Thursday, 28 March 2019

P. 1

Rates: Core bonds steam ahead, but enter overbought conditions

Core bonds rallied ahead yesterday, pushing the European swap rate curve into negative territory for tenors up to 5 years. EMU economic data will probably confirm the recent gloomy picture, adding to ECB Draghi’s and Praet’s recent case to explore mitigating potential risks from the central bank’s negative interest rate policy

Currencies: uncertainty on global growth give mixed signals for FX trading

Swings in the EUR/USD and USD/JPY were modest given sharp moves in interest rate markets. The sharp decline in both US and EMU yields provides some kind of a balance for EUR/USD. Today, the EMU confidence data and German CPI might affect intraday EUR/USD trading. Will soft data push EUR/USD for a test of the 1.1187/1.12 range bottom?

Calendar

• US equity markets lost ground yesterday with losses up to -0.67% (Nasdaq).

Asian markets are largely tracking losses on Wall Street with Japanese indices underperforming.

• UK PM May announced that she is willing to step down as Prime Minister if her deal survives a third vote this week and eventually gets ratified. Meanwhile, not one alternative option to May’s deal found majority in the UK Parliament.

• ECB chief economist Peter Praet said the Bank will need to have a solid monetary policy case to mitigate the side effects of negative interest rates (‘tiering’) on banks, brought up by president Draghi earlier.

• Kansas City Fed chief Esther George said it is appropriate to put monetary policy on hold amid ‘’notable” downside risks. She sees the biggest risk coming from slower growth globally, particularly in China, the euro zone and the UK.

• Turkey took unconventional measures to prevent foreign investors of betting against the Turkish lira, days before local elections will test President Erdogan’s support. The cost of borrowing liras overnight soared past 1000%.

• US-Sino trade negotiations continue today in Beijing. US officials said talks have moved forward in all areas, incl. forced technology transfers as China has made unprecedented proposals to the US.

• Today’s US eco calendar contains this week’s jobless claims and pending home sales (Feb). The EC prints economic confidence gauges (Mar) and Germany releases CPI data. ECB’s de Guindos and an avalanche of Fed governors speak.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Thursday, 28 March 2019

P. 2

European swap rates negative up to 5-years

Global core bonds extended their impressive run yesterday in a high-volume trading session. The new upleg started in European trading after several ECB heavyweights stressed downside risks to a weakening EMU economy. ECB President Draghi added that the ECB is ready to soften the impact of negative interest rates if eroding bank profitability would prevent stimulus reaching the economy. This might mean introducing a tiered deposit rate system which could all else equal also increase the bar for an eventual rate hike. EMU 5y5y forward inflation expectations declined from 1.38% to 1.32%. This market-based measure approaches the 2016 lows (1.25%) when the ECB feared that inflation expectations were at risks of becoming de-anchored from the 2% inflation target. The core bond rally accelerated in US dealings despite a significantly smaller-than-expected trade deficit. German yields lost 4.1 bps (30-yr) to 6.6 bps (5-yr) with the belly of the curve outperforming the wings. European swap rates are now again negative for tenors of up to 5 year. US yields fell by 4.9 bps (5-yr) to 6.2 bps (30-yr). Peripheral yield spread changes vs Germany widened by 3 bps to 6 bps (Greece).

Asian markets stock markets are mixed this morning with Japan significantly underperforming (-1.5%) on the back of a stronger yen. ECB Chief economist Praet elaborated further on the potential tiered deposit rate saying that the weakening economy may in the future hamper the lending channel and warrant readiness to act from a central bank point of view. The brexit deadlock remains in place after UK parliament failed to find consensus on a way forward. Core bonds remain near yesterday’s highs.

Today’s eco calendar contains EMU EC confidence data, M3 money supply and ECB lending data. The latter will be interesting in light of ECB Praet’s warning. The annual growth of loans to non-financials started slowing in recent months. Risks to confidence data are on the downside of expectations while the bar for German inflation (0.6% M/M & 1.6% Y/Y) is probably too high. This suggests core bonds might thrive further on the eco numbers. We add though that both the Bund and the US Note future entered overbought conditions. An avalanche of Fed speakers are a wildcard for trading. Markets currently discount a 79% probability of a Fed rate cut by December.

