Wednesday, 02 November 2016

P. 1

Rates: ST bearish view on hold because of US election uncertainty

Overnight’s risk sentiment is negative as Asian markets react to the ABC tracking poll which puts Trump just ahead in the US election race. We put our short term bearish core bond view on hold even if we expect the Fed to pre-announce a December rate hike tonight.

Currencies: US political uncertainty hammers US dollar

Yesterday, the dollar was sold across the board as markets adapted positions after election polls suggested a tight race for next week’s presidential elections. Today, the Fed pre-announcing a December rate hike and persistent political uncertainty might contain conflicting signals for the dollar.

Calendar

• US equities lost about 0.7% (S&P) yesterday as an ABC poll put Trump just ahead

of Clinton in the election race. Asian equities follow WS down overnight, losing more than 1% on the same theme. Japan stocks underperform on yen strength.

• Yesterday’s risk-off day translated in (modest) gains for US Treasuries, more gains for gold, yen, CHF, EUR and (sharp) loss for the Mexican peso, USD and equities. The follow through gains/losses overnight in these assets are modest.

• Brent oil remains on the defensive trading below $48/barrel as doubts on the OPEC production cut agreement rise. Overnight losses were small though.

• China’s central bank set the renminbi’s trading band stronger, suggesting it may be starting another cycle of pressuring investors who are hoping to bet on the currency’s continued devaluation.

• New Zealand's jobless rate dropped to near eight-year lows last quarter as employment blew past all expectations, yet stubbornly low wage growth meant the broadly strong numbers were still no bar to another cut in interest rates

• BoE Carney decided he will stay at the BoE helm till mid-2019, two years before the end of his mandate to help the UK navigate through the Brexit process.

• Norway is not necessarily done yet with interest rate cuts, despite navigating in “uncharted waters”, the central bank’s governor Olsen said yesterday

• Today, attention goes to the statement after the FOMC meeting and twists in the US election campaign. German labour market data and the final EMU manufacturing PMI are of minor interest.

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

Wednesday, 02 November 2016

P. 2

Modest reaction core bonds on risk off session

On Tuesday, core bonds faced modest downside pressure during most of the session, amongst others due to better US eco data (encouraging ISM). However, as equities slid lower during most of the US cash session, US Treasuries and Bunds recouped the losses. US Treasuries eked out minor gains, the shorter end slightly outperforming the lower end. An ABC/Washington Post poll showed Trump leading Clinton for the first time in months with an albeit statistically irrelevant 1%-point. It clearly affected risk sentiment with US equities down about 0.7%, while gold, JPY and CHF gained substantially. The VIX tested a four month high. In this context, core bond’s performance was all in all disappointing and likely related to today’s Fed meeting.

In a daily perspective, changes on the German yield curve ranged between -0.2 bps (2-yr) and +1.6 bps (10-yr). The US yield curve shifted slightly lower with yields down up to 1.5 bps (5-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany widened up to 7/8 bps for Italian (result earthquake and BMPS saga?) and Spanish bonds (early end Rajoy’s honeymoon?). Greek spreads narrowed 20 bps following a 140bps drop on Monday, as ESM Regling said a Greek ST debt proposal is likely by year-end.

Fed to stand put, but prepare markets for Dec rate hike

The Fed will stand put today, but prepare markets for a December rate increase. Why not November as the September decision was already a close call? First, the presidential elections take place next week and the Fed doesn’t want to inject more uncertainty in the market. Second, the market is not prepared for a rate increase (probability of 17%). Third, the Fed disposes only of one full batch of new eco data since it kept policy unchanged in September. Nevertheless, they will likely increase rates at the December meeting. Many governors said that it was a very close call in September, also those who voted in favour of staying put. Several governors like NY Fed Dudley and SF Fed Williams explicitly pointed to the December meeting. The Summary of projections also showed that 10 out of 17 governors expected a 25 bps rate increase in 2016 while 4 others even wanted a bigger increase. In September risks to the outlook were already revised higher to “roughly balanced”. We expect that today, the FOMC will go a step further and adapt their forward guidance in the same sense as last year, effectively pre-announcing a rate increase. Only an unexpected event may still derail this process, like political turmoil after the election, a sudden crash of the job creation or financial crisis. That’s probably why a rate increase isn’t yet fully discounted.

Rates

US yield -1d2 0,8332 -0,02355 1,2857 -0,042110 1,815 -0,033630 2,5649 -0,0569

DE yield -1d2 -0,6250 -0,00305 -0,4050 -0,021010 0,1790 0,011030 0,8002 -0,0135

Bund future (black) and S&P future (orange) (intraday): Bunds under pressure early on. Only just recovering despite big equity losses

US 2-yr yield trend is still up, but some retracements in past days on election fears. Will that change after FOMC? 0.92% is an important

yield resistance.

Bund under pressure, but late US Treasury rally erases losses

US and German bonds cannot fully profit from risk-off

Italian and Spanish spreads widen quite sharply

Fed to stand put, but to pre-announce a rate hike in December.

