Tuesday, 12 January 2016

P. 1

Rates: Mix of supply, risk sentiment and oil prices

Bond markets have to digest a lot of supply today and later this week. Together with easing tensions on Chinese markets, this suggests more downside for bonds. However, the new crash of the oil price might limit losses, so we hold a more neutral view for today’s trading.

Currencies: PBOC indicates no protracted yuan depreciation

Yesterday, the dollar rebounded slightly as markets ignored a new downleg of Chinese equities. This morning, Chinese officials indicated that China doesn’t pursue a protracted depreciation of the yuan. The off-shore yuan rebounds sharply on supposed PBOC interventions. USD trading might be technically in nature today.

Calendar

• US equities failed to safeguard early gains, ending the session broadly

unchanged. Energy and materials shares were hit the hardest as the oil price fell to new cycle lows. This morning, Asian shares trade mixed. Chinese stocks outperform, trading with limited gains.

• China’s central bank set a relatively strong reference rate for the yuan this morning, keeping it almost stable for a third straight session. Offshore and onshore exchange rates have converged to parity, apparently due to central bank interventions.

• A new selling wave hit the oil price during the US session yesterday and also this morning, the sell-off continues. The Brent oil price hovers around $30/barrel currently. According to a research institute, as many as a third of American oil and gas producers could face bankruptcy next year if oil would not rebound to $50/barrel.

• British consumer spending rose by a disappointing 0.1% Y/Y over the crucial Christmas period, the BRC said this morning, as retailers offered more and deeper discounts.

• Alcoa swung to a loss in the fourth quarter as restructuring charges and sharply lower aluminium prices weighed on its results. Nevertheless, the company still beat market expectations.

• Today, the eco calendar remains thin, especially in the euro zone. In the US, NFIB small business confidence and JOLTS jobs report will be released and in the UK the production data 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

Tuesday, 12 January 2016

P. 2

Bund and US Treasuries fall prey to some profit taking

In a calm start of the trading week German Bunds fell prey to profit taking, underperforming US Treasuries, despite weaker European equities. In a daily perspective, the US curve bear steepened with yields flat (2-yr) to 6 bps higher. The correction of German bonds was modest with yields up between 1.1 bp and 2.7 bps (10-yr). The 10-30 part of the German curve bear flattened slightly. The Bund and US Treasuries are again at the levels of Friday morning, before the post-payrolls surprise rally. News was sparse and mostly ignored.

Regarding the market calendar, following a significant drop in November, US NIFB small business confidence is expected to have picked up slightly in December, from 94.8 to 95.0, but with slight downside risks following a poor manufacturing and non-manufacturing ISM. The JOLTS jobs report is still for November, but we look out whether it will confirm the strong US labour market indicators of recent. None is really a market mover. There are speeches of ECB Praet and Lautenschlaeger, but we are unaware whether they touch on economy or policy. Especially Praet should be scrutinized for comments. Since the ECB meeting early December it has been very quiet ECB-side. With recent turmoil, some guidance would be welcome. Lautenschlaeger usually doesn’t talk on policy, but ahead of the Dec meeting she was critical for ECB policy easing.

Overnight, Atlanta Fed Lockhart, a centrist who doesn’t vote in 2017, said he favours continued tightening this year, while the global sell-off is unlikely to affect the US economy. However, persistence of turmoil such as now occurred starting in August might change that view. In a dovish swipe, he said there may be little new info about inflation by the March meeting to influence a policy choice. He was encouraged about the hiring trend, but added Q4 growth may be disappointing. Inflation would be the key factor in deciding tightening path. Dallas Fed Kaplan (newcomer who votes in 2017) said he was in favour of December lift-off and laid out reasons why the economy may warrant staying on a tightening policy path. He said 4 hikes are not baked into the cake and that by March the Fed would have enough new info to take a decision on rates.

Rates

US yield -1d2 0,9356 -0,00025 1,5824 0,022710 2,1595 0,043930 2,954 0,0454

DE yield -1d2 -0,3840 0,00605 -0,1137 0,017710 0,5439 0,028430 1,4013 0,0327

T-Note future (black) and S&P future (orange): Volatile trading leaving US Treasuries lower and equities little changed

Brent crude cannot find its composure and trades now close to $30$/barrel.

