Tuesday, 26 February 2019

P. 1

Rates: Powell to confirm Fed’s U-turn; confirm end of BS run-off by the end of the year?

Fed Chair Powell testifies before the US Senate banking panel. He is expected to confirm the US central banks’ hasty U-turn made between December and now. He could confirm the Fed’s desire to end the balance sheet run-off by the end of the year while remaining in assessment mode to see where the economy’s going. We hold a tentative positive bias for bonds.

Currencies: EUR/USD holding near 1.1370 resistance. More USD weakness to come?

EUR/USD profited from a mild risk-on due to easing trade tensions yesterday. Today, the focus for USD trading turns to the US with the consumer confidence release and Fed Powell’s testimony before the Senate. Powell confirming a soft approach on the balance sheet roll-off might weigh on the dollar. EUR/GBP is near key support as chances for a Brexit delay are rising.

Calendar

• US equity markets posted rather limited gains (up to 0.36% (Nasdaq)) after

president Trump delayed the Chinese tariff deadline. Asian equities are losing ground this morning with China reversing earlier gains.

• UK PM May is said to consider a Brexit delay to prevent the UK from leaving the EU without a deal next month. She will hold a Cabinet meeting today and then reveal the conclusions in an announcement to Parliament afterwards.

• US vice-president Mike Pence urged Latin American countries to intensify their efforts to isolate Venezuela’s sitting president Maduro, after a weekend of chaos. He said the US would impose more financial sanctions in the next days.

• The US House votes on a resolution to revoke President Trump’s declaration of national emergency to build the wall on the Mexican border. It will likely pass the Democrat-controlled House and then move to the (Rep.-controlled) Senate.

• World trade rose 3.3% in 2018, down from the 4.7% rise in 2017, according to a Dutch research group. Imports to and exports from China plummeted at the end of the year, a sign that the trade war is cooling global economic growth.

• Iranian Foreign Minister Javad Zarif unexpectedly resigned his post yesterday, as his engagement with the West was failing. Zarif, the architect of the 2015 nuclear deal, was known to favour engagement rather than confrontation.

• Today’s eco calendar contains the Conf. Board Consumer Confidence (Feb) in the US. ECB’s Coeuré and Lane speak today. BOE chief Carney and Fed chief Powell address their governments. Spain offers new 15-yr bonds.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Tuesday, 26 February 2019

P. 2

Powell to confirm dovish U-turn Global core bonds lost marginally ground in yesterday’s low-volume trading session. The main move lower occurred around the start of European trading. Risk sentiment was positive from Asia onwards, with huge outperformance of Chinese stocks, after US President Trump extended the US-Sino trade truce. Atlanta Fed governor Bostic, who is dovish-leaning, told the WSJ to be in favour of 1 more rate hike this year and 1 in 2020. This could be a good proxy for what March Fed dots will look like. The US 2-yr and 5-yr Note auctions met with strong (direct) bids and marked the start of some US Note future gains into the close. US yields added 0.5 bps (5-yr) to 1.1 bp (30-yr) in a daily perspective. The German yield curve bear steepened with yields rising by 0.7 bps (2-yr) to 2 bps (30-yr). 10-yr yield spread changes vs Germany narrowed by up to 4 bps (Greece) with Italy (-9 bps) outperforming after avoiding a Fitch rating cut (BBB; negative outlook).

Asian stock markets trade around 0.25% softer this morning with China reversing earlier gains. Core bonds record minor gains. Brent crude hovers near yesterday’s sell-off lows (<$65/barrel) after US President Trump called for lower oil prices.

Today’s eco calendar contains several US eco data (housing figures, Richmond Fed manufacturing index and consumer confidence). We expect consumer confidence to rebound after a three-month slide. The batch of eco data might be overshadowed though by Fed Chair Powell’s testimony before the US Senate banking panel. We expect him to confirm the hasty U-turn made by the Fed between December and now. Recent hints by Fed governors and by January FOMC Minutes suggest that the balance sheet run-off might end around the turn of the year. He’ll probably remain very cautious about the (external) eco outlook while welcoming the end of the government shutdown and progress in US-Sino trade talks. Powell will confirm domestic (labour) market strength, but muted inflationary pressure and the grim outlook allow the Fed to stay in “assessment mode” at least until the Summer. He’ll probably refrain on giving specific guidance on interest rates, leaving the option open of retaking the tightening cycle in H2 2019. Overall, we don’t expect Powell’s rhetoric to inflict wounds to the US Treasury market. We hold a tentative upward bias for core bonds. The Spanish Treasury launches a new 15-yr syndicated deal today. We expect a new success after this year’s stellar €10bn 10-yr syndication. The US Treasury ends its end-of-month refinancing operation with a 7-yr Note auction. Technically, the US 10-yr yield remain stuck in a 2.49%-2.78% sideways trading range. The German 10-yr yield tried to undo the break below 0.15% support last week, but failed.

Rates

US yield -1d2 2,51 0,015 2,46 0,0110 2,66 0,0130 3,02 0,01

DE yield -1d2 -0,56 0,015 -0,33 0,0210 0,11 0,0130 0,74 0,02

German 10-yr yield: test to regain 0.15% failed

US 10-yr yield: 2.49%-2.78% sideways range

Af

Tuesday, 26 February 2019

P. 3

EUR/USD holding near 1.1370 resistance. More USD weakness to

come?

EUR/GBP nearing 0.8620/00 support area as Brexit delay looks

more likely.

