Monday, 21 November 2016

P. 1

Rates: Will US Thanksgiving week bring some calm?

Equities start the week in Asia with a risk-on mood, helped by a stabilizing dollar and signs of some improvement in the bond market. Will it stay that way or will the dollar’s rise and selling of US Treasuries resume? At least an empty eco calendar, few key events and the prospect of a long week-end may give traders the opportunity to take a breather.

Currencies: Dollar holding near the recent top. Rally to slow?

On Friday, the dollar rally showed remarkable resilience as an early correction was easily reversed in US dealings. Today, US trading will again be driven by global factors as there are few eco data on the agenda. Will the USD rally finally take a breather?

Calendar

• US equities closed with modest losses in a largely sideways trading session, as

the Trump trade loses momentum. The NASDAQ set a new intra-day high. Asian equities trade strongly with the noticeable exception of India (see lower)

• India is taking a hard-line stance over renewing a trade deal with the Netherlands. It also announced that it would also unilaterally cancel 57 bilateral treaties. It wants renegotiations of the treaties to get better deals.

• S&P confirmed the Netherlands AAA, outlook stable. It said the country benefits from a solid recovery, continued high external surpluses and improvement in public finances. The debt ratio will drop below 60% this year.

• Mr. Trump met Mitt Romney, who should now be on the short list to become secretary of state. Mnuchin, may become US Treasury secretary. In Germany, chancellor Merkel announced she seeks re-election for a 4th term next year.

• Brent crude opened well in Asia up $0.65/barrel to $47.81/barrel, as Iran and Iraq signalled optimism OPEC will agree a supply-cut when it meets next week.

• The French presidential primary (first round) at the centre-right Republican party gave an outsider, former PM Fillion, the victory with a strong 44% of the votes. He will meet former PM Juppé (28%) in the second round next Sunday.

• NY Fed Dudley said inflation expectations “certainly seem to be” well anchored. That combined with above trend growth and respectable payroll gains is consistent with optimism that we will reach our inflation objectives.

• Today, the eco calendar is uninteresting. Fed Fischer, ECB Draghi and some other EMU national governors speak, but we expect no new information. Belgium, Slovakia and the US tap the bond markets

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, 21 November 2016

P. 2

German and US bonds increasingly part ways

On Friday, global core bonds regained some ground during the European and early US session, after a poor start. It looked like a traditional profit-taking move going into the weekend and after an awful week would take place. Dovish comments by ECB governor Draghi (see Sunset of Friday) were marginally supportive, but the outperformance of the shorter end of the German curve occurred nevertheless only by the end of the session, when longer-dated German issues were dragged a bit lower by the US Treasury sell-off that gathered pace towards the end of the session. The US Treasury sell-off was driven by sentiment (as eco data nor Fed speeches offered guidance). Some pointed to ongoing dollar strength to explain the sell-off, but it isn’t always obvious what asset price drives the other. Upcoming US supply may have played some role. In a daily perspective, the belly of the US yield curve was hit the hardest with 5- and 10-yr yields up 6.1 and 5.2bps, while the 2- and 30-yr were up a moderate 2.2 and 1.8 bps. The 2-year yield approaches now the 1.10% (Dec 2015 highs) and the 5-yr yield the 1.80/85% yield resistance (upper boundary 2013-2015 range). The 10-yr yield is at its sell-off high (2.35%) with next resistance at 2.5%, while the 30-yr yield tries to stay above 3%. German bonds outperformed, even when the earlier closure is taken into account. The curve bull steepened with yields up to 3.1 bps (2-yr) lower, the 10-yr yield was down 0.7 bp and the 30-yr was up 0.3 bp. The US-German 10-yr yield spread reached a new high (since 1990) at 208 bps. All in all, German bonds have until now well resisted the post-Trump sell-off, helped by dovish ECB comments.

