Tuesday, 07 March 2017

P. 1

Rates: Consolidation ahead of ECB and payrolls

Today’s eco calendar contains only second tier eco data suggesting more consolidation on core bond markets with Thursday’s ECB meeting and Friday’s payrolls in mind. Risk sentiment on stock markets is a wildcard for trading. Will we finally get a real correction in the US, away from dazzling heights?

Currencies: Has post-Yellen USD correction already run its course?

Yesterday, the dollar found a bottom as last week’s correction petered out. A rebound of EUR/USD was blocked by political uncertainty in Europe. Today’s eco data might be mixed for the dollar. If sentiment on risk turns positive again, the dollar might gain slightly ground. EUR/GBP remains on an upward trajectory and is testing a next minor resistance.

Calendar

• US equities closed around 0.3% lower after partially overcoming some of the

opening losses in an uneventful session. Overnight, most Asian stock markets eke out small gains with Japan underperforming.

• Australia kept interest rates unchanged as risks from Sydney’s soaring property prices outweighed subdued inflation. The RBA left the cash rate at 1.5% amid strong growth and trade performances in Q4 2016.

• British consumers are cutting back on non-essential spending as the impact of last year's Brexit vote pushes up the cost of their day-to-day shopping, two surveys showed this morning (BRC & Barclaycard).

• German factory orders fell a much stronger than expected 7.4% M/M to be down 0.8% Y/Y, the biggest decline since 2009 on investment goods. The Ministry points to less big ticket items and is confident manufacturing remains on upward trajectory.

• China will strictly control local government debt quotas and step up checks on illegal debt guarantees, FM Xiao Jie said, as the country's top officials stepped up assurances that they will keep financial risks under control.

• The IMF warned that high levels of household debt tied up in property are a risk to New Zealand's financial stability and backed the central bank's lobby for new tools to deal with the red-hot housing market.

• Today’s eco calendar only contains final Q4 EMU GDP and US Trade balance. Austria, Germany (I/L) and the US tap the market. The OECD publishes its interim eco outlook.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Tuesday, 07 March 2017

P. 2

Uneventful opening session

Yesterday, global core bonds ended a data- and news-poor session slightly higher (Germany) to modestly lower (US). Intraday, German bonds opened somewhat higher, catching up with Friday’s late post-Yellen US short squeeze, but soon slid into a sideways 20 ticks trading range that mutated in a downside drift during early US session. Bund traders were occupied with rolling over positions from the March contract into the June Bund contract. EMU eco data were second tier and mixed with a slightly weaker retail PMI, a stronger than expected Sentix investor confidence and a stronger German construction PMI. The US factory orders exceeded expectations, but they certainly didn’t initiate the US Treasuries’ down-move. In the US, some positioning ahead of the 3-, 10- and 30-yr auctions may explain the curve steepening.

In a daily perspective, the German yield curve marginally bull steepened with yields 1.8 bps (2-yr) to 0.6 bps (30-yr) lower. The US yield curve bear steepened with yields flat to 1.7 bps higher. On intra-EMU bond markets, peripheral (and French) 10-yr yield spread changes versus Germany widened 4-to 8 bps. Italy underperformed as the political situation deteriorated further after Renzi’s father and a close associate of Renzi are under investigation. France (+4 bps) underperformed Belgium (+1 bp) as Juppé refused to be installed as replacement for the faltering Fillon as a presidential candidate of the Republican party. Late in the evening, the party leaders assembled around Fillon’s candidature, but his chances to become president are very small (scandal).

German orders and US trade deficit in focus today

The EMU eco calendar is again uneventful with EMU Q4 GDP (final figure), which will likely be confirmed at 0.4% Q/Q and 1.7% Y/Y, and Italian PPI. In the US, the trade deficit is expected to have widened quite sharply, which has become a political issue and thus might get more attention. If the deficit is still wider than expected, it is a modest US Treasury positive factor (via lower US GDP growth). The OECD will update its eco outlook. That cannot but show improved growth, but markets don’t react much to such reports.

Rates

US yield -1d2 1,31 0,005 2,02 0,0110 2,49 0,0230 3,10 0,03

DE yield -1d2 -0,82 -0,025 -0,43 -0,0110 0,34 -0,0130 1,14 -0,01

T Note future (black) & S&P future (orange) (intraday): US Treasuries open strong, but give back most gains later on in uneventful session.