US data (ADP employment & NY ISM) and EMU Final PMI less important

Wednesday, 02 November 2016

P. 3

Small German Bund auction

The German Finanzagentur taps the on the run 10-yr Bund (€3B 0% Aug2026). Total bids averaged €4.74B at the previous 4 Bund auctions. The Bund traded stable in ASW spread terms going into the auction, but is cheap on the German curve (cheapest bond apart from DBR Jul2044 & DBR Aug2046). In combination with the relatively low amount on offer, we don’t expect difficulties for this auction. This week’s supply won’t be supported by redemptions.

Bearish view temporary on hold because of US elections

Overnight, Asian stock markets lose ground like Europe and WS yesterday as nervousness increased after the latest ABC News/Washington Post tracking poll put Trump one percentage point ahead of Clinton. The US Note future is somewhat higher, suggesting a rather beneficial opening for the Bund. Oil prices also faced quite some selling pressure this week.

Today’s calendar contains the final EMU manufacturing PMI, US ADP employment rate and the Fed’s rate decision. The latter is of course key for trading even if we expect the central bank to stand put. Pre-announcing a December rate hike could temporary weigh on the front end of the US yield curve, but shouldn’t impact the longer end in a substantial way. We put our short term bearish view on hold because of developments in the US presidential race. These could trump other eco releases (even Friday’s payrolls) the following week. The increased level of uncertainty is positive for core bonds. After the elections, we hope to put on new short positions.

Technical pictures deteriorated. Rising inflation expectations and central banks’ change of tone (extraordinary policy won’t last forever) triggered the sell-off which started at the beginning of the month. The US 10-yr and 30-yr yields held above key resistance levels at 1.75% and 2.5%, while the US Note future dropped below 129-26 support. The German 10-yr yield moved above the 0.10% resistance. This break is relevant from a technical point of view and unlocks a new trading range (0.10%-0.30%).

R2 164,3 -1dR1 163BUND 162,21 0,1600S1 161,37S2 161,11

German Bund: Break below 163 support area suggests more downside, but short term consolidation is preferred ahead of key US

eco data, Fed and US elections

US Note future: Bearish view on hold because of developments in US presidential race

Wednesday, 02 November 2016

P. 4

USD declines as political uncertainty dominates

On Tuesday, currency investors adapted positions to the growing uncertainty on the outcome of the US Presidential elections. Opinion polls indicating a tight race triggered a global risk-off repositioning and also hit the dollar. Initially, the losses mostly occurred against the euro. Later in US dealings, a down-leg of US equities also pushed USD/JPY back in the previous trading range. EUR/USD closed the session 1.1055 (from 1.0981). USD/JPY finished the day at 104.15 (from 104.82).

Overnight, the risk-off correction continues. Most Asian equity indices show losses of 1.0% to 1.75% for Japanese indices. USD/JPY extends its decline, albeit at a more moderate paced compared to yesterday and trades in the 103.80 area. EUR/USD also gains a few more ticks, but the USD decline apparently slows as the pair trades in the 1.1065 area. The global risk-off trade also weighs on smaller, less liquid currencies (the likes of the SEK and the NOK). The loss of the Australian dollar remains modest (AUD/USD at 0.7625). The kiwi-dollar even gains on strong labour market data. NZD/USD trades around 0.7320.

Today, the focus is on the Fed and on the US election campagaign. For an in depth analysis of the Fed policy decision see the fixed income part of this report. The Fed will stand put today, but prepare markets for a December rate increase. The Summary of projections showed that 10 out of 17 still saw a 25 bps rate increase in 2016 and 4 others wanted an even bigger increase. We expect the Fed to adapt its forward guidance in the same sense as last year, effectively pre-announcing a rate increase. Only some unexpected event like political turmoil after the election may still derail this process. As such, the Fed ‘pre-announcing’ a December rate hike should be USD supportive. Question is whether investors are prepared to take new/additional US/USD exposure on board as long as uncertainty on the elections persists.

Last week, we changed our ST-USD bias from positive to neutral as the rise of core/US yields showed tentative signs of slowing down. Yesterday, the risk-off trade also pushed US bond yields slightly lower, especially at the short end of the curve. If global uncertainty persists, we don’t see much upside for US bond yields, even if the Fed pre-announces a December rate hike. In this context we are not in a hurry to add USD long exposure as long as the visibility on the US political scene remains as low as it is now. We stay side-lined and don’t try to catch the dollar in case of further losses (yet).

