Tuesday, 02 October 2018

P. 1

Rates: Risk aversion to dominate trading?

Italian FM Tria returned from yesterday’s Eurogroup with work to do on the country’s draft budget proposal which is unacceptable to Europe. Italian populist party leaders probably won’t give in, adding selling pressure on BTP’s today amid an empty eco calendar. It could feed into risk sentiment and support core bonds.

Currencies: Italy-EMU budget dispute weighs on euro

Yesterday, EUR/USD moved up and down driven by intraday swings in global sentiment. In the end, tensions on the Italian budget prevailed and this will probably remain the key feature today. EUR/USD is nearing the 1.1526 neckline. A break would worsen the technical picture. Sterling traders continue to keep an eye at the Birmingham Tory conference.

Calendar

• US equity markets opened the week on a positive note, with the exception of

NASDAQ (-0.11%). Risk sentiment soured somewhat towards the end of trading which is also reflected on Asian equity markets this morning. China is closed.

• France’s economy minister, Bruno Le Maire, among other Eurozone finance ministers, has warned Italy that they have to respect the EU budget rules. The EU has asked for more details on the budget proposal that targets a 2.4% deficit.

• Northern Ireland’s DUP party leader Arlene Foster has said she would be happy to work with Boris Johnson as PM, putting pressure on Therese May. Johnson will speak today at day three of the Conservative Party conference.

• The Reserve Bank of Australia kept its policy rates at a record low this morning despite strong growth, employment and inflation numbers. The bank warns for the impact of record high household debt on consumption and growth.

• Ahead of next week’s IMF annual meeting, IMF Managing Director Christine Lagarde expressed her concerns over the health of the global economy. She said the IMF’s official economic forecasts have become less bright.

• President of the Boston Fed Eric Rosengren, who will vote on the FOMC in 2019, has stated the Fed will likely need to move the policy rates gradually from “a mildly accommodative stance to a mildly restrictive stance”.

• Today’s eco calendar is extremely thin, with no data from the US and only PPI data from the EMU for August. Bank of England’s Haldane chairs a panel in London today. Fed Powell, Quarles, Kaplan and ECB Villeroy speak as well.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Tuesday, 02 October 2018

P. 2

Risk aversion to set trading conditions

Global core bonds ended unchanged (Bund) to slightly weaker (US Note future). Positive risk sentiment (no negative Italian news over the weekend, USMCA, new rumors on Irish brexit proposal, strong US manufacturing ISM) hit a snag towards the end of European dealings. The German Bund made an intraday U-turn (higher) as BTP’s sold off. Stock markets returned some of their intraday gains. The move started as EMU FM’s arrived for their Eurogroup meeting with many sounding very skeptical on Italy’s proposed budget for next year. Italian FM Tria eventually returned home earlier to work on it. EMU FM’s won’t accept a 2.4% deficit next year which is way out of line with the 0.8% deficit agreed upon earlier with Europe. Technocrat FM Tria finds himself between a rock (Lega Salvini & 5SM Di Maio) and a hard place (stability and growth pact). If neither of them gives in, he might pull the plug on his job with investors fearing a more controversial FM siding with Italian party leaders and fearing rating downgrades by Moody’s and by Fitch. That’s the short term worst case outcome markets start taking into account. The Italian 10-yr yield spread vs Germany widened by 15 bps yesterday to 282 bps. The German yield curve steepened with yield changes ranging between -1.8 bps (2-yr) and +2.1 bps (30-yr). The US yield curve bear steepened with yields ending up to 2.9 bps (30-yr) higher.

Most Asian stock markets lose ground overnight with Japan outperforming. China and India are closed. Dollar strength feeds into some EM FX weakness and the US Note future gains ground. Italian developments could push the spread over Germany for a test of the 290 bps high. We expect a stronger opening for the Bund as well.

Today’s eco calendar is extremely thin with only EMU PPI data which aren’t expected to influence trading. Fed Quarles, Powell, Kaplan and ECB Villeroy are scheduled to speak at the end or after European trading. We think that the course of Italian assets or EM FX will set the tone for general trading conditions and this suggests some intraday risk aversion, supporting global core bonds. From a technical point of view, the US 10-yr yield sits in the 3%-3.12% range and we eye a new test of the upper bound this week on the back of more US eco data strength. The German 10-yr yield’s attempt to break above 0.5% failed last week. Safe haven bids can cause some short term return action.