US 10-yr yield is close to important yield resistance at 2.52/2.55% and 2.63% (cycle high)

German Bunds slightly higher

US Treasury curve bear steepens

Peripheral spreads widen as political risks flare up

Higher US trade deficit may have some (minor) impact

ECB meeting on Thursday & US payrolls on Friday are the highlights

Tuesday, 07 March 2017

P. 3

Austria and US kick off scheduled supply

The Austrian debt agency taps the on the run 10-yr RAGB (0.75% Oct2026) and off the run 20-yr RAGB (2.4% May2034) for a combined €1.32B. The bonds on offer didn’t cheapen in ASW spread terms going into the auction, but the Oct2026 RAGB is cheap on the Austrian curve. We expect plain vanilla demand.

The US Treasury start its mid-month refinancing operation with a $24B 3-yr Note auction. Currently, the WI trades around 1.6%. Tomorrow, the Treasury continue with a $20B 10-yr Note auction, before concluding on Thursday with a $12B 30-yr Bond auction.

Consolidation ahead of ECB and payrolls

Overnight, Asian stock markets record small gains with Japan (flat) underperforming. The US Note future stabilizes around yesterday’s closing levels and Brent crude remains comfortably above key $54.72/barrel support. We expect a neutral opening for the Bund.

Today’s eco calendar contains only second tier data (final Q4 EMU GDP & US trade balance). Developments in the French presidential election race remain worth watching. Fillon won support from the leadership of the Republican party for his French presidential election candidacy, but we don’t expect that to impact trading. This week’s eco calendar is back-loaded with ECB meeting (Thursday) and payrolls (Friday). A March Fed rate hike is discounted, suggesting that key US resistance levels (2-yr 1.3%, 5-yr 2%) might be protected ahead of the payrolls and perhaps even next week’s Fed meeting (Mar 15) especially if stock markets would finally correct lower after their latest record race. Any correction higher in US Treasuries could afterwards be used to sell-the-uptick.

The German 10-yr yield tested support around 0.17%/0.2% last week, but a break didn’t occur. Longer term, we hold our bearish view also for Bunds as we expect a new “calibration” of the ECB’s QE programme in H2 2017.

R2 164,40 -1dR1 163,12BUND 160,88 0,17S1 160,13S2 158,28

German Bund (June contract!!!)

US Note future (June contract!!!): Rising probability March rate hike pulls US Treasuries lower. Downside protected ahead of payrolls?

Tuesday, 07 March 2017

P. 4

EUR/USD: upside(USD) correction blocked. USD waiting for a trigger to

resume uptrend?

USD/JPY. Post-Yellen correction didn’t go far. Range top remains

within reach.

Has USD correction already run its course?

On Monday, EUR/USD reversed early strength after Alain Juppe said he won’t run for president even as Fillion would step out of the election race. At the same time, the dollar gradually found a better bid after tentative early session softness. Even so, USD/EUR and USD/JPY stayed away from last week’s recovery top even as a March Fed rate hike is discounted. EUR/USD finished the session at 1.0582 (from 1.0622). USD/JPY closed the day at 113.89 from 114.04.

Overnight, Asian equity indices show modest gains despite a negative close in the US yesterday. The constructive equity sentiment is putting a floor under the dollar, but gains are negligible. EUR/USD is changing hands in the 1.0585/90 area. USD/JPY trades in 113.90 area. The RBA, as expected, left its policy rate unchanged at 1.5%. The bank acknowledged an improvement in global conditions and in domestic activity. So, any expectations for an additional rate cut are unjustified. AUD/USD rebounded from the 0.7580/90 area to the 0.7625 area.

Today, the eco calendar is again thin. The OECD is expected to upwardly revise its growth forecasts. In theory this might be supportive for core bond yields. Usually this supports the dollar more than the euro. Any market reaction will only be of intraday significance. The US trade deficit is expected to widen from $44.3 to $47.0. This has become a politically sensitive issue. A deficit in line or bigger than expected might trigger protection reactions from the Trump administration and weigh on the dollar. Political uncertainty in Europe remains a wildcard. In France, some short-term status quo has been reached as Fillon remains the Republican candidate. This is tentatively negative for the euro, but shouldn’t have any immediate further impact. In a daily perspective, the odds for USD trading are mixed. Last week’s buy-the-rumour, sell-the fact USD profit taking move looks finished. If sentiment on risk would again turn positive, the dollar might slightly outperform, but no important technical levels in EUR/USD (1.1494) or in USD/JPY (114.95 will be broken today.

