Monday, 16 April 2018

P. 1

Rates: Better to err on the safe side for now

Risk barometers suggest a neutral start to today’s trading session, but we think that geopolitical tensions still warrant to err on the safe side. We have a positive intraday bias for core bonds today. Apart from risk sentiment, US eco data including retail sales might disappoint.

Currencies: (Geo)political tensions still prevent further USD gains

Dollar dollar improved temporary at the end of last week. However, a coalition taking action against Syria apparently isn’t able to reduce the global level of geopolitical uncertainty. This is slightly weighing on the dollar. There is also no guarantee that US eco data will be strong enough to support further USD gains.

Calendar

• US stock markets corrected 0.5% lower on Friday with geopolitical uncertainty

looming over the weekend. Financials underperformed as first Q1 earnings couldn’t convince. Asian trading is mixed with China underperforming (-1.5%).

• Russian President Putin warned that further Western attacks on Syria would bring chaos to world affairs, as Washington prepared to increase pressure on Russia with new economic sanctions (Reuters).

• The FT reports that the UK House of Lords is expected to vote for Britain to remain in an EU customs union this week, inflicting a damaging defeat on the government.

• President Trump’s top economic advisor Kudlow said he is optimistic the US can avoid a broader trade fight with China and that the Trump administration is “making progress” on Nafta renegotiation, the WSJ reports, citing an interview.

• China, Japan, Germany, Korea, Switzerland and new addition, India, will be subject to US monitoring despite findings that they did not manipulate FX rates in the US Report on International Economic and Exchange Rate Policies.

• Moody’s raised the Spanish Baa2 rating to Baa1 (stable). Enhanced economic resiliency and improved banking sector fundamentals outweigh the drag from political/institutional factors, according to the rating agency.

• Today’s eco calendar contains US retail sales and Empire Manufacturing. Fed Kaplan, Kashkari and Bostic speak. Bank of America and Netflix report earnings.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Monday, 16 April 2018

P. 2

Better to err on the safe side for now

Core bonds ended last week’s final trading session with small gains. The main move occurred as the US trading session started. US risk sentiment faltered with main indices turning a 0.5% gain into a 0.5% loss. Geopolitical concerns loomed over the weekend and financials underperformed after first major Q1 earnings. Disappointing Michigan consumer confidence slightly supported core bonds as well.

The US yield curve flattened with yield changes ranging between +1 bp (2-yr) and -1.6 bps (30-yr). The US yield curve hit its flattest shape in a decade (46 bps). Changes on the German yield curve remained limited to -0.5 bps. The US/German 2-yr yield spread hit a multi-decade high. Last week’s diverging Minutes from the Fed and the ECB contributed to the move. 10-yr yield spread changes vs Germany ended close to unchanged with Portugal outperforming (-4 bps) and Greece underperforming (+10 bps). Moody’s lifted the Spanish rating on Friday night by one notch to Baa1 in a catch-up move. Spain is rated one notch higher at both Fitch and S&P (A-). Therefore, we expect no real outperformance today.

Tensions on the geopolitical scene turn again to Russia with the US preparing new sanction and Russian President Putin warning for global chaos. However, risk barometers suggest a neutral opening. USD/JPY and the US Note future are below Friday’s closing levels while Asian stocks, apart from China, are mixed.

Today’s eco calendar contains US retail sales and Empire Manufacturing survey. Severe winter weather might have a negative effect on March retail sales. Fed speakers include Kaplan, Kashkari and Bostic, but these governors recently shared their views on monetary policy. The Q1 earnings season continues with Bank of America and Netflix. Friday’s first results failed to mark a good start. Overall, risk sentiment will probably remain the key driver and might remain fragile. We hold a positive intraday bias for core bonds today with potential for the US Note future to outperform.

The German 10-yr yield reached key support levels (0.46%/0.48%). We think that the slide went far enough against the background of the ECB slowly turning the corner and embracing policy normalization. We turn neutral going forward. The US 10-yr yield lost its upward momentum mid-March. Rising geopolitical risks weighed on risk sentiment and pulled long term yields down as well. We favour sideways action, roughly between 2.7% and 2.9%.

Rates

US yield -1d2 2,36 0,015 2,68 0,0010 2,83 -0,0130 3,04 -0,02

DE yield -1d2 -0,58 -0,015 -0,08 0,0010 0,51 0,0030 1,19 -0,01

US/German 2yr yield spread hits multi-decade high as last week’s Minutes showed more divergence between the Fed and the ECB

US2y10y yield spread: US yield curve at flattest shape in a decade. Reflection of rising recession fears?!

Af

Monday, 16 April 2018

P. 3

USD (trade-weighted): still going nowhere

EUR/GBP: testing key support area. This week, the focus for sterling trading might turn to the eco data.

(Geo)political uncertainty still prevents USD gains

On Friday, the dollar initially held a slightly positive bias against the yen as geopolitical tensions eased slightly. The US/German interest rate differential reached a new cycle peak, but had only a limited impact on EUR/USD. The dollar (and US equities) reversed earlier gains towards the end of the session. Investors took a cautious approach going into the weekend awaiting the consequences of potential action against Syria during the weekend. EUR/USD finished the week at 1.2331. USD/JPY closed at 107.35. Both cross rates were little changed on a daily basis.

