Thursday, 17 May 2018

P. 1

Rates: US 10-yr yield breaks above 3.07%. Italian politics weighs on periphery

Italian political risk could keep peripheral bond markets under pressure at least until 5SM/Lega reach a coalition agreement and publish their official plans. The US Note future will probably underperform the Bund, especially if US eco data, even second tier, remain strong. The break above 3.07% (US 10-yr), if sustained, argues further in favour of Treasury selling.

Currencies: Euro suffers from uncertainty on Italy. More to come?

The focus for EUR/USD trading turned from the USD to the euro side of the story yesterday. EUR/USD dropped (temporary?) below 1.18 on headlines that the new Italian government program would contain some controversial measures on E(M)U politics. Sterling profits from press headlines that the UK government is considering to stay longer in the EU customs union.

Calendar

• US stock markets ended 0.25% (Dow) to 0.63% (Nasdaq) higher yesterday.

Asian risk equity indices are mixed overnight with Japan outperforming (+0.5%) and China underperforming (-0.3%).

• Britain will tell Brussels it is prepared to stay in the customs union beyond 2021 as ministers remain deadlocked over a future deal with the EU. (Telegraph)

• Brazil’s central bank kept its policy rate unexpectedly unchanged at 6.5% following a strong of a dozen consecutive cuts. Policymakers cited the recent sell-off in emerging markets assets for the move. (FT)

• French energy giant Total joined other European companies in signalling they could exit Iran, casting doubt on whether European leaders meeting to try to salvage the Iran nuclear deal can safeguard trade with Tehran. (Reuters)

• A GOP-led Senate committee backed US intelligence agencies’ finding that Moscow tried to boost Trump’s campaign by hacking and spreading misinformation, a bipartisan conclusion that breaks with a House panel’s position and the president’s rejection that Russia wanted him to win. (WSJ)

• Australia's jobless rate rose to a nine-month high of 5.6% in April as more people looked for work, but the number of employed beat expectations as more full-time jobs were added (+32.7k). (Reuters)

• Today’s eco calendar contains US weekly jobless claims and Philly Fed Business Outlook. Fed Kashkari, Fed Kaplan and ECB Constancio are scheduled to speak. Spain and France sell bonds.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Thursday, 17 May 2018

P. 2

US 10-yr yield > 3.07%; 5SM/Lega scare periphery

Yesterday’s trading session was quiet dynamic. German Bunds outperformed US Treasuries. Focus went to Europe in the first half of dealings as press reported on a (recent, but outdated) proposal from the likely next Italian government (5SM/Lega) to seek a significant debt writedown (€250bn mainly via BTP’s on the ECB’s balance) and return to the pre-Maastricht era. Italian assets underperformed throughout the session with the Italian 10-yr spread 20 bps wider at the end of the day and FTSE MIB recording 2%+ losses. The Greek (+29 bps), Portuguese (+11 bps) and Spanish (+9 bps) spreads suffered spill-over effects. The possible Italian coalition showing its true colours caused safe haven flows into German Bunds while US Treasuries flat-lined. Trading dynamics changed during US trading. The US Note future started losing ground again after strong industrial production data and as oil prices surged from $78/barrel to $79.5/barrel as European companies put in doubt doing future business with Iran given US sanctions and as US crude inventories unexpectedly dropped. The suffering of US Treasuries put an intraday cap on the Bund.

US yields added 1.2 bps (2-yr) to 2.4 bps (10-yr). The US 10-yr yield closed above key 3.07% resistance!! A sustained break suggests more medium term upward potential towards the 3.75%-3.8% area! The US 30-yr yield is heavily testing the neckline of a multi-bottom trading pattern (3.22%). German yields closed 2.5 bps (2-yr) to 4 bps (5-yr) lower.

Asian risk sentiment is mixed overnight. Brent crude tests the cycle highs and seems ready to go for $80/barrel. The US Note future faces some selling pressure. We expect a neutral opening for the Bund though.

Today’s eco calendar contains US weekly jobless claims and Philly Fed Business Outlook. This week’s market reaction has proven sensitivity to stronger data, even if they are second tier. In combination with the technical move above 3.07%, it could therefore prolong weakness in US Treasuries. The underperformance against Bunds could continue given Italian political risk. BTP’s probably won’t rebound before 5SM-Lega publish their official governing programme. In absence of the extreme proposals mentioned above, tensions on peripheral bond markets could ease again somewhat given strong underlying EMU growth dynamics and the ECB’s monetary policy.

Rates

US yield -1d2 2,59 0,015 2,95 0,0210 3,10 0,0230 3,24 0,02

DE yield -1d2 -0,57 -0,025 -0,01 -0,0410 0,61 -0,0430 1,32 -0,03

US 10-yr yield: Sustained break above 3.07% would end long-term downtrend

Italian (black) and Spanish (orange) 10-yr yield spreads widen as Italian political risks heats up

Af

Thursday, 17 May 2018

P. 3

EUR/USD touched new 2018 low on Italian political developments, but

no follow-through price action yet.