Currencies

R2 1,1145 -1dR1 1,0874EUR/USD 1,0585 -0,0037S1 1,0341S2 1,0000

Sentiment on risk is constructive in Asia

USD downside better protected

Aussie dollar rebounds on RBA comments

Eco calendar is again thin

US trade deficit and Emu politics are wild cards

Dollar might (slightly) profit it sentiment on risk improves again

USD profit taking move petered out

Euro declined of a ST correction top as French political uncertainty lingers

Tuesday, 07 March 2017

P. 5

Global context: Last week, the focus shifted from US fiscal policy to the Fed’s monetary policy, as the Fed prepared markets for a March rate hike. However, the dollar rally petered out as a March rate hike is now discounted. EUR/USD 1.0494 and USD/JPY 114.95 were tested, but no break occurred. Some ST USD consolidation might be on the cards. The payrolls are the next key issue for USD trading. USD/JPY 111.60/111.16 (Range bottom/38% retracement of the 99.02/118.66 rally) remains a key/ solid support. Last week’s correction suggests that it is too early for a break. In EUR/USD 1.0829/74 is the short-term line in the sand with intermediate resistance at 1.0679. A sell EUR/USD on upticks approach remains favoured.

Sterling softness persists

On Monday, EUR/GBP to a large extent copied the price pattern of EUR/USD. The pair spiked higher to the 0.8665/70 early in Europe, but the gain was reversed as the euro declined on Juppé’s statement. Still, sterling couldn’t fully profit for the euro softness. EUR/GBP closed the session at 0.8648. Cable also traded with a negative bias and finished the day at 1.2236. So, sterling shows a loss of momentum short-term as recent developments suggest that the BoE has a good case to keep a wait-and-see approach

Overnight, the BRC like for like sales declined slightly more than expected. The BRC sees an ‘undeniable trend of cautious spending on non-essential items. Later today, only the Halifax House prices will be published. The House of lords will have the final debate on the Brexit law. Markets will also look forward to the Budget Statement of UK Fin Min Hammond tomorrow. We see the day-to-day context/momentum as slightly sterling negative. Sterling sentiment has softened of late. The euro was in better shape at the end of last week, helping EUR/GBP to break the 0.8592 resistance, which improved the short-term EUR/GBP picture. We don’t expect the EUR/USD rebound to go far, but a combination of a temporary improving euro sentiment and ongoing sterling softness might trigger some further ST EUR/GBP gains. A sustained break north of 0.8645 might reinforce the ST positive momentum. Longer term, we keep a sterling negative view, as the Brexit will negatively impact the UK.

R2 0,8854 -1dR1 0,8682EUR/GBP 0,8659 0,0027S1 0,8592S2 0,8304

EUR/GBP: clears first resistance at 0.8592. 0.8645 resistance under test

GBP/USD holding near the recent lows.

Tuesday, 07 March 2017

P. 6

Tuesday, 7 March Consensus Previous US 14:30 Trade Balance (Jan) -$48.5b -$44.3b Japan 00:50 Official Reserve Assets (Feb) A $1232B-- $1231.6b Australia 04:30 RBA Cash Rate Target A 1.5% 1.5% China Foreign reserves (Feb) $2969B 2998.2B UK 01:01 BRC Sales Like-For-Like YoY (Feb) A-0.4% -0.6% 09:30 Halifax House Prices MoM & 3Mths/Year (Feb) 0.4%/5.3% -0.9%/5.7% EMU 11:00 Gross Fix Cap QoQ (4Q) 0.6% R -0.5% 11:00 Govt Expend QoQ (4Q) 0.4% R 0.4% 11:00 Household Cons QoQ (4Q) 0.5% 0.3% 11:00 GDP SA QoQ / YoY (4Q F) 0.4%/1.7% 0.4%/1.7% Germany 08:00 Factory Orders MoM / WDA YoY (Jan) -2.5%/4.3% 5.2%/8.1% Italy 10:00 PPI MoM / YoY (Jan) --/-- 0.6%/0.9% Norway 08:00 Industrial Production MoM / WDA YoY (Jan) --/-- -2.7%/-1.4% Events 11:00 OECD Interim Economic Outlook 11:15 Austria to Sell 0.75% 2026 & 2.4% 2034 Bonds 11:30 German to Sell €0.5B 0.5% I/L Bonds 19:00 US to Sell $24B 3-yr Notes

Calendar

Tuesday, 07 March 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

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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