Friday, 20 December 2019

P. 1

Dear reader, There will be no KBC Market Research reports between Monday, December 23 and Thursday, January 2. We resume our publications on Friday, January 3. Merry Christmas and a Happy New Year! Rates: German and US 10-yr yields test resistance levels

The US and German 10-yr yield intensively test resistance levels. Yesterday’s test was aborted after a dismal Philly Fed Business Outlook. We advocated that stronger data would be necessary to force a next upleg in yields, but risks are clearly tilted to a sooner break given current momentum.

Currencies: US and China to rubberstamp partial trade deal early January

EUR/USD managed to eke out gains after disappointing US data yesterday. US Mnuchin said the partial trade deal will be signed early January. Today’s US data is of secondary importance. Quadruple witching might trigger some volatility going into the weekend. PM Johnson will put his Brexitdeal for a first vote in the House of Commons.

Calendar

• US stocks markets extended their record run, gaining around 0.5% and cruising

to fresh all-time highs. Asian risk sentiment is more mixed this morning with main indices treading water around opening levels.

• US Treasury Secretary Mnuchin told CNBC that the phase one US-China trade deal will be released and signed early January. On USMCA, the new NAFTA deal, he added that it would add 0.5% to GDP growth.

• The FT reports that Andrew Bailey will today be announced as new Bank of England governor. Baily is a former deputy governor of the BoE and currently head of the Financial Conduct Authority. He takes over at the start of February.

• The World Bank warns in its publication “Global Waves of Debt” on the latest wave of debt accumulation in emerging and developing countries which started in 2010 and reached $55tn in 2018, roughly 170% of GDP.

• Japanese inflation slightly accelerated as expected in November. The National CPI measure ex fresh food, watched by the BoJ, rose from 0.4% Y/Y to 0.5% Y/Y but remains miles away from the central’s 2% inflation target.

Headlines

Friday, 20 December 2019

P. 2

• UK GfK consumer confidence unexpectedly rose from -14 to -11 in December, matching the strongest reading since July. Improving expectations for 2020 led the surge. Lloyds Business Barometer also hit a 5-month high (10 from 9).

• Today’s US economic calendar contains the final revision of US Q3 GDP, November personal income & spending numbers and PCE deflators. December EMU consumer confidence will be released as well.

Friday, 20 December 2019

P. 3

German and US 10-yr yields test resistance levels

Core bonds ended near opening levels after 10-yr yields failed to pierce through resistance levels, respectively at 1.94% for the US 10-yr yield and -0.25%/-0.22% for the German 10-yr yield. A disappointing December Philly Fed Business Outlook called off the upside yield test, causing return action during US trading hours even as US stock markets cruised to fresh all-time highs. US Treasury Secretary Mnuchin suggested the phase one US-China trade deal will be signed in January. Trump’s impeachment vote is a non-event for markets. The NY Fed’s two-week loan auction was the first such operation covering the year-end to be undersubscribed. Banks requested $31.27bn from $35bn on offer, suggesting no return of September money market stress around year-end. Both the German and US yield curves steepened marginally. Daily US yield changes ranged between -0.2 bps and + 0.6 bps. German yields rose by 0.3 bps (2-yr) to 1.5 bps (30-yr). 10-yr yield spread changes vs Germany ended close to unchanged with Italy (+3 bps) and Greece (+9 bps) underperforming.

Asian stock markets trade more mixed this morning. China and the US marginally underperform. Core bonds trade listless. News flow is extremely thin. Today’s eco calendar contains US income/spending data, PCE deflators and EMU consumer confidence. We don’t expect them to be decisive for trading. The German and US 10-yr yields remain near technical resistance levels (see below) and might be lured into another test. Overall, we expect end-of-year, low volume, conditions to remain in place. Apart from technical factors, we keep an eye on stock markets. Low market volatility, side-lined central banks, disappearance of short-term event risk (no deal Brexit; US-China trade) and lack of direction from eco data provided a fertile breeding ground for stocks. US indices hit fresh record highs with European markets near multiyear tops.

Technically: the German 10-yr yield in October broke above -0.41% resistance. Targets of this double bottom formation are -0.25% and -0.13%. The 38% retracement level of the Oct-Aug decline stands at -0.24%. The US 10-yr yield trades in the upper half of the 1.43%-1.94% sideways trading channel. Tests to break resistance failed so far. A general upswing in eco data is probably needed to do so. Given current momentum, resistance levels might give in sooner rather than later though.

Rates

Af

German 10-yr yield: break above -0.41% opened new range capped by -0.13% and floored by previous resistance.

US 10-yr yield: trade and data cause volatility in upper half of trading range. Test of upper bound intensifies

Friday, 20 December 2019

P. 4

EUR/USD returns in established range. Topside test rejected, ST support

kicks in at 1.1097.

