Friday, 07 February 2020

P. 1

Rates: Risk rally running out of steam

This week’s risk rally shows signs of running out of steam suggesting some profit taking going into the weekend. This could serve a gentle bid for core bonds. US payrolls will probably need to be very strong to leave a permanent trace on trading. German politics are a wildcard this weekend with a scheduled crisis meeting between the ruling CDU and SPD.

Currencies: Payrolls to trigger sustained break below 1.0980 support

The risk rally and the rise in core yields are slowing, but the dollar continues to profit from this week’s strong US eco data. Expectations for the payrolls probably have been raised after the strong APD. Even so, the report probably has to be really weak to change EUR/USD fortunes for the better.

Calendar

• WS gained for a fourth (up to 0.67%, Nasdaq) straight session and struck record

highs as planned Chinese tariff cuts on US goods buoyed risk sentiment. Asian markets are losing steam (up to -1.20%) putting a halt to this week’s risk rally.

• OPEC+ expects Russia to respond in the coming days rather than weeks to its proposed provisional cut in oil output of 600,000 bpd, aiming to mitigate the impact of any weakening in global demand in response to the coronavirus.

• Pete Buttigieg (26.2%) beat Bernie Sanders (26.1%) with a razor-thin lead in the Iowa caucuses with all precincts counted. Numbers are expressed in State Delegate Equivalents. Warren comes in third (18%) and Biden fourth (15.8%).

• US president Trump and his Chinese counterpart Jinping reaffirmed their pledge to implementing the phase one trade agreement signed last month. Trump praised Beijing’s strength and resilience in its fight to contain the coronavirus.

• The RBA slashed its near-term economic forecasts as it expects a hit to growth from the bushfires at home and the coronavirus outbreak in China. The central bank now predicts growth to reach 1.9% in H1, down from a previous 2.6%.

• The Fed’s Quarles stated the central bank is contemplating different changes to its banking supervision framework to enhance money market liquidity through flexible liquidity requirements while not loosening banks’ compulsory buffers.

• Today’s economic calendar is packed, containing US/Canadian labour market data (payrolls, earnings,…). The Fed will release its semi-annual monetary policy report to Congress. Industrial production/trade data are due across Europe.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Friday, 07 February 2020

P. 2

Risk rally running out of fuel

News that China will cut tariffs on some $75bn of US imports as of end next week (when the US is also planning to cut tariffs on Chinese products) positively influenced Asian dealings, but it soon turned out that this week’s risk rally might be running out of fuel. Core bonds set session lows before the European opening bell and drifted with a minor upward bias for the rest of the day. News flow was thin while eco calendar only contained second tier numbers. The German yield curve flattened with yield changes ranging between +1 bp (2-yr) and -1 bp (30-yr). 10-yr yield spread changes vs Germany barely moved. The US yield curve flattened as well with a more significant outperformance of the 30-yr yield (-2.9 bps).

Asian stock markets fall prey to some profit taking this morning with bourses losing around 0.5%. Core bonds extend yesterday’s slow advance. Fed vice-chair Quarles hinted at possible tweaks in the Fed’s banking supervision to raise the flow of liquidity in money markets.

Today’s eco calendar contains US January payrolls. Consensus expects net job growth of 165k, but the psychological bar is probably even higher given the 2nd consecutive stellar ADP employment report released earlier this week. Mild weather was said to boosted construction and leisure payrolls. Employment gauges in manufacturing (46.6 from 45.2) and non-manufacturing (53.1 from 54.8) ISM’s send no strong signal. The unemployment rate is forecast to stabilize at a multi-decade low (3.5%) while consensus foresees only a minor rebound in average hourly earnings after last month’s setback (0.3% M/M & 3% Y/Y). The latter perhaps provides scope for surprise given the tightness of the US labour market. Overall, we think that the payrolls report will be good, but not good enough to leave a lasting stamp on trading. Risk sentiment probably remains the key market driver. Following this week’s rally and with the weekend looming, investors might decide to stick with a more guarded intraday approach. Crisis talks between national coalition partners CDU and SPD in Berlin are a wildcard. The government is at risk of collapse following this week’s political scandal in Thuringia (breach of cordon sanitaire against AfD). Irish general elections aren’t expected to influence IGB’s

