Thursday, 10 November 2016

P. 1

Rates: Inflation expectations set to become key driver US Treasuries?

The US Treasury market will be looking for a new equilibrium. Markets expect a reflationary policy from president-elect Trump which will boost growth and inflation. If inflation expectations rise too rapidly, they could force the Fed to accelerate its tightening cycle. We hold our negative view versus core bonds, but expect some consolidation today.

Currencies: Dollar profits from overall reflation trade

Yesterday, the dollar made an impressive intraday rebound as markets repositioned for an USD-drive reflation trade after the Trump victory. The dollar rebound might slow today as there are few eco data. However, the global picture for the US currency improved. For now, sterling resists the USD rebound very well with cable hardly losing ground.

Calendar

• US equities ended the first post-election session 1.1% (S&P) higher, suggesting

Trump’s victory hasn’t dented market sentiment. Asian stock, who sank yesterday, recoup the losses with flying colours. The Nikkei gains 6.8%.

• SF Fed Williams said that the FOMC’s Nov statement is “still completely timely and accurate” and that the argument for gradual rate increases “still makes sense” He suggests the Trump victory is no reason to stay sidelined in Dec.

• Estonia’s prime minister has lost a parliamentary no confidence vote, opening up the possibility that a pro-Russian party could join a new government at a sensitive moment.

• The RBNZ lowered its official cash rate to 1.75%, a new low, down from 2% previously, stating that global inflation remains weak even as commodity prices have recovered. The kiwi dollar lost slightly ground

• S&P has given the all-clear to America’s credit rating in the wake of Donald Trump’s victory in the presidential election.

• Judy Shelton, a member of Mr Trump’s advisory team, told the FT that the Fed had created a “false economy”. She reiterated that Mr Trump wanted to see someone at the helm of the Fed whose thinking was more in line with his.

• Today’s calendar doesn’t contain strong economic market movers, but various Fed and ECB members speak. Italy publishes its monthly report on “Money and Banks”, while the US Treasury holds a 30-yr. bond auction.

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, 10 November 2016

P. 2

US curve bear steepens on rising inflation expectations

Yesterday, global core bonds surged higher when a Trump victory became likely in a genuine risk-off climate. Other markets followed the risk-off logic too. Equities (and equity futures) crashed, gold surged and the dollar fell off a cliff versus the safe haven currencies. Interestingly, the risk aversion faded in late Asian and European morning trading. Bond gains were largely erased and longer US Treasury yields even jumped sharply higher later on. As 5yr/5yr inflation expectations spiked higher, we can only deduct that markets expect Trump to fire up the economy (and maybe turn to protectionism). Also in other markets the reversal took place. The probability of a December Fed rate increase dropped in the heat of the risk sell-off to about 50% from 86% Tuesday eve, but is currently back at 82%, suggesting that the views on a Dec. Fed rate increase haven’t substantially changed. That seems to have been confirmed by SF Fed Williams (see headlines). The US 10-year yield moved above 1.98% resistance, but the break needs to be confirmed. A loose fiscal questions the need for more rate increases in 2017/18.

In a daily perspective, the US curve steepened sharply with 2-yr yields up 3.6 bps, but 5, 10 and 30-yr yields adding 14.6, 20.5 and 23 bps. Moves on the German yield curve were smaller, varying between -+0.4 bps (2-yr) and and +2.8 bps (30-yr). The US-German 10-yr yield spread surged to 185 bps, a new cyclical high. On intra-EMU bond markets, the higher volatility pushed 10-yr yield spreads up to 4/5 bps higher (Greece/Portugal).

Central bank talk becomes increasingly important

EMU eco data are limited to September French and Italian industrial production. Both countries’ economies are lagging those of its peers. They follow nevertheless strong August production data, which were maybe upwardly influenced by the holidays and difficult seasonal adjustment factors. Declines of respectively 0.3% M/M and 1% M/M are expected, but the risks seems to be on the downside. The market will ignore the data though. In the US, initial claims are expected to drop to 260K from 265K in the previous week. Recently, figures surprised often on the upside. We have no reasons to distance us from consensus. Fed Bullard, Fed Lacker and ECB Mersch, Constancio and Costa speak. We look for signals about the consequence of the US elections for Fed and ECB policy. Fed Williams overnight suggested they won’t affect the Dec meeting.

