Tuesday, 28 January 2020

P. 1

Rates: German and US 10-yr yield lose first support levels

The Chinese coronavirus took markets hostage yesterday, resulting in high-volume risk-off trading. Core bond yields and main European/US equity markets lost/test first important support levels. Tensions ease this morning in Asian dealings, but it’s too soon to call an end to this virus episode. Fed and BoE meetings will grab some attention later this week.

Currencies: EUR/USD stays under pressure. 1.099 area next support

Yesterday, most smaller, less liquid currencies were hit quite hard as the corona related risk-off continued. Moves in the major cross rates including USD/JPY and EUR/USD remained smaller. Still, the gradual EUR/USD downtrend stays in place. The recent sterling rebound stalled as markets are counting down to the BoE policy decision.

Calendar

• WS suffered its worst day in over 3 months with losses up to -1.89% (Nasdaq) as

worries about the economic impact of the coronavirus intensified. Losses in Asia are contained this morning apart from the ones returning from long weekend.

• With the death toll from the coronavirus toping 100 and more cases being reported in China and abroad, the US raised its travel alert for China to level 3, the second highest and urges citizens to rethink traveling plans to the country.

• US new home sales unexpectedly fell to 694K in December from 719K in November, in line with a drop in mortgage applications and a pickup in prices. Nevertheless, low rates and a robust labor market underpin housing demand.

• ECB’s Yves Mersch warned the central bank’s extensive stimulus may stoke up asset bubbles, fuelling financial instability. Mersch urged for fierce vigilance regarding the monetary policy toolkit and its financial-stability consequences.

• EU Brexit negotiator Michel Barnier announced the EU-UK trade deal will need significantly longer than the 11 months until the end-of-year deadline with many questions left open, warning for the risk of cliff-edge Brexit in 2021.

• Canada’s government is the last party to kick off the ramification process for the new USMCA trade agreement and urges lawmakers to quickly approve the pact. President Trump is expected to sign the new deal into law tomorrow.

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• All eyes are on the US today with durable goods orders and consumer confidence data due. Investors will closely watch Q4 earnings and listen to ECB speakers. Greece, France, Italy, the US and the UK tap the bond market

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Tuesday, 28 January 2020

P. 2

German/US 10-yr yield give away first support levels

The Chinese coronavirus remained the dominant market theme yesterday: it’s spreading at an accelerating pace, the death toll rises and authorities are stepping up measures to contain it. Risk aversion was the obvious outcome in absence of other market drivers. Main European equity markets lost over 2%, giving away first support levels. US indices lost around 1.5%, questioning the uptrend since Q4. Core bonds flourished in this environment. US Treasuries outperformed German Bunds. The US yield curve bull flattened with yields falling between 5.3 bps (2-yr) and 7.6 bps (30-yr) on a daily basis. Short term US money markets now completely discount a Fed rate cut by September. The US 10-yr yield lost the 1.7% support area, suggesting a technical return towards the lower bound of the sideways range (1.42%/1.50%). The start of the US Treasury’s end-of-month refinancing operation was mixed with a decent 2-yr Note auction, but weakness at the 5-yr tenor. The German yield curve bull flattened as well with yields down 1.6 bps (2-yr) to 5.8 bps (30-yr). The German 10-yr yield lost intermediate support around -0.3% and is now heading to the key -0.43%/-0.41% zone. 10-yr yield spreads vs Germany narrowed slightly, bucking the risk-off trend, with Greece (-8 bps) and especially Italy (-15 bps) outperforming. BTP’s rally as short term election risk fades after Salvini’s Lega failed to flip leftist stronghold Emilia Romagna in regional elections. Greece announced the launch of 15y syndicated bond.

Most Asian stock markets still cede ground this morning, but there’s little evidence of yesterday’s slaughter apart from regional markets which have some catching up to do because of holidays (eg South Korea & India). WS futures are even positively oriented as Apple indicates an increased iPhone production. Core bonds tread water near yesterday’s intraday highs, while the rush into other safe havens halts as well. While this suggests some easing of market panic, we think it’s too early to already call the turnaround especially given several technical breaks on FI/stock markets. We’d therefore remain cautious. Today’s US eco calendar is well-filled with December US Durable goods orders, November S&P housing data and January consumer confidence & Richmond Fed manufacturing index. While obviously interesting, we don’t expect them to guide trading in current circumstances. Q4 earnings and speeches by ECB members are wildcard for trading.

Technically: core bond yields failed to take out resistance levels at -0.18% (July high)/-0.15% (38% retracement of Feb ’18 – Sep ’19 decline) for the German 10-yr yield and 1.94% for the US 10-yr yield. The Chinese coronavirus took markets hostage via risk aversion, pulling core bond yields below first support. We hold our view that this won’t be a lasting market theme.

Rates

US yield -1d2 1.44 -0.055 1.44 -0.0610 1.61 -0.0830 2.06 -0.08

DE yield -1d2 -0.63 -0.025 -0.62 -0.0410 -0.39 -0.0530 0.13 -0.06

Af

German 10-yr yield trades below intermediate support as Chinese coronavirus takes markets hostage.

US 10-yr yield: 1.94% proved to be tough resistance. No escaping global risk aversion.

Tuesday, 28 January 2020

P. 3

EUR/USD: trend remains south. Intermediate support at 1.0990

EUR/GBP: sterling rally stalls as markets await BoE decision.