EUR/USD holding near recent correction top Global markets traded with a risk-on bias testerday, as president Trump delayed the deadline for raising import tariffs on Chinese goods. Optimism in Europe and the US was more modest compared to their Asian/Chinese counterparts. The guarded reaction also prevented EUR/USD to break important technical levels. EUR/USD came within reach of last week’s top in the 1.1370 area, but a real test/break didn’t occur. A modest risk-on, higher US yields and the BOJ keeping the option open for more easing propelled USD/JPY. The pair closed at 111.06. This morning, Asian investors turned more cautious, pondering the consequences from the ‘truce’ in the US-China trade conflict. The Indian rupee declined on regional tensions, but the move was said to be ‘blocked’ by central bank action. USD/JPY reversed most off yesterday’s rally as global optimism is easing and as US yields are declining ahead of Fed Powell testimony before Congress this afternoon. EUR/USD is holding rather strong (1.1360 area.) Today, US housing data are probably of second tier importance for (USD) trading. Consumer confidence (conference board) will get more attention. A rise from 120.2 to 124.9 is expected. Of late, US data turned more mixed. The jury is still out, but the dollar might be (slightly) more sensitive to a downside surprise than to an upward surprise. However, the focus for (USD) trading will be on Fed Powell’s testimony before the Senate. The Fed chairman will probably maintain its wait-and-see approach on interest rates. A ‘soft’ tone on the normalisation of the balance sheet might is in theory USD negative. Last week, EUR/USD rebounded off recent lows euro, but with no strong momentum. An easing of the risk rally might slow the EUR/USD rebound. However, today’s USD specific news (consumer confidence and Powell’s assessment on the Fed balance sheet) might also weigh on the dollar. Any EUR/USD rebound will probably develop a slow pace as long as EMU data remain unconvincing. Still a break beyond 1.1370 might open the way for further gains in the 1.12/1.15 ST consolidation pattern.

There were plenty of rumours yesterday that the UK and the EU might be preparing for a delay of the March 29 Brexit. Sterling stayed well bid. EUR/GBP closed at 0.8672. Overnight a Bloomberg report indicated that UK PM May is considering a Brexit delay if no deal will be reached next month. At the same time, Labour is opening the dollar for a new referendum. Risks for a no deal scenario are apparently declining. This is supporting sterling. However, longer-term it might cement a status of uncertainty. Despite current sterling positive trend, we are cautious to anticipate a sustained break beyond the EUR/GBP 0.8620/00 support.

Currencies

R2 1,1815 -1dR1 1,1621EUR/USD 1,1358 0,0023S1 1,1187S2 1,1119

R2 0,93067 -1dR1 0,91EUR/GBP 0,8672 -0,0009S1 0,8620S2 0,8314

Tuesday, 26 February 2019

P. 4

Tuesday, 26 February Consensus Previous US 14:30 Housing Starts Total/MoM (Dec) 1256k/-0.1% 1256k/3.2% 14:30 Building Permits Total/MoM (Dec) 1290k/-2.6% 1322kR/4.5% 15:00 FHFA House Price Index MoM (Dec) 0.4% 0.4% 15:00 S&P CoreLogic CS 20-City MoM SA/YoY NSA (Dec) 0.30%/4.50% 0.30%/4.68% 16:00 Richmond Fed Manufact. Index (Feb) 5 -2 16:00 Conf. Board Consumer Confidence (Feb) 124.9 120.2 16:00 Conf. Board Present Situation (Feb) -- 169.6 16:00 Conf. Board Expectations (Feb) -- 87.3 UK 10:30 UK Finance Loans for Housing (Jan) 38441 38779 Germany 08:00 GfK Consumer Confidence (Mar) 10.8 10.8 France 08:45 Consumer Confidence (Feb) 92 91 Events 26FEB Spain is likely to issue new 15y Bonds 09:30 May to chair Cabinet discussion on extending Brexit followed by Parliamentary update at 12:30 09:30 ECB’s Hernandez de Cos to speak in Madrid 10:30 ECB's Lane speaks in Brussels 11:00 BOE's Carney, Ramsden, Vlieghe, Haskel at Parliament Committee 15:30 ECB’s Mersch Speaks in Brussels 16:00 Powell testifies Before Senate Banking Panel 19:00 US to Sell UD32 Bln 7-Year Notes 20:00 ECB’s Coeuré Speaks in Frankfurt

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 2,66 0,01 US 2,51 0,01 DOW 26091,95 60,14DE 0,11 0,01 DE -0,56 0,01 NASDAQ 7554,46 26,92BE 0,65 0,01 BE -0,42 0,01 NIKKEI 21449,39 -78,84UK 1,18 0,02 UK 0,76 0,01 DAX 11505,39 47,69

JP -0,03 0,01 JP -0,16 0,01 DJ euro-50 3280,01 9,46

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0,07 2,54 1,13 Eonia -0,3700 -0,00205y 0,12 2,53 1,22 Euribor-1 -0,3660 0,0010 Libor-1 2,4844 0,000010y 0,64 2,67 1,39 Euribor-3 -0,3090 0,0010 Libor-3 2,6463 0,0000

Euribor-6 -0,2300 0,0010 Libor-6 2,7060 0,0000

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

EUR/USD 1,1358 0,0023 EUR/JPY 126,13 0,66 CRB 181,75 -2,31USD/JPY 111,06 0,37 EUR/GBP 0,8672 -0,0009 Gold 1329,50 -3,30GBP/USD 1,3097 0,0044 EUR/CHF 1,1365 0,0027 Brent 64,76 -2,36AUD/USD 0,7167 0,0038 EUR/SEK 10,5746 -0,0185USD/CAD 1,3187 0,0052 EUR/NOK 9,7616 -0,0136

Calendar

Tuesday, 26 February 2019

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

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