Monday, 28 November 2016

P. 1

Rates: Consolidation ahead of key eco releases?

Today’s eco calendar is uneventful apart from central bank speakers. We expect some short term consolidation ahead of key eco releases later this week (US/EMU inflation, ADP, payrolls, ISM). This week, the Bund could outperform the US Note future on the back of some safe haven flows ahead of the Austrian presidential election and the Italian referendum.

Currencies: Dollar rally finally falling prey to profit taking

On Friday, the USD rally gradually slowed. This morning, the US currency even fell prey to profit taking as the post-Trump rally shifts into lower gear. If global risk sentiment turns less buoyant, USD/JPY looks most vulnerable to profit taking. Uncertainty on Italy might hamper a sustained EUR/USD rebound.

Calendar

• US equities once again closed at record highs in a thinly, half session trading.

Asian stocks are mixed overnight.

• After market closure on Friday, Chinese regulators announced a trading link between Hong Kong and China’s tech-focused Shenzhen Composite would go l ive on December 5.

• Asian currencies strengthened this morning with the yen outperforming, followed by South Korea’s won, as policymakers said they would take steps to stabilise markets, and the Kiwi dollar. Emerging markets currencies l ike Malaysia’s ringgit, the Phil ippine peso and Indonesian rupiah enjoyed some reprieve after hitting multi-year lows last week

• François Fillon won the French centre-right presidential nomination on Sunday, in a landslide vote that brings him closer to the presidency in 2017. It suggests a clear shit to the right of the Republican party sympathisers.

• OPEC is embarking on a last-ditch diplomatic push to reach a production cut, as Saudi Arabia for the first time suggested the oil-club doesn’t necessarily need to curb output. Brent trades around $47.20/barrel, l ittle changed from Friday.

• The PBoC has cut back on 7-day open-market operations and is injecting more funds through 14-day and 28-day contracts. That raised ST borrowing costs and pressed up bond yields. It’s another sign of selective tightening that’s reinforced the views of many China has turned the corner away from stimulus

• Today, the EMU M3 and the Dallas Fed manufacturing survey are the sole reports to be published. OECD releases its economic outlook and, more importantly, ECB Draghi and Coeuré speak

Headlines

S&P Eurostoxx50

Nikkei Oil

CRB Gold

2 yr US 10 yr US

2 yr EMU 10 yr EMU

EUR/USD USD/JPY

EUR/GBP

Monday, 28 November 2016

P. 2

Consolidation on Black Friday

Friday’s German bond trading session mirrored Thursday’s: listless, low-volume action. The US “black Friday” hype and an empty eco calendar side-lined most investors ahead of this week’s key eco releases (ISM, ADP, PCE inflation, payrolls). German bonds consolidated into the weekend. The German 2-yr yield reached a new intra-day low around -0.76%, but that was probably still related to the shortage issue. US Treasuries managed to largely erase the losses inflicted during the Asian session. The Note future nevertheless registered another new intraday (124-25+) and closing low (125-06+) (12th in 14 sessions).

In a daily perspective, the German yield curve shifted slightly lower with yields down between 1.9 bps (10-yr) and 0.6 bps (5-yr). Changes on the US yield curve were minimal and ranged between -1.5 bps (30-yr) and +0.7 bps (10-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany widened 2/3 bps for the semi-core and non-German core bonds, while narrowing 3 bps for Italy/Ireland and 5 bps for Portugal.

ECB speakers main driver?