EUR/USD holding near recent correction low The risk-off due to the outbreak of the corona virus further spread through markets yesterday. In FX smaller, less liquid currencies (SEK, NOK, CE currencies like the HUF, PLN and the CZK) were hit the most, irrespective of their eco fundamentals. The Swiss Franc touched the strongest level against the euro since April 2017. In the major FX crosses (EUR/USD, USD/JPY and even EUR/JPY) price swings remained modest. USD/JPY held a sideways range near the 109 level (close 108.90). EUR/USD kept tentative negative bias. A mediocre German IFO didn’t help the euro. EUR/USD finished the day marginally lower at 1.1019. Overnight, most Asian equity indices are losing further ground, but the pace of the decline slows. Headlines on the spreading of the virus and its consequences still dominate the news. The offshore yuan (USD/CNY 6.97) shows first signs of potential bottoming. The Aussie dollar was hit hard yesterday. AUD/USD currently stabilizes near 0.67. USD/JPY tries to regain the 109 handle. EUR/USD also gains a few ticks. Today, headlines on the coronavirus will continue to dominate trading. At the same time, there are plenty of US eco data (durable orders, consumer confidence, Richmond Fed Manuf. index) and important corporate earnings. Question is whether/to what extent they will be able to counterbalance the corona-related risk-off. In case of good earnings/guidance from high profile corporates and solid confidence data, the risk-off might gradually ease. However, it’s not easy to draw conclusions for EUR/USD. Of late, the EUR/USD trend was south, a bit irrespective of the eco or other news. So, we look for technical signals. The EUR/USD technical picture deteriorated after last week’s break below 1.1066/40. It paints a H&S pattern with targets near/below 1.09, with intermediate support at 1.0990. A rebound above 1.1120 would be a first sign that downside momentum is easing. The pond failed to extend its recent rally Friday, despite a strong PMI. For sterling longs, this was the trigger to turn more cautious going into this week’s Bank of England policy decision. Yesterday, EUR/GBP closed the day even marginally higher despite overall euro softness. Today, the CBI retail data could get some more attention than is usually the case, but we expect more technical, order driven trade for sterling. The 0.8388/0.84 area should be solid support going in the BoE decision.

Currencies

R2 1.1265 -1dR1 1.1199EUR/USD 1.1019 -0.0006S1 1.1000S2 1.0879

R2 0.8798 -1dR1 0.8676EUR/GBP 0.8438 0.0010S1 0.8275S2 0.8117

Tuesday, 28 January 2020

P. 4

Tuesday, 28 January Consensus Previous US 14:30 Durable Goods Orders (Dec P) 0.40% -2.10% 14:30 Durables Ex Transportation (Dec P) 0.30% -0.10% 14:30 Cap Goods Orders Nondef Ex Air (Dec P) 0.20% 0.20% 14:30 Cap Goods Ship Nondef Ex Air (Dec P) 0.20% -0.30% 15:00 S&P CoreLogic CS 20-City MoM SA / YoY NSA (Nov) 0.40%/2.40% 0.43%/2.23% 16:00 Conf. Board Expectations (Jan) -- 97.4 16:00 Conf. Board Consumer Confidence (Jan) 128.0 126.5 16:00 Conf. Board Present Situation (Jan) -- 170 16:00 Richmond Fed Manufact. Index (Jan) -3 -5 UK 12:00 CBI Retailing Reported Sales (Jan) 5 0 12:00 CBI Total Dist. Reported Sales (Jan) -- -3 28JAN-03FEB Nationwide House PX MoM / NSA YoY (Jan) 0.30%/1.5% 0.10%/1.4% Spain 09:00 Unemployment Rate (4Q) 13.95% 13.92% Events 28JAN France and Greece likely to sell 30y and 15y Bonds Q4 earnings Pfizer (bef-mkt), 3M (bef-mkt), Starbucks (aft-mkt), Apple (aft-mkt), AMD (aft-mkt) … 12:15 ECB’s Villeroy Speaks in Paris 16:00 ECB’s Lane Participates on Panel in Brussels 17:30 & 19:00 US to Sell $20bn 2-yr FRN’s & $32bn 7-yr Notes 19:00 ECB policy maker Pablo Hernandez de Cos speaks in Madrid

Calendar

Tuesday, 28 January 2020

P. 5

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 1.61 -0.08 US 1.44 -0.05 DOW 28535.8 -453.93DE -0.39 -0.05 DE -0.63 -0.02 NASDAQ 9139.31 -175.60BE -0.14 -0.06 BE -0.59 -0.03 NIKKEI 23215.71 -127.80UK 0.51 -0.05 UK 0.41 -0.01 DAX 13204.77 -371.91

JP -0.04 0.01 JP -0.13 0.01 DJ euro-50 3677.84 -101.32

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0.32 1.44 0.61 Eonia -0.4520 0.00005y -0.26 1.44 0.62 Euribor-1 -0.4530 -0.0020 Libor-1 1.6595 0.000010y -0.02 1.55 0.71 Euribor-3 -0.3980 -0.0120 Libor-3 1.7954 0.0000

Euribor-6 -0.3330 -0.0100 Libor-6 1.8053 0.0000

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

EUR/USD 1.1019 -0.0006 EUR/JPY 120 -0.49 CRB 173.18 -2.58USD/JPY 108.9 -0.38 EUR/GBP 0.8438 0.0010 Gold 1583.70 5.50GBP/USD 1.3057 -0.0016 EUR/CHF 1.0683 -0.0026 Brent 59.32 -1.37AUD/USD 0.6761 -0.0071 EUR/SEK 10.6042 0.0557USD/CAD 1.3194 0.0051 EUR/NOK 10.0752 0.1005

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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

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