A coalition of the US, France and the UK indeed executed selective strikes on targets in Syria this weekend. This morning, there were tentative signs that the action removed some of political uncertainty. However, Asian equities failed to sustain opening gains (if any) with China underperforming. USD/JPY slipped from the 107.60 area to the 107.20 area. EUR/USD trades little changed in the 1.2330 area. The Hong Kong dollar is holding near the weak band against the US currency even as the monetary authority is said to execute further

Today, the US retail sales are interesting, but geopolitics will also remain in play. US retail sales are expected to rebound (0.4% M/M) after three months of a rather poor sales. A really positive surprise is probably needed to support the US dollar. There is no guarantee for that. This morning’s equity performance is also a bit disappointing given that Syria might become less important for markets after this weekend’s action. Markets apparently aren’t convinced that the geopolitical noise is out of the way. Ongoing uncertainty could also keep some USD caution in place. End last week, sentiment on the dollar improved slightly. For now, there is little reason to expect the dollar to start a real up leg. Fed speakers remain a wildcard. EUR/USD perfectly holding in the middle of the 1.2155/1.2550 consolidation pattern.

End last week, sterling showed ‘remarkable’ strength. Technical factors played a role. The data mostly weren’t sterling supportive. Of late, several political analysises suggested that a bigger role for Parliament could support the case for a soft Brexit or even open the way for a new referendum. For now, we see too little political backing in the UK government for that scenario. The test of the EUR/GBP 0.8652 support is ongoing. The day-to-day momentum is sterling positive, but we see too little substance for a sustained acceleration of the sterling rebound. This week, the data UK data will get more attention.

Currencies

R2 1,2598 -1dR1 1,2555EUR/USD 1,2331 0,0004S1 1,2165S2 1,2055

R2 0,9307 -1dR1 0,9033EUR/GBP 0,8662 -0,0002S1 0,8652S2 0,8628

Monday, 16 April 2018

P. 4

Monday, 16 April Consensus Previous US 14:30 Empire Manufacturing (Apr) 18.6 22.5 14:30 Retail Sales Advance MoM (Mar) 0.4% -0.1% 14:30 Retail Sales Ex Auto MoM (Mar) 0.2% 0.2% 14:30 Retail Sales Ex Auto and Gas (Mar) 0.4% 0.3% 14:30 Retail Sales Control Group (Mar) 0.3% 0.1% 16:00 Business Inventories (Feb) 0.6% 0.6% 16:00 NAHB Housing Market Index (Apr) 70 70 UK 01:01 Rightmove House Prices MoM / YoY (Apr) A: 0.4%/1.6% 1.5%/2.1% Germany 08:00 Wholesale Price Index MoM / YoY (Mar) --/-- -0.3%/1.2% Events Start of Brexit Trade talks Q1 earnings Bank of America (12:45), Netflix (22:05),… 18:00 Fed’s Kaplan Speaks at Internation Economic Forum 18:00 Fed’s Kashkari Discusses Too Big to Fail in Washington 19:15 Fed's Bostic Speaks on the Economy and Rural Market Trends

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 2,83 -0,01 US 2,36 0,01 DOW 24360,14 -122,91DE 0,51 0,00 DE -0,58 -0,01 NASDAQ 7106,65 -33,60BE 0,79 -0,02 BE -0,51 0,00 NIKKEI 21835,53 56,79UK 1,44 -0,02 UK 0,91 -0,02 DAX 12442,4 27,39

JP 0,04 0,00 JP -0,15 0,00 DJ euro-50 3448 4,03

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y 0,03 2,75 1,28 Eonia -0,3640 0,00005y 0,37 2,81 1,41 Euribor-1 -0,3710 0,0000 Libor-1 1,8955 -0,001410y 0,95 2,86 1,56 Euribor-3 -0,3290 0,0000 Libor-3 2,3528 0,0051

Euribor-6 -0,2710 0,0000 Libor-6 2,4900 0,0081

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

EUR/USD 1,2331 0,0004 EUR/JPY 132,38 0,07 CRB 199,70 0,39USD/JPY 107,35 0,02 EUR/GBP 0,8662 -0,0002 Gold 1347,90 6,00GBP/USD 1,4238 0,0010 EUR/CHF 1,1868 0,0004 Brent 72,58 0,56AUD/USD 0,7764 0,0010 EUR/SEK 10,4494 0,0857USD/CAD 1,2608 0,0021 EUR/NOK 9,5894 0,0091

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Calendar

Monday, 16 April 2018

P. 5

Brussels Research (KBC) Global Sales Force Mathias van der Jeugt +32 2 417 51 94 Brussels Peter Wuyts +32 2 417 32 35 Corporate Desk +32 2 417 45 82 Institutional Desk +32 2 417 46 25 Dublin Research France +32 2 417 32 65 Austin Hughes +353 1 664 6889 London +44 207 256 4848 Shawn Britton +353 1 664 6892 Singapore +65 533 34 10 Prague Research (CSOB) Jan Cermak +420 2 6135 3578 Prague +420 2 6135 3535 Jan Bures +420 2 6135 3574 Petr Baca +420 2 6135 3570 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.

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