Core bonds fell prey to modest profit taking as equities keep up in the face of huge Asian equity losses

PBOC takes action to avoid further yuan appreciation

Unattractive calendar, with ECB Praet speech the wildcard.

Atlanta Fed Lockhart not sure Fed has enough new info when meeting in March.

Stance newcomer Dallas Fed Kaplan not unequivocally clear.

Tuesday, 12 January 2016

P. 3

Heavy supply with new 10-yr OLO (Jun2026)

Belgium, Spain and the EFSF announced new syndicated deals in the near future (likely today). The Belgian debt agency launches a new 10-yr benchmark (OLO 77 Jun2026). Concerning the pricing of the new OLO 77 (1% (?) Jun2026) on the Belgian yield curve, we interpolate asset swap spreads between OLO 74 (0.8% Jun2025) and OLO 75 (1% Jun2031) to calculate fair value. We didn’t use OLO 64 (4.5% Mar2026) and OLO 31 (5.5% Mar2028) because they trade a tad special given their off-the-run status (especially OLO 31). Based on yesterday’s closing levels, the interpolation corresponds with an asset swap spread of 6 basis points. This corresponds with a 1.02% yield to maturity. The Spanish treasury also issues at the tenor 10-yr tenor with a new Obligacion (Apr2026). The EFSF sells new 5-yr benchmark bonds. Regular tap auctions are also scheduled in the Netherlands and Austria. The Dutch debt agency taps the on the run 20-yr DSL (€1-1.5B 2.5% Jan2033). The Austrian treasury taps the on the run 10-yr RAGB (1.2% Oct2025) and 20-yr RAGB (2.4% May2034) for a combined €1.2B. In the US, the Treasury starts its mid-month refinancing operation with a $24B 3-yr Note auction. Currently, the WI trades around 1.2%.

Supply, risk sentiment and oil prices: difficult mix

R2 161,71 -1dR1 160,66BUND 159,28 -0,5300S1 156,4S2 154,54

Overnight, calm returned on Asian equities with a Japanese underperformance (-3%), catching up after yesterday’s closure. Oil prices drop 3% with Brent crude at a new cycle low around $30.50/barrel. The US Note future trades slightly higher.

Today, the eco calendar contains only US NFIB Small Business Optimism. Risks are on the downside of expectations, but the eco release might be overshadowed by global events. Friday’s soft market reaction on stellar payrolls indicates that Asian/Chinese turmoil is key for trading at this stage. Overall, we have a more neutral view for today. The devaluation of the renminbi stopped this week and this halted safe haven trades. Yesterday, core bonds fell prey to some profit taking. Apart from the Chinese side of the story, markets will also have to digest huge bond supply this week, which is also negative for bonds. Continued weakness in the oil price might dampen the downside though. The speech by ECB Praet (hints on chances of additional easing?) is a wildcard. Fed Lacker’s hawkish views are known. We nevertheless put our sell-on-up ticks strategy on hold, at least until risk sentiment improves again. Longer term, we believe that December policy action by the ECB (failing to deliver on expected easing) and the Fed (start tightening cycle) puts a bottom below yields.

German Bund: Sideways trading range. US Note future: Dovish reaction on payrolls suggests that Asian/Chinese turmoil is key for markets at this stage.

Tuesday, 12 January 2016

P. 4

PBOC signals no yuan devaluation

On Monday, the dollar was slightly better bid after Friday’s disappointing performance despite a strong payrolls report. The US currency profited slightly as European and US investors shrugged off a new selling wave on the Chinese equity markets. However, the moves were modest and are not really significant from a technical point of view. EUR/USD closed the session at 1.0859 (from 1.0922 on Friday). USD/JPY closed at 117.76 from 117.26.

