Wednesday, 11 October 2017

P. 1

Rates: Catalan issue not resolved yet, cautiousness remains warranted

Focus of today’s trading session will be on Spanish-Catalan issue. Uncertainty remains high at this stage and continues to warrant some cautiousness vis-à-vis Spanish assets, while it might even support some safe haven flows in the Bund especially if we get a strong verbal response from Madrid. FOMC Minutes and a speech by ECB Praet (!) are wildcards.

Currencies: EUR/USD profits slightly from ‘Catalan solution’

The dollar traded with a soft bias yesterday. EUR/USD finally regained 1.18 after Catalonia kept the door open for negotiations. The eco calendar offers no clues for FX trading today. The minutes of the September Fed meeting and a speech of ECB’s Praet might be slightly USD supportive and/or euro negative.

Calendar

• US stock markets ended 0.1% to 0.3% higher after returning from the long

weekend. Risk sentiment remains positive overnight with man indices clocking gains of around 0.5%

• Catalan leader Puigdemont stepped back from making a formal declaration of the region’s independence as he called for more dialogue with Spain following last week’s referendum.

• Theresa May risked upsetting both sides of the Brexit debate when she refused to say how she would vote in another Brexit referendum and appeared to suggest EU citizens’ future rights in the UK were in doubt.

• The EC will present today a list of measures it plans to put forward by next spring on reducing bad loans held by European banks, a draft document said, a move that could slow similar moves by the ECB.

• Germany may need to wait until next year for a new government as the three blocs trying to form an alliance are so far apart they will need a deeply detailed coalition deal, a senior Bavarian ally of Chancellor Merkel has told Reuters.

• The leader of the small nationalist party that will decide New Zealand's next government said that "huge" progress had been made in coalition talks, but he has dropped a self-imposed deadline of Oct. 12 to announce a government.

• Today’s eco calendar remains rather thin with only Minutes of the previous Fed meeting. Spain’s cabinet holds an emergency session on Catalonia. Germany, the Netherlands and the US tap the market while several central bankers speak.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Wednesday, 11 October 2017

P. 2

Core bonds remain in wait-and-see mode

The return of US traders yesterday didn’t bring more animus, even if equities and the declaration of the Catalan leader brought some temporary fuss in an otherwise calm session. Sideways trading was temporary interrupted when US equities dived on a mistaken headline that Google would buy Apple. Bunds and US Treasuries profited from this decline while the approaching speech of Catalan President Puigdemont also attracted safe haven flows. The declaration came in European after-trading and triggered a brief spike higher. Catalan President Puigdemont told regional parliament that they won the right to become independent after the recent referendum. However, he is prepared to wait a few weeks to officially declare it. He wants dialogue with Spain first. Spain’s cabinet holds an emergency meeting today to discuss the Catalan move. It’s unclear whether they will enter the dialogue and/or evoke article 155 (scrapping autonomy). Puigdemont’s statement smells like a coup as he strongly holds on to the outcome of the illegal referendum and wants to start negotiations from that base. We continue to shun Spanish assets at this stage.

In a daily perspective, German and US bond yields ended virtually unchanged. On intra-EMU bond market trading remained lethargic ahead of a key meeting of the Catalan parliament. The German-Spain 10 yr yield spread closed unchanged, while other spread differentials ranged between +1 bp and -1 bp

FOMC Minutes, Fed speakers and supply

The US JOLTS labour market lags payrolls by one month and thus doesn’t impact markets. It is interesting from an economic point of view though, as it gives a richer pictures of developments inside the labour market. Fed Evans (dove) and Williams (centrist) speak, but we don’t count on market moving revelations. The FOMC Minutes are interesting and surprises are not excluded. The debate on too low inflation has been lively and might give us some additional insights though the Fed’s new eco & rate projections and Yellen’s press conference on the decisions and the outlook already revealed a lot. Most governors also already shared their views. So, we are afraid that the Minutes won’t push core bonds out of the recent tight trading ranges. ECB Praet speaks after European trading in NY on the European exit strategies. Praet is a dove who preaches slowly changing the current ultra-easy policy stance. We suspect he is a proponent of the tactic “lower (amount of monthly purchases), but for longer (in time)” regarding the ECB bond buying programme. In this way, the ECB may fight eventual market expectations of higher ECB rates.

