Wednesday, 06 February 2019

P. 1

Rates: Italy set to launch new 30-yr syndicated benchmark

Today’s eco calendar is empty apart from US and Italian supply. The Italian debt agency probably launches a new 30-yr syndicated benchmark deal. We expect demand will be there, benefiting peripheral bonds. Core bonds are stuck in no man’s land. More sentiment-driven trading within existing technical ranges is probable.

Currencies: EUR/USD drifting lower in the 1.15/1.13 ST range

The news flow from Europe was mixed yesterday rather than negative, but it didn’t help the euro. EUR/USD is drifting below the 1.14 big figure. There are few data to guide trading in the major FX cross rates. Italian and US bond auctions might influence intraday sentiment. Sterling stays in the defensive as PMI’s indicate that Brexit uncertainty is weighing on growth.

Calendar

• US equity markets gained ground yesterday with gains varying between 0.50%-

0.75%. Half of Asian bourses are closed due to the Lunar New Year holiday, Other bourses are mainly trading in green this morning.

• US President Trump called for bipartisanship in his State of the Union address, with a special focus on border wall funding. Next, he announced the meeting with North Korean leader Kim Jong Un will take place Feb 27-28 in Vietnam.

• Rumours suggest that ECB officials don’t see any urgency to offer new long-term loans to banks (e.g. TLTRO’s), as they are not convinced about the necessity for more liquidity in the market. ECB spokesman declined to comment.

• The Brexit debates continues as UK PM May is in Northern Ireland to discuss modifications to the Irish backstop, while Irish PM Varadkar travels to Brussels today. May meets with European Commission President Juncker tomorrow.

• The French government’s discontent with the EU’s is growing as the latter is expected to veto a rail merger (Alstom/Siemens). France calls for an overhaul of the bloc’s antitrust rules and a stronger backing for its companies.

• Reserve Bank of Australia chief Philip Lowe unexpectedly shifted to a more neutral policy outlook (probability of next move – rate cut or hike – 50/50) after the bank left policy rates unchanged yesterday without altering its bias.

• Today’s economic calendar is empty. Earnings season continues with Q4 results of amongst others GM. The US taps the market, while Italy will likely launch a new 30-yr syndication today.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Wednesday, 06 February 2019

P. 2

Italian Treasury intends to launch new 30y BTP Global core bonds closed a strange trading session with gains. US Treasuries outperformed German Bunds. Bullish sentiment on European equity markets (+1.5% to +2%) and positive surprises from (final) EMU services PMI’s pulled the Bund lower in the early stages of trading. The contract spiked to an intraday low around noon on rumours that the ECB isn’t willing to change its forward guidance on rates (“unchanged at least through Summer”). The recent admittance of downside risks to the outlook suggested a further delay. Core bonds staged a sudden intra-day U-turn in the run-up to US trading. Some nervousness ahead of President Trump’s State of the Union? A near-consensus, but still strong (56.7), US non-manufacturing ISM couldn’t stop the bid. A strong 3-yr Note auction and US equity strength (+0.5% to +0.75%) didn’t impact trading. Non-voting Dallas Fed Kaplan urged no further policy action until the outlook becomes clearer, which he expects during the first half of the year. US yields dropped by 1.3 bps to 2.5 bps with the belly of the curve outperforming the wings. Changes on the German curve varied between +0.5 bps (2-yr) and -0.5 bps (30-yr), flattening the curve. 10-yr yield spread changes vs Germany widened up to 2 bps with Italy (+7 bps) underperforming as Italy mandated banks for a near term launch of a new 30-yr syndicated bond.

Most Asian stock markets trade positive overnight with China and South Korea still closed. US Treasury Secretary Mnuchin and Trade Representative Lighthizer visit Beijing early next week to extend high-level trade talks. The US also announced a new summit between President Trump and North Korean leader Kim Jong-Un in Vietnam at the end of the month. In his State of the Union, Trump held a hard line on immigration, indicating he is going to build a wall with or without (emergency) Democratic support. The US government is at threat of a new partial shutdown from Feb 15 onwards. Core bonds tentatively gain ground this morning.

Today’s eco calendar is razor-thin. US (10-yr Note) and Italian (30-yr syndication) supply are the only things worth mentioning. We expect the Italian auction to go well, suggesting some relief on peripheral bond markets. The US outcome is less straightforward. Overall, we have no strong view for today and expect more sentiment-driven trading within existing trading ranges.Last week’s clear Fed signal suggests range trading for the US 10-yr yield between 2.49% and 2.78%. The German 10-yr yield tested the lower bound of the 0.15%-0.31% again. We expect sideways trading going forward with little reason at this stage to project upward breaks. On the other hand we also think that sufficient bad news is discounted at those levels, but messages coming from the January central bank meetings suggest unchanged policies from both, probably through the Summer.

Rates

US yield -1d2 2,52 -0,015 2,50 -0,0310 2,70 -0,0330 3,02 -0,02

DE yield -1d2 -0,57 0,015 -0,30 0,0010 0,17 -0,0130 0,78 0,00

German 10-yr yield tests this year’s low around 0.15%. Range-trading between 0.15% and 0.31% ahead

US 10-yr yield: sideways within 2.49%-2.78% trading range?