Rates

US yield -1d2 2,82 0,005 2,95 0,0110 3,08 0,0230 3,23 0,03

DE yield -1d2 -0,54 -0,025 -0,10 -0,0110 0,47 0,0030 1,10 0,02

German 10-yr yield failed to close above key resistance last week following Italian-related safe haven flows

Italian (black) and Spanish (orange) 10-yr yield spread vs Germany: budget woes aren’t over yet

Aff

Tuesday, 02 October 2018

P. 3

EUR/USD: Italy weighs on euro; 1.1526 neckline within reach

EUR/GBP: sterling in wait-and-see modus. Euro weakness also

weighs on EUR/GBP cross rate

Euro under pressure as Italy stays in the spotlights

Yesterday, FX traders looked for guidance from global risk sentiment. The US-Canada trade deal but at the same time uncertainty on the Italian budget were the main ingredients for the swings in sentiment. Caution on Italy initially prevailed pushing EUR/USD to the 1.1570 area. Later, the euro felt some mild support as global markets turned more optimistic on trade after USMCA. However, after a good open of US equities, this optimism proved fragile, too. Negative comments from the EU on the Italian budget probably also capped any further euro gains. Eco data (decent US ISM) were only of second tier importance. EUR/USD closed at 1.1578. USD/JPY was hardly affected by lingering uncertainty and held near 114. Overnight, most Asian markets that are open, are trading in negative territory. Japan outperforms. Asian EM currencies like the IDR remain under pressure. The RBA as expected left its policy unchanged, keeps a balanced assessment and doesn’t signal a rate hike anytime soon. AUD/USD is drifting back to the 0.72 area, but that is probably due to global sentiment. Today, the eco calendar in Europe and the US is almost empty. So, global sentiment will continue to dominate FX trading. Italian Fin Min Tria returning home with a ‘no go’ from Europe on the budget will meet harsh talk from the Party leaders supporting the government. This might cause renewed pressure on Italian govies, European equities and weigh on the euro. If sentiment turns more negative globally, the dollar will probably also profit. Last week’s topside test in EUR/USD is rejected. 1.1526 is the neckline of a ST double top formation. A break would signal more trouble for the single currency and might open way to the 1.1301 correction low. The technical picture of USD/JPY is constructive, but we are reluctant on yen shorts. In case of a less positive global sentiment, selling pressure from EUR/JPY might start on weigh on this cross rate, too.

Yesterday, sterling initially traded in the defensive as headlines from the Tory party meeting on Brexit remained quite harsh. Later, the UK currency rebounded on press headlines/rumours that the government was preparing a new proposal on the Irish border issue. Today, the focus will remain on the Birmingham meeting. Markets will especially monitor the position of Boris Johnson. We stay cautious on sterling, but euro weakness might also weigh on EUR/GBP. The 0.8850 area is a first intermediate support.

Currencies

R2 1,2155 -1dR1 1,1996EUR/USD 1,1578 -0,0026S1 1,1510S2 1,1448

R2 0,91 -1dR1 0,9052EUR/GBP 0,8878 -0,0025S1 0,8628S2 0,8548

Tuesday, 02 October 2018

P. 4

Tuesday, 2 October Consensus Previous Japan 01:50 Monetary Base YoY (Sep) 5.9%A 6.9% UK 08:00 Nationwide House PX MoM/NSA YoY (Sep) 0.2%/1.9% -0.5%/2.0% 10:30 Markit/CIPS UK Construction PMI (Sep) 52.9 52.9 EMU 11:00 PPI MoM/YoY (Aug) 0.2%/3.8% 0.4%/4.0% Australia 06:30 RBA Cash Rate Target 1.50%A 1.50% Events 10:45 BOE Chief Economist Haldane Chairs Panel in London 12:35 BOE's Haskel Chairs Panel in London 16:00 Fed's Quarles Testifies to Senate Banking Committee 16:30 ECB’s Francois Villeroy de Galhau speech 18:45 Fed's Chairman Powell Speaks at NABE Conference in Boston 20:00 Fed’s Kaplan Speaks in El Paso

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 3,08 0,02 US 2,82 0,00 DOW 26651,21 192,90DE 0,47 0,00 DE -0,54 -0,02 NASDAQ 8037,302 -9,05BE 0,85 0,02 BE -0,46 -0,02 NIKKEI 24270,62 24,86UK 1,59 0,02 UK 0,84 0,01 DAX 12339,03 92,30

JP 0,13 -0,01 JP -0,11 0,00 DJ euro-50 3414,16 14,96

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y 0,07 3,05 1,29 Eonia -0,3630 -0,01205y 0,40 3,08 1,45 Euribor-1 -0,3710 0,0000 Libor-1 2,2606 0,000010y 1,00 3,14 1,66 Euribor-3 -0,3170 0,0010 Libor-3 2,3984 0,0000

Euribor-6 -0,2680 0,0000 Libor-6 2,6039 0,0000

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

EUR/USD 1,1578 -0,0026 EUR/JPY 131,9 -0,03 CRB 197,79 2,63USD/JPY 113,93 0,23 EUR/GBP 0,8878 -0,0025 Gold 1191,70 -4,50GBP/USD 1,3042 0,0011 EUR/CHF 1,1394 -0,0004 Brent 84,98 2,25AUD/USD 0,7224 0,0000 EUR/SEK 10,3576 0,0416USD/CAD 1,2814 -0,0094 EUR/NOK 9,437 -0,0173

Calendar

Tuesday, 02 October 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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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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