Monday, 12 December 2016

P. 1

Rates: US yields hit key resistance ahead of Fed

Oil prices surged $2/barrel higher this morning after most non-OPEC members agreed to join the oil production cut agreement. US Treasuries lose more ground, with the 5- and 10-yr yield testing key resistance. A break is normally unlikely ahead of the Fed, but not excluded given sentiment and upcoming US supply.

Currencies: Combination of USD strength and euro weakness persists

On Friday, the euro’s post-ECB decline continued. At the same time, the dollar also profited from higher US (LT) yields. This morning, it looks that the USD trends of last week stay in place. However, will the dollar rally continue going into the Fed’s policy decision?

Calendar

• US equities extended their bull run last Friday reaching once more all-time

highs. Overnight, Asian risk sentiment is mixed with China underperforming as curbs on insurers’ stock trading weigh.

• Asking prices for newly-listed properties in the UK declined in November, but sales were higher than the same period last year despite Brexit-induced uncertainty, according to Rightmove.

• OPEC has won the backing of countries outside the oil cartel to join supply cuts for the first time since 2001, overcoming the final major obstacle for a global agreement to curb output. Brent crude surged $2/barrel to $56.5/barrel.

• Paolo Gentiloni, Italy’s foreign minister, has been chosen to replace Matteo Renzi as prime minister amid signs of a quick solution to the political crisis that has convulsed the eurozone’s third-largest economy over the past week.

• BMPS will step up efforts to win investors for a debt-for-equity swap over coming days, pressing ahead with a €5B capital raise to avoid a state rescue that would impose losses on bondholders and shareholders.

• US President-elect Trump said the US did not necessarily have to stick to its long-standing position that Taiwan is part of "one China," questioning nearly four decades of policy in a move l ikely to antagonize Beijing.

• Greek lawmakers approved the country's 2017 budget, projecting a return to strong economic growth next year, but also imposing a wave of tax hikes and austerity cuts prescribed by its international lenders.

• Today’s eco calendar is empty apart from $24B 3-yr Note and $20B 10-yr Note auctions in the US.

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, 12 December 2016

P. 2

ECB still dominates market movements; US T’s sell off

On Friday, US Treasuries crashed hard late in the US session. Michigan consumer confidence skyrocketed, upcoming supply caused some positioning and equities hit new highs (rotation out of US Treasuries into stocks?). Technically, the T-Note future trades back near the lows, the US 5-yr yield moved above 1.90%, the US 10-yr yield tests 2.5% resistance and the US 30-yr reached a sell-off high at 3.18%. German bonds outperformed US Treasuries. They initially eked out more gains on the back of Thursday’s ECB decisions, but erased the gains during the afternoon session, especially at the longer end. The 5-yr yield outperformed (-4.4 bps) due to expectations that those tenors will be eligible for ECB buying despite yielding less than the deposit rate (-0.44%). The ECB’s rejection of Monte Paschi’s bid for more time to raise capital was an additional positive for short dated safe haven Bunds. Oil and equities initially started to weigh in late afternoon when they climbed higher.

In a daily perspective, the German yield curve flattened with yield changes ranging between -4.4 bps (5-yr) and + 4.2 bps (30-yr). US yield changes varied between +2.3 bps (5-yr) and +6 bps (10-yr). On intra-EMU bond markets, peripherals underperformed partly due to the ECB’s changes to the parameters of APP which favour German and non-German core bonds over peripherals. Spanish and Italian 10-yr yield spreads widened 3 and 6 bps, the latter also due to banking problems (BMPS). Irish and Poruguese spreads widened by 12 and 9 bps respectively. Both countries face diminishing ECB purchases as they near the 33% issuer l imit. Purchases may further slow or eventually even be stopped. The widening hit all maturities. Semi-core bonds also lost some ground (+2 bps).

No economic releases today

The FOMC meeting, US supply, oil prices (see headlines) and the fate of Italian Banca Monte Dei Paschi are the main events this week. The FOMC will most l ikely hike rates for the second time this cycle. A 25 bps rate increase is fully discounted. The FOMC publishes its quarterly economic and rate projections and chairwoman Yellen gives a press conference. Markets will be interested in any hints about monetary policy in 2017 and beyond, giving Donald Trump’s very expansionary fiscal programme. We fear however that we’ll have to wait for longer to get the Fed’s 2017 policy intentions.

Rates

US yield -1d2 1,1573 0,03255 1,9223 0,069810 2,5042 0,076930 3,1935 0,0674

DE yield -1d2 -0,7590 -0,02205 -0,4220 -0,031010 0,3890 0,009030 1,2104 0,0640

T-note future (black) and S&P future (orange) (intraday): After an uneventful morning and early afternoon session, US Treasuries sell

off on multiple drivers. Equities do fine.

