Wednesday, 12 December 2018

P. 1

Rates: US Treasuries underperform German Bunds

German Bunds held remarkably strong yesterday despite positive risk sentiment in Europe. WS ended flat, but US Treasuries continued Monday’s slide. The same story develops overnight with thawing Sino-US trade talks strengthening the risk rebound. German Bunds might outperform further with EMU bonds facing selling pressure and ahead of tomorrow’s ECB.

Currencies: Dollar drifts higher within established ranges

The euro took a strong start yesterday, but EUR/USD 1.14 resistance again proved to be a tough hurdle. A higher US PPI and positive talk on the Sino-US trade relations finally turned out USD positive. The US CPI is a wildcard today. For now, the dollar apparently gets the benefit of the doubt going into next week’s Fed meeting.

Calendar

• US stock markets closed mixed yesterday after a volatile trading session.

Nasdaq (+0.16%) outperforms. Asian bourses open well in green as US/China trade tensions might ease. Japanese indices outperform.

• Canada released the Huawei CFO on bail, raising hopes of easing trade tensions between the US and China. US President Trump already signalled he thinks this is a good thing “for what will be the largest trade deal ever made”.

• In a disagreement over a year-end spending bill, US President Trump told Democratic leaders he would be proud to shut down the US government later this month if he doesn’t get funding for a wall on the Mexican border.

• UK PM May is back in MP’s crosshairs after she delayed the Brexit vote and hinted a new vote will not take place before January ’19. Rumours now say Tory rebels had secured the 48 votes needed to trigger a confidence vote.

• Japanese PPI’s decreased in October to 2.3% (YoY) from 3.0% in October. The month-on-month figure printed -0.3%, down from 0.4% a month before and below expectations of -0.1% and the biggest drop since August 2016.

• Italian Deputy PM and leader of the League Party, Matteo Salvini, is said to be seeking new elections in March 2019, according to local Italian media. Meanwhile, PM Conte said to seek a 2019 budget deficit of 2.05%-2.08%.

• Today’s economic calendar is rather thin with the November CPI’s in the US and the Industrial Production result for the EMU in October. ECB’s Hakkarainen is speaking in Frankfurt. The US Treasury holds a $24bn 10-yr Note auction.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Wednesday, 12 December 2018

P. 2

More underperformance of US Treasuries vs Bunds?

Global core bonds ended mixed yesterday with US Treasuries underperforming German Bunds. The latter held remarkably strong amid the European risk rebound (+1.5%). Easing Sino-US trade tensions lifted sentiment further even if WS eventually closed near opening levels. Second tier eco data had no impact. The German yield curve bull steepened with yields 2.4 bps (2-yr) to 1.1 bp (30-yr) lower. The US yield curve bear flattened with yields gaining up to 3.5 bps (2-yr). 10-yr yield spread changes vs Germany widened by up to 3 bps, including for France. French President Macron’s generous spending reaction to the “gilet jaunes” risks widening the French deficit to 3.5% of GDP next year. The French/German 10-yr yield spread hit 48 bps, the highest level since May 2017.

Risk sentiment improves again this morning in Asia with main indices rising up to 2%. China is a laggard despite more signs of thaw in the trade dispute (see headlines). The US Note future holds its downward bias since the start of the week. Italian media report that Lega Salvini wants to bank on his party’s strong polling by calling a new vote in March. He aims to leverage momentum to secure more spending/bigger deficit next year. We expect peripheral yield spreads to widen further today.

Today’s eco calendar contains EMU October industrial production and US November CPI inflation. We especially eye the latter. Core inflation (0.2% M/M, 2.2% Y/Y) is expected to match consensus with oil-related downside risks for the headline number (0% M/M, 2.2% Y/Y). We think eco data will continue to be dwarfed by risk sentiment. A prolonged comeback of stock markets and the continuation of the US Treasury’s refinancing operation ($24bn 10-yr Note) could in this respect weigh further on Treasuries with underperformance vs Bunds. The latter could hold strong in case of peripheral widening and as some investors will await the outcome of tomorrow’s ECB meeting. We expect a balanced message from the ECB, explaining small downward revisions to growth/inflation forecasts, but trying to avoid market swings. The June policy decisions will be confirmed, with possible hints to a new round of TLTRO’s.

From a technical point of view, 0.18% (German 10y yield) and 2.78/2.8% (US 10y yield) are the lines in the sand. A break lower would, especially in the US and taking into account the inversion at the 2y-5y, signal heightened fears of a nearby end to the economic & monetary cycles. For now, our hypothesis remains that the correction on rate markets the past month resulted in a too dovish positioning going into the final ECB & Fed meetings of the year.

Rates

US yield -1d2 2,76 0,035 2,75 0,0310 2,88 0,0230 3,14 0,00

DE yield -1d2 -0,60 -0,025 -0,30 -0,0210 0,23 -0,0130 0,83 -0,01

German/French 10-yr yield reaches highest level since May last year as Macron hits the spending pedal

US 10-yr yield: technical rebound away from 2.78%/2.8% support, but Fed will have final say next week

A

Wednesday, 12 December 2018

P. 3

EUR/USD: Dollar drifting higher going into the Fed policy decision

EUR/GBP: sterling to remain in the defensive after crucial brexit

vote being postponed.

