Thursday, 03 November 2016

P. 1

Rates: Fed flags December rate hike, but market focusses on US presidential election

The Fed kept its policy unchanged yesterday, but flagged its intention to tighten policy with a 25 bps rate hike in December. The market implied probability of that happening increased from 68% to 78%, but it didn’t impact the US Treasury market which is currently under the spell of the tighter than expected US presidential election race.

Currencies: Dollar extends decline despite Fed raising the odds of a rate hike

Yesterday, the Fed kept the door wide open for a December rate hike, but it didn’t help the dollar. Political uncertainty dominates USD trading. Today, the data might be USD supportive, but a USD rebound is unlikely as long as the presidential election isn’t out of the way. Sterling traders will keep a close eye on the BoE inflation report.

Calendar

• US equities lost 0.65% due to the risk off sentiment, generated by the changing

fortunes of the candidates in the US presidential election. Asian equities do well overnight, helped by better Chinese data

• The Chinese Caxin-Markit services PMI came in at 52.4 in October, up from 52 in September. Similarly the composite PMI improved to 52.9 from 51.4, as an earlier released manufacturing survey improved substantially.

• The FOMC meeting ended with a little changed, dull, statement. However, the change of a few words suggested that the FOMC will increase rates at its December meeting. This was largely discounted and reactions were accordingly

• Portugal will have amassed enough cash by the year-end to cover half its 2017 financing needs, the FM said yesterday, allaying concerns that it would discard the strategy adopted by the previous government after the 2011 debt crisis.

• The PBOC has allowed a steady increase in money market rates in recent weeks to squeeze leverage in the murky shadow banking realm

• British PM May will learn today whether she must seek parliamentary approval before triggering the formal process of leaving the EU, a step some investors hope will lessen the chances of an economically disruptive "hard Brexit".

• BoE Governor Carney settled questions about his future this week but faces a new challenge today, when he is due to present the central bank's latest attempt to estimate the hit to Britain's economy from June's Brexit vote.

• Today, the eco calendar is well packed, especially in the US with the Nonmanufacturing ISM, the initial claims and the factory orders. The BoE meets and the UK services PMI will be released.

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

Thursday, 03 November 2016

P. 2

FOMC meeting passes by almost unnoticed

Yesterday, European investors initially panicked as an ABC poll put Trump just ahead of Clinton. The heightened risk aversion favored Bunds. Brent crude reached the lowest level since end September around $46.50/barrel on higher US crude inventories. During US dealings, bonds gains evaporated after a decent US ADP employment report. However, US Treasuries returned higher in the run up to the FOMC statement. The statement was near expectations and caused some volatility, but US Treasuries ended with modest daily gains. In a daily perspective, the German yield curve bull flattened with yields 1.3 bps (2-yr) to 4.9 bps (30-yr) lower. US yields dropped 1.4 bps (2-yr) to 3.1 bps (5-yr). Changes on the intra-EMU bonds varied between -4 bps (Spain/Italy) and +2 bps (Ireland), with Portugal and Greece (-7/-16 bps) outliers.

The FOMC left its policy unchanged and this time there were only two instead of three governors who dissented in favour of an immediate rate hike. They may get one in December. The statement suggests that the Fed waits for some further evidence of continued progress towards its objectives before increasing rates. So, unless some calamity occurs, the Fed will raise rates in December. The reaction was modest across markets because expectations are that after the December rate increase, it will again take a lot of time before another rate hike will be forthcoming. (see our flash for a full review).

Juicy calendar, but US payrolls will overshadow them

In EMU, the employment rate is expected to have fallen to 10% in September from 10.1% previously. Given the reasonable growth figures, a gradual decline in unemployment is likely. In the US. Q3 productivity and labour costs are interesting but no market mover. Given strong GDP, productivity should have risen 2.1% following a 0.6%% decline in Q2, while Q3 labour costs will have slowed to 1.2% from 4.3%. We don’t forecast these series, but the direction looks correct. Initial claims are expected little changed at 256K. Factory orders won’t affect market much, as the durable orders which comprise more than 50% of the factory orders, have already been released. The October non-manufacturing ISM on the contrary is a timely key series about activity in the important services sector. Markets expect a decline to 56 from 57.1 in September. The modest decline should be put against the 5.7 point increase in September which followed a surprising 4 point decrease in August. So, the consensus estimate for October (56), if confirmed, should be considered as a strong figure showing robust growth in the sector.

