Thursday, 25 January 2018

P. 1

Rates: A tough task for ECB Draghi

Protectionist US comments caused new tests of key US yield resistance levels. Trump’s speech, trade balance data and Q4 GDP might decide over a break tomorrow. Attention turn to EMU today with the ECB meeting. Draghi will try to downplay all early ECB exit speculation, but we think that markets won’t buy it. The normalization genie is out the bottle.

Currencies: USD hammered. Markets fear more US protectionism

The USD decline accelerated yesterday. Comments from US officials in Davos suggest that the US might take further protectionist action and that the US is happy with a weak dollar. ECB’s Draghi will receive plenty of questions on the rise of the euro today. Has he enough ammunition to ease FX swings as EUR/USD’s rise is mainly USD weakness.

Calendar

• US stock markets ended mixed yesterday with Nasdaq underperforming

(-0.6%). Asian stock markets trade mixed overnight with Japan the exception to the rule, losing more than 1% on yen strength.

• The dollar got a tremendous blow yesterday following protectionist comments by Treasury Secretary Mnuchin and Commerce Secretary Ross. The worse seems over in overnight trading, though USD remains under modest pressure.

• President Trump said he was willing to testify under oath in special counsel Mueller’s investigation into Russia’s interference in the 2016 election, the latest twist in a probe that he has repeatedly denounced as a “witch hunt.”

• Saudi Arabia’s energy minister took a rare sideways swipe at the IEA, accusing the body of overhyping the impact of US shale growth on the oil market. Brent crude moved to $71/b, mainly buoyed by the weaker dollar though.

• New Zealand's consumer prices rose at a slower-than-expected pace in the Q4 2017 (0.1% Q/Q & 1.6% Y/Y), weighed by the falling costs of cars and food and hosing down expectations that the central bank will raise interest rates this year.

• South Korea’s GDP saw a quarterly contraction in the final three months of 2017 (-0.2% Q/Q) after expanding at the fastest pace in seven years during the third quarter (1.5% Q/Q).

• Main attention turns to the ECB meeting today. Eco data include German IFO, US weekly jobless claims and new home sales. The trade balance release is delayed to tomorrow because of the brief government shutdown.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Thursday, 25 January 2018

P. 2

Trade wars: additional bearish factor bonds on MT?

Global core bonds traded with a downward bias yesterday before stabilizing into the close. Another batch of strong EMU PMI’s initially weighed on bond sentiment, but the downmove accelerated after comments from US Treasury Secretary Mnuchin and Commerce Secretary Ross sparked fears of a trade war. Earlier this year, there were already (denied) rumours that China would retaliate by slowing or even stopping US Treasury buying from its FX reserves. The move ran into technical (yield) resistance in US dealings. The US yield curve bear steepened with yields 2.2 bps (2-yr) to 3.4 bps (30-yr) higher. The 5- and 10-yr yields are still toying with key resistance levels, respectively at 2.42% and 2.63%. Changes on the German yield curve ranged between +0.2 bps (2-yr) and +2.7 bps (10-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany ended nearly unchanged with Spain/Portugal (-3 bps) and Greece (-8 bps) outperforming.

Most Asian stock markets trade mixed overnight with Japan underperforming on yen strength. The US Note future is a tad higher. Brent crude surpassed $71/b on dollar weakness. We expect a neutral opening for the Bund.

Attention turns to the ECB today. Click here for an extended preview. The central bank probably won’t change its forward guidance yet. ECB president Draghi will try to downplay early ECB exit speculation, but we don’t think that it will send German/European yields much lower. The normalization genie is out the bottle. A return, if any, from the German 10-yr yield towards 0.5% could be used as an opportunity to enter new Bund short positions. A test and eventually break of 0.62% resistance seems more likely. Strong global growth, rising inflation expectations and the global push to monetary normalization are bearish factors for bonds medium term. Our end-of-year target for the German 10-yr yield is 1.3%.

US yields remain near/at key resistance levels. If “trade wars” gain influence as a dominant market theme, it’s probably an additional bearish factor for core bonds. Tomorrow’s Trump speech in Davos, trade balance data (delayed due to government shutdown) and Q4 GDP figures could decide over an imminent break. Our strategy for the US Note future is the same as for the Bund. In case of any profit taking in an oversold Treasury market, we would use it to install new short positions (around 2.5% in yield terms).

Rates

US yield -1d2 2,08 0,045 2,42 0,0210 2,65 0,0330 2,92 0,03

DE yield -1d2 -0,59 0,005 -0,12 0,0210 0,59 0,0330 1,33 0,02

German 10-yr yield: ECB president Draghi will have a hard time downplaying ECB exit speculation.

US 10-yr yield: new test of 2.63%/2.64% resistance on protectionist US comments

Af

Thursday, 25 January 2018

P. 3

EUR/USD: USD sell-off continues on fears for protectionism. Has Draghi

ammunition to ease the pain?

EUR/GBP: testing key support in the 0.8700/0.8690 area

Fear of US protectionism hammers the dollar

The USD sell-off accelerated yesterday. Comments from US officials raised fears that the US would take an ever more protectionist approach. US Treasury Secretary Mnuchin said that the USD decline is good for US trade short-term, unsettling markets. EUR/USD rose a full big figure to close at 1.2408. USD/JPY selling accelerated. The pair finished the day at 109.22. EMU January PMI’s were again strong, but no big issue for EUR/USD trading. USD weakness prevailed.

