Tuesday, 10 October 2017

P. 1

Rates: Limited impetus, more consolidation?

The eco calendar remains uneventful today and won’t influence trading. Catalan President Puidgemont’s speech after European trading is a wildcard, which warrants some cautiousness as he is rumoured to unilaterally declare independence. We think that core bonds are prone for more consolidation/correction higher.

Currencies: Dollar rally ran into resistance. Catalonia to weigh on the euro?

The dollar stabilized yesterday as last week’s rally stalled. Today, the eco calendar remains thin. The dollar probably won’t receive additional interest rate support. Catalonia remains a wildcard for the euro. Until now there was no negative fall-out on the euro, but his might change if tensions mount after a declaration of independence.

Calendar

• European equities ended a calm trading session with minor gains. Spanish

equities outperformed on hopes the Catalonian tensions will ease. Asian equities are narrowly mixed overnight, awaiting the return of US traders.

• The ECB should reduce its asset buys from next year with the aim of ending them altogether, ECB Executive Board member Lautenschlaeger said, just weeks before policymakers decide whether to curb stimulus.

• The US's spat with Turkey could drag on, as animosity builds between the NATO allies. U.S. envoy John Bass said a resolution depends on officials explaining why two Turkish employees at American outposts were detained.

• OPEC chief Barkindo said a drop in floating crude storage and the OECD's stock overhang are "strong and positive" signs of rebalancing. The comments drew a muted response from traders, suggesting they don't think the Saudi-led alliance can immediately turn the market around

• Catalan President Puigdemont will make a declaration of gradual independence today (6 PM). The announcement will include a constituent process without a regional assembly vote and will call on negotiations with Madrid

• Theresa May has set out detailed plans for the first time on how Britain would try to keep trade flowing if it fell out of the EU without a deal, as the prime minister prepared for a high-stakes game of brinkmanship with Brussels

• Today, the eco calendar is well filled with US small business confidence and production data from the UK, France and Italy, together with German and UK trade figures. However, these releases usually don’t impact trading much.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Tuesday, 10 October 2017

P. 2

Bund treads water in thin market conditions

The German Bund gained slightly ground after yesterday’s opening, but hovered sideways in a narrow range for the remainder of the European session, only to gain slightly more ground at the very end of the session. Traded volumes were extremely low. Japanese and US markets were closed and the EMU eco calendar only contained (strong) German production data. Last week’s failure to break above 0.50% resistance (German 10-yr yield) suggests some consolidation ahead despite this week’s heavy EMU supply calendar.

The German yield curve bull flattened with yield changes ranging between -0.3 bps (2-yr) and -1.7 bps (30-yr). On intra-EMU bond markets, 10-yield spread changes versus Germany ranged between +1 bp and -2 bps (Italy and Spain). Spanish bonds initially profited after the mass demonstrations against the Catalan secession case which play in the advantage of PM Rajoy in the current stand-off. However, gains largely evaporated as attention turned to today’s possible unilateral declaration of Catalan independence.

Calendar better filled, but devoid of market movers

US NIFB small business confidence is expected to have stabilized in September (105 vs. 105.3). That’s near the highs of the last thirty years. As other business indicators all surprised on the upside in September, there might be risks on the upside of expectations, but the report usually doesn’t drive markets. In EMU, there are only national data. France & Italy report August industrial production and Germany August trade figures. August figures are difficult to forecast, especially in France. German production already printed very strong, which may suggest upside risks for French and Italian production too. Anyway, these reports also have little market driving power. A similar assessment can be made for German trade data. The main market event may be the potential unilateral declaration of independence of the Catalan government (after market closure). Minneapolis Fed governor Kashkari speaks, but his ultra-dovish views are well-known.

