Friday, 10 February 2017

P. 1

Rates: US Treasuries sell-off after failed test resistance and announcement Trump

US Treasuries lost ground yesterday after another failed test of 125-09/16 resistance. Trump’s promise of a “phenomenal” corporate tax announcement the next weeks, accelerated the sell-off. Today’s eco calendar remains rather uneventful, suggesting more sentiment- and technically-driven trading.

Currencies: Dollar rebounds on renewed ‘Trump tax-hope’

Yesterday, the dollar rallied as Trump’s comments on upcoming tax measures reactivated the global reflation trade. Today, the fate of the reflation trade will be important for USD trading. USD investors will also keep a close eye at the outcome of the meeting between US president Trump and Japanese PM Abe.

Calendar

• US stocks climbed to new heights (+0.50%), after Trump said he will release a

‘phenomenal’ corporate tax announcement the next two to three weeks. Overnight, Asian indices gain up to 1% with Japan outperforming (+2%).

• A federal appeals court ruled against President Trump’s executive order on immigration and refugees, saying such a travel ban shouldn’t go into effect while courts consider whether it goes too far in limiting travellers to the US.

• In a phone call with Chinese President Xi Jinping, US President Trump affirmed the “One China” policy that has long underpinned Sino-US relations, a declaration that appeared aimed at ending weeks of uncertainty.

• China reported better-than-expected trade data for January as demand picked up both at home and abroad, an encouraging start to 2017 even as Asia's exporters brace for a rise in US protectionism.

• Mexico’s central bank increased its key lending rate as expected by 50 bps to 6.25% in a bid to cool inflation and prevent the peso, which has weakened around 12% since Trump’s election, from piling further pressure on prices.

• German chancellor Merkel set out tough plans to speed the removal of failed asylum seekers, including a repatriation centre to handle difficult cases and increased cash inducements for those leaving voluntarily.

• Around €1.7T of French public debt could be redenominated into francs if Le Pen’s far-right FN gets into power, according to party officials, in what would according to ratings agencies amount to the world’s largest sovereign default.

• Today’s eco calendar contains UK industrial production and US Michigan consumer confidence. ECB governors Weidmann and Mersch speak.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Friday, 10 February 2017

P. 2

US Treasuries sell-off as resistances hold

Global core parted ways yesterday with US Treasuries underperforming steady Bunds following the failed test of 125-09/16 T-Note resistance and US yield supports at 5, 10 and 30-yr tenors. It convinced traders to close long positions. Tensions on EMU bond markets eased further, while stock markets eked out small gains. Oil prices traded with an upward bias. In this context, the Bund held firm, but of course, couldn’t copy Wednesday’s stellar gains. During US dealings, a shy attempt to fight back was aborted when president Trump announced he will release a ‘phenomenal’ corporate tax announcement in the next weeks. It became a genuine risk-on market in which US Treasuries slid further down. The Bund future followed US Treasuries down, but the cash market was already closed. The 30-yr T-bond auction went well, but couldn’t stop the selling. In a daily perspective, German yields rose 1.5/1.6 bps in the 2-to-10-sector, while the 30-yr was virtually flat. The US yield curve shifts 3.6 bps (2-yr) to 6.4 bps (10-yr) higher, the belly underperforming.

Yield spreads versus Germany narrowed 8/9 bps for Portugal/Spain and Italy. For the second consecutive day, there was considerable spread narrowing for France and Belgium too (4/3 bps). Investors are apparently less concerned about the French elections. Dovish talk of ECB Weidmann might have eased fears for an early dialling back of QE. The front end of the Greek curve suffered (2yr yield > 10%). The quarrel between the IMF and European creditors heightens risks of a July default. After trading, BB quoted “sources” saying Greece’s creditors may present PM Tsipras today a proposal of measures to be taken to complete the bailout review.

