KBC Market Research Desk
KBC Bank
Markets
The ebb and flow of US-Sino trade headlines continued dominating trading. Pessimistic comments from the US corner were wiped out by a more softer tone from China. Market pessimism was erased by optimism in the same vein. European and US stock markets rebounded by 1% to 1.5%, putting core bonds in the defensive. The German yield curve steepened with yield changes ranging between -2.1 bps (2-yr) and +4.6 bps (30-yr). Comments by ECB Knot, who said that the EMU economy isn't in that dire straits to launch a new QE program, help explain the curve shift with investors doubling down on changes at policy rates instead. The US yield curve flattened with daily changes varying between +1.9 bps (2-yr) and -0.7 bps (30-yr). The US Treasury's 7-yr Note auction flopped with the lowest demand since 2009 (bid cover 2.16) and the biggest tail since 2016. Markets didn't really react, but we keep it in mind for the 10-yr and 30-yr auctions in two weeks' time. 10-yr yield spreads vs Germany ended close to unchanged with Greece (-17 bps) and Italy (-8 bps) outperforming. Both countries' bonds extend their rally respectively following the end of capital controls which raises the prospect of an investment grade rating and in the run-up to an anti-Salvini coalition which averts early elections. The dollar performed well which was especially visible in USD/JPY given positive risk sentiment. The pair closed at 106.52. The technical picture doesn't improve as long as the pair remains below 106.78/107.21 resistance. EUR/USD (1.1057 close) again grinded slowly lower with the 2019 low (1.1027) coming into play. Losing that minor support brings the 1.0778/1.0821 support area into play. Sterling continues to take PM Johnson's maneuvering well with EUR/GBP whipsawing around 0.9070.
Asian stock markets copy WS's gains. Japanese eco data were mixed with lower than expected inflation and weak retail sales balancing decent industrial production and a multi-year low unemployment rate. Yesterday's trends on bond markets and FX markets continue as well. Today's eco calendar contains EMU August inflation numbers, US personal income/spending data, PCE deflators and Chicago PMI. Inflation is expected to print a t 1% Y/Y both for headline and core readings which remains way below the 2% target. Risks might even be tilted to the downside following this week's disappointing German readings. US data gently started beating estimates of late. It would support the case of an underperformance of US Treasuries vs German Bunds today, but we add that investors generally tend to take a more cautious approach ahead of long weekends in the US. That's the case now with markets closed on Monday for US Labor Day. EUR/USD is at risk of breaking below 1.1027/1.10.
News Headlines
The Bank of Japan tweaked its regular bond buying operations for a third time this month. It pursued some curve steepening by keeping the buying amount stable for the short and middle end of the curve (up to 5yr) but cutting purchases in longer maturities. The Japanese 10-yr bond added some 2 bps only temporarily as Japanese data (inflation, retail sales, industrial production, unemployment) painted a mixed picture.
A day after Argentina said it looks into extending the maturity of $100 bn debt "unilaterally", rating agency S&P slashed its long-term debt rating by three notches from B- to CCC, the deepest area of junk debt, saying the government's plan had triggered a default.
In its 2019/20 corporate plan, the Australian central bank said that the country's high household debt "could complicate future monetary policy decisions by making the economy less resilient to shocks". The RBA also thinks movements in asset values and leverage will be more important for economic developments than in the past given the already high debt levels.
The US Chamber of Commerce advised president Donald Trump and Xi Jinping to hold back on new tariffs starting on Sunday, revamping trade talks instead. Uncertainty and concerns among US companies has made them sit on cash and scaling back on business investment, Thomas Donohue, head of the Chamber said. Comments by China yesterday already suggested they might not retaliate immediately on Trump's new round of tariffs.
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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EUR/USD treads water just above 1.0400 post-US data
Another sign of the good health of the US economy came in response to firm flash US Manufacturing and Services PMIs, which in turn reinforced further the already strong performance of the US Dollar, relegating EUR/USD to the 1.0400 neighbourhood on Friday.
GBP/USD remains depressed near 1.2520 on stronger Dollar
Poor results from the UK docket kept the British pound on the back foot on Thursday, hovering around the low-1.2500s in a context of generalized weakness in the risk-linked galaxy vs. another outstanding day in the Greenback.
Gold keeps the bid bias unchanged near $2,700
Persistent safe haven demand continues to prop up the march north in Gold prices so far on Friday, hitting new two-week tops past the key $2,700 mark per troy ounce despite extra strength in the Greenback and mixed US yields.
Geopolitics back on the radar
Rising tensions between Russia and Ukraine caused renewed unease in the markets this week. Putin signed an amendment to Russian nuclear doctrine, which allows Russia to use nuclear weapons for retaliating against strikes carried out with conventional weapons.
Eurozone PMI sounds the alarm about growth once more
The composite PMI dropped from 50 to 48.1, once more stressing growth concerns for the eurozone. Hard data has actually come in better than expected recently – so ahead of the December meeting, the ECB has to figure out whether this is the PMI crying wolf or whether it should take this signal seriously. We think it’s the latter.
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