Technically: core bond yields failed to take out resistance levels at -0.18% (July high)/-0.15% (38% retracement of Feb ’18 – Sep ’19 decline) for the German 10-yr yield and 1.94% for the US 10-yr yield. The Chinese coronavirus took markets hostage via risk aversion, pulling core bond yields below first support. We hold our view that this won’t be a lasting market theme. The Chinese return to trading after Lunar NY holidays proved to be a turning point.

Rates

US yield -1d2 1,19 0,005 1,93 0,0010 2,44 0,0030 3,07 0,00

DE yield -1d2 -0,79 -0,025 -0,56 -0,0310 0,18 -0,0330 0,92 -0,03

Af

German 10-yr yield bounced off key support (-0.41%). US 10-yr yield: 1.94% proved to be tough resistance. No escaping global risk aversion in January. Sufficient bad news discounted

Friday, 07 February 2020

P. 3

EUR/USD breaking below the 1.0980 support.

EUR/GBP: sterling eases slightly but range firmly in place.

Will payrolls hammer EUR/USD below 1.0980? Yesterday, the dollar held on to recent gains against other majors even as the risk-rebound slowed. The rise in core yields halted but didn’t hurt the dollar. This week’s strong data kept the US dollar well supported going into today’s payrolls. The trade-weighted dollar (98.50 area) and USD/JPY (110 area) were closing in on technical resistance. The euro again underperformed. EUR/USD slipped below the 1.0981 support as mediocre eco data and lingering political issues continue to weigh. Overnight, the relief-rally also halted in Asia as several equity indices retraced most/all of the initial corona-related loss. The yuan (USD/CNY 6.98 area) is losing a few ticks. RBA chief Lowe indicated that currently the risk of further rate cuts slightly outweighs benefits. The RBA wait-and-see bias doesn’t help the AUD much. AUD/USD is drifting lower in the 0.67 figure (0.6725 area). USD/JPY hovers just below 110. EUR/USD (1.1080) still struggles not to fall below the key 1.0980 area. Today, German and French industrial production probably won’t save the euro. Expectations for the US payrolls are probably lifted after the strong ADP report. Meeting expectations (165 000) might be a disappointment for USD bulls. On the other hand, an upward surprise in wage growth still might support the dollar. The easing of the global risk rally limits additional interest rate support for the USD, but we don’t see it changing fortunes for EUR/USD. The payrolls probably will have to be really weak to block the EUR/USD slide. Last week, a first test of this key support was rejected, but the USD soon regained the upper hand. A sustained move below 1.0981 would pave the way for a full retracement to 1.0879 (2019 low). A return above 1.1120 would call off the ST alert, but we don’t see a trigger for that. Sterling remained under slight pressure against the dollar and the euro yesterday. However, EUR/GBP remained within established sideways range. Uncertainty on the UK-EU trade negotiations blocked recent positive GBP-momentum. There are again no UK eco data today. We keep the view that sterling can hold rather strong on better eco news, especially against a weak euro.