The debate on US protectionism dominates Asian markets overnight. The trade-weighted dollar (DXY) declines below 0.89, the lowest level since December 2014. USD/JPY is testing the 109 big figure. EUR/USD extends gains north of 1.24. Japanese equities lose about 1%. The loss on other markets is modest. The calendar heats up today with German Ifo confidence, the ECB meeting and series of US data. It is probably too early for the ECB to change forward guidance, even as the latest Minutes showed that the internal debate has started. Draghi will receive questions on the rise of the euro. The ECB isn’t happy with the pace of the rise. Question is whether Draghi has ammunition to ease the trend as EUR/USD’s rise is mainly USD weakness. In this respect, comments of US officials in Davos including tomorrow’s speech of President Trump, are probably more important for the next directional move in global FX rather than Draghi’s press conference today. The USD decline is out of line with the eco fundamentals and the developments on the interest rate markets, but politics dominate for now. This remains a binary risk. The dollar is a falling knife. For now, it remains dangerous to try to catch it. From a technical point of view, 1.2596 (62% retracement) is the next important resistance. A return below 1.2165 would be a first indication of that the USD decline is easing.

Sterling rose sharply against the dollar yesterday, but also against the euro, supported by good UK labour data and hope on a constructive outcome of the Brexit talks. EUR/GBP dropped to the low 0.87 area. Today the January CBI reported sales balance is expected to decline slightly. The EC holds a seminar to discuss future Brexit ties. EUR/GBP is nearing key 0.8690 support. A break would be technically relevant. For now we don’t preposition for a sustained break as the euro is also trading strong. However, more positive news from Brexit could reinforce GBP momentum.

Currencies

R2 1,2643 -1dR1 1,2459EUR/USD 1,2408 0,0109S1 1,1713S2 1,1554

R2 0,9307 -1dR1 0,9033EUR/GBP 0,8713 -0,0072S1 0,8690S2 0,8657

Thursday, 25 January 2018

P. 4

Thursday, 25 January Consensus Previous US 14:30 Initial Jobless Claims 235k 220k 14:30 Continuing Claims 1925k 1952k 16:00 New Home Sales & MoM (Dec) 675k/-7.9% 733k/17.5% Japan 06:00 Supermarket Sales YoY (Dec) A: 0.9% -0.6% UK 12:00 CBI Retailing Reported Sales (Jan) 13 20 12:00 CBI Total Dist. Reported Sales (Jan) -- 24 EMU 13:45 ECB Main Refinancing Rate 0.000% 0.000% 13:45 ECB Marginal Lending Facility 0.250% 0.250% 13:45 ECB Deposit Facility Rate -0.400% -0.400% Germany 08:00 GfK Consumer Confidence (Feb) 10.8 10.8 10:00 IFO Business Climate (Jan) 117.0 117.2 10:00 IFO Expectations (Jan) 109.3 109.5 10:00 IFO Current Assessment (Jan) 125.3 125.4 Italy 10:00 Industrial Sales MoM / WDA YoY (Nov) --/-- 1.1%/6.0% Belgium 15:00 Business Confidence (Jan) 0.4 0.1 Spain 09:00 Unemployment Rate (4Q) 16.10% 16.38% Norway 08:00 Unemployment Rate AKU (Nov) 4.0% 4.0% 10:00 Deposit Rates 0.50% 0.50% Sweden 09:30 Unemployment Rate SA (Dec) 6.5% 6.4% 09:30 PPI MoM / YoY (Dec) --/-- 1.5%/2.7% Events Q4 Earnings Caterpillar (13:30), 3M (13:30), Intel (22:00) 14:30 Press conference ECB President Draghi 19:00 US to Sell $28bn 7-yr Notes

Calendar

Thursday, 25 January 2018

P. 5

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 2,65 0,03 US 2,08 0,04 DOW 26252,12 41,31DE 0,59 0,03 DE -0,59 0,00 NASDAQ 7415,059 -45,23BE 0,72 0,02 BE -0,50 -0,01 NIKKEI 23669,49 -271,29UK 1,41 0,05 UK 0,59 0,02 DAX 13414,74 -144,86

JP 0,09 0,01 JP -0,12 0,01 DJ euro-50 3643,22 -29,07

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y 0,05 2,38 1,05 Eonia -0,3630 0,00005y 0,39 2,51 1,24 Euribor-1 -0,3690 0,0000 Libor-1 1,5614 0,000010y 0,98 2,68 1,49 Euribor-3 -0,3280 0,0000 Libor-3 1,7452 0,0000

Euribor-6 -0,2780 -0,0020 Libor-6 1,9284 0,0000

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

EUR/USD 1,2408 0,0109 EUR/JPY 135,52 -0,14 CRB 199,51 2,57USD/JPY 109,22 -1,09 EUR/GBP 0,8713 -0,0072 Gold 1361,40 19,70GBP/USD 1,4242 0,0242 EUR/CHF 1,1729 -0,0049 Brent 70,53 0,57AUD/USD 0,8062 0,0062 EUR/SEK 9,8358 -0,0122USD/CAD 1,2348 -0,0071 EUR/NOK 9,6127 -0,0089

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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.

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