Thanksgiving and black Friday main events

The US trading week will be shortened by the above mentioned events, which might impact other markets too. Today, the eco calendar is devoid of interesting releases. ECB Draghi speaks, but he was Friday already super dovish and buried all chances on a policy change in December. Like-wise, Fed Fischer comments won’t contain much new info. A FOMC December rate increase is baked in the cake and it makes no sense for the Fed to front-run in its comments on the future administration‘s policies and their impact on monetary policy.

Later this week, EMU eco releases contain the consumer confidence (Tuesday), the PMI’s (Wednesday) and the German IFO (Thursday). Surely interesting to gauge the strength of the EMU recovery, but giving Draghi’s views that policy will stay ultra-soft, the market impact of eventual surprises will be modest.

Rates

US yield -1d2 1,0683 0,01285 1,7826 0,010410 2,3352 0,000130 3,0174 -0,0203

DE yield -1d2 -0,6760 -0,03905 -0,3580 -0,023010 0,2780 -0,014030 0,9031 -0,0448

T-Note future (black) EUR/USD (orange) (intraday): Sell-off Treasuries and dollar strength well correlated, but what direction goes the

causality? From dollar to US Treasuries?

US-German 10-yr yield spread widens sharply to 208 bps, a multi-decade high. German bonds look rather well shielded from hammered

US Treasuries, helped by ECB policy and comments

US curve again higher with belly hit the most

German bonds hold on well driving US-German yield spread to 208 bps high

Peripheral spreads little changed with exception Portugal & Greece

Eco calendar is empty

ECB & Fed speakers unlikely to bring new info.

US shortened trading week

Monday, 21 November 2016

P. 3

Belgium concludes 2016 funding plan

The Belgian debt agency kicks off this week’s scheduled EMU bond supply by tapping three on the run OLO’s: OLO 77 (1% Jun2026), OLO 75 (1% Jun2031) and OLO 78 (1.6% Jun2047). It’s the final Belgian auction of the year. The Kingdom already raised €34.69B of this year’s OLO funding need (€36.5B), explaining the relatively low amount on offer (€2.3B). The bonds cheapened in ASW spread terms in the run-up to the auction, especially at the very long end of the curve. We expect the auction to go smoothly. Slovakia will sell today a new May 22 2026 bond for an amount of €1.5B. The US Treasury starts its end-of-month refinancing operation exceptionally on Monday, because of Thursday’s Thanksgiving Holiday. The Treasury sells $26B 2-yr Notes. Currently, the WI trades around 1.08%.

Some calm to return to US Treasury markets?

Overnight, Asian stocks trade positively, despite mixed Japanese data. Oil is a bit higher (see headlines) and US Treasuries climb cautiously. The trade weighted dollar is a tad lower after 10 consecutive daily gains.

Today’s eco calendar is empty apart from central bank speeches, which likely won’t affect bond markets (see higher). The sell-off in US Treasuries has been fast and ruthless (50 bps 10-yr in 8 days), but losses of German bonds have been modest, even as also the shorter end of the German curve was hit as rate hike expectations were brought forward. Given the extent of the US Treasury losses, we would expect a pause or correction to be close, even as markets have still priced in too few rate hikes for 2017/18. The Thanksgiving shortened week might be a good opportunity for profit taking on shorts. However, we remain cautious and keep a negative bias as the excessive long duration of the market may still command repositioning, while also the upcoming auctions may be a hurdle. In this respect we still prefer a sell-on-upticks for US Treasuries. Regarding German bonds, the ECB has calmed fears by strongly suggesting that they won’t taper in March. However, we think that the space for a correction lower in yields will be small and temporary. EMU growth is accelerating and at least headline inflation will climb steeply in the next months. Tapering fears won’t stay away for long. Therefore, we also keep a MT negative bias for the German bonds. Semi-core bonds may re-narrow, but for the peripherals, investors may be more cautious (Italian referendum). The French presidential primary with Fillon coming out first and Szarkozy heavily beaten may be positive for OAT’s, as it shows that left voters already prepare to prevent extreme right Marine Le Pen from the presidency in April/May 2017.

