Tuesday, 15 January 2019

P. 1

Rates: Italy eyes 15y syndicated bond sale

Risk sentiment is positive at the onset of trading following Chinese fiscal/monetary stimulus headlines. The Italian syndicated 15y bond sale will be closely watched and is a good proxy for sentiment. We expect good demand, lifting (risk) spirits further even if some investors probably stay side-lined ahead of tonight’s Brexit vote.

Currencies: sterling rebounds going into key Brexit vote

The dollar is losing a few ticks as sentiment on risk improves this morning. The enfolding debate on fiscal easing in Germany might become a euro positive over time. Sterling rebounds even as UK PM May is expected to be defeated in Parliament on her Brexit. Markets anticipate a delay of Brexit, but a less sterling friendly outcome is also possible.

Calendar

• US stock markets have taken a step back yesterday as all indices noted losses

between 0.25% and 1.0%. Asian equities edge higher this morning. Chinese indices slightly outperform on new fiscal/monetary stimulus headlines.

• China announced new supportive measures to help stabilize its slowing economy. It will cut taxes “on a larger scale”, especially for small businesses and the manufacturing sector, and confirmed more supportive measures for 2019.

• UK PM May is planning for a second vote on her Brexit deal as German Chancellor Angela Merkel suggested the EU could grant extra concessions if MP’s vote May’s current deal down tonight, as widely expected.

• Annegret Kramp-Karrenbauer, who succeeded Merkel as new leader of Germany’s Christian Democrats, called for tax cuts as Germany faces an economic slowdown after nine straight years of growth.

• Fed Vice Chairman Clarida reiterated the softer normalization approach of the US central bank. He left the possibility open to raise interest rates in 2019 fewer than the two times projected by the bank’s dot plot after the Dec. meeting.

• US Secretary of State Pompeo and a senior North Korean official are said to meet later this week The pair would discuss and finalize the details of a second summit between US President Trump and North Korean leader Kim Jong Un.

• Today’s economic calendar shows the Empire Manufacturing Business Survey (Jan) and producer inflation data (Dec). The UK Parliament votes on PM May’s Brexit proposal. Italy probably holds a 15y syndicated bond sale.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Tuesday, 15 January 2019

P. 2

Italy eyes 15y syndicated bond sale

Global core bonds ended near opening levels after overturning intraday gains during US dealings. US Treasuries underperformed German Bunds. Risk aversion reigned in the early trading hours following weak Chinese trade data and with the US shutdown ongoing. A story about CDU leader AKK being open for tax cuts is only now starting to gain traction. German openness to fiscal stimulus would be a major shift across the European landscape. We follow the story closely. German yields eventually lost 0.8 bps (2-yr) to 1.6 bps (10-yr) in a daily perspective. The US yield curve steepened with yield changes varying between -0.6 bps (2-yr) and +2 bps (30-yr). 10-yr yield spread changes vs Germany ranged between -2 bps and +1 bp. Italian BTP’s held strong despite the ECB’s warning against Monte dei Paschi di Siena and despite the Treasury’s announcement of a new 15-yr syndicated BTP.

Asian markets steam ahead this morning with China outperforming (>+1.5%) on new fiscal and monetary policy stimulus promises. The US Note future and German Bund grind lower as well. We expect positive risk sentiment to persist at the start of European trading.

The eco calendar contains US January Empire Manufacturing Survey and December PPI data. We see upside risks for the former, a first gauge for this year, following last month’s steep drop. However, the US eco data aren’t expected to guide dealings today. European investors might prefer to stay side-lined ahead of tonight’s scheduled brexit vote (8pm CET), even if spill-over effects remained rather limited up until now. The Italian syndicated bond sale is a very important proxy for sentiment towards Italy. We think that demand will be there, which could bring boost to Italian BTP’s and further underpin positive risk sentiment. That could tighten peripheral spreads and weigh on core bonds in an intraday perspective. German Bunds are particularly vulnerable at current levels if the fiscal stimulus story gains traction. Wildcards today are Q4 earnings by JPMorgan & Wells Fargo and speeches by Fed governors George (voter), Kashkari and Kaplan.

Technically, the German 10-yr yield bounced off 0.15% support, but the picture didn’t change yet. Therefore, the 10-yr yield needs to clear the 0.31% hurdle. The US 10-yr yield lost the 2.75%-2.8% area by the end of last year. This zone now works as resistance in a trading band floored by 2.5%. In both Germany and the US, we think that sufficient bad news is discounted at current levels. Policy normalization expectations in the US and EMU have become extremely/too dovish. However, a clear trigger is needed before declaring a sustained turnaround.

Rates

US yield -1d2 2,53 -0,015 2,54 -0,0110 2,70 0,0030 3,06 0,02

DE yield -1d2 -0,60 -0,015 -0,36 -0,0110 0,23 -0,0130 0,84 -0,01

German 10-yr yield bounced off 0.15% support, but no change to technical picture yet. 0.31% is first resistance

US 10-yr yield. No clear trigger available to regain 2.75%-2.8% area. Sideways action ahead, floored by 2.5%?

Af

Tuesday, 15 January 2019

P. 3

EUR/USD: dollar shows no clea trend. USD decline might resume if risk

sentiment improves again.

EUR/GBP: sterling rebounds going into Brexit vote as markets

anticipate delay of Brexit beyond March 29.