EUR/GBP to hold near new ST equilibrium around 0 85

US and China to rubberstamp deal early January EUR/USD was whipsawed on Thursday, though price action developed in a narrow trading range. Gains eked out during European dealings didn’t last as early US investors entered market. Weaker than expected US data took away some shine from the dollar eventually. US Treasury Secretary Mnuchin said the phase one trade deal text is undergoing a technical and legal review but should be released and signed early January. EUR/USD closed at 1.1122, marginally up from 1.1114. USD/JPY declined from 109.55 to 109.37. Overnight newsflow is very scarce. Wall Street set new all-time highs again yesterday, but Asian equity markets are struggling for direction this morning. Trading needs new drivers as there are only few data available (until year-end) and major event risks turned less of an issue for the short term lately. South Korean stocks slightly outperform. EUR/USD is trending down, trading in the low 1.11 area (1.1117). The Japanese yen gains a tad on stronger than expected (core) inflation (0.8% y/y vs. 0.7% expected). USD/JPY trades near 109.3. Today’s economic calendar is centred around the US. The final reading of Q3 GDP is due. Personal income and spending are worth watching but are unlikely to trigger a lasting market reaction. Same goes for the (core) PCE deflator, expected at 0.2% m/m (0.1% m/m) and 1.4% y/y (1.5% y/y) as inflation isn’t the Fed’s main concern at the current stage. Quadruple witching might cause some intraday volatility though. EUR/USD settled in the higher part of the 1.10/1.12 range by the end of last week. The ‘return of Brexit’ made a break beyond 1.12 difficult however. EUR/USD turned back lower in that ST range. We turned neutral on EUR/USD recently and keep that bias for today. The 1.1097 previous neckline marks ST support. Awful UK retail sales in November had a fairly limited impact on sterling yesterday, as had the Bank of England. The central bank held rates stable (with a 7-2 majority) and kept options for either a rate cut (in case of entrenched uncertainty) or hike (orderly trade and Brexit outcome) open. Sterling lost a few tiks in afternoon trading. EUR/GBP closed at 0.855, up from 0.85. Johnson will put his Brexitdeal to a (first) vote in the House of Commons today. It’s widely expected to be approved with ease and should have no significant impact on sterling. We maintain our neutral view with EUR/GBP hovering near its ST 0.85 equilibrium.

Currencies

Friday, 20 December 2019

P. 5

Friday, 20 December Consensus Previous US 14:30 GDP Annualized QoQ (3Q T) 2.1% 2.1% 16:00 Personal Income / Spending (Nov) 0.3%/0.4% 0.0%/0.3% 16:00 PCE Deflator MoM / YoY (Nov) 0.2%/1.3% 0.2%/1.3% 16:00 PCE Core Deflator MoM / YoY (Nov) 0.1%/1.5% 0.1%/1.6% 16:00 U. of Mich. Sentiment (Dec F) 99.2 99.2 17:00 Kansas City Fed Manf. Activity (Dec) -3 -3 Japan 00:30 Natl CPI YoY (Nov) 0.5%A 0.2% 00:30 Natl CPI Ex Fresh Food YoY (Nov) 0.5%A 0.4% 00:30 Natl CPI Ex Fresh Food, Energy YoY (Nov) 0.8%A 0.7% UK 01:01 GfK Consumer Confidence (Dec) -11A -14 01:01 Lloyds Business Barometer (Dec) 10A 9 10:30 Public Sector Net Borrowing (Nov) 5.2b 10.5b 10:30 GDP QoQ / YoY (3Q F) 0.3%/1% 0.3%/1% EMU 10:00 ECB Current Account SA (Oct) -- 28.2b 16:00 Consumer Confidence (Dec A) -7.0 -7.2 Germany 08:00 GfK Consumer Confidence (Jan) 9.8 9.7 France 08:45 PPI MoM / YoY (Nov) --/-- -0.10%/-1.4% 08:45 Consumer Spending MoM / YoY (Nov) 0.2%/0.4% 0.2%/-0.2% Italy 10:00 Consumer Confidence Index (Dec) 109.0 108.50 Norway 10:00 Unemployment Rate (Dec) 2.20% 2.10% Events 12:00 BOE's Haskel Speaks in London

Calendar

Friday, 20 December 2019

P. 6

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 1.92 0.00 US 1.63 0.00 DOW 28376.96 137.68DE -0.24 0.01 DE -0.63 0.00 NASDAQ 8887.218 59.48BE 0.04 0.01 BE -0.62 0.01 NIKKEI 23816.63 -48.22UK 0.80 0.03 UK 0.56 0.03 DAX 13211.96 -10.20

JP 0.01 0.01 JP -0.10 0.00 DJ euro-50 3739.17 0.17

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0.27 1.69 0.80 Eonia -0.4550 0.00005y -0.16 1.72 0.86 Euribor-1 -0.4530 0.0080 Libor-1 1.7646 0.000010y 0.15 1.87 0.98 Euribor-3 -0.3980 0.0050 Libor-3 1.9080 0.0000

Euribor-6 -0.3420 0.0060 Libor-6 1.9049 0.0000

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

EUR/USD 1.1122 0.0008 EUR/JPY 121.67 -0.10 CRB 185.13 0.16USD/JPY 109.37 -0.18 EUR/GBP 0.8550 0.0052 Gold 1484.40 5.70GBP/USD 1.3009 -0.0069 EUR/CHF 1.0881 -0.0015 Brent 66.54 0.37AUD/USD 0.6886 0.0033 EUR/SEK 10.4673 -0.0052USD/CAD 1.3125 0.0010 EUR/NOK 9.9827 -0.0316

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Rates: German and US 10-yr yields test resistance levelsCurrencies: US and China to rubberstamp partial trade deal early JanuaryCalendar