Currencies

R2 1,1145 -1dR1 1,0851EUR/USD 1,0487 -0,0036S1 1,0518S2 1,0458

R2 0,8828 -1dR1 0,8689EUR/GBP 0,8510 -0,0015S1 0,846S2 0,8333

Friday, 07 February 2020

P. 4

Friday, 7 February Consensus Previous US 14:30 Change in Nonfarm Payrolls (Jan) 165k 145k 14:30 Change in Private Payrolls (Jan) 155k 139k 14:30 Change in Manufact. Payrolls (Jan) -2k -12k 14:30 Unemployment Rate (Jan) 3.50% 3.50% 14:30 Average Hourly Earnings MoM /YoY (Jan) 0.30%/3.00% 0.10%/2.90% 14:30 Average Weekly Hours All Employees (Jan) 34.3 34.3 14:30 Labor Force Participation Rate (Jan) 63.20% 63.20% 14:30 Underemployment Rate (Jan) -- 6.70% 21:00 Consumer Credit (Dec) $15.000b $12.513b Canada 14:30 Part Time Employment Change (Jan) -- -6.5R 14:30 Full Time Employment Change (Jan) -- 33.9R 14:30 Net Change in Employment (Jan) -- 27.3kR 14:30 Hourly Wage Rate Permanent Employees YoY (Jan) -- 3.80% 14:30 Unemployment Rate (Jan) -- 5.60% 14:30 Participation Rate (Jan) -- 65.5 Japan 00:30 Real/Labor Cash Earnings YoY (Dec) -0.9%A/0.0%A -0.6%R/0.1%R 00:30 Household Spending YoY (Dec) -4.8%A -2.00% Germany 08:00 Trade Balance (Dec) 15.0b 18.6bR 08:00 Current Account Balance (Dec) 23.5b 24.9b 08:00 Exports/Imports SA MoM (Dec) 0.5%/0.3% -2.3%/-0.5% 08:00 Industrial Production SA MoM/WDA YoY (Dec) -0.2%/-3.7% 1.1%/-2.6% France 08:45 Private Sector Payrolls QoQ (4Q P) 0.20% 0.20% 08:45 Industrial Production MoM/YoY (Dec) -0.3%/1.0% 0.3%/1.3% 08:45 Manufacturing Production MoM/YoY (Dec) 0.10%/1.20% -0.1%/1.2% 08:45 Wages QoQ (4Q P) 0.30% 0.30% Italy 10:00 Retail Sales MoM/YoY (Dec) --/1.00% -0.20%/0.90% China 07FEB Exports/Imports YoY (Jan) -4.2%/-5.%% 7.9%R/16.5%R 07FEB Trade Balance (Jan) $36.52b $47.21bR Norway 08:00 GDP Mainland QoQ (4Q) 0.30% 0.70% 08:00 GDP QoQ (4Q) -- 0.00% Events Q4 earnings AbbVie (bef-mkt) … 01:15 Fed's Quarles Discusses Monetary Policy and Economic Outlook 17:00 Fed Releases Semi-Annual Monetary Policy Report to Congress

Calendar

Friday, 07 February 2020

P. 5

10-year td -1d 2-year td -1d Stocks td -1dUS 2,44 0,00 US 1,19 0,00 DOW 19762,6 0,00DE 0,18 -0,03 DE -0,79 -0,02 NASDAQ 5383,117 0,00BE 0,51 -0,04 BE -0,69 -0,02 NIKKEI 19114,37 0,00UK 1,24 0,00 UK 0,08 0,00 DAX 11575,57 94,51

JP 0,05 0,00 JP -0,18 0,00 DJ euro-50 3302,48 11,96

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,11 1,69 0,69 Eonia -0,3290 0,00005y 0,06 2,00 0,86 Euribor-1 -0,3680 0,0000 Libor-1 0,7717 0,000010y 0,64 2,34 1,23 Euribor-3 -0,3190 0,0000 Libor-3 0,9979 0,0000

Euribors-6 -0,2210 0,0000 Libor-6 1,3177 0,0000

Currencies td -1d Currencies td -1d Commodities td -1d

EUR/USD 1,0487 -0,0036 EUR/JPY 123,15 0,11 CRB 192,51 0,00USD/JPY 117,43 0,52 EUR/GBP 0,8510 -0,0015 Gold 1151,70 0,00GBP/USD 1,2326 -0,0018 EUR/CHF 1,0714 -0,0008 Brent 56,82 0,00AUD/USD 0,717 -0,0040 EUR/SEK 9,5408 -0,0323USD/CAD 1,3417 -0,0024 EUR/NOK 9,0556 -0,0236

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