Rates

US yield -1d2 1,50 0,005 1,96 0,0010 2,36 0,0030 2,90 0,00

DE yield -1d2 -0,70 0,005 -0,27 -0,0110 0,44 -0,0230 1,28 -0,02

T-Note future(2 days, intraday): Sell-off after payrolls, but losses largely recouped (US T) followed by follow through buying (sideways)

in very thin market

EuroStoxx: near 2015 high (resistance)

Af

Uneventful opening session

German curve bull flattens slightly

Slight outperformance Spanish/Italian bonds

Again unattractive calendar today

Friday’s US data remain key

Tuesday, 10 October 2017

P. 3

Finland and Slovakia (?) supply market

The Finnish treasury taps the on the run 5-yr RFGB (0% Apr 2022) for up to €1B. The bond on offer cheapened slightly in ASW spread terms going into the auction, but sits normal on the curve. We expect plain vanilla demand. The Slovak debt agency yesterday announced the near-term syndication (likely tomorrow) of a new 30-yr benchmark. The new issue significantly lengthens the Slovak curve. Currently, the longest-dated outstanding Slovak bond is a 20-yr one (SLOVGB 1.875% Sep2037; issued in Q1 2017).

Core bonds prone for some consolidation/correction?

Asian stock markets trade mixed overnight with South Korea outperforming in a catch-up move. The US Note future trades stable overnight as US investors return from the long weekend (Columbus Day). We expect a neutral opening for the Bund.

The eco calendar remains uneventful today and won’t influence trading. Catalan President Puidgemont’s speech after European trading is a wildcard, which warrants some cautiousness as he is rumoured to unilaterally declare independence. Upcoming supply in EMU and US is negative for bonds in theory, but probably won’t be the dominating trading factor. Technically, US yields ran into resistance after Friday’s payrolls, initiating some short term consolidation. A December rate hike is now almost completely discounted and also suggests that the sell-off is ripe for a pause. Adding the geopolitical context and US/German stock markets at record levels (ready for some profit taking?) even suggest a small positive bias for core bonds in this back-loaded (key US eco data on Friday) week. Central bank comments are wildcard for trading. Looking passed this week, we hold a sell-on-upticks strategy both in the US Note future (entry around 126) and the Bund (entry levels around 162).

R2 163,43 -1dR1 161,98BUND 161,38 0,28S1 160,49S2 159,80

German Bund: Sell-on-upticks around 162, anticipating ECB announcement?

US Note future: Almost completely retraced Summer rally. US 10y yield’s failed test of 2.4% suggests some ST consolidation

Tuesday, 10 October 2017

P. 4

EUR/USD rebounds as 1.1662 support stayed out of reach

USD/JPY rebound losing momentum

Dollar awaits eco news. Catalonia remains wildcard

Yesterday, the dollar traded listless in a tight ranges following a failed attempt to gain more ground after the payrolls on Friday. A thin calendar and the absence of US traders (Columbus Day) contributed to the dull trading. Tensions between the US and Turkey and ongoing uncertainty about Catalonia didn’t affect global currency markets. EUR/USD closed the session little changed at 1.1740. USD/JPY showed a similar developed and finished the day at 112.68.

Overnight, Asian equity markets are trading mixed. The PBOC fixed the yuan strong against the dollar. PBOC officials advocated further financial reforms and a more market-based regime for the yuan. Yuan strength weighs on the dollar. EUR/USD jumped from the 1.1740 area and trades currently around 1.1775. USD/JPY is the exception the dollar rule. BOJ governor Kuroda indicated that the BOJ will keep its ultra-stimulating policy until inflation will reach the 2% target. The Aussie dollar rebounds after the recent decline. USD weakness is one factor. The Aussie dollar is also supported as the AUD/NZD cross rises on the ongoing political uncertainty in the New-Zealand. AUD/USD trades around 0.7785.