USD slide to resume? The dollar traded in consolidation modus yesterday. Global sentiment was risk-off as investors digested disappointing China and EMU data. Core yields initially declined and US/German interest rate differentials widened. However, the dollar failed to profit and the risk-off trade eased later. Ongoing uncertainty on the US shutdown maybe capped further USD gains, too. EUR/USD ended the day unchanged at 1.1469. USD/JPY closed at 108.16 (from 108.48). Investors see the glass again half full rather than half empty this morning. The rebound is supported by comments from Chinese policy makers as they indicate more monetary and fiscal easing to support the economy. Asian equities are showing solid gains with China and Korea outperforming. The yen weakens (USD/JPY in the 108.60 area). The dollar is ceding ground against most other majors. AUD/USD rebounded north of 0.72. EUR/USD is changing hands near 1.1475/80. The yuan is holding near it short-term peak (USD/CNY 6.75). Later today, EMU data are again second tier, but the evolving debate on fiscal easing in Germany is interesting. The jury is still out, but the issue is a potential euro supportive over time. In the US, December headline PPI is expected unchanged at 2.5%. The impact on the dollar will probably be limited as CPI is already available. On Friday and yesterday the USD decline halted, but the USD comeback was far from impressive. If risk sentiment improves again, the dollar decline (ex USD/JPY) might resume. Political event risk is an ambiguous factor for EUR/USD. Brexit chaos might weigh on the euro. The shutdown is a potential USD negative. We maintain the view that any USD rebound might be modest unless risk sentiment deteriorates sharply. The downside in EUR/USD looks rather well protected. EUR/USD 1.1621 (mid-Oct top) remains the next topside reference. Last-minute efforts of UK PM May yesterday to convince MP’s to support her Brexit deal have apparently failed. Even so, sterling extended its recent rebound. At least part of the market sees a growing chance of the March 29 UK exit from the EU being delayed. This is causing a scaling back of sterling shorts. A big defeat of PM May in the vote might lead to general elections and might lead to a prolonged period of uncertainty. However, more sterling friendly outcomes ( new referendum, EU concessions, …) are also possible. For now, we avoid the binary sterling risk.

Currencies

R2 1,1815 -1dR1 1,1621EUR/USD 1,1469 0,0000S1 1,1187S2 1,1119

R2 0,93067 -1dR1 0,91EUR/GBP 0,8915 -0,0016S1 0,8700S2 0,862

Tuesday, 15 January 2019

P. 4

Tuesday, 15 January Consensus Previous US 14:30 Empire Manufacturing (Jan) 10.0 10.9 14:30 PPI Final Demand MoM/YoY (Dec) -0.1%/2.5% 0.1%/2.5% 14:30 PPI Ex Food and Energy MoM/YoY (Dec) 0.2%/3.0% 0.3%/2.7% 14:30 PPI Ex Food, Energy, Trade MoM/YoY (Dec) 0.2%/-- 0.3%/2.8% Japan 00:50 Money Stock M3 YoY (Dec) 2.1%A 2.1% EMU 11:00 Trade Balance SA (Nov) 12.6b 12.5b Germany 10:00 GDP NSA YoY (2018) 1.5% 2.2% 10:00 Budget Maastricht % of GDP (2018) -- 1.0% France 08:45 CPI EU Harmonized MoM/YoY (Dec F) 0.1%/1.9% 0.1%/1.9% Spain 09:00 CPI EU Harmonised MoM/YoY (Dec F) -0.5%/1.2% -0.5%/1.2% Events 15JAN Italy is likely to issue new 2035 bond 2018Q4 earnings JPMorgan Chase & Co (13:00), Wells Fargo & Co (14:00) … 16:00 ECB's Draghi Presents 2017 Annual Report in Strasbourg 17:30 Fed’s Kashkari Speaks on Regional Economy in Minnesota (non-voter) 19:00 Fed’s George Speaks on Economy and Monetary Policy Outlook (voter) 19:00 Fed’s Kaplan Speaks in Plano, Texas (non-voter) 19:00-21:00 UK Parliament votes on Brexit deal

Calendar

Tuesday, 15 January 2019

P. 5

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 2,70 0,00 US 2,53 -0,01 DOW 23909,84 -86,11DE 0,23 -0,01 DE -0,60 -0,01 NASDAQ 6905,916 -65,56BE 0,70 -0,02 BE -0,52 0,00 NIKKEI 20555,29 195,59UK 1,30 0,01 UK 0,82 0,01 DAX 10855,91 -31,55

JP 0,01 0,00 JP -0,15 0,00 DJ euro-50 3055,18 -14,86

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0,06 2,64 1,24 Eonia -0,3660 0,00005y 0,18 2,61 1,33 Euribor-1 -0,3680 -0,0030 Libor-1 2,5089 0,000010y 0,79 2,73 1,47 Euribor-3 -0,3080 0,0000 Libor-3 2,7873 0,0000

Euribor-6 -0,2360 0,0000 Libor-6 2,8646 0,0000

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

EUR/USD 1,1469 0,0000 EUR/JPY 124,05 -0,39 CRB 177,79 -0,29USD/JPY 108,16 -0,32 EUR/GBP 0,8915 -0,0016 Gold 1291,30 1,80GBP/USD 1,2864 0,0020 EUR/CHF 1,1250 -0,0034 Brent 58,99 -1,49AUD/USD 0,7197 -0,0018 EUR/SEK 10,2636 0,0189USD/CAD 1,3285 0,0018 EUR/NOK 9,804 0,0145

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