Friday, 05 May 2017

P. 1

Rates: Commodity weakness takes a grip on global risk sentiment

Oil and other commodities took another hit and start affecting global sentiment. The US Note future profits. A very strong payrolls report will be needed to push the US Note future below 125-04+/03+ support, if commodity weakness remains today’s trading theme. We expect a near-consensus outcome though and have a positive intraday bias for core bonds.

Currencies: EUR/USD near 1.10 barrier

The dollar hardly profited from rising market expectations on a June Fed rate hike yesterday. Weaker risk sentiment due to a sell-off in commodities weighs more on the dollar than on the euro. US payrolls are in focus today. If risk sentiment deteriorates further, the payrolls will probably have to be very strong to change fortunes in favour of the dollar.

Calendar

• US stock markets ended a second straight session nearly unchanged, failing to

profit from European optimism. Overnight, the commodity rot gets a grip on risk sentiment, sending Asian bourses lower.

• House Republicans repealed most of ex-President Obama’s signature health-insurance law in a tight vote, handing President Trump his first legislative victory and vindicating GOP leaders who failed twice before to pass a bill.

• The House Financial Services Committee launched a Republican-supported rollback of Obama-era financial regulations, voting 34-26 along party lines for a plan to undo significant parts of the 2010 Dodd-Frank law.

• Oil prices fell by as much as a further 3% this morning, after prices had crashed to five-month lows in the previous session. Other commodities feel the pain as well with eg iron ore futures down 8%.

• Jeremy Corbyn, the UK Labour party leader, is braced for heavy losses in local elections across Britain on Friday, in an ominous foretaste of what could happen in next month’s general election.

• The administrators of Euribor have decided against an overhaul in which they would calculate the benchmark based on actual transaction data rather than the old system of banks’ best estimates.

• Today’s eco calendar contains US payrolls. Fed Yellen, Fischer, Williams, Rosengren, Evans and Bullard are scheduled to speak.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Friday, 05 May 2017

P. 2

Core bonds sell off

Global core bonds lost significant ground yesterday with German Bunds underperforming US Treasuries. Several factors played a role. First, some catching up with US Treasury losses on Wednesday evening. Second, improved (European) risk sentiment with French assets outperforming (stocks and bonds) after centrist presidential candidate Macron cleared the final (TV Debate) hurdle ahead of Sunday’s run-off against Le Pen. Third, markets anticipated (and received) more comments about the ECB’s June policy meeting. ECB chief economist Praet suggested that the ECB could do something about its language at. Fourth, eco data printed strong. Fifth, anticipation on the US House clearing a bill to change Obamacare. Continued weakness of the oil price (Brent crude below $50/barrel) and commodities in general failed to stop the rot on core bond markets

In a daily perspective, the German yield curve bear steepened with yields 1.8 bps (2-yr) to 7.4 bps (30-yr) higher. Changes on the US yield curve varied between +1.2 bps (2-yr) and +3.6 bps (10-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany narrowed 1 bp for core countries, up to 5 bps (France) for the semi-core and up to 11 bps for the periphery (Portugal).

US payrolls in focus

On Wednesday, the FOMC left the door open to more gradual rate increases, starting in June, but they are still data-dependent. This means: rebound of growth, inflation remaining near the 2% objective and reasonably healthy labour market conditions. In March, the US payrolls disappointed (98K), but it was likely a payback from mild weather earlier. In April, consensus expects a rebound to 190K. We think the odds are good for a rebound. The ADP reported a 177K increase in private payrolls in April. More important: the very strong March tally was only marginally revised lower to 255K, the third consecutive very strong reading. On top, the biggest gain in the ADP report was in the professional and business sector, the sector with high wages. While we stand behind the expected rebound, there is a caveat: the employment component slowed sharply both in the manufacturing and non-manufacturing ISM. So, we refrain from deviating from consensus. Anyway with the unemployment rate at 4.5%, it becomes ever more difficult to register on a trend basis +200K job gains. Half that gain would be sufficient to keep the unemployment rate declining, albeit at a slower pace. Given the steep fall from 4.8% to 4.5% last month, risks are for some temporary payback (4.6%). Wages should have risen 0.3% M/M, which is needed to keep them stable at 2.7% Y/Y.

Rates

US yield -1d2 1,29 -0,015 1,87 0,0110 2,34 0,0130 3,00 0,02

DE yield -1d2 -0,70 0,015 -0,32 0,0310 0,39 0,0530 1,18 0,05

Core bonds sell off, Germany underperforming the US.

Multiple factors at play

French bonds outperform on likely Macron victory

ECB Praet suggested the ECB might change forward guidance at June meeting

US Note future (black) and Brent crude (orange) (intraday, 2 days): crashing oil/commodities ignored by bond markets yesterday, but

pattern changed overnight

CRB commodity index tests key support. Commodity decline about to take a grip on global trading?

Payrolls expected to rebound in April, but no reason to deviate from consensus

Friday, 05 May 2017

P. 3

Commodity decline takes grip on global sentiment

Overnight, most Asian stock markets lose ground with China again underperforming. Oil and other commodity prices took another hit and start affecting global sentiment. The US Note future and Japanese yen gain ground while commodity currencies feel the pressure. We expect a stronger opening for the Bund.