This morning, Asian markets (ex Japan) trade mixed to marginally higher. The PBOC fixed the yuan little changed against the dollar. Chinese officials came out to convince markets that they don’t intend a protracted weakening of the yuan. They reiterate that the value of the yuan should be seen against a basket of currencies and not only against the US dollar. The off-shore yuan strengthened sharply and even trades at a stronger level than the on-shore yuan on suspected PBOC interventions in the off shore market. Those interventions sharply reduced yuan liquidity in Hong Kong pushing yuan short-term interest rates sharply higher. The PBOC action stabilizes regional equity markets, but commodities remain under pressure. The dollar is little changed against the euro and the yen this morning at respectively EUR/USD 1.0880 and 117.50

Today, there are again few important eco data. The US NFIB small business confidence and the Jolts job openings are interesting but no FX movers. ECB’s Praet and Lautenschlaeger will speak, but not often on policy or economy, ,the speech of ECB Praet may be more interesting, as we heard little to nothing from ECB since December easing. . Later today, Fed Lacker, hawk but no voter, will gives his view. So, with few eco data on the calendar and no clear guidance from Asia, trading in the major dollar cross rates might be again order driven and technica. China’s signal (see above) might be a slightly positive for developed equity markets and for the dollar. However, the performance of oil/commodities remains a wildcard for global market sentiment. In a broader perspective, there is no clear sign yet that the China driven volatility is over. This questions the ST upside potential for the dollar. Earlier last week, we ignored the EUR/USD decline. We look to sell EUR/USD higher in the trading range (e.g closer to the 1.10/1.11 area).

Currencies

R2 1,106 -1dR1 1,097EUR/USD 1,088 -0,0048S1 1,0711S2 1,0524

Dollar gained slightly ground in technical trade on Monday

Eco calendar remains thin

Speech ECB Praet Wildcard

Technical dollar trading likely

EUR/USD: dollar slightly stronger within tight range

USD/JPY: decline slows, but no sustained rebound yet

PBOC sets yuan fixing little changed and signals that it doesn’t intend a protracted decline of its currency

Off-shore yuan rebounds sharply

Tuesday, 12 January 2016

P. 5

From a technical point of view, EUR/USD failed to regain important resistances at 1.1087 (breakdown) and 1.1124 (62% retracement from the October high). Last week, EUR/USD failed to sustain below 1.0796 support (07 Dec low). Next support is at 1.0650 (76% retracement off 1.0524/1.1060) and at 1.0524. On the topside, 1.1004 (reaction top) is a first reference. Next resistance comes in at 1.1060/1.1124 (15 Dec top/62% retracement) The picture for USD/JPY remains negative below 120. Next support comes in at 116.18 (August low). The pair is moving into oversold territory and the decline slows. However, there is no sign that a bottom might be in place.

Sterling decline taking a breather

On Monday, pressure on sterling eased as risk sentiment turned less negative in Europe and in the US. In technical trade, sterling reversed part of Friday’s post-payrolls’ losses, especially against the euro. Cable also tried to regain the 1.46 big figure, but the attempt was rejected. The pair closed the session at 1.4543 (from 1.4517 on Friday). EUR/GBP tested the 0.7550 area early yesterday morning, but failed and sterling made a nice intraday rebound. The pair closed at 0.7467.

Overnight, the UK BRC sales (Like for like) were rather weak. Sterling is losing slightly ground against the euro and the dollar. Later today, the November (industrial and manufacturing) UK production will be published. Production is a weak spot in the UK economy. For manufacturing, a weak +0.1% M/M and -0.8% Y/Y is expected. Sterling investors are already counting down to Thursday’s BoE policy meeting and its Minutes. A loss of momentum in UK activity (especially in manufacturing), ongoing low headline inflation, modest wage growth and global uncertainty are good reasons for the BoE to keep its rates unchanged (at lowest levels). This is weighing on sterling. Part of the bad news should already be discounted after the recent sterling decline. However,a sustained rebound will be difficult unless there is progress in the Brexit debate or unless risk sentiment improves. EUR/GBP broke above the 0.7493 Oct top yesterday morning and the test is ongoing despite yesterday’s intra-day sterling rebound. A sustained break would be a negative for sterling. Next resistance stands at 0.7593 (Feb 2015 top). Sterling is moving in oversold territory against the euro and the dollar, but it is no good enough a reason to rush into sterling longs.