Rates

US yield -1d2 0,8748 0,10085 1,4366 0,214210 2,0087 0,198530 2,8163 0,1331

DE yield -1d2 -0,6290 0,03705 -0,3840 0,081010 0,2110 0,109030 0,8504 0,1432

T-Note future (black) S&P future (orange) (intraday and overnight): Rollercoaster on election result: Risk off correction took place for risk-

on on hopes Trump will open the fiscal spigot

US yield curve (before and after Trump) Tremendous steepening of curve under influence of higher inflation expectations

The initial risk off reaction on Trumps victory rapidly faded

Very sharp US curve steepening, as markets expect loose fiscal policy

German yield increases limited

US claims and national EMU data of little importance for markets

Fed and ECB speakers: Will they signal how election results might influence policy?

What about pressure Trump on Fed?

Thursday, 10 November 2016

P. 3

Weak US 10-yr Note auction

The US Treasury continued its mid-month refinancing operation yesterday with a weak $23B 10-yr Note auction. The auction stopped firmly above the 1:00 PM bid side and the bid cover was the smallest in more than 7 years (2.22). Bidding details showed little interest from indirect bidders, reflecting foreign investor demand, but direct and dealer bids also disappointed. Election timing might have played a role. Today, the US Treasury ends its refinancing operation with a $15B 30-yr Bond auction. Currently, the WI trades around 2.81%. Given the timing of the auction, just after the US elections and a huge sell-off at the very long end of the curve, we fear that investors aren’t willing yet to already pick up long US Treasury bonds.

Rising inflation expectations hammer US Treasuries

Overnight, Asian stock markets gain significant ground after yesterday’s huge losses. Japan outperforms (+6%). The US Note future rebounds somewhat in volatile Asian trade following yesterday’s huge sell-off and Brent crude trades higher as well. We expect a slightly stronger opening for the Bund (compared to US after trading levels, but well under the official closing level).

Today’s eco calendar won’t impact bond trading. The US Treasury market will be looking for a new equilibrium. The coming weeks, we suggest closely monitoring US inflation expectations. The 5y5y market based measure increased from 2.21% ahead of Trump’s election to 2.42% this morning. Markets expect a reflationary policy which will boost growth and inflation. If inflation expectations rise too rapidly, they could force the Fed to accelerate the timing of its very gradual tightening cycle. We hold our negative view versus core bonds, but expect some consolidation today after yesterday’s huge repositioning.

Medium term technical pictures deteriorated. Better eco data, 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 broke above 2% and 2.75% resistance yesterday. If they manage to hold those levels, next targets are 2.25% and 3.25%. The German 10-yr yield moved above the 0.10% resistance. This break is relevant from a technical point of view and unlocked a new trading range (0.10%-0.30%). The Bund ended below 161 (160.94), which is technically relevant and a further negative, if it is confirmed in an official close. We expect German yields to go higher today in follow through action on yesterday eve’s developments in the Bund.

R2 164,3 -1dR1 163BUND 160,94 -1,2100S1 160,89S2 159,58

German Bund: Break below 163 support area suggests more downside

US Note future: Huge sell-off as Trump-victory boosts inflation expectations

Thursday, 10 November 2016

P. 4

Dollar propelled by US-driven reflation trade

On Wednesday, the dollar succeeded a high profile intraday reversal. The dollar initially nosedived due to global uncertainty as election results pointed to a Trump victory. However, the dollar dip was very short-lived. Rising US inflation expectations on Trump’s expected fiscal expansion kept a Fed rate hike on investors’ radar. The dollar started an impressive intraday rebound. The dollar closed the session in positive territory against euro and (safe haven) yen. EUR/USD closed at 1.0910 (from 1.1026 and after testing the 1.13 area in Asia. USD/JPY ended at 105.67 from 105.16, setting a new short-term high.