R2 161,9 -1dR1 161,11BUND 160,8 0,2800S1 159,14S2 158,67

German Bund: deteriorating technical picture, but signs of bottoming out multiply.

US Note future: No sign sell-off has finished, but some profit taking during Thanksgiving week is likely.

Monday, 21 November 2016

P. 4

USD holding near recent top. Rally to slow?

On Friday, there was little hard news to guide USD trading. The dollar copied the intraday pattern from the previous sessions. The rise in core/US bond yields slowed in European trading. The dollar fell prey to modest intraday profit taking. However, USD bond yields resumed their uptrend in US dealings and the US/German spread widened further. This reversed intraday fortunes of the dollar. The dollar set new post-Trump highs. EUR/USD finished the week at 1.0588 (1.0626 on Thursday). USD/JPY close the session at 110.91 (from 110.12). The trade-weighted dollar (DXY) recorded a multi-year top well north of 101.

Overnight, most Asian equities still trade moderately higher. Japanese equities continue to outperform. Japan October foreign trade data disappointed with imports (-16.5% Y/Y) and exports (-10.3% Y/Y) both declining more than expected. However, Japanese equity investors are in the first place inspired by the decline of the yen. USD/JPY regained another big figure this morning and is trading north of 111. The rebound of oil might also be a moderately positive for global equity sentiment. The trade-weighted USD stabilizes in the101.25 area. The dollar is also holding within reach of the recent highs against the euro. EUR/USD is changing hands in the 1.06 area.

Later today, the eco calendar is devoid of interesting releases. ECB Draghi speaks, but he was already super dovish on Friday and buried all chances on a policy change in December. Like-wise, Fed Fischer comments won’t contain much new info. A FOMC December meeting is baked in the cake and it makes little sense for the Fed to front-run in its comments on the future administration‘s policies and their impact on monetary policy. So, trading will again be sentiment driven. Will the post-Trump reflation trade continue or is it time for markets to take a breather after recent repositioning? Trading in Asia this morning doesn’t give a clear signal, but there are tentative signs that the dollar rally might gradually shift into a lower gear.

Since the US election, the dollar trended decisively higher propelled by an unabated rise in US bond yields as the Trump-driven reflation trade unfolded. Interest rate differentials with the euro (and the yen) widened sharply. The USD ascent/decline of EUR/USD was in the first place driven by the US reflation story.

Currencies

R2 1,13 -1dR1 1,1145EUR/USD 1,0605 0,0007S1 1,0524S2 1,0458

USD rally continues

USD/JPY sets another post-Trump top

EUR/USD stabilizes near 1.06

Oil rebounds

No important eco data

Central bankers probably won’t bring ‘new news’

USD(trade-weighted) breaks out of LT consolidation pattern

EUR/USD nearing the LT range bottom

Monday, 21 November 2016

P. 5

At the same time, the ECB indicates that it won’t announce any form of tapering soon. Political event risk is maybe also an underlying negative for the euro. The trade-weighted dollar broke beyond the 100.50 top of a 2-year consolidation pattern. A sustained break beyond this area would be a significant from a technical point of view. So, underlying sentiment remains USD constructive. In case of a consolidation in core bond yields, the dollar rally may also temporary slow, but for now there is no signal of a correction.

From a technical point of view, EUR/USD easily cleared intermediate resistance at 1.0851 and 1.0711 (2016 low) improving the picture of the dollar. The break below 1.0710 brings the December 1.0524 low and the cycle low of 1.0458 on the radar. We maintain a sell-on-upticks bias for EUR/USD. The picture for USD/JPY also improved. Interest rate differentials rather than the risk-on/risk-off paradigm are currently the main driver for USD/JPY. The trend looks well supported as long as the dollar receives interest rate support. However, what will be the reaction of USD/JPY if equity sentiment turns less positive? We don’t jump on the USD/JPY rally at current levels.

EUR/GBP set new ST low. Decline to slow?

