Monday, 23 October 2017

P. 1

Rates: US 10-yr yield tests 2.4%, countdown to ECB meeting

The US 5-yr yield closed above the psychological 2%-mark while the US 10-yr yield tested 2.4% resistance after a first breakthrough in the US tax reform process. We expect trading to slow down this week ahead of Thursday’s ECB meeting. Investors might be too complacent about a 9-month APP extension, ignoring the possibility of a shorter APP lifetime.

Currencies: Dollar extends cautious rebound

The dollar was better bid at the end of last week. This morning, there are tentative signs that this trend might continue. However, the gain of USD/JPY (decline of the yen) after Abe’s victory remains modest. At the same time, euro losses are limited despite Spanish uncertainty. In a broader perspective, the US currency is still captured in directionless trading.

Calendar

• US equities closed the week on Friday with solid gains and new all-time highs as

hopes on a tax cut improved after passage of the 2018 budget deal. Asian stock markets book small gains with Japan outperforming after the election outcome.

• The Spanish government will take over the regional Catalan government, once the Senate votes on art. 155 (Friday?). The Catalan government is considering an declaration of independence within days. The stand-off continues.

• The ANO party (29.6%) won the Czech elections before the Civic Democrats (11.3%) ANO party leader Babis is accused for fraud and will face difficulties to form a government. The impact on Czech markets should be modest.

• Two wealthy regions of northern Italy voted overwhelmingly for greater autonomy in referendums that could fan regional tensions in Europe at a time when Spain is striving to prevent Catalonia from breaking away.

• Japanese PM Abe’s ruling coalition secured a two-thirds parliamentary “super majority” that gave him a fresh mandate for “Abenomics” and the chance to pursue his personal priority of revising Japan’s post-war constitution.

• Fitch affirmed Italy’s BBB rating stable outlook, and raised Cyprus BB- rating to BB with a pos. outlook. Moody’s surprisingly didn’t update the Hungarian Ba1, stable outlook, rating, contrary to expectations of an upgrade of the outlook.

• The market calendar is thin today. Key eco data are limited to the EMU consumer confidence and the UK CBI trends survey. Belgium holds its OLO auction.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Monday, 23 October 2017

P. 2

US Senate revives reflationary spirits

Global core bonds lost ground on Friday. The main move occurred overnight for the US Note future and in the European opening for the Bund. The US Senate adopted a fiscal budget for next year which is critical for implementing tax reforms. Reflationary spirits took control of trading and pushed yields, US equities and the dollar sharply higher. The sell-off in core bonds slowed throughout the day, but they held a slight downward bias. There were some jitters on comments of Trump regarding the succession of Fed chair Yellen, but these were after all inconclusive. Technically, the US 2-yr yield reached a new cycle high and the 5-yr yield crossed the 2% threshold for the first time in more than 6 months. The US 10-yr yield nears the key 2.40% resistance area. US Existing Home sales were stronger than expected, but without much impact.

In a daily perspective, US yields increased by 4.6 bps (2-yr) to 6.7 bps (5- & 10-yr). The German yield curve bear steepened too with yields 1.5 bps (2-yr) to 6.5 bps (30-yr) higher. On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed with the periphery outperforming (-4 bps to -7 bps).

Eco calendar light, ECB meeting in spotlight

The economic calendar is light. The US Chicago Fed National Activity index for September is no market mover. The EMU debt to GDP ratio for 2016 is outdated, but October consumer confidence is more important. Another slight increase is expected to a 17-year high. We side with consensus, but don’t think the market will react much in case of surprise, be it positive or negative. We expect volumes to decline from now on with investors eying Thursday’s ECB policy meeting. Draghi is expected to deliver clarity on the future of the central bank’s asset purchase programme. Consensus has been building around a 9-month APP extension while lowering monthly purchases from the start of 2018 from €60 bn to €30 bn. We agree with the reduction in purchases, but think that underlying growth developments argue for a shorter, 6-month extension. Besides the ECB meeting, US Q3 GDP on Friday and EMU PMI’s (Tuesday) are other highlights. Spanish-Catalan tensions and speculation on the successor of Yellen remain wildcards.

Rates

US yield -1d2 1,58 0,055 2,02 0,0710 2,38 0,0730 2,89 0,06

DE yield -1d2 -0,72 0,015 -0,27 0,0410 0,45 0,0630 1,32 0,07

US Note future (black) & S&P future (orange) (intraday):US Treasuries lose ground and equities rise on new hopes of tax reform.

US 10-yr yield near key resistance at 2.40% area.

Af

US & German curves bear steepen sharply

Peripheral bonds outperform on risk-on and ignore political tensions

Calendar unattractive

Focus on Thursday’s ECB meeting

Monday, 23 October 2017

P. 3

Belgium fully funded after today’s auction?