Rates

US yield -1d2 1,51 0,015 1,96 0,0010 2,36 0,0030 2,89 0,00

DE yield -1d2 -0,70 0,005 -0,26 0,0010 0,44 0,0030 1,30 0,00

T-Note future (black) & S&P future (orange)(intraday): Mistaken headlines on Apple temporarily distort bond and equity trading

Bund (orange) & EuroStoxx (black): Bunds trade sideways briefly interrupted by speech Catalan leader

Aff

Calm trading session temporary interrupted by surprises

German & US curves end unchanged

Little changes in peripheral markets

Again unattractive calendar today

Friday’s US data remain key

Wednesday, 11 October 2017

P. 3

The Netherlands, Germany, Portugal and US tap market

The Dutch debt agency launches a new 7-yr DSL (Jan2024) via Dutch direct auction. They aim to raise €5-7B. Recent political developments (finally new government) are marginally positive for the auction, but we expect plain vanilla demand overall. The Portuguese Treasury sells to on the run OT’s for a combined €1-1.25B (2.2% Oct2022 & 4.125% Apr2027). Portuguese bonds performed very strong recently after S&P raised the country’s rating to investment grade. This could still be reflected in good demand at today’s auction with more investors able to participate. The German finanzagentur aims to raise €3B via tapping the on the run Bobl (0% Oct2022). Total bids at the previous 4 Bobl auctions averaged €3.83B and we don’t expect much improvement today. The US Treasury starts its mid-month refinancing operation with a $24B 3-yr Note auction. The WI trades currently around 1.67%.

Catalan issue not yet resolved, cautiousness warranted

Most Asian stock markets trade positive overnight. The US Note future and EUR/USD don’t give an indication for the start of Bund trading (neutral?). Markets probably want to see the answer of Madrid first before reacting to Catalan president Puigdemont’s speech yesterday (see above).

Focus of today’s trading session will be on Spanish-Catalan issue. Uncertainty remains high at this stage and continues to warrant some cautiousness vis-à-vis Spanish assets, while it might even support some safe haven flows in the Bund especially if we get a strong verbal response from Madrid. Apart from Spain, focus turns to FOMC Minutes and a speech by ECB Praet (!) after trading (see above). Both are wildcards as they can shape expectations about ECB and Fed policy normalisation.

Technically, US yields ran into resistance after Friday’s payrolls, initiating some short term consolidation. A December rate hike is now almost completely discounted and also suggests that the sell-off is ripe for a pause. Adding the geopolitical context and US/German stock markets at record levels (ready for some profit taking?) even suggest a small positive bias for core bonds in this back-loaded (key US eco data on Friday) week. Looking past this week, we hold a sell-on-upticks strategy both in the US Note future (entry around 126) and the Bund (entry levels around 162).

R2 163,43 -1dR1 161,98BUND 161,26 0,04S1 160,49S2 159,80

German Bund: Sell-on-upticks around 162, anticipating ECB announcement unless Catalan issue spirals out of control

US Note future: Almost completely retraced Summer rally. US 10y yield’s failed test of 2.4% suggests some ST consolidation

Wednesday, 11 October 2017

P. 4

EUR/USD: EUR/USD returns to 1.1823/33 intermediate resistance

USD/JPY still going nowhere

USD confined to tight ranges. Euro gains slightly

Yesterday, the dollar traded soft in Asia and this bias persisted in Europe early in the US. Later, the euro received a better bid as Catalonia leader Puidgemont applied some kind of a ‘forward start’ for the start of the independence after the referendum. EUR/USD closed the session at 1.1808. USD/JPY dropped to the 112.00 area early in US dealings, but finally still closed the session in well-know-territory in the mid 112 area, propelled by new intraday highs on WS.

Overnight, Asian equities continue their uptrend with several indices nearing multi-year or even all-time record levels (Kospi). The dollar stabilizes after recent setback, but without an indication of a real comeback. Political bickering within the Trump administration raises questions on the ability to execute the tax reform plans. EUR/USD trades in the 1.1815 area. USD/JPY is little changed at 112.50. The Aussie dollar initially profited from a record bond auction and strong consumer confidence, but the gains evaporated. AUD/USD trades at 0.7780.

The eco calendar is again very thin. In the US, only US JOLTS labour market report is scheduled for release. It is interesting from an economic point of view, as it gives a richer pictures of developments inside the labour market, but it lags the payrolls. The FOMC Minutes are interesting. However, after the September meeting, the Fed eco and rate projections were published and Yellen elaborated during a press conference on the decisions and the outlook. Nevertheless, the debate on too low inflation may give us some interesting insights. ECB’s Praet speaks after European trading in NY about the European exit strategies. Praet preaches slowness in changing the current ultra-easy policy stance. He might support the “lower (amount of monthly purchases), but for longer (in time)” tactic for the APP. In this way, the ECB may fight market expectations of higher official rates. Yesterday the dollar traded soft for most of the day. The euro profited slightly from the news from Catalonia. This process might still go a bit further this morning, but we don’t expect big euro gains. The stalemate in Catalonia isn’t solved and it doesn’t look the Spanish government is prepared to start negotiations. The Fed minutes should support the scenario of a December rate hike. The comments from Praet might be soft. In this context, we expect any EUR/USD rebound to run into resistance soon. It won’t be easy for EUR/USD to regain the 1.1823/33 area in a sustainable way.

