Monday, 13 February 2017

P. 1

Rates: Calm start of the week?

The eco calendar is empty today. Sentiment in Asia is modestly risk-on. In this context, core bonds may feel some modest downside pressure, especially as investors will also be cautious ahead of Yellen’s testimony on Tuesday and a raft of US eco data, including inflation to be released Wednesday.

Currencies: dollar extends gradual rebound

The dollar still profits from a constructive risk sentiment. The positive tone from the meeting between president Trump and Japanese PM Abe eased market fears on global trade and is marginally supportive for the dollar. The prospect of important tax measures in the US still prevents investors from going short equities and the dollar.

Calendar

• On Friday, US equities eked out modest gains, setting again new all-time highs

in an uneventful session. Asian equities start the week with moderate gains, as the yen weakens and dollar slightly strengthens and ahead of key US eco data.

• Japanese investors culled their stakes of US Treasuries in December by the most in four years. It’s not just Japanese investors, as across the world foreigners are pulling back from USD debt like never before.

• Fed Tarullo, dove and architect of the Fed’s banking regulation, will leave the Fed early April. It gives Donald Trump the opportunity to nominate 3 new Fed governors and to reshape the Fed’s oversight of Wall Street and monetary policy.

• Commodities opened the week excellent with copper and iron ore surging, while oil stabilizes. Copper futures hit the highest level since 2014. It pushed producer shares higher in Asia.

• Fitch affirmed Sweden’s AAA+ rating stable outlook and Slovakia’s A+ rating stable outlook

• Fed vice chair Fischer said over the weekend that significant uncertainty remains over the outlook for US fiscal policy

• Tokyo stocks gained as PM Abe and president Trump refrained from arguing about FX levels during their meeting. Japanese GDP grew for the 4th consecutive quarter, but the advance (0.2% Q/Q) was slightly below expectations.

• Today’s eco and event calendar is empty. Attention might go to the Italian BTP auction. Later this week, Yellen will hold her semi-annual testimony before Congress and manifold interesting US eco data will be released.

Headlines

Monday, 13 February 2017

P. 2

Modest losses for core bonds in dull session

On Friday, global core bonds lost minor ground, as initial losses were largely erased. The failure to take out key US yield support on Thursday and Trump’s suggestions that a huge corporate tax package was under preparation, weighed still on core bonds in Asian and to lesser extent in European morning trading. So did higher US import prices. The last down-move lacked conviction though and was the start of a bond recovery. Weaker Michigan consumer confidence helped the recovery. Rising equities and oil prices were ignored. In a daily perspective, the German yield curve steepened with yields varying between -1.6 bps (2-yr) to up +3.4 bps (30-yr). US yields were 0.1 (30-yr) to 2 bps (5-yr) higher. On the EMU bond markets, the peripheral markets’ rally was aborted. 10-yr yield spreads versus Germany widened following two days of substantial spread narrowing. Spreads increased 6, 7 and 9 bps for Portugal, Spain and Italy. The French 10-yr yield spread widened again 6 bps, underperforming other semi-core bonds. Greek bonds outperformed with yield spreads narrowing by 117 bps (2-yr) and 43 bps (10-yr) on signals that an agreement between Greece and its creditors has come closer, which would avoid insolvency when €8B of Greek bonds mature in July.

Eco calendar empty today, but busy later this week

The EMU economic calendar remains thin and contains the (outdated) December production, Q4 GDP (revision) and the German ZEW economic confidence on Tuesday. In the US, main releases are the PPI on Tuesday, the Empire State manufacturing survey, CPI, retail sales, production and homebuilders’ sentiment on Wednesday. On Thursday, housing starts and permits and Philly Fed survey on business sentiment are released.

