Wednesday, 10 January 2018

P. 1

Rates: US 10-yr yield breaks above 2.5%, heading to 2016/2017 highs

The technical break of the US 10-yr yield suggests a move to 2.63%/2.64% and thus more downside for the US Note future. Higher oil prices, rising inflation expectations and more signs of global monetary policy normalization are at play. US inflation readings (tomorrow and Friday) and German wage negotiations have the potential to accelerate the move.

Currencies: USD/JPY, EUR/JPY and EUR/USD drifting south

Yesterday, yen strength was the name of the game and it looks that this trend might continue today. The dollar is a good second best. The eco calendar is thin today. A less buoyant risk sentiment might reinforce the rebound of the yen. Sterling hardly profits from the UK government reshuffle.

Calendar

• US stock markets ended marginally higher yesterday (+0.1%) with the Dow

Jones outperforming (+0.4%). Most Asian stock markets lose some ground overnight with China underperforming.

• China's producer prices rose at their slowest pace in 13 months in December, as the government's war against winter smog dented factory demand for raw materials in a sign the world's second largest economy has started to slow.

• US job openings fell for a second straight month in November, with declines in the manufacturing and real estate sectors. The monthly JOLTS also found that layoffs dropped to a six-month low, showing continued labour market strength.

• Italy’s 5-Star leader Luigi Di Maio says that he doesn’t think the country needs to leave the euro anymore because the French-German alliance isn’t as strong as in the past, Corriere della Sera reports

• Global growth appears to have peaked, with demographics, a lack of investment, a slowing in productivity gains and tightening monetary policy placing limits on economic expansion, the World Bank said.

• The EU is systematically warning UK companies of a regulatory chill after Brexit as it seeks to accelerate the private sector’s preparations for a no-deal UK exit, according to recent legal notices reviewed by the FT.

• Today’s eco calendar contains UK industrial production and US import/export prices. Germany and the US tap the market. Chicago Fed Evans discusses the economic outlook.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Wednesday, 10 January 2018

P. 2

US 10-yr yield breaks above 2.5%, heading to 2.64%

Global core bonds lost ground yesterday with US Treasuries underperforming German Bunds. The main move occurred in US dealings. Several factors were at play. First of all Asian central bank action. The BoJ announced plans to cut the size of JGB purchases in the 10-25yr bucket, triggering early speculation on policy normalization. The PBOC changed how it calculates yuan fixing, raising concerns about future Chinese demand for US Treasuries. Second, surging oil prices following a big drop in inventory data. Third, a technical break of the US 10-yr yield above 2.5% resistance, paving the way towards 2.63%/2.64%. Finally, market-based measures of (US) inflation expectations (5y5y forward, break-even rate, inflation swap) continue to rise.

The US and German yield curves bear steepened. US yields increased by 1.1 bp (2-yr) to 8.4 bps (30-yr). German yields added 0.2 bps (2-yr) to 4.9 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrow up to 4 bps (Greece/Portugal) with Italy (+2 bps) underperforming.

Most Asian stock markets lose some ground overnight while Brent crude levels around yesterday’s highs. The Japanese 10-yr yield increases further, reaching the highest level since July 2017. The US Note future remains under selling pressure as well, suggesting a weaker opening for the Bund.

Today’s eco calendar is thin (US import & export prices) and probably won’t impact trading ahead of PPI (tomorrow) and CPI (Friday) releases. The technical break of the US 10-yr yield suggests a move to 2.63%/2.64% and thus more downside for the US Note future. In Germany, we expect the 10-yr yield to rise towards 0.62%. German trade union negotiations about pay rises are expected to conclude tomorrow and can also influence trading. German wages are expected to be pivotal to start an upward spiral in EMU price dynamics and could be a bearish signal for Bunds. Heavy supply (German and US 10-yr bonds) could additionally weigh on core bonds. Strong global growth and a global drive towards monetary policy normalization are medium-term bearish factors for core bonds.

Rates

US yield -1d2 1,97 0,015 2,34 0,0410 2,55 0,0730 2,92 0,08

DE yield -1d2 -0,61 0,005 -0,20 0,0210 0,47 0,0430 1,32 0,05

US 10-yr yield breaches through 2.5%, heading to the 2017/2016 top (2.63%/2.64%)

Brent crude rises north of $69/barrel to test 2015 top after huge drop in inventories (API data)

Af

Wednesday, 10 January 2018

P. 3

USD/JPY: repositioning out of yen-shorts continues

EUR/USD extends correction after rejected topside test on Friday

USD/JPY, EUR/JPY and EUR/USD all drifting south

The swings in the yen took centre stage on FX markets yesterday. The yen rose against most majors. The BOJ bought fewer long-dated bonds, raising speculation that it might consider a first step to a less easy monetary policy. The yen held strong and USD/JPY closed the day at 112.65. The dollar was a good second best. The trade-weighted dollar (DXY) rebounded of recent lows, supported by higher US yields. EMU eco data remained very strong, but didn’t help the euro. The correction in EUR/USD and EUR/JPY longs that started on Friday, continued. EUR/USD closed the day at 1.1937. EUR/JPY dropped to 134.47, compared with an intraday top of 136.64 on Friday.