The eco calendar is uneventful. The Nov. US Dallas manufacturing survey is no market mover. An improvement versus October is expected on the basis of an improvement in a number of other regional surveys. In the euro area, Oct. M3 money supply is expected to have stabilized at 5% Y/Y. The credit pulse weakened in September, especially due to weaker consumer credit. Mortgage and corporate lending held up better. A further weakening would raise concerns at the ECB and might influence the policy debate during the Dec. ECB meeting. In this respect, we closely l isten to the comments of ECB chairman Draghi and Coeuré. There is sti ll a lot of uncertainty on the outcome of the so-called important Dec. meeting. Most ECB comments point in the direction of continuing the purchase programme at the current pace, but we’ve heard some dissonant voices. Will the ECB announce for how long it extends the APP? What technical modifications will be implemented? Will the ECB take measures to address the scarcity of AAA (German) collateral by unifying the rules on CB bond lending? Will its cost be lowered? Are the technical issues of the APP important enough to influence the continuation of the programme itself? Is tapering urgently needed or could it be extended longer in time? We suspect that the ECB’s policy will gradually take shape and Draghi may find it opportune to start managing market expectations.

Rates

US yield -1d2 1,1109 -0,03575 1,7959 -0,069210 2,3196 -0,057530 2,9795 -0,0574

DE yield -1d2 -0,7460 -0,01005 -0,4530 -0,026010 0,2270 -0,031030 0,8953 -0,0092

T-Note future (black) and S&P future (orange) (intraday): Uneventful shortened session ends with equities closing higher (records), while

Treasuries start on a strong footing overnight.

2-yr yields Germany (blazck), Netherlands (orange) and Belgium (yellow): Scarcity problem is not exclusively a German problem. Good

collateral becomes scarce.

German yields slightly lower, while US ones were narrowly mixed

Uneventful trading in intra-EMU market

Monday, 28 November 2016

P. 3

Relatively small auctions as we approach year-end

This week’s scheduled EMU bond supply comes from Italy, Germany, Spain and France. Tomorrow, the Italian debt agency kicks off with tapping the on the run 5-yr BTP (€1.25-1.75B 0.35% Nov2021) and 10-yr BTP (€1-1.5B 1.25% Dec2026). Additionally, they’l l tap two floating rate CCTeu’s for a combined €1.75-3B. On Wednesday, the German Finanzagentur holds its final 5-yr Bobl auction of the year (€3B 0% Oct2021). On Thursday, the French treasury holds a small OAT auction by selling the on the run 15-yr OAT (1.5% May2031) and off the run 30-yr OAT (4.5% Apr2041) for a total amount of €2-3B. The Spanish debt agency auctions the on the run 5-yr Bono (0.75% Jul2021), 10-yr Obligacion (1.3% Oct2026) and off the run 30-yr Obligacion (4.7% Jul2041). The amount on offer sti l l needs to be determined. This week’s supply won’t be supported by redemptions.

Consolidation ahead of key eco releases

Overnight, nearly all Asian stock markets record small to modest gains. The dollar and US interest rates correct lower. Brent crude stabilizes around Friday’s lows after the Saudi energy minister suggested for the first time that a production cut deal isn’t necessary. We expect the Bund to open somewhat stronger this morning.

Today’s eco calendar is uneventful apart from central bank speakers (ECB Draghi & Coeuré). We expect some short term consolidation ahead of key eco releases later this week (US/EMU inflation, ADP, payrolls, ISM). The US 5-yr tested key resistance (1.8-1.85%) last week, but a break didn’t occur. Overall, we remain cautious and keep a negative bias (sell-on-upticks) for the US Note future. A new sell ing wave could be triggered later this week by the eco data. We target 2.5% for the US 10-yr yield.

The ECB calmed fears by strongly suggesting that they won’t taper in March. The space for a correction lower in yields will nevertheless be small and temporary. EMU growth is accelerating and at least headline inflation will climb steeply in the next months. Tapering fears won’t disappear though, as negative side-effects become more visible (eg Schatz scarcity). Therefore, we also keep a MT negative bias for the German bonds. This week, the Bund could outperform the US Note future on the back of some safe haven flows ahead of the Austrian presidential election and the Italian referendum. Those events could keep peripheral bond markets under pressure.