R2 0,7593 -1dR1 0,7555EUR/GBP 0,7491 -0,0024S1 0,7421S2 0,7313

EUR/GBP: test of the 0.75 area continues despite yesterday’s sterling rebound

Cable holding near multi-year low

Tuesday, 12 January 2016

P. 6

Tuesday, 12 January Consensus Previous US 12:00 NFIB Small Business Optimism (Dec) 95.0 94.8 16:00 JOLTS Job Openings (Nov) 5450 5383 16:00 IBD/TIPP Economic Optimism (Jan) 47.5 47.2 Japan 00:50 BoP Current Account Balance (Nov) A: ¥1143.5b ¥1458.4b 00:50 BoP Current Account Adjusted (Nov) A: ¥1423.5b ¥1493.7b 00:50 Trade Balance BoP Basis (Nov) A: -¥271.5b ¥200.2b 06:00 Consumer Confidence Index (Dec) A: 42.7 42.6 UK 01:01 BRC Sales Like-For-Like YoY (Dec) A: 0.1% -0.4% 10:30 Industrial Production MoM/YoY (Nov) 0.0%/1.7% 0.1%/1.7% 10:30 Manufacturing Production MoM/YoY (Nov) 0.1%/-0.8% -0.4%/-0.1% 16:00 NIESR GDP Estimate (Dec) -- 0.6% France 08:30 Bank of France Bus. Sentiment (Dec) 99 98 Spain 09:00 House transactions YoY (Nov) -- 2.7% Sweden 09:30 Budget Balance (Dec) -- 21.8b Events 11:30 ECB Executive Board Member Praet Speaks in Paris 20:00 ECB Executive Board Member Lautenschlaeger Speaks in Frankfurt 21:15 Fed's Lacker To Speak on Outlook in Columbia, South Carolina Austria Bond Auction( Eur 1.21bn; 2.4% May 2034, 1.2% Oct 2025) (11:00) The Netherlands DSL Auction (Eur 1-1.5bn 2.5% 2033 DSL) (11:00) UK IL Gilt Auction (Gbp 0.9bn 0.125% Mar 2046) (11:30) US 3Yr notes Auction ($24B) (19:00)

10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 2,16 0,05 US 0,94 0,00 DOW 16399 16398,57DE 0,54 0,03 DE -0,38 0,01 NASDAQ for Exch - NQI #VALUE!BE 0,90 0,04 BE -0,35 0,01 NIKKEI 17219 17218,96UK 1,77 0,01 UK 0,50 -0,02 DAX 9825,07 9825,07JP 0,22 -0,01 JP -0,02 0,01 DJ euro-50 3027 3027,49

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,236 -0,0013y -0,005 1,193 1,090 Euribor-1 -0,22 0,00 Libor-1 USD 0,51 0,515y 0,250 1,492 1,365 Euribor-3 -0,14 0,00 Libor-3 USD 0,59 0,5910y 0,898 1,989 1,802 Euribor-6 -0,05 0,00 Libor-6 USD 0,75 0,75

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,0883 -0,0045 EUR/JPY 127,68 -0,26 164,2365 1094,35 30,64USD/JPY 117,365 0,24 EUR/GBP 0,7491 -0,0024 - 1d -4,30 -12,35 -2,18GBP/USD 1,4526 -0,0007 EUR/CHF 1,0877 0,0023AUD/USD 0,6960 -0,0003 EUR/SEK 9,276 -0,01USD/CAD 1,4231 0,0064 EUR/NOK 9,7211 0,01

Calendar

Tuesday, 12 January 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 Joke Mertens +32 2 417 30 59 Institutional Desk +32 2 417 46 25 Mathias van der Jeugt +32 2 417 51 94 France +32 2 417 32 65 Dublin Research London +44 207 256 4848 Austin Hughes +353 1 664 6889 Singapore +65 533 34 10 Shawn Britton +353 1 664 6892 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

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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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