Dollar drifting higher within established ranges

EUR/USD initially rebounded yesterday, supported by an improved risk climate and a better than expected German ZEW, but the gain could not be sustained. The 1.14 big figure was a tough resistance. Later, the USD received support from stronger than expected US PPI data and positive comments from US president Trump on the US China trade talks. French and Italian spending plans were potentially euro negative. EUR/USD finished the day at 1.1317 (from 1.1356). The gain in USD/JPY was more modest (close at 113.38). Asian investors also considered the positive comments from US president Trump on the trade talks enough a reason to turn more positive on risk overnight. Positivism on trade currently outweighs the Brexit chaos and the risk of a US government shutdown as a driver for global markets. In an interview, US president Trump called the Fed not to raise interest rates next week. For now, his call has little impact on US yields or on the dollar. The dollar remains well supported despite the overall risk-on context (DXY 97.40 area; EUR/USD 1.1325 Regarding the data, US CPI inflation takes centre stage today. Core inflation is expected to rise a ‘trend-like’ 0.2% M/M and 2.2% Y/Y. Headline CPI is seen easing from 2.5% Y/Y to 2.2%. We have no strong arguments to deviate from the consensus. A negative surprise from headline (oil) might hamper a rise in US yields and in the dollar. Global sentiment and technical factors will also again play an important role. Brexit remains in the headlines and is a tentative euro negative (against the dollar). We consider an easing of the China/US trade tensions as neutral for EUR/USD. The topside in EUR/USD showed tough resistance in the 1.14+ area of late. Given the recent sharp decline in US yields, the market maybe has still some ‘less dovish’ repositioning to do in the run-up to the Fed meeting. This might keep the dollar well supported with the established ranges. (EUR/USD 1.12/1.15) Sterling remained in the defensive yesterday as Monday’s decision to delay the Brexit vote reduced the visibility of the Brexit process even further. Sterling held near a 3-month low against the euro and tested the 1.25 barrier against the dollar. Currently, the debate whether or not there will be a confidence vote on PM May’s position only adds to uncertainty. We still so no reason to row against the current negative sterling tide.

Currencies

R2 1,1815 -1dR1 1,1621EUR/USD 1,1317 -0,0039S1 1,1187S2 1,1119

R2 0,94 -1dR1 0,91EUR/GBP 0,9062 0,0021S1 0,8700S2 0,862

Wednesday, 12 December 2018

P. 4

Wednesday, 12 December Consensus Previous US 13:00 MBA Mortgage Applications -- 2.0% 14:30 CPI MoM/YoY (Nov) 0.0%/2.2% 0.3%/2.5% 14:30 CPI Ex Food and Energy MoM/YoY (Nov) 0.2%/2.2% 0.2%/2.1% 14:30 Real Avg Weekly/Hourly Earnings YoY (Nov) --/-- 0.8%R/0.6%R Japan 00:50 PPI MoM/YoY (Nov) -0.3%A/2.3%A 0.4%R/3.0%R 05:30 Tertiary Industry Index MoM (Oct) 1.9%A -1.2%R EMU 11:00 Industrial Production SA MoM/WDA YoY (Oct) 0.1%/0.7% -0.3%/0.9% Italy 10:00 Unemployment Rate Quarterly (3Q) 10.3% 10.7% Sweden 09:30 CPI MoM/YoY (Nov) 0.0%/2.0% -0.1%/2.3% 09:30 CPIF MoM/YoY (Nov) 0.0%/2.2% -0.1%/2.4% Events 14:30 ECB's Hakkarainen Speaks in Frankfurt 19:00 U.S. to Sell USD24 Bln 10-Year Notes

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 2,88 0,02 US 2,76 0,03 DOW 24370,24 -53,02DE 0,23 -0,01 DE -0,60 -0,02 NASDAQ 7031,832 11,31BE 0,75 0,01 BE -0,53 -0,02 NIKKEI 21602,75 454,73UK 1,19 -0,01 UK 0,69 -0,01 DAX 10780,51 158,44

JP 0,06 0,01 JP -0,14 0,00 DJ euro-50 3055,32 38,33

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0,02 2,86 1,17 Eonia -0,3600 -0,00205y 0,27 2,84 1,25 Euribor-1 -0,3680 0,0000 Libor-1 2,4205 0,000010y 0,86 2,91 1,39 Euribor-3 -0,3120 0,0020 Libor-3 2,7759 0,0000

Euribor-6 -0,2440 0,0010 Libor-6 2,8779 0,0000

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

EUR/USD 1,1317 -0,0039 EUR/JPY 128,32 -0,39 CRB 181,80 0,15USD/JPY 113,38 0,05 EUR/GBP 0,9062 0,0021 Gold 1247,20 -2,20GBP/USD 1,2487 -0,0074 EUR/CHF 1,1241 -0,0005 Brent 60,20 0,23AUD/USD 0,7206 0,0016 EUR/SEK 10,2863 -0,0437USD/CAD 1,339 -0,0008 EUR/NOK 9,7094 -0,0164

Calendar

Wednesday, 12 December 2018

P. 5

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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 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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