The US 10-yr yield fell through the lower bound of the 2.5%-2.79% trading range, continuing the downward trend since the beginning of March. Next support levels are the 2.3% area (intermediate) and 2% zone (key). The German 10-yr fell to negative levels again, the first time since October 2016 and is on its way to revisit the all-time low (-0.2%).

Rates

US yield -1d2 2,20 -0,075 2,15 -0,0510 2,37 -0,0630 2,81 -0,06

DE yield -1d2 -0,60 -0,045 -0,45 -0,0710 -0,08 -0,0730 0,54 -0,04

German 10-yr yield returns to negative levels after growth slowdown fears

US 10-yr yield breaks the 2.5% support area with 2.30% serving as new support level

Af

Thursday, 28 March 2019

P. 3

EUR/USD: drifting lower in the 1.12/1.15 range. However, global

uncertainty on growth makes a real trend-move not evident.

EUR/GBP: sterling trading still paralysed as Brexit uncertainty is

mounting further.

Uncerainty on growth indecisive for EUR/USD?

Interest rate markets signalled ever growing market concerns on global growth yesterday. Both US and European yields nosedived. Early in the session, ECB’s Draghi confirmed the soft U-turn in policy at the March meeting but also indicated that the ECB is studying measures to mitigate the side-effects negative interest rates, if necessary. The euro temporarily regained a few ticks, but EUR/USD soon returned the mid 1.1250 area. For now, the relative valuation between the euro and the dollar is not the focus for trading as growth (& rate) expectations for both regions are being scaled back. EUR/USD closed at 1.1244 (from 1.1266). The loss in USD/JPY was modest given the decline in core yields and fragile risk sentiment. The pair finished at 110.51 (from 110.64).

This morning, Asian equity indices are mostly drifting lower, with Japan underperforming. Australia and India are outperforming. Yields of most developed markets remain under pressure as doubts on global growth persist. USD/JPY is drifting back south to the low 110 area. EUR/USD regained some ground (currently in the 1.1255 area).

US data (final US Q4 GDP, jobless claims and pending home sales) are probably of second tier importance today. In the EMU the confidence indicators from the EC and German (regional) CPI will be published. In the current context, growth-related indicators (including confidence) are probably more important for global markets/FX trading rather than inflation. That said, the consensus for the German HICP (0.6% M/M and 1.6% Y/Y) is quite high and an undershoot probably won’t pass unnoticed with potentially (temporary?) implications for the EUR/USD. At the same time, the growth story will remain the focus for global trading. EUR/USD is drifting further south in the 1.2/1.15 MT trading range. Euro sentiment is fragile, but US data are also turning mixed. For now, we maintain the view that there is no compelling reason for EUR/USD break below the 1.1187/1.12 support in a sustainable way even as we understand downside risks have increased. In this respect, we continue to monitor EUR/JPY which is nearing the key 123.40/80 support area.

Overnight, sterling reversed yesterday’s intraday gain against the euro as the UK parliament failed to agree on alternative options to solve the Brexit stalemate. The impasse persists. UK PM May still has the option to bring hear deal back to parliament but it is unsure (unlikely) she will get a majority. So for now, more erratic wait-and-see trading might be on the cards for the major sterling cross rates.