Oil shoots higher overnight as 10 non-OPEC members join the OPEC production cut agreement

US Treasuries under pressure

ECB decision still dominates European bond trading

Irish and Portuguese bonds underperform

Monday, 12 December 2016

P. 3

The Fed probably wants more information on Trumps’ plans and on their implementation before taking them on board. So the dots chart may show little changes compared to the September one. The US eco calendar contains the retail sales and PPI on Wednesday and the CPI and regional surveys on Thursday. In EMU, the preliminary PMI’s on Thursday are the most important release. Besides these we will listen to ECB speakers to get more information about last week’s meeting.

US yields at key levels ahead of the Fed

Overnight, Asian stock markets trade mixed with China underperforming as curbs on insurers’ stock trading and higher oil weighs. The US Note future loses ground though on the back of a surge in oil prices (up $2/barrel) as non-OPEC members agreed to join supply cuts. We expect a lower opening for the Bund.

Today’s eco calendar is empty apart from US supply ($24B 3-yr Note and $20B 10-yr Note auctions), which could keep US Treasuries in the defensive. Overall, global markets will count down to Wednesday’s FOMC meeting. A rate hike is discounted, but will the Fed governors wait for Trump’s inauguration before changing their dots for next years in a hawkish way? This factor of uncertainty might prevent a break of key technical levels. The US 2-yr yield broke above 1.1% resistance. Key resistance levels in the US 5-yr yield (1.85-1.9%) and 10-yr yield (2.5%) remain under attack. The US 30-yr yield reached a new post-Trump high (3.18%) and approaches 3.25% resistance. We wait for specific news (e.g. a hawkish Fed) before anticipating a break higher (5-yr & 10-yr). We hold our sell-on-upticks approach in US Treasuries.

Last week, the ECB cemented the front end of the European yield curves for longer though we’re not sure whether they cap the upward potential for long term yields. From a technical point of view, the German 30-yr yield tested key resistance (1.2% area). We watch out how the market assess the change of the guard in Italy and the endgame in the Monte dei Paschi thriller. Are the ECB surprises now discounted in the peripherals.

R2 163,36 -1dR1 162,08BUND 161,15 0,0400S1 159,91S2 158,67

German Bund: no change to technical picture after ECB meeting

US Note future (March contract): Break lower ahead of the Fed normally unlikely, but sentiment reamins negative?

FOMC, US supply, Monte dei Paschi and some data will spice trading this week

Monday, 12 December 2016

P. 4

EUR/USD: Range bottom again on the radar

USD/JPY: tries to sustain north of 115 barrier

EUR/USD nearing key support going into Fed decision

On Friday, the post-ECB trends continued. The euro remained in the defensive on low EMU yields in absolute terms at the short end of the yield curve. At the same time, long term spread differentials between the US and Germany widened also further, supporting the dollar. EUR/USD set a new short-term low in 1.0531 area and pair closed the session at 1.0561 (from 1.0615). The dollar stayed well bid across the board. USD/JPY sets a new correction top north of 115 and closed the session at 115.32 (from 114.04).

Overnight, Asian equities mostly trade with modest losses. China and Japan are the exceptions. China loses 2%-3%. Amongst others, CNY weakness and technical factors inspire selling of Chinese assets. Japanese equities profit from the decline of the yen against the dollar. Japanese October machine orders were also stronger than expected. Japanese equities show gains of about 0.5%. USD/JPY trades in the 115.55 area, with reach of the recent highs. Higher oil prices keep long term US bond yields under pressure. EUR/USD came within reach of the 1.0506 support in Asia this morning (1.0520 area), but a real test didn’t occur. The pair trades currently again in the 1.0550/60 area.

Today, there are no important eco data. So, trading in the major USD cross rates will be driven by global market developments. Investors will also look forward and adapt positions in the run-up to the Fed policy decision on Wednesday. At the start of the week, core bond yields remain under upward pressure with the US 10-year yield at the 2.50% barrier. Of late, higher US bond yields, even at the long end of the curve, were USD supportive. Especially USD/JPY profited from higher long term yield differentials. The jury is still out, but developments on the Asian equity markets overnight suggest the post-Trump positive equity sentiment might gradually lose momentum. Of late, the impact of global risk sentiment on the dollar wasn’t straightforward, but if the Trump-reflation rally would slow, this might also slow the rise of the dollar. In a day-to-day perspective, there is no reason to row against the USD positive tide, but we wouldn’t be surprised if the decline of EUR/USD would shift into a lower gear ahead of the Fed decision and ahead of key support in the 1.0458 area.

Currencies

R2 1,0874 -1dR1 1,0796EUR/USD 1,05645 -0,0049S1 1,0506S2 1,0458

Dollar setting new highs against the yen

EUR/USD holding in the mid 1.05 area.

Calendar is empty today

Global interest rate trends to set the tone for USD trading.

Dollar rally to slow going into the Fed decision.

Post-ECB euro decline continued

Dollar remained well bid across the board

Monday, 12 December 2016

P. 5

In a longer term perspective, the context will remain USD constructive/euro negative. Low absolute short-term EMU yields will continue to weight on the euro. At the same time, there is underlying USD strength supported by higher LT core yields. With the ECB prolonging substantial bond buying at least till end 2017, the Fed keeps the lead in the policy normalization process. This puts a strong floor under the dollar. Short-term interest differentials will remain wide and might even widen more as the Fed extends its gradual normalization process into 2017. From a technical point of view, last week’s rejected test of the 1.0795/1.0809 area suggests that the topside of EUR/USD is well capped. The 1.0506 correction low and the 1.0458 cycle low are the next important short-term support levels in EUR/USD.