R2 163 -1dR1 161,9BUND 161,7 0,5700S1 159,14S2 158,67

German Bund: tries to improve technical picture, but work still has to be done

US Note future: sell-on-upticks

Monday, 28 November 2016

P. 4

Dollar finally falling prey to profit taking

On Friday, there were no eco data with market moving potential. The dollar still traded strong in Asia, but gradually lost some ground, without a clear driver. Some modest end-of-week profit taking after a strong rally of late was probably the most likely reason. EUR/USD finished the session at 1.0589 (from 1.0554 on Thursday) USD/JPY declined off the correction top set early in Asia (113.90) and closed the day at 133.22.

Overnight, Asian equities are trading positively, but the overall picture is bit different compared to last week. Investors are taking profit on the dollar rally. This USD decline supports EM currencies and equity markets and most commodities. Oil is an exception to the rule as uncertainty on an OPEC deal weighs. Japanese equities underperform, due to yen strength. USD/JPY dropped temporary below the 112 barrier and trades currently in the 112.10 area. The dollar lost also ground against the euro. EUR/USD spiked to the 1.0685 area this morning and trades currently in the 1.0650 area.

Today, the eco calendar is uneventful. The Nov. US Dallas manufacturing survey is no market mover. In the euro area, Oct. M3 money supply is expected to have stabilized at 5% Y/Y. The credit pulse weakened in September, especially due to weaker consumer credit. A further weakening would raise concerns at the ECB and might influence the policy debate during the Dec. ECB meeting. In this respect, we closely l isten to the comments of ECB chairman Draghi and Coeuré. There is still a lot of uncertainty on the outcome of the December meeting. Most ECB comments indicate a continuation of the APP at the current pace, but some dissonant voices have been heard. We suspect that gradually the ECB policy will get shape and thus Draghi may find it opportune to start managing market expectations.

Over the previous two weeks, the post-Trump reflation trade was the main driver for the USD rally. This factor probably isn’t completely worked out, but its impact might gradually decrease and other factors might come to the forefront. Friday’s and overnight’s price action suggest that the USD rally lose momentum. This is maybe also be the case for the equity rally. Amongst others, markets might look forward to the Italian referendum next weekend. This is a source of

Currencies

R2 1,1145 -1dR1 1,0851EUR/USD 1,06465 0,0067S1 1,0518S2 1,0458

Dollar rally ran into resistance on Friday

Dollar falling prey to more profit taking in Asia.

EUR/USD: rebounds after post-Trump rally

USD/JPY: finally, some profit taking

Unimportant eco data

Rising uncertainty could be a mixed signal for the dollar

Monday, 28 November 2016

P. 5

European and global uncertainty and thus slow the rise of core bond yields and of the dollar. USD/JPY looks vulnerable to further profit taking. Given the potential negative consequences for Europe, the upside potential of EUR/USD looks much more limited. So, we turn more neural on the dollar short-term.

The US election outcome propelled the dollar via a sharp rise in US yields. Interest rate differentials against the euro (and the yen) widened sharply. At the same time, the ECB indicated that it won’t start tapering. Political event risk is also a negative for the euro. The trade-weighted dollar broke beyond the 100.50 top of a 2-yr consolidation pattern. Underlying sentiment remains USD constructive, but consolidation on the recent rally looks likely.

From a technical point of view, EUR/USD cleared intermediate support at 1.0851 and 1.0711 (2016 low) improving the picture of the dollar. The pair also tested the 1.0524 Dec 2015 low, but a break didn’t occur. So, the cycle low at 1.0458 is left intact for now. We maintain a sell-on-upticks bias for EUR/USD. 38% retracement from the Trump decline comes in at 1.0817. It’s not evident for EUR/USD to regain that level. The technical picture for USD/JPY improved too. The pair took out the key resistance at 111.45/91, further improving the picture. Next key resistance is now near 114.50/115. The uptrend remains in place, but on Friday, a doji-like signal suggested that correction might be in store short-term.