US Fed speakers are plentiful with Lacker, Kaplan , Lockhart, Rosengren and Harker. However, most attention will evidently go to chairwoman Yellen who gives her semi-annual testimony before Congress on Tuesday and Wednesday. We don’t expect Fed Chairwoman Yellen to give more information on the outlook for rates. The Fed is firmly in wait-and-see mode, as the lastest Fed statement showed. Yellen doesn’t want to stimulate the market in thinking that rates will be raised in March, even as before the February 1 FOMC meeting, we heard some hawkish soundbits coming from the Fed. Yellen probably will only guide market expectations towards higher rates when she gets more clarity on the size, timing and composition of the proposed fiscal stimulus. We suspect that Trump, who promised news on the corporate tax package in the next 2 to 3 weeks, will use his appearance before Congress on February 28 to give more details.

Rates

T-Note future (black) and S&P future (orange) (intraday): Slight downside bias in early Asia and early US dealings, but losses

remained minor.

Greek 2-yr yield dropped sharply as hope revived an agreement on the bail-out and as participation of the IMF remains possible

Core bonds end slightly lower in dull trading.

Peripheral/soft-core bonds 2-day rally aborted as spreads widened again

Greek ST bonds shot higher on hopes for an agreement on a bail-out

Thin EMU and busy US calendar this week

Manifold Fed speakers, but Yellen’s semi-annual testimony key.

Monday, 13 February 2017

P. 3

New supply from Italy, France and Spain

The Italian Treasury kicks off this week’s supply with a tap of 5 BTP’s for an targeted amount of €10.75B. It taps the 0.05% Oct2019, the 0.7% May2020, the 0.65% Oct 2023, the 5% Aug.2039 and finally the 2.7% Mar 2047 BTP. Italian yields have gone up substantially recently and so have spreads against Germany and swaps (also underperformance on Friday), especially at the longer end of the curve. Italian political uncertainty remains high and the banking sector woes are not resolved yet. 2017 BTP issuance is also up some €40B from 2016. In this context, we are eager to see whether yields/spreads have gone up enough to attract sufficient demand, despite the price concession (also on Friday).

Will Yellen and US inflation give core bonds direction?

Overnight, Asia is trading with a mild risk-on bias. The Trump-Abe meeting went well and nothing was said on currencies. Commodities are sharply up, equities trade with modest gains and the US T-Note opened lower. Japanese GDP stats were about neutral, but other stats showed Japanese investors continued to sell US Treasuries (in December). So, the Bund may open on the defensive.

Today’s eco calendar is empty. The BTP auction is interesting (see higher). Given the empty calendar, sentiment and technicals will drive the price action today. In this respect, it looks like the upward corrective rally of Bund and T-Note future ran out of steam at the end of last week and more evidence may come today. More evidence is needed though to firmly state that 164.90 (Bund) and 125-09/16 resistances won’t be tested again. This week, investors may be cautious to buy core bonds ahead of Yellen testimony (Tuesday) and US CPI (Wednesday) and maybe even ahead of president Trump announcement on corporate tax, probably when he appears in Congress on February 28. This will tell the markets much about the fate of the reflation trade. Uncertainty about the upcoming elections (Netherlands, France, Italy? Germany) is a Bund supportive factor. However, spreads went already out substantially. So while prices may still go against our bearish view short-term, it only opens opportunities longer term to enter short core bond positions at better levels.

Technically, the short term picture of the Bund improved after the break above 162.49/62, with next resistance at 164.90. 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 may face another “recalibration” of the ECB’s APP in H2 2017.

German Bund: short term picture improved with 164.90 resistance lining up. However, the corrective rally might run into resistance

US Note future: new test of 125-09/16 resistance failed

Monday, 13 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 extends gradual rebound

On Friday, the dollar traded again higher, as the new phase in the reflation trade continued. USD/JPY trended higher in the 113 big figure, supported by higher core/US yields and by a decent equity sentiment. The decline of EUR/USD was even more pronounced as the pair also suffers from underlying euro softness. The US rally slowed in US trading after Michigan consumer confidence was reported softer than expected. USD/JPY closed the session at 113.22 (from 113.25 on Thursday). EUR/USD finished the session at 1.0643 (from 1.0655).