Currencies

R2 1,1366 -1dR1 1,1123EUR/USD 1,10635 0,0103S1 1,0826S2 1,0711

The dollar hammered as focus returns to the US elections

US political uncertainty weighs on Asian markets

Dollar extends decline, but pace of the sell-off slows

Fed policy decision and uncertainty on the US election conflicting signals for USD

EUR/USD: racing north on US uncertainty

USD/JPY returns in previous range

Wednesday, 02 November 2016

P. 5

From a technical point of view, EUR/USD dropped below 1.0952/13 support. This was USD positive and opened the way to next support (1.0822/1.0711). Friday’s rebound already questioned the room for sustained USD gains short-term. 1.1109 is the 50% retracement level from 1.1366 to the correction low of 1.0851. Several other resistances levels are coming in in the 1.12 area. These levels might come on the screens if global uncertainty persists. USD/JPY finally broke above the 104.32/64/87 resistance last week, painting a double bottom formation on the charts with targets in the 108/109 area. We were cautious to pre-position for higher USD/JPY, as we feared that a rise in global volatility could prevent a further yen decline. However, the rise in core yields dominated as a driver for USD/JPY and finally forced the technical break higher. The return of US/global (political) uncertainty pushed USD/JPY back in the previous trading range. For now the USD/JPY losses remain modest. We stay side-lined for now.

Global uncertainty weighs on sterling

Yesterday’s risk-off trade due to rising uncertainty on the US presidential election had a different impact on cable and on EUR/GBP. Cable basically drifted sideways in the 1.22 big figure. BoE governor Carney staying till 2019 didn’t help sterling much. EUR/GBP mostly followed the rise of EUR/USD. The pair closed the session at 0.9030 (from 0.8969). Cable finished the day at 1.2243.

Overnight, Nationwide house prices were slightly softer at 0.0% M/M and 4.6% Y/Y. Later today, only the UK construction PMI will be published. So, Sterling trading will probably again be driven by global developments. Ongoing risk aversion will probably remain a negative for sterling, especially against the euro. The picture for cable is more neutral. EUR/GBP currently nears a first resistance area in the 0.9050/60 area. A break beyond this area would open the way for a test of the 0.9142 area.

R2 0,9142 -1dR1 0,9068EUR/GBP 0,9042 0,0049S1 0,888S2 0,8725

EUR/GBP: rebounds north of 0.90

GBP/USD: consolidation, but no sustained rebound yet

Wednesday, 02 November 2016

P. 6

Wed., 2 November Consensus Previous US 12:00 MBA Mortgage Applications -- -4.1% 13:15 ADP Employment Change (Oct) 165k 154k 14:45 ISM New York (Oct) -- 49.6 19:00 FOMC Rate Decision (Upper Bound) 0.50% 0.50% 19:00 FOMC Rate Decision (Lower Bound) 0.25% 0.25% Japan 00:50 Monetary Base YoY (Oct) A 22.1%-- 22.7% 00:50 Monetary Base End of period (Oct) A ¥417.6t ¥412.8t 06:00 Consumer Confidence Index (Oct) A 42.3 43.0 UK 01:01 BRC Shop Price Index YoY (Oct) A -1.7%- -1.8% 08/00 Halifax house prices (Oct) M/M Y/Y 0.2%/4.9% 0.3%/5.3% 10:30 Markit/CIPS UK Construction PMI (Oct) 51.8 52.3 EMU 10:00 Markit Eurozone Manufacturing PMI (Oct F) 53.3 53.3 Germany 09:55 Unemployment Change (000's) (Oct) -1k 1k 09:55 Unemployment Claims Rate SA (Oct) 6.1% 6.1% 09:55 Markit/BME Germany Manufacturing PMI (Oct F) 55.1 55.1 France 09:50 Markit France Manufacturing PMI (Oct F) 51.3 51.3 Italy 09:45 Markit/ADACI Italy Manufacturing PMI (Oct) 51.4 51.0 Spain 09:00 Unemployment MoM Net ('000s) (Oct) -- 22.8 09:15 Markit Spain Manufacturing PMI (Oct) 52.6 52.3 Events Q3 earnings Lufthansa (07:30, Alibaba (Bef-mkt), Facebook (21:00),… 11:35 German Bund auction (€3B 0% 2026)

Calendar

Wednesday, 02 November 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 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.

Contacts

10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 1,82 -0,04 US 0,83 -0,05 DOW 18037 18037,10DE 0,18 0,01 DE -0,63 -0,01 NASDAQ for Exch - NQI #VALUE!BE 0,41 0,01 BE -0,63 0,00 NIKKEI 17135 17134,68UK 1,28 0,03 UK 0,25 -0,02 DAX 10526,16 10526,16JP -0,06 -0,02 JP -0,25 -0,02 DJ euro-50 3023 3023,15

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,348 0,0063y -0,113 1,134 0,687 Euribor-1 -0,37 0,00 Libor-1 USD 0,27 0,275y 0,008 1,296 0,852 Euribor-3 -0,31 0,00 Libor-3 USD 0,40 0,4010y 0,504 1,659 1,222 Euribor-6 -0,21 0,00 Libor-6 USD 0,56 0,56

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,10635 0,0161 EUR/JPY 114,96 0,15 185,8108 1293,2 47,83USD/JPY 103,9 -1,44 EUR/GBP 0,9042 0,0084 - 1d -2,91 24,46 -2,66GBP/USD 1,2233 0,0068 EUR/CHF 1,0773 -0,0059AUD/USD 0,7627 0,0037 EUR/SEK 9,9009 0,01USD/CAD 1,3400 0,0019 EUR/NOK 9,0822 0,07