Currencies

R2 1,2225 -1dR1 1,2167EUR/USD 1,1808 0,0068S1 1,1662S2 1,1311

Dollar traded with a soft bias

EUR/USD rebounded after ‘delayed’ independence declaration in Catalonia.

Asian equities extend rally

Dollar stabilizes after recent setback

Thin eco calendar today

FOMC Minutes end central bank speeches might move currencies

Catalonia remains a factor of uncertainty

Wednesday, 11 October 2017

P. 5

Sterling awaiting directional news

Moves in sterling were modest yesterday , even as there were plenty UK data. Those data painted a diffuse picture. UK (manufacturing) production rose at a fairly healthy pace in August (0.4% M/M) and Y/Y figures jumped higher due to revisions of earlier data. At the same time, the August UK trade deficit printed at a record as imports rose much more than exports. This set of conflicting data had no noticeable impact on sterling. EUR/GBP closed an uneventful session at 0.8943. Cable succeeded some modest further gains on overall USD softness. The pair closed the session at 1.3203.

There are no important eco data in the UK today. UK PM May will answer questions of the UK Parliament. She probably won’t be able to bring any high profile news/progress on Brexit. We don’t see a trigger for a clear directional move in EUR/GBP. The pair might continue to drift sideways in the 0.89 big figure, awaiting new eco or other news.

EUR/GBP staged a strong uptrend since April to set a top at 0.9307 late August. UK price data amended the dynamics and hawkish BoE comments reinforced a sterling rebound. Medium term, we maintain a EUR/GBP buy-on-dips approach as we expect the mix of euro strength and sterling softness to persist. The prospect of (limited) withdrawal of BOE stimulus triggered a good sterling countermove, but this rebound has run its course. EUR/GBP supports at 0.8743 and 0.8652 are difficult to break. We look to buy EUR/GBP on dips. Last week’s rebound above the 0.89 area improved the ST technical picture of EUR/GBP. EUR/GBP 0.9026 is the 50% retracement of the recent countermove.

R2 0,9415 -1dR1 0,9307EUR/GBP 0,8943 0,0009S1 0,8743S2 0,8657

EUR/GBP rebound slows, but holds north of 0.89

GBP/USD: decline blocked on USD weakness

Wednesday, 11 October 2017

P. 6

Wednesday, 11 oct Consensus Previous US 16:00 JOLTS Job Openings (Aug) 6160- 6170 20:00 FOMC Meeting Minutes -- -- Japan 08:00 Core Machine Orders MoM YoY (Aug) 1%/0.8%-- 8%/-7.5% Events 02:00 Fed’s Kaplan Speaks at Stanford Institute 11:30 Germany to Sell €3B 0% 2022 Bonds 11:30 Netherlands to Sell 2024 Bonds 13:15 Fed’s Evans Speaks on Economy and Monetary Policy 19:00 US 3-Year Note & $20B 10-yr Note auction 20:40 Fed’s Williams Gives Community Leaders Speech 20:50 ECB’s Praet Speaks in New York (European exit strategies)

10-year Close -1d 2-year td -1d Stocks Close -1dUS 2,36 0,00 US 1,51 0,01 DOW 22830,68 69,61DE 0,44 0,00 DE -0,70 0,00 NASDAQ 6587,251 7,52BE 0,72 0,00 BE -0,54 0,00 NIKKEI 20881,27 57,76UK 1,36 0,01 UK 0,45 0,02 DAX 12949,25 -27,15

JP 0,06 0,01 JP -0,14 0,00 DJ euro-50 3598,79 -11,71

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0,04 1,89 0,91 Eonia -0,3610 -0,00105y 0,25 2,04 1,07 Euribor-1 -0,3710 0,0020 Libor-1 1,2372 0,000010y 0,89 2,32 1,39 Euribor-3 -0,3290 0,0000 Libor-3 1,3564 0,0000

Euribor-6 -0,2740 0,0000 Libor-6 1,5249 0,0000

Currencies Close -1d Currencies Close -1d Commodities Close -1d

EUR/USD 1,1808 0,0068 EUR/JPY 132,78 0,48 CRB 183,20 2,24USD/JPY 112,45 -0,23 EUR/GBP 0,8943 0,0009 Gold 1293,80 8,80GBP/USD 1,3203 0,0061 EUR/CHF 1,1514 0,0011 Brent 56,61 0,82AUD/USD 0,7778 0,0025 EUR/SEK 9,5339 -0,0057USD/CAD 1,2515 -0,0036 EUR/NOK 9,3898 0,0174

Calendar

Wednesday, 11 October 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 VIA OUR KBC RESEARCH APP (iPhone, iPad, Android) 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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