Friday, 18 March 2016

P. 1

Rates: Slight positive bias ahead of the weekend?

Overnight, US Treasuries maintain an upward bias despite a positive risk sentiment in Asia and higher oil prices. Today’s eco calendar is thin. With the Fed in mind and against the background of an uncertain outcome of the EU Summit, we think core bonds could be slightly supported ahead of the weekend.

Currencies: Dollar extends post-Fed decline

Yesterday, the dollar was sold across the board as investors adjusted positions in the wake of Wednesday’s soft Fed assessment. Sterling rebounded as the BoE was slightly less soft than (some) expected. Today, the focus is on US consumer confidence. Will the USD decline slow at the end of the a volatile trading week?

Calendar

• US Equities extended their rebound yesterday supported by a further increase

in oil and other commodity prices and a weakening US dollar. The Dow has now fully reversed the early year losses. This morning, also Asian shares extend their gains led by Chinese ones. Japanese stocks continue to suffer from a stronger yen.

• The EU and Turkey hardened their positions over the EU’s latest migration plan, leaving many issues still to be resolved after five hours of talks. Negotiations will restart again this morning, with differences on both sides still huge.

• China set the yuan 0.52% stronger against the dollar this morning, its steepest one day increase since November, due to dollar weakness after the dovish tone of the Fed. Both the onshore and offshore yuan strengthened today to highest level for the year against the US dollar.

• Japanese department store sales improved in February compared with the year before, confirming that consumption is picking up, as the Bank of Japan already indicated. Strong spending on clothes and food underpinned growth.

• Crude oil prices extended their rebound yesterday with the US benchmark, the WTI, jumping above $40/barrel, touching new highs for the year. The Brent rose too, ending above $41.5/barrel. Prices are still underpinned by optimism that major producers would strike a deal to freeze output.

• Today, the eco calendar contains the first estimate of US University of Michigan consumer confidence for March. EU Leaders will continue their two-day Summit in Brussels and Fed’s Dudley, Rosengren and Bullard are scheduled to speak.

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

Friday, 18 March 2016

P. 2

Follow through buying aborted by strong US eco data

Global core bonds initially still profited from Wednesday’s dovish FOMC decisions and European equity weakness, but strong US eco data (Philly Fed/initial claims) and rising US equities/commodities eventually took the shine off US Treasuries which erased earlier gains. The Norges Bank cut its rates while the Swiss National Bank stood pat, but neither affected Bund trading. In a daily perspective, US yields were little changed (between -1.1 bp at the 2-yr and -10.7 bps at the 30-yr). German yields caught up with Wednesday eve’s US Treasury rally. German yields fell between 1.1 bp (2-yr) to 10.7 bps (30-yr), the curve bull flattening. On intra-EMU bond markets, peripheral yields widened marginally (1-to3 bps) with Portugal bucking the trend (-2 bps).

EU top on refugees key event of the day

After a quite interesting week, the eco calendar is thin today with only the first estimate of US University of Michigan consumer confidence for March. Several Fed governors (Dudley, Rosengren & Bullard) will take the stage. Dudley gives opening remarks at a Supervision conference where also Boston Fed Rosengren participates. We suspect they won’t address actual economic or monetary themes. St-Louis Bullard on the contrary may speak on policy, but only after the European close.

After having weakened slightly at the start of the year, University of Michigan consumer confidence is forecast to have improved again in March. The consensus is looking for a limited uptick from 91.7 to 92.2, but we see risks for an upward surprise. Improving labour market conditions, an easing in global growth concerns, turmoil on financial markets and continued declines in gasoline prices should support sentiment.

EU leaders are struggling to finalize an agreement with Turkey on a return of refugees in a so-called one-for-one swap. In a preliminary Top last week, chancellor Merkel tried to push through an agreement reached with the Turkish PM. To persuade refugees not to cross the sea, Europe would send them back to Turkey in exchange for refugees that stayed in Turkey. These will be spread over all European countries. Turkey asked also $3B extra money, visa waivers for Turkish people coming to Europe and a speeding up of EU membership talks for Turkey.

Rates

US yield -1d2 0,8434 0,01265 1,3479 -0,006210 1,8679 -0,019130 2,6628 -0,0297

DE yield -1d2 -0,4670 -0,01505 -0,2890 -0,033010 0,2200 -0,095030 0,9414 -0,0728

T-Note future (black) & S&P future (oil) (intraday): Follow through buying stopped by stronger eco data and rising equities/oil

German yield curve: catching up with post FOMC US Treasurty gains.

US-Germ

US Treasury sold after strong data

German curve bull flattens in catching up move on post FOMC gains of US Treasuries

Upside risks Michigan consumer confidence

Some Fed speakers, but will they speak on policy?

EU Summit on Turkey source of political troubles inside the union?

Friday, 18 March 2016

P. 3

There was widespread protest against this agreement from all sides with legal, operational and other problems invoked. Yesterday, no agreement was reached, but attempts will continue today. The absence of an agreement would set further strains on the open frontiers inside Europe (Schengen), leave the EU in a limbo and might even help Brexit proponents taking the UK out of the EU. So, the stakes are high. It is a tail risk, that didn’t have much impact on the euro markets yet, but it’s potentially very important.