In the US, the NIFB small business confidence is expected to have stabilized in September near multi-year highs (105 vs. 105.3). We see upside risks as other business indicators surprised on the upside in September but the report has usually only a limited impact on the dollar. In EMU, there are only national data. The main market event may be the potential unilateral declaration of independence of the Catalonian government (after market closure). Until now, tensions on Catalonia hardly affected to euro. However, if the situation escalates, there could be negative fall-out on other European markets and maybe on the euro. The dollar started with a negative bias in Asia this morning, due to local/regional factors (CNY strength). It is unsure that European markets will join this trading dynamics. With little guidance from the eco data, we expect more technical trading ahead of the statement in the Catalonian Parliament late today. The rise in core yields has taken a breather. For now, the US currency doesn’t receive additional interest rate support, preventing further gains. Still, EUR/USD 1.1823 (previous range bottom) might continue to cap the topside in EUR/USD. US CPI and retail sales on Friday are the next milestones for USD trading.

Currencies

R2 1,2225 -1dR1 1,2167EUR/USD 1,1740 0,0010S1 1,1662S2 1,1311

Dollar traded sideways yesterday

Asian equity markets are trading mixed

Dollar declines as PBOC fixes the yuan at strong level.

Thin eco calendar today

Catalonia remains a wild card.

Tuesday, 10 October 2017

P. 5

From a technical point of view, EUR/USD dropped below the 1.1823/ 1.2070 consolidation pattern. The USD rebound develops very slowly, keeping below the 1.1823 previous range bottom. Higher US yields are needed to support additional USD gains. Next support in EUR/USD comes in at 1.1662, while 1.1423 marks the 38% retracement from the 2017 rally. EUR/USD is captured in a cautious sell-on-upticks pattern. The USD/JPY momentum was constructive of late, but for an important part due to yen weakness. USD sentiment recently improved though. USD/JPY regained 110.67/95 (previous resistance), a short-term positive. The 114.49 correction top is the next important resistance. The rally lost momentum last week. So a break beyond 114.49 is difficult.

Sterling decline takes a breather

Yesterday, sterling rebounded following a 6 days losing streak as the the political future of PM May became again a bit more secure. The political situation in the UK remains fragile, but for now this relative stability was enough to ease recent sterling selling. EUR/GBP was already downwardly oriented in late Asian trading and continued to slide lower in the European session. The correction petered out later in the session. EUR/GBP finished the day at 0.8935 (from 0.8981). Cable closed the session at 1.3142, up from 1.3066 on Friday.

Overnight, BRC like for-like sales rebounded in September from 1.3% Y/Y to 1.9% Y/Y. BRC indicated that most of the rise was due to price rises. If confirmed by other data evidence, it might reinforce the case for BoE tightening. Later today, the UK eco calendar is well filled with production data, the trade balance and the NIESR GDP estimate. Production is expected to growth modestly. The trade deficit to remain wide. Sterling trades marginally stronger against the dollar and flat against the euro. However, we don’t expect this “countermove” to go very far. We maintain a buy-on-upticks approach for EUR/GBP.

EUR/GBP staged a strong uptrend since April to set a top at 0.9307 late August. UK price data amended the dynamics and hawkish BoE comments reinforced a sterling rebound. Medium term, we maintain a EUR/GBP buy-on-dips approach as we expect the mix of euro strength and sterling softness to persist. The prospect of (limited) withdrawal of BOE stimulus triggered a good sterling countermove but this rebound has run its course. EUR/GBP supports at 0.8743 and 0.8652 are difficult to break. We look to buy EUR/GBP on dips. Last week’s rebound above the 0.89 area improved the ST technical picture of EUR/GBP. EUR/GBP 0.9026 is the 50% retracement of the recent countermove.

R2 0,9415 -1dR1 0,9307EUR/GBP 0,8935 -0,0047S1 0,8743S2 0,8657

EUR/GBP rebound slows, but holds north of 0.89

GBP/USD: decline to slow, at least temporary?