Today’s eco calendar heats up with US payrolls. We expect a near-consensus outcome which should be neutral for trading. If commodity weakness remains today’s trading theme, we think that a very strong report will be needed to push the US Note future below 125-04+/03+ support (previous high/38% retracement). Yesterday’s first test failed. US stock markets are prone for correction lower ahead of the weekend, suggesting some potential extra support for US Treasuries. Fed speakers are a wildcard for trading with Yellen, Fischer, Williams, Rosengren, Evans and Bullard all lining up. However, topics of their speeches suggest that apart from Williams they will all tackle non-monetary related issues. Markets will nevertheless look for close about a June rate hike (discounted) and even more important, intentions about the balance sheet run-off around the end of the year.

From the EMU (Bund) side, there are no ECB speakers scheduled to elaborate on potential policy changes/announcements at the June meeting and trigger more exit speculation. Global risk sentiment will be key and suggest some rebound higher today. Ahead of the second round of the French presidential election, some cautiousness might still be warranted with the Brexit-vote and US presidential elections in mind.

R2 163,99 -1dR1 162,49BUND 160,9 -0,51S1 158,73S2 158,28

German Bund: ECB exit speculation becomes trading theme, but might be overshadowed by commodities today

US Note future: positive intraday bias with first support lining up and declining commodities weighing on risk sentiment

Friday, 05 May 2017

P. 4

EUR/USD breaks above the recent highs in the 1.0950 area. Will the payrolls

be strong enough to ‘save’ the dollar?

USD/JPY: technical picture improved as the pair regained the

112.20 neckline, but risk-off sentiment prevents further gains .

EUR/USD nears 1.10 barrier

European assets initially took the lead in a risk-on trade yesterday. This trade supported at the same time EUR/USD, USD/JPY and EUR/JPY. So, rising expectations for a June Fed rate hike weren’t unequivocally positive for the dollar. Later in the session, risk sentiment turned less positive. Ongoing commodity selling slowed the rise of core yields and turned out to be dollar negative. The US House approving the repeal of Obamacare also didn’t help the US currency. EUR/USD even cleared the recent highs and finished the session at 1.0985. USD/JPY reversed earlier gains and closed the session at 112.46.

The ongoing decline in commodities weighs on Asian equities overnight. Japan and Korea are closed for regional holidays. The risk-off correction supports the yen. USD/JPY dropped to the low 112 area. The decline in commodities also weighs on the Aussie dollar (AUD/USD 0.7375) and on the Canadian dollar (USD/CAD 1.3785). In its quarterly report, the RBA was quite positive on the growth outlook and grew more confident that domestic inflation is strengthening. The comments don’t help the Aussie dollar currently. With the dollar and commodity currencies in the defensive, the euro is ‘by default’ outperformer. EUR/USD hovers near the recent highs just below 1.10.

US payrolls are today’s key feature. Consensus expects US job growth to have picked up in April to 190K after a disappointing March report (only 98K). This week’s ADP report at least suggest that the odds for a rebound are good, even as the employment component in the ISM’s eased substantially. Wage growth is expected at 0.3% M/M and 2.7%Y/Y. We also keep an eye at speeches from Fed governors (especially Fed Williams), for comments on the reduction of the Fed’s balance sheet. Last but not least, global risk sentiment will be important. The the decline of commodities might become a source of global uncertainty. Short-term, the dollar momentum remains fragile, to say the least. A series of potential USD positive factors (rising expectations for a June Fed rate hike, the healthcare deal in the House,) didn’t help the dollar. The dollar has often an inverse correction with commodity prices, but this trick currently also doesn’t work.

At the same time, the euro profits from the expected victory of Macron in the French Presidential elections and from market speculation that the ECB is coming closer to scaling down policy stimulation in a not that distant future.

Currencies

R2 1,13 -1dR1 1,1145EUR/USD 1,0982 0,0085S1 1,0778S2 1,0341

Will US payrolls be strong enough to save the dollar

Dollar looks more vulnerable to a risk-off correction than the euro, at least for now.

Dollar declines even as Fed is on course to raise rates in June

Decline in commodities weighs on the dollar rather than on the euro

Asian markets shift into risk-off modus as commodities stay under pressure

Dollar and commodity currencies in the defensive

Euro by default outperformer

Friday, 05 May 2017

P. 5

In this context, the payrolls will probably have to be very strong to change fortunes in favour of the dollar. In addition, negative risk sentiment (commodities) is currently more negative for the dollar than for the euro. We don’t expect the euro to continue to outperform in case of a more pronounced risk-off correction. However, short-term market momentum remains euro positive and dollar fragile. So for now there is no hurry to add to USD long positions. We wait for a sign that the dollar is bottoming out.