Eco calendar remains uninspiring for trading

The EMU economic calendar contains only French and Italian production data for December. Given the publication of Q4 GDP figures earlier, national data won’t be important for trading. After a strong November month, some giveback is expected. In the US, January import prices are expected to continue their rise higher (0.3% M/M and 3.4%) based on petroleum and food prices. Risks may be on the downside. Michigan consumer sentiment is expected to have slightly declined in February to 98 from 98.5. With sentiment at its highest since the end of 2000, such a minimal decline shouldn’t have much impact. We have no reasons to distance us from consensus. ECB goverenors Mersch and Weidmann are hawks, but they have n recently talked quite dovish, suggesting the real debate on QE is something for after the French elections.

Rates

US yield -1d2 1,19 0,045 1,88 0,0610 2,40 0,0630 3,01 0,04

DE yield -1d2 -0,78 0,015 -0,44 0,0210 0,34 0,0430 1,09 0,01

T-Note future (black) and S&P future (orange) (intraday): Initial slide due to technical reasons, but decline accelerated after Trumps’

promise for tax cuts (which pushed equities to new highs).

US 10yr yield: Rebound when key yield support loomed, avoiding a bearish double top configuration

Core bonds sell off as US resistance holds and Trump promises tax cuts.

Peripheral/soft-core bonds rallied with substantial spread narrowing

Friday, 10 February 2017

P. 3

US 30-yr Bond auction went fairly well

The US Treasury ended its mid-month refinancing operation with a fairly good $15B 30-yr Bond auction. The auction stopped through the 1:00 pm bid side and the bid cover (2.25) was above average. Bidding details were mixed with a strong indirect bid, reflecting foreign investors’ demand, but a disappointing direct bid. Earlier this week, the US Treasury held a solid 3-yr Note auction and a very weak 10-yr Note auction.

Trump throws markets a bait, revives reflation spirits

Overnight, Asian risk sentiment is positive on the back of Trump’s “phenomenal” corporate tax announcement, his confirmation of the US’ One-China policy and strong Chinese trade data. Asian stock markets gain up to 1% with Japan outperforming (+2%). The US Note future lost slightly more ground, suggesting a weaker opening for the Bund.

Today’s eco calendar remains thin and irrelevant for trading with only US Michigan consumer confidence and speeches by ECB Mersch and Weidmann. US President Trump threw markets a bait with his future communication on tax policy, reviving reflation spirits. We think that investors’ don’t want to be long US Treasuries ahead of the announcement, suggesting that the 125-09/16 resistance area is a strong ceiling. More correction lower is likely, with first support at 123-18. European trading will remain sentiment- and technically-driven. Monday’s spread widening (concerns about Greece/France/Italy) caused a global safe haven bid. Moves petered out on all markets, apart from the Bund market which held firm. The short term technical picture of the Bund improved after the break above 162.49/62, with next resistance approaching 164.90. Nevertheless, we expect some profit taking could occur today.

Longer term, we hold our negative views on both German Bund and US Note future on the back of accelerating growth and inflation. US investors still have to adapt to the Fed’s 2017 rate hike scenario (3 hikes) while European investors might face another “recalibration” of the ECB’s APP-programme in H2 2017.

R2 164,90 -1dR1 164,45BUND 164,03 -0,22S1 160,72S2 159,91

German Bund: short term picture improved with 164.90 resistance lining up

US Note future: new test of 125-09/16 resistance failed after disappointing 10-yr Note auction

Friday, 10 February 2017

P. 4

EUR/USD: Topside test rejected. Dollar succeeds a cautious/gradual

comeback

USD/JPY leaves the recent lows as Trump reflation trade

resumes, at least temporary

Dollar reaccelerates on ‘Trump’s tax promise’

On Thursday, USD trading was initially technically in nature, with few links to other markets. During the US trading session, markets were propelled by a tweet from President Trump as he indicated to announce something on taxes in the weeks to come. The Trump reflation trade resumed. Major US equity indices touched new record highs, yields jumped higher and so did the dollar. USD/JPY closed at 113.25 (from 111.93). EUR/USD dropped and finished the day at 1.0655 (from 1.0698).