Currencies

R2 1,1815 -1dR1 1,1621EUR/USD 1,1244 -0,0022S1 1,1187S2 1,1119

R2 0,93067 -1dR1 0,91EUR/GBP 0,8526 -0,0006S1 0,8500S2 0,8314

Thursday, 28 March 2019

P. 4

Thursday, 28 March Consensus Previous US 13:30 GDP Annualized QoQ (4Q T) 2.3% 2.6% 13:30 Initial Jobless Claims 220k 221k 13:30 Continuing Claims 1778k 1750k 15:00 Pending Home Sales MoM/NSA YoY (Feb) -0.5%/-3.0% 4.6%/-3.2% 16:00 Kansas City Fed Manf. Activity (Mar) 0 1 EMU 10:00 M3 Money Supply YoY (Feb) 3.9% 3.8% 11:00 Economic Confidence (Mar) 105.9 106.1 11:00 Business Climate Indicator (Mar) 0.69 0.69 11:00 Industrial Confidence (Mar) -0.6 -0.4 11:00 Services Confidence (Mar) 12.0 12.1 11:00 Consumer Confidence (Mar F) -7.2 -7.2 Germany 28MAR CPI Baden Wuerttemberg MoM/YoY (Mar) --/-- 0.5%/1.7% 09:00 CPI Saxony MoM/YoY (Mar) --/-- 0.3%/1.4% 10:00 CPI Brandenburg MoM/YoY (Mar) --/-- 0.6%/1.6% 10:00 CPI Hesse MoM/YoY (Mar) --/-- 0.5%/1.1% 10:00 CPI Bavaria MoM/YoY (Mar) --/-- 0.5%/1.7% 10:30 CPI North Rhine Westphalia MoM/YoY (Mar) --/-- 0.5%/1.6% 14:00 CPI MoM MoM/YoY (Mar) 0.6%/1.5% 0.4%/1.5% 14:00 CPI EU Harmonized MoM/YoY (Mar P) 0.6%/1.6% 0.5%/1.7% Belgium CPI MoM/YoY (Mar) --/-- 0.32%/2.17% Spain 09:00 CPI EU Harmonised MoM/YoY (Mar P) 1.6%/1.5% 0.2%/1.1% Events 00:00 Fed’s George Speaks to Money Marketeers of New York (voter) 10:10 ECB's Guindos Speaks in Frankfurt 11:00 Italy to Sell Bonds 12:15 Fed's Quarles Speaks at ECB Conference in Frankfurt (voter) 13:00 Dutch Central Bank Governor Klaas Knot Speaks in Amsterdam 13:40 Banque de France Governor Villeroy de Galhau Speaks in Paris 14:30 Fed's Clarida Speaks at Bank of France Conference in Paris (vice chair) 15:00 Fed's Bowman Discusses Agriculture and Community Banking (voter) 16:30 Fed’s Bostic Discusses Income Mobility and Equality (non-voter) 18:00 US to Sell USD32 Bln 7-Year Notes 18:15 Fed's Williams Visits Puerto Rico (voter) 22:20 Fed's Bullard Discusses Outlook US Economy and Monetary Policy at Madison, Wisconsin (voter)

Calendar

Thursday, 28 March 2019

P. 5

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 2,37 -0,06 US 2,20 -0,07 DOW 25625,59 -32,14DE -0,08 -0,07 DE -0,60 -0,04 NASDAQ 7643,377 -48,14BE 0,40 -0,06 BE -0,51 -0,04 NIKKEI 21033,76 -344,97UK 1,01 0,01 UK 0,67 0,01 DAX 11419,04 -0,44

JP -0,10 -0,03 JP -0,18 -0,01 DJ euro-50 3322,04 2,51

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0,16 2,22 1,00 Eonia -0,3700 -0,00205y -0,01 2,20 1,07 Euribor-1 -0,3680 0,0000 Libor-1 2,4955 0,000010y 0,44 2,34 1,21 Euribor-3 -0,3090 0,0000 Libor-3 2,5974 0,0000

Euribor-6 -0,2270 0,0010 Libor-6 2,6821 0,0000

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

EUR/USD 1,1244 -0,0022 EUR/JPY 124,26 -0,38 CRB 183,94 -1,28USD/JPY 110,51 -0,13 EUR/GBP 0,8526 -0,0006 Gold 1316,90 -4,50GBP/USD 1,3189 -0,0023 EUR/CHF 1,1186 -0,0018 Brent 67,83 -0,14AUD/USD 0,7084 -0,0051 EUR/SEK 10,4329 0,0185USD/CAD 1,3409 0,0028 EUR/NOK 9,7013 0,0755

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