Rates

US yield -1d2 0,8016 -0,03165 1,2435 -0,042210 1,7884 -0,026630 2,557 -0,0079

DE yield -1d2 -0,6360 -0,01105 -0,4340 -0,029010 0,1260 -0,053030 0,7440 -0,0562

T-Note future (black) and S&P future (orange) (intraday): Bonds move up, down and up. Impact FOMC modest and temporary. Risk

off positive impact.

Probabilities for Dec. meeting: Green line shows a 80% chance for a 25 bps hike

Core bonds profit moderately from risk-off sentiment

FOMC statement dull, but pointing to December rate increase

Strong performance peripheral bond markets

New drop EMU unemployment rate

US Nonmanufacturing ISM still strong like initial claims, while factory orders should be weak

Thursday, 03 November 2016

P. 3

Heavy EMU bond supply

Today’s EMU bond supply is heavy with Spain, France and Ireland tapping the markets. The French debt agency taps the on the run 10-yr OAT (0.25% Nov2026) and 20-yr OAT (1.25% May2036) for a combined €7-8B. Both bonds trade normal on the curve and we expect the French tap to pass without difficulties, as usual. The Spanish treasury taps the on the run 5-yr Bono (0.75% Jul2021), on the run 10-yr Obligacion (1.3% Oct2026) and on the run 15-yr Obligacion (1.95% Jul2030) for a total amount of €2.5-3.5B. The 10- and 15-yr bonds cheapened in ASW spread terms ahead of this tap, but are expensive on the Spanish curve. The amount on offer is relatively low though, suggesting plain vanilla demand. Additionally, the Spanish treasury taps an inflation-linked bond for €0.5-1B. The Irish debt agency (NTMA) taps the on the run 15-yr IGB (2.4% May2030) for €0.75B. The bond cheapened in ASW spread terms going into the auction and trades normal on the Irish curve. After this auction, NTMA will have raised €8.25B from its stated €6-10B target.

Bearish view temporary on hold because of US elections

Overnight, Asian stock markets trade near opening levels with China outperforming (good Caixin Services PMI) and Japan closed. Oil prices rebound, but the US Note future and the Japanese yen eke out some gains. We don’t read too much into the relatively strong Asian equity performance and would be cautious at the start of European trading.

Today’s calendar contains the US non-manufacturing ISM, but we expect US eco data to have a smaller impact on markets as the Fed flagged a December rate hike yesterday evening. Sentiment will be the key trading factor. We’ve put our short term bearish view on core bonds on hold yesterday because of developments in the US presidential race (narrowing gap Clinton-Trump). The increased level of uncertainty is positive for core bonds at this stage. After the elections, we hope to put on new short positions.

Medium term technical pictures deteriorated. Rising inflation expectations and central banks’ change of tone (extraordinary policy won’t last forever) triggered the sell-off which started at the beginning of October. The US 10-yr and 30-yr yields held above key resistance levels at 1.75% and 2.5%. The German 10-yr yield moved above the 0.10% resistance. This break is relevant from a technical point of view and unlocks a new trading range (0.10%-0.30%).

R2 164,3 -1dR1 163BUND 162,65 0,4400S1 161,37S2 161,11

German Bund: Break below 163 support area suggests more downside, but short term consolidation is preferred ahead of key US

eco data, Fed and US elections

US Note future: Bearish view on hold because of developments in US presidential race

Thursday, 03 November 2016

P. 4

USD extends politically driven decline

On Wednesday, the dollar remained under pressure as uncertainty on the presidential election continued to weigh. The US and EMU data were OK, but largely ignored. The Fed statement was almost unchanged from September, but the Bank suggested a rate hike is likely at the December meeting (see our flash report) . Markets made some nervous swings around the time of publication of the Fed statement. The dollar decline finally took a breather. EUR/USD had tested the 1.1123 resistance before the Fed statement and closed the session at 1.1098. USD/JPY finished the day at 103.30 (from 104.15).