Overnight, Asian equities join the Trump risk-rebound. Japanese equities outperform on the weaker yen. USD/JPY is currently changing hands in the 113.75 area. US president Trump accepting the ‘One Chine’ policy and strong Chinese trade data (January exports and imports rose more than expected) support regional sentiment. The dollar extends the Trump driven rebound, but gains remain most. EUR/USD changes hands in the mid 1.0650 area.

Today’s EMU economic calendar contains French and Italian production data. They are no market movers. In the US, January import prices are expected to rise further (3.4% Y/Y from 1.8% Y/Y) based on petroleum and food prices. Risks may be on the downside. Michigan consumer sentiment is expected to have slightly declined in February to 98 from 98.5. Sentiment is at its highest since the end of 2000. So such a minimal decline shouldn’t have much impact. The data will again only be of second tier importance for trading, unless they bring a big surprise. Markets will also look out to the meeting between President Trump and Japanese PM Abe. The valuation of the yen and Japanese exports to the US are sensitive issues. However, over the previous days, Trump sounded less offensive on China. Maybe the headlines from the meeting with Abe also shouldn’t be that hard/negative. If so, it might be (slihglty) positve for risk sentiment and for the dollar (including USD/JPY). The ST USD momentum improved this week, but the rise in core yields and of the dollor (both against the yen and the euro) remains moderate. The hope on new US tax maesures might put a floor for equities and for the dollar short-term. That said, we have the impression that any further rebound will develop rather gradually.

Currencies

R2 1,1145 -1dR1 1,0874EUR/USD 1,0660 -0,0016S1 1,0341S2 1,0000

Dollar extends Trump-driven rebound

Asian markets also shift into risk-on modus

Eco calendar better filled

Trump tax hope might help put a ST USD bottom in place

Dollar going north again as Trump promises something phenomenal on taxes

Friday, 10 February 2017

P. 5

Global context: The dollar is/was in a corrective downtrend since the start of January as the Trump reflation trade petered out. Interest rate differentials in favour of the dollar narrowed. Trump’s communication became a source of uncertainty, also for the dollar. At some point, absolute interest rate support should provide a USD floor, especially as the Fed is expected to continue its policy normalisation. This week, the dollar showed tentative signs of such a bottoming out process. Price action earlier this week showed that euro weakness might be a factor too. As we see the 1.0874 as solid resistance, a sell EUR/USD on upticks approach might be considered. The downside test of USD/JPY is also rejected. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) remains key support. The day-to-day momentum improved, but a return to the recent highs looks an uphill battle. The post-Trump highs (118.60/66) are still far away.

Still no clear driver for sterling trading

Yesterday, sterling trading was basically technical in nature, as the Brexit headlines moved to the background. Later in US dealings, cable even slightly underperformed EUR/USD, as the dollar rebounded after the Trump tax comments. EUR/GBP closed the session at 0.8526 (from 0.8531). Cable finished the day at 1.2497.

Today, the UK calendar is well filled with the Dec UK trade balance and production, and the NIESR January GDP estimate. The UK trade deficit is expect to narrow, but coming from a very high November level. On the other hand, production is expected to show very modest growth after strong November growth. We side with the consensus. However, sterling might become more sensitive in case the data would be much weaker than expected. Context. On Tuesday, sterling rebounded as the UK Parliament was allowed to vote on the final Brexit agreement. We don’t see this ‘agreement’ as a reason for further sterling strength though. Last week’s balanced BoE approach capped the topside of sterling and helped a cautious bottoming out process for EUR/GBP. The EUR/GBP 0.8450 support looks again better protected, as sterling momentum is waning. A cautious EUR/GBP buy-on-dips approach is preferred.