Bonds: Neutral to slightly positive bias

R2 164 -1dR1 163,4BUND 162,42 0,6500S1 160,81S2 160,11

Overnight, most Asian equity indices profit from yesterday’s WS gains with China outperforming. Japanese stocks underperform on the back of initial yen strength (see FX). Oil prices maintain their momentum with Brent at the highest level of 2016. Despite this positive risk sentiment, the US Note future holds an upward bias. The 10-yr Japanese government bond yield reached its lowest level on record (-0.12%). Overall, we expect a neutral to stronger opening for the Bund.

Today’s eco calendar is thin with only Michigan consumer confidence. Risks are on the upside of expectations, but any downward reaction of US Treasuries is likely limited by the dovish Fed stance. Three Fed governors are scheduled to speak, but Bullard is the only one who’ll probably touch on monetary policy. It’s a wildcard for trading. The EU Summit suggests some cautiousness ahead of the weekend and the struggle to reach an agreement (see above). Therefore, we have a neutral to slightly positive bias for today’s trading.

Going forward, we think that there is a firm bottom below rate markets in yield terms as the ECB doesn’t intend to lower rates further. As of Wednesday, the Fed also put a (temporary) ceiling on rate markets. Therefore, we put our downward bias for core bonds on hold and favour more sideways trading ahead. In first instance, bonds will likely move away from recent lows, especially in the US, the 128-01+ level becomes a strong support for the US Note future (2% resistance for US 10-yr yield).

German Bund (June contract): First support around 161.02 (38% retracement)/160.81 (neckline double top) could be harder to break

after Fed

US Note future (June contract): repositioning after dovish Fed. 128-01+ (recent low) becomes strong support

Friday, 18 March 2016

P. 4

Post-Fed USD decline continues

Yesterday, follow-through USD selling in the wake of Wednesday’s FOMC policy decision dominated. The EMU CPI and the strong US eco were largely ignored. EUR/USD closed the session at 1.1318 (from 1.1224 on Wednesday). USD/JPY dropped temporary below the 111 support, but rebounded on rate-BOJ rate checking rumours. The pair closed the session at 111.39 (from 112.56).

This morning, most Asian equities continue to trade positive. Rising oil and commodity prices remain a supportive factor. Oil trades near the recent highs with Brent at $41.50 p/b. AUD/USD holds near the recent highs in the mid 0.76 area. Japanese equities again underperform, suffering from the rise of the yen. USD/JPY hovers in the lower half of the 111 big figure. The yuan rebounded from the second day in row, mostly due to overall USD weakness. USD/CNY trades in the 6.4665 area. EUR/USD is holding the low 1.13 area, near the highs.

After an interesting week, the eco calendar is thin today with only the March US University of Michigan consumer confidence for release. EU Leaders will continue their two-day Summit on the refugee crisis After this week’s FOMC meeting, several Fed governors (Dudley, Rosengren & Bullard) will take the stage. We especially look for the comments from Fed’s Bullard. University of Michigan consumer confidence is forecast to have improved in March, but we see risks for an upward surprise. A positive surprise might help to slowed the decline of the dollar. However, positive US eco data didn’t help the dollar much earlier this week. The change in the Fed policy assessment was the major driver. Some end of week profit taking on USD shorts might be on the cards, but it’s too early to call an end to the dollar setback.

Before the FOMC decision, we advocated sideways EUR/USD trading within the 1.1200/1.0810 range. The top of this range was tested after last week’s ECB meeting and was broken after Wednesday’s soft Fed. Yesterday more post-Fed USD repositioning caused still broad-based USD selling. It will take some time for the dollar to digest the U-turn in the Fed interest rate assessment.

Currencies

R2 1,1495 -1dR1 1,1376EUR/USD 1,1294 0,0066S1 1,1068S2 1,081

EUR/USD: jumps higher in the established range after the Fed- statement

-

USD/JPY: extensively testing the range bottom

Tion

Dollar extends post-Fed decline

Asian equities extend rebound

USD/JPY holds near key support

Commodity currencies tradestrongly

Eco calendar is thin today

How far has the post-Fed decline of the dollar to go?

Friday, 18 March 2016

P. 5

We don’t expect a big sustained jump higher in EUR/USD. Even so, the post ECB topping out process is put on hold and we look how far this post-Fed repositioning will go. 1.1376 is the next important resistance. 1.1495 is the key line in the sand medium term. The soft Fed approach also pushed USD/JPY back lower in the 110.99/114.87 sideways range. The pair dropped temporary below this range yesterday, but the move was countered by rumours on rate checking from the BOJ. The BOJ will most probably continue to send warning signals in case of a drop below 111. However, for now, USD/JPY fails to rebound off the recent lows. We are in no hurry to go USD/JPY long as we want more confirmation that the BOJ won’t have to accept a lower USD/JPY bottom.