Overnight, Asian markets caught up with WS and gain 1% to 3%. Japan even outperforms (6%). Markets are positioning for a US-driven reflation trade. Yesterday, this reflation traded propelled US bond yields and the dollar. However, for now, there are no additional gains for the US currency. EUR/USD trades in the 1.0945 area. USD/JPY around 105.45. The reflation trade also propels commodities and commodity assets. Even so, the gains of the Aussie dollar remain modest. AUD/USD reversed only part of yesterday’s initial loss and trades in the 0.7665 area. The Reserve Bank of New Zealand, as expected, cut its policy rate by 25 bps to 1.75%. It indicated that rates can be reduced further. Governor Wheeler also said to have an open mind on FX interventions. The kiwi dollar dropped from the NZD/USD 0.7300/50 area and trades around 0.7250.

Later today, EMU eco data are limited to September French and Italian industrial production. In the US, initial claims are expected to drop to 260K from 265K in the previous week. Recently, figures surprised often on the upside. We have no indication though to distance us from consensus. Fed Bullard & Lacker and ECB Mersch, Constancio and Costa speak. We look for signals about the consequence of the US elections for Fed and ECB policy. Fed Williams overnight suggested they won’t affect the Dec meeting.

Yesterday, the dollar rebounded impressively supported by sharply higher US bond yields, especially at the long end of the curve. If the reflation theme remains in place many a lot of repositioning still needs to be done. However after yesterday’s jump higher in (long-term) yields and with the dollar getting less additional interest rate support at the short end of the curve, the USD rally might take a breather today, unless there would come higher profile news from the political scene. However, there is now a strong floor for the dollar.

Currencies

R2 1,13 -1dR1 1,1145EUR/USD 1,0937 -0,0263S1 1,0826S2 1,0711

Dollar reversed early risk-off losses as US reflation raised inflation expectations and US bond yields

USD maintains yesterday’s gains, but for now the rally is taking a breather

USD rally might take a breather, but downside looks well protected

.

EUR/USD: dollar succeeds impressive post-Trump rebound

USD/JPY sets minor short-term top

Thursday, 10 November 2016

P. 5

From a technical point of view, EUR/USD tested the 1.13 barrier yesterday morning, but the first important resistance (1.1366) stayed out of reach. The pair dropped below the psychological barrier of 1.10 which is a short-term USD positive. The 1.0851 correction low is the next important supports. From a monetary policy point of view, a Fed December rate hike is still likely, while the ECB’s intentions regarding tapering of the APP are unclear. This context might be USD supportive/slightly euro negative. We reinstall a sell-on-upticks bias for EUR/USD. The 1.0851/1.0711 correction lows are the next targets on the charts. The picture for USD/JPY also improved after yesterday’s move. Of late interest rate differentials, rather than the risk-on/risk-off paradigm were also the main driver from USD/JPY. Nevertheless, we are still more cautious on the USD/JPY upside as global economic and political uncertainties linger.

Sterling resists overall USD strength well

On Wednesday, the swings in sterling were primarily driven by the US developments, rather than by UK specific news. Cable jumped to the an intraday top just below 1.2550 yesterday morning. A protracted intraday USD rebound pushed cable south. That pair even touched a minor ST low in the 1.2355 area. The pair closed the session at 1.2406 (from 1.2379). So, sterling performed rather well given the overall USD rebound. EUR/GBP initially also joined the global risk off trade, but returned south in line with EUR/USD later in the session. Sterling even outperformed the euro as the dollar rebounded. EUR/GBP closed the session slightly below 0.88 (0.8794).