On Friday, sterling showed some aggressive swings even in the absence of eco data.. Early in the session, EUR/GBP touched a new correction low in the 0.8527 area. Later, EUR/GBP rebounded. BoE’s Broadbent indicated that the Bank could tolerate higher inflation from the GBP drop. So, the BoE’s priority remains with growth: a sterling negative. Sterling fell gradually prey to profit taking. EUR/GBP returned temporary north of 0.8600 and Cable dropped to the 1.2311 area. In the afternoon, the sterling correction eased on some soft Brexit comments of PM May. EUR/GBP finished at 8578 (from 8557). Cable at 1.2342.

Today, global factors will continue to drive GBP trading as the calendar is empty. Sterling held very strong in the post-Trump USD rally. The loss of sterling against the dollar was much more limited than for most other major currencies, in particular the euro. The decline of EUR/USD weighed on EUR/GBP. EUR/GBP dropped below the 0.8725 previous top and set a new correction low at 0.8527 on Friday. This made the short-term picture sterling friendly. The rise of sterling/decline of EUR/GBP slowed toward the end of last week, but the jury is still out whether 0.8527 will mark a correction bottom. We are not convinced on the sustainability of the GBP rebound. We wait for a clearer sign that EUR/GBP is bottoming out. In this respect, underlying euro weakness currently also weighs on the EUR/GBP cross rate

R2 0,905 -1dR1 0,8708EUR/GBP 0,8594 0,0046S1 0,8527S2 0,8333

EUR/GBP declines slows, but no clear sign of a trend reversal. EUR/USD decline continues to weigh

GBP/USD: sterling losses stay limited as dollar rallies across the board

Monday, 21 November 2016

P. 6

Monday, 21 Nov Consensus Previous US 14:30 Chicago Fed Nat Activity Index (Oct) 0.0 -0.14 Japan 00:50 Trade Balance Adjusted (Oct) A ¥474.3b R ¥358.5b 00:50 Exports YoY (Oct) A -10.3% -6.9% 00:50 Imports YoY (Oct) A -16.5% -16.3% 05:30 All Industry Activity Index MoM (Sep) A 0.2% 0.2% 06:00 Supermarket Sales YoY (Oct) A 0.6% -3.2% 08:00 Convenience Store Sales YoY (Oct) -- -0.0% Belgium 15:00 Consumer Confidence Index (Nov) -- -13 Events 10:30 Bank of Portugal's Costa Speaks at Conference on Economy 11:30 Belgium to sell 1% 2026, 1%2031 & 1.6% 2047 OLO’s 13:30 Bank of Spain, Bank of France Governors Speak in Madrid 14:00 Fed’s Fischer Speaks in New York 17:00 ECB’s Draghi Speaks at European Parliament in Strasbourg 19:00 US to sell 2-yr Notes

10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 2,34 0,00 US 1,07 0,01 DOW 18868 18867,93DE 0,28 -0,01 DE -0,68 -0,04BE 0,67 -0,03 BE -0,63 -0,05 NIKKEI 18106 18106,02UK 1,47 0,05 UK 0,20 -0,03 DAX 10664,56 10664,56JP 0,03 -0,01 JP -0,14 -0,01 DJ euro-50 3021 3020,83

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,35 -0,0013y -0,065 1,473 0,790 Euribor-1 -0,37 0,00 Libor-1 USD 0,26 0,265y 0,115 1,779 1,005 Euribor-3 -0,31 0,00 Libor-3 USD 0,40 0,4010y 0,670 2,164 1,405 Euribor-6 -0,22 0,00 Libor-6 USD 0,57 0,57

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,0605 0,0007 EUR/JPY 117,84 0,61 183,1352 1213,06 47,49USD/JPY 111,14 0,49 EUR/GBP 0,8594 0,0046 - 1d 0,80 4,30 1,27GBP/USD 1,2334 -0,0055 EUR/CHF 1,0707 0,0021AUD/USD 0,7332 -0,0056 EUR/SEK 9,8034 -0,02USD/CAD 1,3467 -0,0076 EUR/NOK 9,0890 0,00

Calendar

Monday, 21 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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