Tuesday, 10 October 2017

P. 6

Tuesday, 10 October Consensus Previous US 12:00 NFIB Small Business Optimism (Sep) 105 105.3 Japan 01:50 BoP Current Account Adjusted (Aug) A ¥2266.9b ¥2032.9b 07:00 Eco Watchers Survey Outlook SA (Sep) A 51 51.1 China 10OCT-18OCT Money Supply M2 YoY (Sep) 9.0% 8.9% 10OCT-18OCT Foreign Direct Investment YoY CNY (Sep) -- 9.1% UK 01:01 BRC Sales Like-For-Like YoY (Sep) A 1.9%-- 1.3% 10:30 Industrial Production MoM / YoY (Aug) 0.2%/0.9% 0.2%/0.4% 10:30 Manufacturing Production MoM / YoY (Aug) 0.2%/1.9% 0.5%/1.9% 10:30 Construction Output SA MoM / YoY (Aug) 0.0%/0.2% -0.9%/-0.4% 10:30 Visible Trade Balance GBP/Mn (Aug) -£11150 -£11576 14:00 NIESR GDP Estimate (Sep) -- 0.4% Germany 08:00 Trade Balance (Aug) 19.5b 19.5b 08:00 Current Account Balance (Aug) 17b- 19.4b 08:00 Exports SA MoM / Imports SA MoM (Aug) 1.1%/0.5% 0.2%/2.2% France 08:45 Industrial Production MoM / YoY (Aug) 0.4%/1.5% 0.5%/3.7% 08:45 Manufacturing Production MoM / YoY (Aug) --/2.7% 0.3%/3.9% Italy 10:00 Industrial Production MoM / WDA YoY (Aug) 0.1%/2.9% 0.1%/4.4% Norway 08:00 CPI MoM / YoY (Sep) 0.7%/1.7% -0.8%/1.3% 08:00 CPI Underlying MoM / YoY (Sep) 0.6%/1.2% -0.9%/0.9% Events 11:30 Germany to Sell €1B 0.1% I/L 2026 Bonds 12:00 Finland to Sell Up to €1B 0% 2022 Bonds 16:00 Fed’s Kashkari Speaks at Regional Economic Conference

Calendar

Tuesday, 10 October 2017

P. 7

10-year Close -1d 2-year td -1d Stocks Close -1dUS 2,36 0,00 US 1,50 0,00 DOW 22761,07 -12,60DE 0,44 -0,02 DE -0,70 0,00 NASDAQ 6579,731 -10,45BE 0,72 -0,02 BE -0,54 -0,01 NIKKEI 20823,51 132,80UK 1,36 -0,01 UK 0,43 0,00 DAX 12976,4 20,46

JP 0,06 0,00 JP -0,14 -0,01 DJ euro-50 3610,5 7,18

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0,05 1,89 0,90 Eonia -0,3600 -0,00105y 0,24 2,04 1,07 Euribor-1 -0,3730 0,0000 Libor-1 1,2350 0,000010y 0,89 2,32 1,39 Euribor-3 -0,3290 0,0000 Libor-3 1,3503 0,0000

Euribor-6 -0,2740 -0,0010 Libor-6 1,5188 0,0000

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

EUR/USD 1,1740 0,0010 EUR/JPY 132,3 0,14 CRB 180,96 0,00USD/JPY 112,68 0,03 EUR/GBP 0,8935 -0,0047 Gold 1285,00 10,10GBP/USD 1,3142 0,0076 EUR/CHF 1,1503 0,0018 Brent 55,79 0,17AUD/USD 0,7753 -0,0014 EUR/SEK 9,5396 0,0147USD/CAD 1,2551 0,0022 EUR/NOK 9,3724 -0,0048

Brussels Research (KBC) Global Sales Force Piet Lammens +32 2 417 59 41 Brussels Peter Wuyts +32 2 417 32 35 Corporate Desk +32 2 417 45 82 Mathias van der Jeugt +32 2 417 51 94 Institutional Desk +32 2 417 46 25 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 Petr Baca +420 2 6135 3570 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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