EUR/GBP shows tentative signs of bottoming out, but …

On Friday, the UK data were again strong. The UK Q3 GDP was confirmed at 0.5% Q/Q and 2.3% Y/Y. the CBI retail ing/distribution sales were even much stronger than expected. Sterling enjoyed a strong momentum of late, but this time the UK currency didn’t react to the eco data. In technical, order-driven trade, the UK currency even fell prey to some modest profit taking. EUR/GBP rebounded temporary to the 0.8545 area, but closed the session at 0.8496 (from 0.8477). Cable didn’t go anywhere as the sterling correction and the modest intraday decline of the dollar keep each other in balance.

Today, sterling trading will be driven by global factors, as the calendar is empty. Cable might profit from a dollar correction. A rebound of EUR/USD is often also supportive for EUR/GBP and to some extent this might also now be the case. However, given political uncertainty in Europe (Italy), the topside potential of euro is modest. So, EUR/GBP shows some tentative signs of bottoming out, but for now, there is no a big case for a protracted rebound yet, unless there would high profile negative news from the UK . We turn neutral on EUR/GBP.

R2 0,8828 -1dR1 0,8689EUR/GBP 0,8514 0,0025S1 0,846S2 0,8333

EUR/GBP: decline slows, Some consolidation ahead?

GBP/USD: sterling drifting higher as USD rally is running into resistance

Monday, 28 November 2016

P. 6

Monday, 28 Nov Consensus Previous US 16:30 Dallas Fed Manf. Activity (Nov) 1.5 -1.5 UK 28NOV-03DEC Nationwide House PX MoM / NSA YoY (Nov) 0.2%/4.8% 0.0%/4.6% EMU 10:00 M3 Money Supply YoY (Oct) 5% 5.0% Italy 10: 00 Manufacturing confidence 103 103 10:00 Consumer Confidence Index (Nov) 107.6 108.0 Norway 08:00 Retail Sales W/Auto Fuel MoM (Oct) 0.4% -0.3% Sweden 09:30 Retail Sales MoM / NSA YoY (Oct) 0.8%/2% -0.6%/0.6% Events 11:00 OECD Economic Outlook 14:10 ECB's Coeure speaks in Athens 15:00/17:00 ECB's Draghi Speaks at European Parliament in Brussels and in Brussels

10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 2,32 -0,06 US 1,11 -0,04 DOW 19152 19152,14DE 0,23 -0,03 DE -0,75 -0,01 NASDAQ for Exch - NQI #VALUE!BE 0,64 -0,04 BE -0,66 -0,01 NIKKEI 18357 18356,89UK 1,41 -0,03 UK 0,08 -0,04 DAX 10699,27 10699,27JP 0,02 -0,02 JP -0,14 -0,01 DJ euro-50 3048 3048,38

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,35 0,0023y -0,092 1,485 0,761 Euribor-1 -0,37 0,00 Libor-1 USD 0,26 0,265y 0,090 1,764 0,967 Euribor-3 -0,31 0,00 Libor-3 USD 0,39 0,3910y 0,650 2,134 1,368 Euribor-6 -0,22 0,00 Libor-6 USD 0,56 0,56

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,06465 0,0067 EUR/JPY 119,18 -0,75 185,7263 1190,8 47,18USD/JPY 111,97 -1,40 EUR/GBP 0,8514 0,0025 - 1d -1,96 8,24 -1,16GBP/USD 1,2498 0,0040 EUR/CHF 1,0753 0,0011AUD/USD 0,7479 0,0034 EUR/SEK 9,7972 0,02USD/CAD 1,3466 -0,0007 EUR/NOK 9,0770 0,00

Calendar

Monday, 28 November 2016

P. 7

Brussels Research (KBC) Global Sales Force Piet Lammens +32 2 417 59 41 Brussels Peter Wuyts +32 2 417 32 35 Corporate Desk +32 2 417 45 82 Mathias van der Jeugt +32 2 417 51 94 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 ON WWW.KBCCORPORATES.COM/RESEARCH 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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