R2 0,9047 -1dR1 0,8881EUR/GBP 0,8521 -0,0014S1 0,8471S2 0,8304

EUR/GBP still struggles to rebound off the 0.8450 support area

GBP/USD topside test rejected, but no further losses.

Friday, 10 February 2017

P. 6

Friday, 10 February Consensus Previous US 14:30 Import Price Index MoM / YoY (Jan) 0.3%/3.4% 0.4%/1.8% 16:00 U. of Mich. Sentiment (Feb P) 98 98.5 16:00 U. of Mich. Current Conditions (Feb P) -- 111.3 16:00 U. of Mich. Expectations (Feb P) -- 90.3 16:00 U. of Mich. 1 Yr Inflation (Feb P) -- 2.6% 16:00 U. of Mich. 5-10 Yr Inflation (Feb P) -- 2.6% Canada 14:30 Unemployment Rate (Jan) 6.9% 6.9% 14:30 Net Change in Employment (Jan) -10K R 46.1K Japan 00:50 PPI MoM / YoY (Jan) A 0.6%/0.5% 0.6%/-1.2% 05:30 Tertiary industry index A 0.4% R 0.3% China Trade Balance CNY (Jan) A 354.5b 275.40b Imports / Exports YoY CNY (Jan) A25.5%/15.9 10.8%/0.6% UK 10:30 Visible Trade Balance GBP/Mn (Dec) -£11450 -£12163 10:30 Industrial Production MoM/YoY (Dec) 0.2%/3.2% 2.1%/2.0% 10:30 Manufacturing Production MoM / YoY (Dec) 0.5%/1.7% 1.3%/1.2% 10:30 Construction Output SA MoM / YoY (Dec) 1.0%/-0.5% -0.2%/1.5% 16:00 NIESR GDP Estimate (Jan) -- 0.5% France 08:45 Industrial Production MoM / YoY (Dec) -0.7%/1.4% 2.2%/1.8% 08:45 Wages QoQ (4Q P) -- 0.2% Italy 10:00 Industrial Production MoM / WDA YoY (Dec) -0.1%/3.2% 0.7%/3.2% Norway 08:00 CPI MoM / YoY (Jan) 0.2%/2.9% -0.5%/3.5% Events Saturday Fed Fischer to address Economic conference in UK US president Trump meets PM Abe 10:50 ECB Mersch speaks in Hamburg 11:00 ECB’s Weidmann Speaks in Hamburg

Calendar

Friday, 10 February 2017

P. 7

10-year td -1d 2-year td -1d Stocks td -1dUS 2,40 0,06 US 1,19 0,04 DOW 20172,4 118,06DE 0,34 0,04 DE -0,78 0,01 NASDAQ 5715,18 32,73BE 0,86 -0,01 BE -0,56 0,00 NIKKEI 19378,93 471,26UK 1,25 0,03 UK 0,10 0,02 DAX 11642,86 99,48

JP 0,09 -0,01 JP -0,21 -0,01 DJ euro-50 3277,79 39,75

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,06 1,69 0,72 Eonia -0,3530 -0,00305y 0,14 1,96 0,89 Euribor-1 -0,3710 0,0020 Libor-1 0,7717 -0,001110y 0,74 2,33 1,28 Euribor-3 -0,3280 0,0000 Libor-3 1,0337 -0,0045

Euribor-6 -0,2410 0,0010 Libor-6 1,3379 -0,0056

Currencies td -1d Currencies td -1d Commodities td -1d

EUR/USD 1,0660 -0,0016 EUR/JPY 121,16 1,32 CRB 192,76 0,49USD/JPY 113,66 1,40 EUR/GBP 0,8521 -0,0014 Gold 1225,00 -16,10GBP/USD 1,251 0,0002 EUR/CHF 1,0681 0,0038 Brent 55,75 0,22AUD/USD 0,7652 0,0032 EUR/SEK 9,4925 0,0433USD/CAD 1,313 -0,0023 EUR/NOK 8,9082 0,0113

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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