Wednesday, 04 December 2019

P. 1

Rates: Core bonds thrive on hawkish trade rhetoric

The relationship between the US and China soured again on many levels, creating a risk-off environment in which core bonds flourished. Overnight developments offer no signs of improvement yet, on the contrary. Risks to today’s key US eco data (ADP & non-manufacturing ISM) are tilted to the downside, suggesting core bonds can retain their momentum.

Currencies: EUR/USD rebound blocked as sentiment turned risk-off

Yesterday, FX markets experienced a typical risk-off session as trade tensions came back to the forefront. USD/JPY declined. EUR/USD showed resilience after Friday’s rise. We look out whether soft US eco data might cause further USD losses. However, global uncertainty might complicate a consistent USD reaction.

Calendar

• US equities stumbled (up to -1%) as trade hopes waned and induced a risk-off

environment. Asian markets are tracking the fall on Wall Street with Australia underperforming (-1.58%).

• The US House of Representatives vigorously approved a bill that would enforce sanctions on China over human rights abuses against Uighur Muslims. China threatened retaliation, casting a shadow over US-China trade negotiations.

• US-China trade tensions intensified as US commerce secretary Wilbur Ross stated the US will proceed with its plan to impose another round of tariffs on Chinese goods on December 15 if no first phase deal is on the table by then.

• Australia’s economy expanded 0.4% (Q/Q) in Q3 down from 0.6% in Q2. Growth missing expectations (0.5%) and the government’s reluctance to stimulate through fiscal stimulus could prompt the RBA to resume easing.

• HK’s PMI fell to 38.5 in November down from 39.3 in October, its lowest reading since the SARS epidemic in 2003. Increasingly violent anti-government protests and softening global demand push the city in a severe downturn.

• China’s services sector accelerated to a 7-month high in November. The Caixin services PMI rose to 53.5 in November from 51.1 in October. New (export) business picked up while business expectations/sentiment remain subdued.

• In today’s economic calendar we line up for US jobs data and the ISM non-manufacturing PMI. The Bank of Canada meets, likely leaving rates unchanged. ECB & Fed speeches are due. Germany taps the bond market.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Wednesday, 04 December 2019

P. 2

Core bonds thrive on hawkish trade rhetoric

Core bonds put up a stellar performance yesterday as US President Trump dashed hopes on a rapid US-Sino trade solution. He even suggested postponing one until after November 2020 presidential elections. Additionally, he slapped tariffs on France and warned to do the same to NATO members not willing to comply with their part to NATO funding. On Monday, Brazil and Argentina were already victim of fresh tariffs on aluminum. The hawkish trade rhetoric sent stock markets south while providing a generous safe have bid into core bonds. US Treasuries outperformed German Bunds. US yields declined by 6.3 bps at the front end (2-yr) and around 10 bps further down the curve. The German yield curve bull flattened with yields dropping by 2.3 bps (2-yr) to 7.6 bps (30-yr) and erasing Monday’s upleg triggered by German fiscal stimulus bets. 10-yr yield spread changes vs Germany narrowed by up to 3 bps (Portugal, Ireland) with Greece (+11 bps) underperforming.

Asian stock markets remain downwardly oriented this morning with Australia (-1.4%; China proxy and slightly disappointing Q3 GDP) and Japan (-1%) underperforming. The US House passed a bill to take a tougher stance against China on the mass detention of Uighurs in Xinjiang. The move follows on accepting a pro-democracy Hong Kong support bill last week. China reacted by weakening its currency a second straight session by more than expected. The US-Chinese powerplay overshadows a much stronger-than-expected November Chinese Caixin Services PMI (53.5 vs 51.2). The German Bund and US Note future hover sideways near yesterday’s intraday top. The US House intelligence committee vote to send the Trump impeachment report to the House judiciary committee, the next phase in preparing for a House vote and a Senate trial.

Today’s eco calendar heats up in the US with ADP employment and non-manufacturing ISM. Risks are tilted to the downside of forecasts after Monday’s weak manufacturing gauge, which included a significant drop in the employment component. That would be an additional positive for core bonds in the current risk averse environment. Yesterday intraday recovery of main US indices suggests some resistance, but we believe that stock markets could be prone for some additional profit taking.

Technically, the German 10-yr yield broke above -0.41% resistance as geopolitical uncertainty diminished and capped intermediate resistance at -0.328%, improving the technical picture. Targets of this double bottom formation are -0.25% and -0.13%. The 38% retracement level of the Oct-Aug decline stands at -0.24%. The US 10-yr yield trades in the upper half of the 1.43%-1.94% sideways trading channel. First tests to take out 1.94% failed. Trade rhetoric broke recent upward momentum in core bond yields.

Rates

US yield -1d2 1.54 -0.065 1.54 -0.1010 1.72 -0.1030 2.17 -0.10

DE yield -1d2 -0.63 -0.025 -0.59 -0.0510 -0.35 -0.0730 0.16 -0.08

Af

German 10-yr yield: Bearish engulfing suggests short term downward momentum. Revisiting -0.41% support?

US 10-yr yield: Hawkish trade talks pulls yield back to middle of sideways range band

Wednesday, 04 December 2019

P. 3

EUR/USD preserves most of Monday’s gain, but rebound was blocked

by yesterday’s risk-off.

EUR/GBP: sterling holding strong going into next week’s election.