EUR/GBP drifts lower as markets see rising chance for a Brexit compromise

Italian politics weighs- on euro. More to come?

Earlier this week, EUR/USD resumed its downtrend. The move was mainly the result of USD strength and rising US yields. US yields rose further yesterday, but the focus for FX trading turned more to the euro. EUR/USD selling resumed on headlines that an Italian 5SM/Lega government would ask a write-down on debt held by the ECB. The parties who are negotiating a government program downplayed the issue, but couldn’t restore confidence. Italian assets were sold. EUR/USD tumbled (temporary?) below 1.18, but closed at 1.1808. US eco data (production) remained good, but harly affected USD trading. USD/JPY ran into resistance, settling in the lower half of the 110 big figure.

Overnight, Asian equities hardly profit from a good close in the US. Japan outperforms. The US 10-yr yield reached 3.1%, but for now it doesn’t trigger further USD gains. The trade-weighted USD (93.20) hovers just below the recent top as does USD/JPY (110.3). EUR/USD is changing hands near 1.1820. Australian April job growth was OK, but the 5.6% unemployment rate indicates that there is still spare capacity. AUD/USD (currently 0.7535) gained modest ground after the release.

Investors will keep a close eye on the negotiations to form a new Italian government today. Any controversial proposals to amend EU/EMU rules might weigh on the euro. In the US, the jobless claims and the Philly Fed business outlook will be released. US data recently confirmed a good momentum at the start of Q2 and we see no reason for this to change right now. However, will upcoming data be strong enough to support a further rise in the dollar after recent gains? The MT picture remains USD constructive, but yesterday’s price action suggests that the dollar rally might be losing some momentum in a daily perspective. Some consolidation might be on the cards, especially for USD/JPY. Uncertainty on Italy might cap the topside in EUR/USD. EUR/USD 1.1718 remains the next reference.

Sterling held stable against the dollar and gained slightly against a soft euro yesterday. Overnight, sterling profits from a press article that the UK would be prepared to stay longer in the customs union (beyond 2021) if that would be necessary to implement a final solution. There are no important UK eco data. The hope on some kind of Brexit compromise might continue to support sterling in a daily perspective. EUR/GBP might drift lower in the 0.8850/0.8650 trading range.

Currencies

R2 1,2598 -1dR1 1,2555EUR/USD 1,1808 -0,0030S1 1,1812S2 1,1718

R2 0,9307 -1dR1 0,9033EUR/GBP 0,8753 -0,0012S1 0,8627S2 0,8541

Thursday, 17 May 2018

P. 4

Thursday, 17 May Consensus Previous US 14:30 Initial Jobless Claims 215k 211k 14:30 Continuing Claims 1780k 1790k 14:30 Philadelphia Fed Business Outlook (May) 21.0 23.2 Japan 01:50 Core Machine Orders MoM/YoY (Mar) -3.9%/-2.4% A 2.1%/2.4% EMU 11:00 Construction Output MoM/YoY (Mar) -- -0.5%/0.4% Events 16:45 Fed's Kashkari Speaks at Moderated Q&A in Minneapolis 19:30 Fed’s Kaplan Speaks in Moderated Q&A 12:30 ECB Vice-President Constancio Speaks in Frankfurt 14:00 ECB Vice-President Constancio Speaks in Frankfurt 10:30 Spain to Sell Bonds 10:50 France to Sell (I/L) Bonds

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 3,10 0,02 US 2,59 0,01 DOW 24768,93 62,52DE 0,61 -0,04 DE -0,57 -0,02 NASDAQ 7398,295 46,67BE 0,88 -0,02 BE -0,48 -0,01 NIKKEI 22856,35 139,12UK 1,50 -0,01 UK 0,82 -0,02 DAX 12996,33 26,29

JP 0,06 0,01 JP -0,13 0,00 DJ euro-50 3562,85 -1,44

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y 0,06 2,94 1,18 Eonia -0,3690 -0,00805y 0,44 3,03 1,39 Euribor-1 -0,3710 -0,0020 Libor-1 1,9388 0,000010y 1,06 3,13 1,66 Euribor-3 -0,3260 0,0000 Libor-3 2,3206 0,0000

Euribor-6 -0,2720 -0,0010 Libor-6 2,4925 0,0000

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

EUR/USD 1,1808 -0,0030 EUR/JPY 130,35 -0,28 CRB 203,76 0,31USD/JPY 110,4 0,05 EUR/GBP 0,8753 -0,0012 Gold 1291,50 1,20GBP/USD 1,3486 -0,0016 EUR/CHF 1,1822 -0,0031 Brent 79,28 0,85AUD/USD 0,7516 0,0044 EUR/SEK 10,2785 -0,0028USD/CAD 1,279 -0,0087 EUR/NOK 9,5411 -0,0754

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Calendar

Thursday, 17 May 2018

P. 5

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 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 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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