The equity rally lost momentum overnight, but the correction is limited given recent gains. Yesterday’s rise of the yen continues. USD/JPY trades near 112.30. EUR/USD trades in the 1.1930 area, holding with reach of yesterday’s ST correction low. The eco calendar is again only modestly interesting. US import prices will be published. Markets are growing more sensitive to price data. A small reaction is possible in case of a big surprise, but the PPI’s and CPI later this week are more important. This morning, it looks that the FX trends of the previous days continue. A less buoyant risk sentiment might support further yen gains. The decline of USD/JPY and EUR/JPY also weighed on EUR/USD earlier this week. The EUR/USD decline might slow if the rise in US yields slows. Even so, we see no trigger for a sharp EUR/USD rebound right now. The price action since Friday suggest that the topside in EUR/USD is rather well protected. In a broader perspective, slightly disappointing payrolls didn’t cause USD damage. EUR/USD 1.2092 resistance survived. This week’s US price data are a next reference for USD trading. Recently, the greenback suffered as the global recovery might force other major CB’s to join policy normalisation. We keep the hypothesis that enough good news on the euro/’bad news’ on the USD is discounted and that a sustained break beyond 1.2092 is not evident.

Yesterday, sterling held a tight sideways range against the euro and declined against a stronger dollar. The UK government reshuffle had no big impact. UK production and trade balance data will be published today. Production is expected rather solid. However, we don’t expect a the data to be really supportive for sterling. The EUR/GBP correction might slow (underlying GBP weakness), but a rebound will be difficult if EUR/USD remains under pressure. EUR/GBP 0.8700/60 support looks solid. We keep a EUR/GBP buy-on-dips in case of return action to 0.87.

Currencies

R2 1,2225 -1dR1 1,2092EUR/USD 1,1937 -0,0030S1 1,1713S2 1,1554

R2 0,9307 -1dR1 0,9033EUR/GBP 0,8816 -0,0005S1 0,8690S2 0,8657

Wednesday, 10 January 2018

P. 4

Wednesday, 10 January Consensus Previous US 14:30 Import Price Index MoM / YoY (Dec) 0.4%/3.1% 0.7%/3.1% 14:30 Import Price Index ex Petroleum MoM (Dec) 0.1% 0.1% 14:30 Export Price Index MoM / YoY (Dec) 0.3%/-- 0.5%/3.1% UK 10:30 Industrial Production MoM / YoY (Nov) 0.4%/1.8% 0.0%/3.6% 10:30 Manufacturing Production MoM / YoY (Nov) 0.3%/2.8% 0.1%/3.9% 10:30 Construction Output SA MoM / YoY (Nov) 0.8%/-1.0% -1.7%/-0.2% 10:30 Visible Trade Balance GBP/Mn (Nov) -£10950 -£10781 14:00 NIESR GDP Estimate (Dec) 0.5% 0.5% France 08:45 Industrial Production MoM / YoY (Nov) -0.5%/2.6% 1.9%/5.5% 08:45 Manufacturing Production MoM / YoY (Nov) -1.4%/2.9% 2.7%/6.9% Belgium 10JAN-20JAN Budget Balance YTD (Dec) A: -4.220b -9.986b China 02:30 PPI YoY (Dec) A: 4.9% 5.8% 02:30 CPI YoY (Dec) A: 1.8% 1.7% 10JAN-15JAN Money Supply M2 YoY (Dec) 9.2% 9.1% Norway 08:00 CPI MoM / YoY (Dec) -0.1%/1.5% 0.1%/1.1% 08:00 CPI Underlying MoM / YoY (Dec) -0.1%/1.2% -0.3%/1.0% Events 09:30 Riksbank Minutes 11:30 Germany to Sell €5bn 2028 Bonds 15:00 Fed’s Evans Discusses Economy and Policy Outlook 19:00 US to Sell $20bn 10-yr Notes 19:30 Fed’s Bullard Speaks on U.S. Economic Outlook in St. Louis

Calendar

Wednesday, 10 January 2018

P. 5

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 2,55 0,07 US 1,97 0,01 DOW 25385,8 102,80DE 0,47 0,04 DE -0,61 0,00 NASDAQ 7163,578 6,19BE 0,69 0,04 BE -0,50 0,00 NIKKEI 23788,2 -61,79UK 1,28 0,05 UK 0,54 0,03 DAX 13385,59 17,81

JP 0,09 0,02 JP -0,12 0,01 DJ euro-50 3622,87 6,42

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y 0,00 2,27 0,94 Eonia -0,3580 -0,00105y 0,32 2,37 1,10 Euribor-1 -0,3690 -0,0010 Libor-1 1,5538 0,000010y 0,90 2,54 1,35 Euribor-3 -0,3290 0,0000 Libor-3 1,7080 0,0000

Euribor-6 -0,2710 0,0000 Libor-6 1,8653 0,0000

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

EUR/USD 1,1937 -0,0030 EUR/JPY 134,47 -0,88 CRB 194,16 1,24USD/JPY 112,65 -0,44 EUR/GBP 0,8816 -0,0005 Gold 1313,70 -6,70GBP/USD 1,354 -0,0028 EUR/CHF 1,1734 0,0040 Brent 68,82 1,04AUD/USD 0,7824 -0,0018 EUR/SEK 9,8242 0,0070USD/CAD 1,2464 0,0043 EUR/NOK 9,665 -0,0015

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