Overnight, Asian equities decouple from the US. China outperforms as the Caixin services PMI rebounded from 52.0 to 52.4. The yuan strenghtens gradually (USD/CNY 6.76) on dollar weakness. Conflicting headlines/rumous on the US election race keeps the dollar under pressure, in particular against the yen. USD/JPY dropped below 103 and trades around 102.80. The losses of the dollar against the euro remain modest. The pair tested again the 1.1123 resistance, but a break again didn’t occur yet (1.1110/15). Commodity currencies like the Aussie dollar continue to perform relatively well with AUD/USD (0.7665) holding near the reccent highs.

Today, the September EMU unemployment rate is expected to have declined to 10% from 10.1%. In the US, Q3 productivity and labour costs are interesting but no market mover. Given a strong GDP, productivity should have risen 2.1% following a 0.6%% decline in Q2, while Q3 labour costs will have slowed to 1.2% from 4.3%. We don’t forecast these series, but the direction looks correct. Initial claims are expected little changed at 256K. The October Non-manufacturing ISM is a timely series on activity in the important services sector. Markets expect a decline to 56 from 57.1 in September. The consensus estimate of 56, if confirmed, should be considered as a strong figure showing robust growth in the sector.

The US data should support the case for a December rate hike. However, any positive USD reaction might be limited and short-lived as long as uncertainty on the elections persists.Last week, we changed our ST-USD bias from positive to neutral as the rise of core/US yields slowed. Earlier this week, the risk-off trade

Currencies

R2 1,1366 -1dR1 1,1123EUR/USD 1,1126 0,0063S1 1,0826S2 1,0711

Dollar remains under pressure even as Fed eyes a December rate hike

Dollar extends decline, but pace of the sell-off slows

Today’s US non-manufacturing taking center stage

Data overshadowed by the US election saga?

EUR/USD: testing 1.1123 resistance

USD/JPY decline accelerates

Thursday, 03 November 2016

P. 5

pushed US bond yields lower. We don’t see much upside for US bond yields even as Fed “pre-announced” a December rate hike. In this context of global uncertainty, we are in no hurry to add USD long exposure. We stay side-lined and don’t try to catch the dollar in case of further losses.

From a technical point of view, EUR/USD dropped below 1.0952/13 support, which was USD positive. However, Friday’s rebound already questioned the room for sustained USD gains 1.1109 is the 50% retracement level from 1.1366 to the correction low of 1.0851. 1.1123 was the previous range bottom. Other resistances levels are located in the 1.12 area. These levels might come into play if global uncertainty persists. USD/JPY broke above the 104.32/87 resistance last week, painting a double bottom formation with targets in the 108/109 area. We were cautious to pre-position for a higher USD/JPY, as we feared that a rise in global volatility could prevent a yen decline. Until last week, the rise in core yields dominated USD/JPY and forced a (temporary) break higher. The return of US political uncertainty pushed USD/JPY back in the previous range. Initially, the USD/JPY losses remained modest, but the decline accelerated yesterday. We stay side-lined for now.

BoE to stand put on higher inflation forecast

Yesterday, sterling was in better shape even as global uncertainty continued to haunt global markets. Sterling trading was in the first place technical in nature. EUR/GBP came close to the 0.9050 resistance early in the session, but a break didn’t succeed. Cable jumped to the mid 1.23 area on overall USD weakness and tried to break beyond a short-term consolidation pattern. In volatile trading, EUR/GBP dropped temporary below 0.90 but closed the session at 0.9021 (from 0.9030). Cable closed the session at 1.2304 (from 1.2243).

Today, the BoE will probably leave policy unchanged, despite a pre-announcement on a rate cut in September The forecasts from the inflation report will be interesting. A bigger overshoot of the inflation target might make it difficult for the BoE to support the UK economy in case of a further setback. In theory, this scenario should be less negative for sterling. However, the BoE will probably keep the door open to support growth (at the expense of higher inflation) if it would be really necessary. Will also keep an eye at the decision of the London Court on a the involvement of parliament in the Brexit debate.

The day-to-day momentum might be slightly supportive as the BoE will take a more balanced approach short-term. However, we think it’s too early foir a sustained rebound of sterling , especially against the euro. A test of the EUR/GBP 0.9050/60 area was rejected yesterday. Even so, we still look to sell sterling (buy EUR/GBP) on dips. A break beyond 0.9060 would open the way for a test of the 0.9142 area.

