and EMU have become extremely/too dovish. However, a clear trigger is needed before declaring a sustained turnaround.

Rates

US yield -1d2 2,56 0,025 2,57 0,0310 2,75 0,0330 3,07 0,00

DE yield -1d2 -0,59 0,015 -0,35 0,0210 0,24 0,0230 0,85 0,01

German 10-yr yield bounced off 0.15% support, but no change to technical picture yet. 0.31% is first resistance

US 10-yr yield. No clear trigger available to regain 2.75%-2.8% area. Sideways action ahead, floored by 2.5%?

Af

Friday, 18 January 2019

P. 3

EUR/USD: no high profile story to guide trading. Tentative signs of

EUR/USD to bottom out?

EUR/GBP: sterling extends rebound as markets expect Brexit to

be delayed.

Dollar still looking for direction Global markets initially show no clear trend yesterday. The equity rally slowed (temporarily) and so did the rebound of the dollar. Later in the session, US yields rose a few bps and equities resumed their uptrend. The move was supported by decent US eco data and by press headlines that the US was considering easing China trade tariffs. The impact on the dollar was mixed. USD/JPY gained some further ground and closed the session at 109.26. EUR/USD didn’t go anywhere and finished at 1.1389 (from 1.1392). This morning, Asian markets are joining the risk rally from the US yesterday evening. Investors continued to hope for easing trade tensions between the US and China even as the US Treasury officials denied yesterday’s reports on the US considering rolling back tariffs. USD/JPY (109.35 area) is gaining modestly further ground. EUR/USD is currently hovering just below 1.14. The yuan is losing a few ticks despite the constructive risk sentiment (USD/CNY 6.7775 area, PBOC liquidity). There are no important data in Europe later today. In the US December production data and consumer confidence from the University of Michigan will be published. A decline from 98.3 to 96.8 is expected. The risk probably is for negative surprise as the impact of the shutdown is filtering through. If so, it might be a tentative negative for the dollar. This morning, the global positive risk sentiment supports USD/JPY. Market speculation on easing trade tensions should be neutral or maybe even slightly positive for EUR/USD. This week, markets turning more uncertain on EMU growth compared the US, weighed on the euro and supported the dollar. This balance might tilt again (e.g. due to the shutdown) but for now the dollar gets the benefit of the doubt. We still see no big case for a sustained USD rally and look for a EUR/USD bottoming out process. Yesterday’s intraday price action suggests such pattern might be in the making. EUR/USD 1.1309 is first minor support. Sterling continued its rebound yesterday. The poltical stalemate on Brexit persists. UK PM May is talking to MP’s from several parties but labour leader Corbyn still refuses to cooperate. Still, markets continue to see rising chances for a new referendum or for a delay of the March 29 Brexit deadline. For now this scenario is considered as sterling positive. EUR/GBP dropped below the 0.88 support. The 0.8656/21 range bottom is key. We consider the sterling rally as a bit premature, but the day-to-day momentum on sterling is cleary improving.

Currencies

R2 1,1815 -1dR1 1,1621EUR/USD 1,1389 -0,0003S1 1,1187S2 1,1119

R2 0,93067 -1dR1 0,91EUR/GBP 0,8770 -0,0074S1 0,8700S2 0,862

Friday, 18 January 2019

P. 4

Friday, 18 January Consensus Previous US 15:15 Industrial Production MoM (Dec) 0.2% 0.6% 15:15 Manufacturing (SIC) Production (Dec) 0.3% 0.0% 15:15 Capacity Utilization (Dec) 78.5% 78.5% 16:00 U. of Mich. Sentiment (Jan P) 96.8 98.3 16:00 U. of Mich. Current Conditions (Jan P) 116.0 116.1 16:00 U. of Mich. Expectations (Jan P) 86.5 87.0 16:00 U. of Mich. 1 Yr Inflation (Jan P) -- 2.7% 16:00 U. of Mich. 5-10 Yr Inflation (Jan P) -- 2.5% Canada 14:30 CPI NSA MoM/YoY (Dec) -0.4%/1.7% -0.4%/1.7% 14:30 CPI Core Common YoY% (Dec) 1.9% 1.9% Japan 00:30 Natl CPI YoY (Dec) 0.3%A 0.8% 00:30 Natl CPI Ex Fresh Food YoY (Dec) 0.7%A 0.9% 00:30 Natl CPI Ex Fresh Food, Energy YoY (Dec) 0.3%A 0.3% 05:30 Capacity Utilization MoM (Nov) 1.0%A 4.0% UK 10:30 Retail Sales Ex Auto Fuel MoM/YoY (Dec) -0.8%/3.8% 1.2%/3.8% 10:30 Retail Sales Inc Auto Fuel MoM/YoY (Dec) -0.8%/3.6% 1.4%/3.6% Events 2018Q4 earnings Schlumberger (13:00) … 10:00 Italy FinMin Tria, Bank of Italy Governor Visco Speak at Event 15:05 Fed’s Williams Speaks on Economic Outlook and Monetary Policy (voter) 17:00 Fed’s Harker Speaks Symposium on Prosperity (non-voter)

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 2,75 0,03 US 2,56 0,02 DOW 24370,1 162,94DE 0,24 0,02 DE -0,59 0,01 NASDAQ 7084,463 49,77BE 0,69 0,00 BE -0,53 0,01 NIKKEI 20666,07 263,80UK 1,34 0,03 UK 0,82 -0,01 DAX 10918,62 -12,62

JP 0,01 0,00 JP -0,17 0,00 DJ euro-50 3069,35 -7,87

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0,06 2,68 1,24 Eonia -0,3690 0,00105y 0,19 2,67 1,34 Euribor-1 -0,3680 0,0010 Libor-1 2,5133 0,000010y 0,79 2,78 1,51 Euribor-3 -0,3080 0,0000 Libor-3 2,7803 0,0000

Euribor-6 -0,2360 0,0000 Libor-6 2,8616 0,0000

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

EUR/USD 1,1389 -0,0003 EUR/JPY 124,42 0,14 CRB 179,76 0,12USD/JPY 109,26 0,17 EUR/GBP 0,8770 -0,0074 Gold 1292,30 -1,50GBP/USD 1,2986 0,0101 EUR/CHF 1,1323 0,0039 Brent 61,18 -0,14AUD/USD 0,7193 0,0025 EUR/SEK 10,2708 0,0183USD/CAD 1,3279 0,0024 EUR/NOK 9,74 0,0120

Calendar

Friday, 18 January 2019

P. 5

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