The technical picture for USD/JPY improved some time ago. The pair took out the key resistance at 111.45/91. Last week, the USD/JPY rally took a breather, but the pair tries to sustain north of the next resistance area at 114.50/115. For now, the downside in USD/JPY looks well protected as long as sentiment on risk remains constructive. Even in case of an equity correction, the damage for USD/JPY might be less than previously, as interest rate differentials have become more important. Also for USD/JPY, we don’t row against the trend.

Euro weakness continues to weigh on EUR/GBP

On Friday, sterling trading was again mainly driven by global moves in the dollar and the euro (especially the latter) rather than by UK specific events. The UK October trade deficit narrowed more than expected (albeit after a substantial widening in September). The UK currency hardly profited from the trade data. The FT reported that UK Brexit Minister Davis wasn’t keen to consider a transition deal as the UK separates from EU. The headlines suggest that the UK government is probably not prepared to pay a big price to get a ‘soft Brexit’. For now the impact on sterling remains limited. Cable hovered in the 1.26 area and closed the session at 1.2585 on USD strength. At the same time, euro weakness also weighed on EUR/GBP. The pair closed the session at 0.8388 (from 0.8433).

Overnight, the Rightmove house prices declined 2.1% M/M to be up 3.4% Y/Y (from 4.5%). The impact of the report on sterling trading was close to non-existent. There are no other UK eco data later today. So, EUR/GBP trading will probably still be driven by the global EUR/USD price move. If the decline of EUR/USD slows going into the Fed’s policy decision, this might also filter through in EUR/GBP trading. From a technical point of view, EUR/GBP extensively tested 0.8333 support early last week, but a sustained break didn’t occur. The 0.8333/05 area bacame an important point of reference. It won’t be easy for EUR/GBP to drop below this area and a bottoming out is likely

R2 0,8708 -1dR1 0,8578EUR/GBP 0,8394 -0,0038S1 0,83S2 0,8117

EUR/GBP still struggling as euro weakness weighs, but recent low stays out of reach.

GBP/USD runs into resistance

Monday, 12 December 2016

P. 6

Monday, 12 Dec Consensus Previous Japan 00:50 Machine Orders MoM / YoY (Oct) A4.4%/-5.6% -3.3%/4.3% 00:50 PPI MoM / YoY (Nov) A0.4%/-2.2% -0.1%/-2.7% 05:30 Tertiary Industry Index MoM (Oct) A 0.2% R -0.3% 07:00 Machine Tool Orders YoY (Nov P) -- -8.9% UK 01:01 Rightmove House Prices MoM / YoY (Dec) A-2.1%/3.4% -1.1%/4.5% China 09DEC-18DEC Foreign Direct Investment YoY CNY (Nov) 2.0% -- 10DEC-15DEC Money Supply M0 YoY (Nov) 7.6% 7.2% 10DEC-15DEC Money Supply M1 YoY (Nov) 22.5% 23.9% 10DEC-15DEC Aggregate Financing CNY (Nov) 1098.2b 896.3b 10DEC-15DEC New Yuan Loans CNY (Nov) 720.0b 651.3b 10DEC-15DEC Money Supply M2 YoY (Nov) 11.5% 11.6% Sweden 08:00 PES Unemployment Rate (Nov) -- 4.0% Events 17:30 US to Sell USD24B 3-yr Notes 19:00 US to Sell USD20B 10-yr Notes Reopening

10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 2,43 0,08 US 1,12 0,02 DOW 19615 19614,81DE 0,38 0,03 DE -0,74 -0,05 NASDAQ for Exch - NQI #VALUE!BE 0,71 0,05 BE -0,63 -0,02 NIKKEI 18996 18996,37UK 1,38 0,03 UK 0,09 0,01 DAX 11179,42 11179,42JP 0,06 0,01 JP -0,15 0,00 DJ euro-50 3186 3185,79

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,346 0,0033y -0,082 1,531 0,734 Euribor-1 -0,37 0,00 Libor-1 USD 0,26 0,265y 0,135 1,843 0,932 Euribor-3 -0,32 0,00 Libor-3 USD 0,38 0,3810y 0,783 2,270 1,340 Euribor-6 -0,22 0,00 Libor-6 USD 0,54 0,54

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,0613 -0,0152 EUR/JPY 121,41 -0,92 191,4124 1169,64 54,08USD/JPY 114,4 0,74 EUR/GBP 0,8432 -0,0075 - 1d 0,56 -5,26 1,17GBP/USD 1,2584 -0,0063 EUR/CHF 1,0785 -0,0052AUD/USD 0,7468 -0,0015 EUR/SEK 9,6893 -0,07USD/CAD 1,3197 -0,0030 EUR/NOK 8,9586 -0,03

Calendar

Monday, 12 December 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