R2 0,9142 -1dR1 0,9068EUR/GBP 0,8999 -0,0043S1 0,888S2 0,8725

EUR/GBP: test of 0.9050/60 rejected. Focus turns to BoE.

GBP/USD: bottoming out on USD weakness

Thursday, 03 November 2016

P. 6

Thu. , 3 November Consensus Previous US 12:30 Challenger Job Cuts YoY (Oct) -- -24.7% 13:30 Nonfarm Productivity (3Q P) 2.1% -0.6% 13:30 Unit Labor Costs (3Q P) 1.2% 4.3% 13:30 Initial Jobless Claims (Oct 29) 256K 258k 13:30 Continuing Claims (Oct 22) 2043K 2039k 14:45 Markit US Services PMI (Oct F) 54.8 54.8 14:45 Markit US Composite PMI (Oct F) -- 54.9 15:00 ISM Non-Manf. Composite (Oct) 56.0 57.1 15:00 Factory Orders (Sep) 0.2% 0.2% 15:00 Factory Orders Ex Trans (Sep) -- 0.0% 15:00 Durable Goods Orders (Sep F) -0.1%- -0.1% 15:00 Durables Ex Transportation (Sep F) 0.1% 0.2% 15:00 Cap Goods Orders Nondef Ex Air (Sep F) -- -1.2% 15:00 Cap Goods Ship Nondef Ex Air (Sep F) -- 0.3% UK 10:00 New Car Registrations YoY (Oct) -- 1.6% 10:30 Official Reserves Changes (Oct) -- $722m 10:30 Markit/CIPS UK Services PMI (Oct) 52.5 52.6 10:30 Markit/CIPS UK Composite PMI (Oct) 53.5 53.9 13:00 Bank of England Bank Rate 0.250% 0.250% 13:00 BOE Asset Purchase Target (Nov) 435b 435b 13:00 BOE Corporate Bond Target (Nov) 10b 10b EMU 11:00 Unemployment Rate (Sep) 10% 10.1% Italy 10:00 Unemployment Rate (Sep P) 11.4% 11.4% Belgium 11:00 Unemployment Rate (Sep) -- 8.2% China 02:45 Caixin China PMI Services (Oct) A 52.4 52.0 02:45 Caixin China PMI Composite (Oct) A 52.9- 51.4 Sweden 08:30 Swedbank/Silf PMI Services (Oct) 56.5- 56.9 Events 10:00 ECB Publishes Economic Bulletin 10:50 France to sell bonds (OAT 0.25% 2026 and OAT 1.25% 2036) 11:30 Ireland to sell bonds (€750M 2.4% 2030) 13:00 Bank of England Inflation Report 22:00 ECB's Coeure speaks at Harvard University

Calendar

Thursday, 03 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.

Contacts

10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 1,79 -0,03 US 0,80 -0,03 DOW 17960 17959,64DE 0,13 -0,05 DE -0,64 -0,01 NASDAQ for Exch - NQI #VALUE!BE 0,38 -0,03 BE -0,63 0,00 NIKKEI 17135 17134,68UK 1,17 -0,10 UK 0,16 -0,09 DAX 10370,93 10370,93JP -0,01 0,05 JP -0,25 0,00 DJ euro-50 2980 2980,17

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,343 0,0053y -0,120 1,099 0,651 Euribor-1 -0,37 0,00 Libor-1 USD 0,27 0,275y 0,004 1,257 0,782 Euribor-3 -0,31 0,00 Libor-3 USD 0,40 0,4010y 0,486 1,630 1,126 Euribor-6 -0,21 0,00 Libor-6 USD 0,56 0,56

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,1126 0,0063 EUR/JPY 114,1 -0,86 184,2921 1301,87 47,41USD/JPY 102,62 -1,28 EUR/GBP 0,8999 -0,0043 - 1d -1,52 8,67 -0,42GBP/USD 1,2354 0,0121 EUR/CHF 1,0784 0,0011AUD/USD 0,7678 0,0051 EUR/SEK 9,8982 0,00USD/CAD 1,3363 -0,0037 EUR/NOK 9,0865 0,00