Overnight, the UK RICS house price balance was stronger than expected at 23% (from 17%). Later today, the UK calendar is thin. BoE Chief economist Haldane speaks in Cambridge. Yesterday, sterling performed quite well given the overall strength of the dollar. So, sterling apparently profited more from the global reflation trade compared to the euro. However, for now this is not really supported by the relative developments in the UK/EMU bond markets. In this respect, we are a bit puzzled by yesterday’s sterling outperformance against the euro. We take notice of the strong performance of sterling, but for now we maintain the working hypothesis that a break below 0.8725 is difficult

R2 0,9142 -1dR1 0,905EUR/GBP 0,881 -0,0168S1 0,8763S2 0,8725

EUR/GBP: sterling nears 0.8725 support

GBP/USD: sterling holds strong despite overall USD rebound

Thursday, 10 November 2016

P. 6

Thursday, 10 Nov. Consensus Previous US 14:30 Initial Jobless Claims 260k 265k 14:30 Continuing Claims 2025k 2026k Japan 00:50 Machine Orders MoM / YoY (Sep) A: -3.3%/4.3% -2.2%/11.6%

00:50 Money Stock M2 / M3 YoY (Oct) A:3.7%/3.2% 3.5%/3.0% 03:00 Tokyo Avg Office Vacancies (Oct) A: 3.7 3.70 07:00 Machine Tool Orders YoY (Oct P) A: -8.9% -6.3% UK 01:01 RICS House Price Balance (Oct) A: 23% 17% France 08:45 Wages QoQ (3Q P) 0.3% 0.3% 08:45 Industrial Production MoM / YoY (Sep) -0.3%/0.4% 2.1%/0.5% 08:45 Manufacturing Production MoM / YoY (Sep) -0.1%/0.4% 2.2%/0.7% Italy 10:00 Industrial Production MoM / WDA YoY (Sep) -1.0%/2.2% 1.7%/4.1% Norway 08:00 CPI MoM / YoY (Oct) 0.3%/3.5% 0.3%/3.6% 08:00 CPI Underlying MoM / YoY (Oct) 0.1%/2.9% 0.3%/2.9% Events ECB’s Mersch Gives Speech in Windsor, England Bank of Portugal Governor Carlos Costa Speaks in Evora 03:00 Fed’s Williams Speaks on Economic Outlook in San Francisco 11:00 Bank of Italy Publishes Monthly Report “Money and Banks” 15:15 Fed’s Bullard Speaks on U.S. Economic Outlook in St. Louis 15:30 Riksbank’s Ingves, ECB’s Constancio Speak in Stockholm 18:00 BoE Haldane speaks at Cambridge 18:45 Richmond Fed Lacker speaks 19:00 US $15B 30-yr Bond auction

10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 2,01 0,20 US 0,87 0,10 DOW 18590 18589,69DE 0,21 0,11 DE -0,63 0,04 NASDAQ for Exch - NQI #VALUE!BE 0,48 0,11 BE -0,64 0,03 NIKKEI 17344 17344,42UK 1,26 0,01 UK 0,21 0,00 DAX 10646,01 10646,01JP -0,04 0,03 JP -0,23 0,02 DJ euro-50 3056 3056,29

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,356 -0,0123y -0,085 1,246 0,699 Euribor-1 -0,37 0,00 Libor-1 USD 0,26 0,265y 0,055 1,472 0,842 Euribor-3 -0,31 0,00 Libor-3 USD 0,40 0,4010y 0,585 1,861 1,197 Euribor-6 -0,21 0,00 Libor-6 USD 0,56 0,56

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,0937 -0,0263 EUR/JPY 115,26 0,69 183,5516 1287,62 46,69USD/JPY 105,405 3,06 EUR/GBP 0,881 -0,0168 - 1d 0,00 -30,64 1,45GBP/USD 1,2409 -0,0064 EUR/CHF 1,0752 -0,0062AUD/USD 0,7671 0,0026 EUR/SEK 9,9143 -0,10USD/CAD 1,3410 0,0003 EUR/NOK 9,0959 -0,07

Calendar

Thursday, 10 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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