Overnight, Asian equities show modest gains across the board. The meeting between US president Trump and Japanese PM Abe developed in a constructive environment, easing market fears on global trade tensions. Asian equities are also supported by new equity records (three indices) in the US on Friday. Japan Q4 GDP was reported marginally softer, but had no big impact on trading. Japanese investors cut their Treasury holdings the most on four years in December. This could be a negative for the dollar. However, currently, the risk-on sentiment prevails and is supporting the dollar. USD/JPY is trading in the 113.70 area. EUR/USD also resumed its gradual decline, trading in the 1.0630 area.

Today, the eco calendar is empty. So, USD trading will be driven by global market sentiment. The price action in Asia suggests a positive risk sentiment at the European open. This is USD supportive. Investors apparently still don’t want to go short US equities and/or short USD as US president Trump promised to present its tax plans in the near future. Short-term, markets will also look forward to Fed’s Yellen semi-annual testimony before Congress (Tuesday). The Fed chair will probably keep a balanced approach, but confirm that the Fed is nearing its targets. Yellen’s assessment at least shouldn’t be negative for the dollar. Markets will also keep a close eye on the US CPI and retail sales data (Wednesday). We start the week with a cautious USD-positive bias, but the moves might by modest given the upcoming key events/data.

Currencies

Dollar rebound continues on risk-on

Trump-Abe meeting constructive, easing global trade fears

Empty eco calendar

Prospect for tax relief continues to protect the downside of the USD

Dollar extends gains as reflation trade is back in play

Monday, 13 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. Last week, the dollar showed tentative signs of a bottoming out process, supported by the ‘Trump tax promise’. Price action earlier last 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.

EUR/GBP holding in the 0.85 area

On Friday, UK eco data were unequivocally positive. Production rose more than expected and so was construction output. At the same time, the UK trade deficit narrowed more than expected. However, for the production output and the trade deficit, the ONS mentioned one-off factors potentially distorting the data. Sterling gained temporary a few ticks after the data, but the gains couldn’t be sustained. EUR/GBP even spiked temporary higher in the 0.85 big figure. Sterling sentiment improved slightly later in the session. EUR/GBP closed the day at 0.8513 (from 0.8526). Cable ended the session at 1.2491.

Today, there are no UK or EMU eco data. For now, we see no driver for sterling trading. A constructive risk-on sentiment and tentative euro softness caps the topside of EUR/GBP short-term. Later this week, important UK eco data including the CPI, the labour data and the retail sales will be published. We still look out whether the 0.8450 support will continue to play its role as ST line in the sand. Context. The ongoing balanced BoE approach capped the topside of sterling and helped a cautious bottoming out process for EUR/GBP. Last week, 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. The EUR/GBP 0.8450 support remains key for EUR/GBP short-term. A cautious EUR/GBP buy-on-dips approach remains preferred, but overall euro softness remains a risk. In case of a break, the 0.8304 area is the next MT support.

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

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

Monday, 13 February 2017

P. 6

Monday, 13 February Consensus Previous Japan 00:50 GDP SA QoQ (4Q P) A 0.2% 0.3% 00:50 GDP Annualized SA QoQ (4Q P) A 1% R 1.4% 00:50 GDP Deflator YoY (4Q P) -0.1% R -0.1% 00:50 GDP Private Consumption QoQ (4Q P) A 0.0% 0.3% 00:50 GDP Business Spending QoQ (4Q P) A 0.9% -0.4% Germany 08:00 Wholesale Price Index MoM / YoY (Jan) --/-- 1.2%/2.8% Belgium 10FEB-20FEB Budget Balance YTD (Jan) -- -12.617b Sweden 08:00 PES Unemployment Rate (Jan) -- 4.1% Events 11:00 European Commission Economic Forecasts 11:00 Italian BTP auction (0.05% Oct2019, 0.7% May2020, 0.65% Oct2023, 5%

Aug2039, 2.7% Mar2047)

Calendar

Monday, 13 February 2017

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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