Sterling shows mixed picture after the Fed

On Thursday, Sterling trading was affected by two factors: the repositioning in the dollar after Wednesday’ Fed decision and the BoE policy decision. Initially, the post-Fed repositioning pushed EUR/GBP (in line with EUR/USD) and cable (USD weakness) higher. EUR/GBP filled offers north of 0.79 late in the morning session. The BoE as expected left its policy unchanged. The vote was 9-0. They acknowledged that uncertainty on the Brexit referendum is weighing on sterling. It might also slow growth of aggregate demand in the near term. Even so, the bank still saw a rate rise as the most likely next policy move. Some market players were probably positioned for a softer BoE (e.g a more open debate on potential easing). Sterling was squeezed sharply higher after the BoE decision. EUR/GBP closed the session at 0.7815 (from 0.7886). Cable traded in the mid 1.42 area yesterday morning but closed the session at 1.4482.

Today, there are no important eco data in the UK. Yesterday, sterling made a nice rebound as the BoE was less soft than some had anticipated. The market was probably also quite heavily positioned GBP short going into the BoE decision. Yesterday’s technical rebound took some of the heat off sterling, but Brexit-uncertainty still lingers. We doubt that the currency rebound will have strong legs unless there is really positive news from the Brexit debate.

Of late, sterling bottomed out as Brexit-fears moved (temporary) to the background. For cable, the hypothesis of a bottoming out process remains in place. For EUR/GBP the picture was damaged by last week’s overall post-ECB euro rebound and the pair came close to the 0.7929 resistance yesterday. The test was rejected. If this levels holds, it could be a first indication that sterling enters calmer waters also against the euro. The medium-term picture of sterling against the euro remains negative as EUR/GBP holds above the 0.75 area. Short-term, EUR/GBP tested a first support at 0.7696 and temporary broke it last week. Finally, the test failed though. 0.7652 is the first important support level.

R2 0,8066 -1dR1 0,7929EUR/GBP 0,7811 -0,0077S1 0,7652S2 0,7526

EUR/GBP: test of key 0.7929 resistance rejected

GBP/USD: cable rebounds further after the Fed

Friday, 18 March 2016

P. 6

Friday, 18 March Consensus Previous US 15:00 U. of Mich. Sentiment (Mar P) 92.2 91.7 15:00 U. of Mich. 1 Yr Inflation (Mar P) -- 2.5% 15:00 U. of Mich. 5-10 Yr Inflation (Mar P) -- 2.5% Canada 13:30 Retail Sales MoM (Jan) 0.6% -2.2% 13:30 CPI NSA MoM YoY (Feb) 0.2% / 1.5% 0.2% / 2.0% 13:30 CPI Core MoM YoY (Feb) 0.5% / 2.0% 0.3% / 2.0% Japan 06:30 Tokyo Dept Store Sales YoY (Feb) A 2.7% 0.2% 06:30 Nationwide Dept Sales YoY (Feb) A 0.2% -1.9% EMU 11:00 Labour Costs YoY (4Q) -- 1.1% Germany 08:00 PPI MoM YoY (Feb) A-0.5%/-3% -0.7%/ -2.4% France 08:45 Wages QoQ (4Q F) 0.1% 0.1% Belgium 15:00 Consumer Confidence Index (Mar) -- -5 Norway 10:00 Unemployment Rate (Mar) 3.3% 3.3% Spain 09:00 Labour Costs YoY (4Q) -- 0.3% Events 17-18/March EU Leaders Hold Summit 14:00 Fed's Dudley Gives Opening Remarks at Supervision Conference 16:00 Fed's Rosengren Speaks on a Panel at Supervision Conference 19:00 Fed's Bullard Speaks at Policy Forum in Frankfurt

10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 1,87 -0,02 US 0,84 0,01 DOW 17481 17481,49DE 0,22 -0,10 DE -0,47 -0,02 NASDAQ for Exch - NQI #VALUE!BE 0,47 -0,04 BE -0,41 -0,01 NIKKEI 16725 16724,81UK 1,46 -0,07 UK 0,47 -0,03 DAX 9892,2 9892,20JP -0,09 -0,05 JP -0,22 -0,03 DJ euro-50 3043 3043,10

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,347 -0,0083y -0,115 1,037 0,895 Euribor-1 -0,32 0,00 Libor-1 USD 0,51 0,515y 0,045 1,265 1,047 Euribor-3 -0,23 0,00 Libor-3 USD 0,59 0,5910y 0,575 1,691 1,460 Euribor-6 -0,13 0,00 Libor-6 USD 0,75 0,75

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,1294 0,0066 EUR/JPY 125,59 -0,33 177,6558 1263,36 41,55USD/JPY 111,24 -0,90 EUR/GBP 0,7811 -0,0077 - 1d 3,90 4,95 1,05GBP/USD 1,4452 0,0227 EUR/CHF 1,0923 -0,0057AUD/USD 0,7646 0,0054 EUR/SEK 9,258 0,03USD/CAD 1,2985 -0,0102 EUR/NOK 9,4149 -0,08

Calendar

Friday, 18 March 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

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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