From a technical point of view, USD/JPY bottoming out in April. The pair regained 112.20 resistance earlier this week. This improved the technical picture. However, for now there are no follow-through gains. Next intermediate resistance comes in at 115.51. EUR/USD extensively tested the topside of the MT range (1.0874/1.0906 area) late March. The pair returned to the range top after the French election and set minor new highs. Yesterday’s break beak north of the recent highs (if confirmed), would improve the ST picture. Next resistance stands at 1.1129 (62% retracement) and at 1.1366 (correction top). A decline below 1.0821 would suggest that the dollar is regaining traction against the euro.

EUR/GBP returns to 0.85 area on euro strength

Sterling trading mostly followed the major trends of euro strength and relative dollar softness yesterday. EUR/GBP drifted north to the high 0.84 area, supported by the rise of EUR/USD. Cable dropped temporary lower early this morning, but rebounded north of 1.29 as the dollar couldn’t maintain its post-Fed gains. The UK services PMI was again better than expected (55.8 from 55.00), but didn’t really help sterling. On the negative side negative side for sterling, the Brexit bickering between the UK and the EU continued as the EU prepares measures to gain control on euro clearing activity which is mainly centralised in London. EUR/GBP closed the session at 0.8500. Cable finished the day at 1.2923.

There are no important eco data in the UK today. Markets might keep an eye at the local election as a precursor for the general election next month. However, global trends in the dollar and/or the euro will probably dominate sterling trading. The Brexit bickering between the EU and the UK will probably continue, but for now it has no really big impact on sterling. Of late the downside in EUR/GBP has become better protected, mostly due to euro strength. This trend might continue short-term?

Two weeks ago, EUR/GBP dropped below EUR/GBP 0.84 support, (temporary) improving the sterling picture. The pair came within reach of the key 0.8305 support (Dec low), but no real test occurred. After last week’s EUR/GBP rebound, the range bottom is better protected. Longer term, Brexit-complications remain potentially negative for sterling. On technical considerations we slightly prefer a EUR/GBP buy-on-dips approach.

R2 0,8881 -1dR1 0,8854EUR/GBP 0,8499 0,0038S1 0,8314S2 0,8304

EUR/GBP: downside better protected after last week’s rebound

GBP/USD: holding near the recent top on USD softness

Friday, 05 May 2017

P. 6

Friday, 5 May Consensus Previous US 14:30 Change in Nonfarm Payrolls (Apr) 190k 98k 14:30 Two-Month Payroll Net Revision (Apr) -- -- 14:30 Change in Private Payrolls (Apr) 190k 89k 14:30 Change in Manufact. Payrolls (Apr) 10k 11k 14:30 Unemployment Rate (Apr) 4.6% 4.5% 14:30 Average Hourly Earnings MoM / YoY (Apr) 0.3%/2.7% 0.2%/2.7% 14:30 Average Weekly Hours All Employees (Apr) 34.4 34.3 14:30 Labor Force Participation Rate (Apr) -- 63.0% 14:30 Underemployment Rate (Apr) -- 8.9% Canada 14:30 Net Change in Employment (Apr) 10.0k 19.4k 14:30 Unemployment Rate (Apr) 6.7% 6.7% Germany 09:30 Markit Germany Construction PMI (Apr) -- 56.4 Spain 09:00 Industrial Production MoM (Mar) 0.3%/2% -0.2%/2.5% Sweden 09:30 Industrial Production MoM / NSA YoY (Mar) 0.6%/3.4% 0.2%/4.1% Events 17:30 Fed Fischer Speaks at Panel on Monetary Policy at Hoover Event in Stanford 18:45 Fed’s Williams Gives Keynote in New York (Shadow Open Market Committee Event) 19:30 Fed’s Rosengren, Evans and Bullard on Hoover Institution Panel (“The Structural

Foundations of Monetary Policy”)

19:30 Fed Yellen speaks at Brown University

Calendar

Friday, 05 May 2017

P. 7

10-year td -1d 2-year td -1d Stocks td -1dUS 2,44 0,00 US 1,19 0,00 DOW 19762,6 0,00DE 0,18 -0,03 DE -0,79 -0,02 NASDAQ 5383,117 0,00BE 0,51 -0,04 BE -0,69 -0,02 NIKKEI 19114,37 0,00UK 1,24 0,00 UK 0,08 0,00 DAX 11575,57 94,51

JP 0,05 0,00 JP -0,18 0,00 DJ euro-50 3302,48 11,96

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,11 1,69 0,69 Eonia -0,3290 0,00005y 0,06 2,00 0,86 Euribor-1 -0,3680 0,0000 Libor-1 0,7717 0,000010y 0,64 2,34 1,23 Euribor-3 -0,3190 0,0000 Libor-3 0,9979 0,0000

Euribors-6 -0,2210 0,0000 Libor-6 1,3177 0,0000

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

EUR/USD 1,0487 -0,0036 EUR/JPY 123,15 0,11 CRB 192,51 0,00USD/JPY 117,43 0,52 EUR/GBP 0,8510 -0,0015 Gold 1151,70 0,00GBP/USD 1,2326 -0,0018 EUR/CHF 1,0714 -0,0008 Brent 56,82 0,00AUD/USD 0,717 -0,0040 EUR/SEK 9,5408 -0,0323USD/CAD 1,3417 -0,0024 EUR/NOK 9,0556 -0,0236

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

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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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