Risk-off caps EUR/USD rebound For the first time in a while markets experienced a typical risk-off session yesterday. President Trump is on collision course with France, both on the future of NATO on tax and trade issues. Markets were also unsettled as the president said he is in no hurry to strike a deal with China. This might even be delayed till after the US elections. The risk of a prolonged period of trade uncertainty triggered a return to safe havens. Equities were sold, core bonds and gold jumped higher. USD/JPY declined further below 109 (close 108.63). EUR/USD was resilient after Monday’s rise and held a tight range in the upper half of 1.10 (close 1.1082). This morning, Asian equities stay under pressure, mostly with losses of up to 1.0%. Australia underperforms. The US Congress approving a bill to impose sanctions on China for not respecting human rights of Muslim minorities, further complicates the US-China relations. China’s services and composite PMI’s were quite strong but are overshadowed by the political headlines. The yuan weakens further (USD/CNY 7.07). USD/JPY hovers around 108.50/60. EUR/USD is losing a few ticks (1.1075 area). Today, the final EMU PMIs, the US ADP labour report and the non-manufacturing ISM will be published. On Monday, the dollar declined on divergent US and EMU data and a (slight) narrowing of the interest rate differential. It is interesting to see whether this trend will be confirmed by other data evidence. We are cautious on the US data compared to consensus. However, any market reaction will be complicated by the flaring up of global tensions. Even so, we are keen to see whether EUR/USD can make further progress in case of softer US data. Last week, EUR/USD extensively tested the 1.0989 support, but the pair rebounded Monday on divergent US-EMU eco news, including a soft US ISM. The EUR/USD rebound stalled in yesterday’s risk-off trade, but the 1.11 resistance stays within reach. A break above 1.11 would call off the ST downward alert and open the way for a retest of the 1.1179 top. Any downticks in sterling, as happened on Monday, apparently are still used to reduce sterling short exposure. EUR/GBP yesterday reversed Monday’s up-tick. There was little high-profile news on the elections campaign. Most polls still suggest a lead for the conservative party. EUR/GBP again hovers in the lower part of 0.85 and can stay there going into the election. EUR/GBP 0.8475 is key technical support/reference.

Currencies

R2 1.1533 -1dR1 1.1448EUR/USD 1.1082 0.0003S1 1.0864S2 1.0778

R2 0.93067 -1dR1 0.91EUR/GBP 0.8528 -0.0034S1 0.8500S2 0.8314

Wednesday, 04 December 2019

P. 4

Wednesday, 4 December Consensus Previous US 13:00 MBA Mortgage Applications -- 1.50% 14:15 ADP Employment Change (Nov) 135k 125k 16:00 ISM Non-Manufacturing Index (Nov) 54.5 54.7 Canada 14:30 Labor Productivity QoQ (3Q) 0.20% 0.20% 16:00 Bank of Canada Rate Decision 1.75% 1.75% EMU 10:00 Markit Eurozone Services PMI (Nov F) 51.5 51.5 10:00 Markit Eurozone Composite PMI (Nov F) 50.3 50.3 Italy 09:45 Markit Italy Services PMI (Nov) 51.2 52.2 09:45 Markit Italy Composite PMI (Nov) 50.6 50.8 China 02:45 Caixin China PMI Composite (Nov) 53.2A 52 02:45 Caixin China PMI Services (Nov) 53.5A 51.1 Spain 09:15 Markit Spain Services PMI (Nov) 51.9 52.7 09:15 Markit Spain Composite PMI (Nov) 50.7 51.2 Sweden 08:30 Swedbank/Silf PMI Services (Nov) -- 49.5 08:30 Swedbank/Silf PMI Composite (Nov) -- 48.6 Events 04DEC Euro-area finance ministers meet in Brussels 11:30 Germany to Sell EUR 3 Bln of 0% 2029 Bonds 12:15 ECB’s Villeroy Speaks in Paris 16:00 Fed's Quarles Speaks on Supervision and Regulation to Congress

Calendar

Wednesday, 04 December 2019

P. 5

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 1.72 -0.10 US 1.54 -0.06 DOW 27502.81 -280.23DE -0.35 -0.07 DE -0.63 -0.02 NASDAQ 8520.643 -47.34BE -0.06 -0.07 BE -0.62 -0.02 NIKKEI 23135.23 -244.58UK 0.67 -0.07 UK 0.50 -0.05 DAX 12989.29 24.61

JP -0.04 -0.02 JP -0.15 0.00 DJ euro-50 3610.99 -15.67

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0.31 1.50 0.77 Eonia -0.4560 0.00005y -0.23 1.51 0.80 Euribor-1 -0.4480 -0.0090 Libor-1 1.6938 0.000010y 0.06 1.64 0.88 Euribor-3 -0.3970 0.0030 Libor-3 1.9001 0.0000

Euribor-6 -0.3330 0.0120 Libor-6 1.9061 0.0000

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

EUR/USD 1.1082 0.0003 EUR/JPY 120.39 -0.34 CRB 177.59 0.47USD/JPY 108.63 -0.35 EUR/GBP 0.8528 -0.0034 Gold 1484.40 15.20GBP/USD 1.2995 0.0056 EUR/CHF 1.0938 -0.0044 Brent 60.82 -0.10AUD/USD 0.6847 0.0028 EUR/SEK 10.5611 -0.0105USD/CAD 1.3296 -0.0012 EUR/NOK 10.1783 0.0252

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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

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