Af

Wednesday, 06 February 2019

P. 3

EUR/USD: drifting lower in the 1.15/1.13 ST trading range

EUR/GBP: sterling suffers as uncertainty on Brexit weighs on

economic activity

EUR/USD extends downside drift The dollar held the benefit of the doubt yesterday. EUR/USD extended its gradual rebound off last week’s correction top, reached on Thursday, soon after the Fed policy decision. As such, the news flow was not too bad for the euro. EMU PMI’s were less weak than expected, but (FX) markets focused on poor readings in France and Italy. There were also rumours that the ECB was unlikely to change (ease) its guidance on rates in March. It hardly helped the euro. A break lower in cable also weighed on EUR/USD. The US manufacturing ISM was close to expectations with little impact on FX trading. EUR/USD finished at 1.1406. USD/JPY held close to the 110 mark but couldn’t sustain above. In his State of the Union, US president Trump reiterated the need to build a wall on the Mexican border, but didn’t elaborate on market sensitive items. Most Asian equity indices show modest gains. The Aussie dollar (more than) reversed yesterday’s post-RBA gain. In a speech, Governor Lowe clarified that the RBA has currently a neutral stance. Developments in the labour market will decide whether the next rate move will be a hike or a cut. AUD/USD lost about a full big figure and nears the 0.7140 area. EUR/USD is drifting below the 1.14 handle. USD/JPY (109.75) is losing a few ticks. The eco calendar is thin today. The US trade balance will probably only be of intraday significance for USD trading, at best. Markets will keep an eye at an (expected) sale of 30-y Italian bonds and the auction of 10-y US Notes. Of late, sales of long-dated EMU bonds went smooth. If this is again the case for today’s Italian auction, it might remove a source of euro caution. Last week, the post-Fed USD decline (EUR/USD rebound) halted soon, mainly due to poor EMU data. The subsequent USD rebound was not impressive, but gradually continues. The day-to-day momentum is USD supportive & cautious on the euro. However, we don’t seen a strong case for the pair to drop below key support. Intermediate support at 1.1390 is currently under test. The 1.1290/67 area is the next line in the sand.

Sterling remained in the defensive yesterday. The composite (50.3) and services (50.1) PMI’s suggested that the UK economy might be heading for stagnation. Cable dropping below 1.30 triggered additional sterling selling. EUR/GBP closed at 0.8809. Today, there are no UK eco data. After yesterday’s GBP-decline, trading might sift into wait-and-see modus ahead of tomorrow’s BoE meeting.

Currencies

R2 1,1815 -1dR1 1,1621EUR/USD 1,1406 -0,0032S1 1,1187S2 1,1119

R2 0,93067 -1dR1 0,91EUR/GBP 0,8809 0,0035S1 0,8620S2 0,8314

Wednesday, 06 February 2019

P. 4

Wednesday, 6 February Consensus Previous US 13:00 MBA Mortgage Applications -- -3.0% 14:30 Trade Balance (Nov) -$54.0b -$55.5b Germany 08:00 Factory Orders MoM/WDA YoY (Dec) 0.3%/-6.7% -1.0%/-4.3% 09:30 Markit Germany Construction PMI (Jan) -- 53.3 Events 2018Q4 earnings General Motors (13:30), Chipotle Mexican Grill (22:10) … 19:00 US to Sell USD27 Bln 10-Year Notes Events 06FEB Italy is likely to issue a new 30y bond

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 2,70 -0,03 US 2,52 -0,01 DOW 25411,52 172,15DE 0,17 -0,01 DE -0,57 0,01 NASDAQ 7402,084 54,55BE 0,61 -0,01 BE -0,50 0,00 NIKKEI 20874,06 29,61UK 1,23 -0,05 UK 0,75 -0,04 DAX 11367,98 191,40

JP -0,02 -0,01 JP -0,16 0,00 DJ euro-50 3215,04 49,84

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0,06 2,62 1,15 Eonia -0,3630 -0,00505y 0,15 2,60 1,24 Euribor-1 -0,3680 -0,0010 Libor-1 2,5131 0,000010y 0,70 2,72 1,40 Euribor-3 -0,3080 -0,0010 Libor-3 2,7344 0,0000

Euribor-6 -0,2340 0,0010 Libor-6 2,7958 0,0000

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

EUR/USD 1,1406 -0,0032 EUR/JPY 125,42 -0,27 CRB 179,95 -0,66USD/JPY 109,96 0,07 EUR/GBP 0,8809 0,0035 Gold 1319,20 -0,10GBP/USD 1,2945 -0,0092 EUR/CHF 1,1405 -0,0008 Brent 61,98 -0,53AUD/USD 0,7234 0,0008 EUR/SEK 10,3976 -0,0121USD/CAD 1,3126 0,0016 EUR/NOK 9,6782 0,0005

Calendar

Wednesday, 06 February 2019

P. 5

If you no longer wish to receive this mail, please contact us: “kbcmarketresearch@kbc.be ‘ to unsubscribe

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

ALL OUR REPORTS ARE AVAILABLE VIA OUR KBC RESEARCH APP (iPhone, iPad, Android) This non exhaustive information is based on short term forecasts for expected developments

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.

Contacts