The Belgian debt agency kicks off this week’s scheduled EMU bond supply by tapping two on-the-run OLO’s (OLO 79 0.2% Oct2023 & OLO 78 1.6% Jun2047) and off-the-run OLO 64 (4.5% Mar2026) for a combined €2.3-2.8 bn. Belgium already raised €32.3 bn through OLO auctions and syndications this year which represents more than 92% of the 2017 OLO funding need (€35 bn). Issuing the maximum amount on offer today, which should be feasible, makes Belgium fully funded for the year. The remaining auction in November could be used to start 2018 pre-funding while the one in December could be scrapped. Bonds on offer cheapened slightly in the run-up to today’s auction in ASW spread terms. The off the run OLO sits rather expensive on the Belgian curve.

The German Finanzagentur holds a 10-yr Bund auction (€3 bn 0.5% Aug2027) on Wednesday. Italy holds an inflation-linked auction on Thursday. The US starts its end-of month refinancing operation tomorrow with a $26 bn 2-yr Note auction. They continue on Wednesday with a $15 bn 2-yr FRN auction and a $34 bn 5-yr Note auction. On Thursday, the Treasury concludes with a $28 bn 7-yr Note auction.

US 10-yr yield tests 2.4% resistance

Asian stock markets trade positive with Japan outperforming after Japanese elections. Abe secured a 2/3rd majority in parliamentary elections confirming a continuation of Abenomics. The US note future has a small upward bias though and recouped opening losses. Fed chair Yellen admitted that there is a concern that inflation remains under 2%. Brent crude is flat just below the $58/barrel mark. We expect a neutral opening for the Bund.

Eco data and won’t impact trading today. Investors remain very calm under the Catalan-Madrid stand-off, but we still shun Spanish/peripheral assets. European investors might decide to take a wait-and-see attitude though with Thursday’s ECB meeting looming on the horizon (see above). Investors are possibly too complacent about a 9-month extension, ignoring the risk of a shorter lifetime for APP. Risk sentiment on stock markets is a wildcard for trading.

Technically, the German Bund trades sideways since this Summer’s rally ended early September. The US Note future completely retraced the Summer move with the US 5-yr yield moving above the 2% mark and the US 10-yr yield testing 2.4% resistance. Progress in the US tax reform debate boosted the reflation trade. More specific news is probably needed to cause a break higher, which we eventually expect to come.

R2 163,43 -1dR1 162,19BUND 161,49 -0,84S1 160,49S2 159,80

German Bund: Counting down to ECB meeting

US Note future: Consolidation pattern still in place

Monday, 23 October 2017

P. 4

EUR/USD: euro declines, but stays within the established

USD/JPY extends gains on higher core yields and risk-on

sentiment

Dollar cautiously higher, but within current ranges

On Friday, the dollar staged a gradual rebound after a Senate budget vote that might also pave the way for a US tax reform. The dollar traded hesitant in Europe, but captured a better momentum later in US dealing. Interest rate differentials moved only marginally in favour of the dollar. Political uncertainty in Spain maybe caused some caution on the euro going into the weekend. EUR/USD closed the session at 1.1784 (from 1.1852 on Thursday). USD/JPY finished the day at 113.52, again off one figure on a daily basis.

Overnight, the trade weighted dollar gains cautiously ground. USD/JPY is taking the lead. The yen falls as the coalition of Japanese PM Abe secured a two-thirds majority in the lower house of Parliament. The Japanese economy is expected to continue receiving support from a stimulating monetary (and fiscal) policy. Japanese equities outperform with gains of abound 1.0% . Gains in the rest of the region are modest. EUR/USD hovers in the 1.1750/75 area. The single currency remains resilient giving rising political uncertainty in in Spain. The kiwi dollar extends its decline below NZD/USD as markets ponder the impact of the new government.

The economic calendar is light today. The US Chicago Fed National Activity index is no market mover. The October EMU consumer confidence is interesting. A slight further increase to a 17-year high is expected. The reaction in the currency market will only be of intraday significance at best. The focus for euro trading will gradually turn to the ECB policy meeting on Thursday and to the developments in Catalonia. On the ECB decision, consensus has been building around a 9-month APP extension while lowering monthly purchases from the start of 2018 from €60 bn to €30 bn. We agree with the reduction in purchases, but think that growth developments argue for a shorter, 6-month. Speculation on the successor of Yellen and on the chances for fiscal easing in the US remain wildcards for USD trading.

At the end of last week, the USD momentum improved slighlty as investors saw rising chances for a US tax refrom. Still, the gain of the USD currency remained modest. The price action this morning sugests a continuation of this pattern. EUR/USD trades below the 1.18 barrier, but the euro remains resilent given the political uncertainty in the region (Spain). USD/JPY jumped temporary above the

Currencies

R2 1,2225 -1dR1 1,2167EUR/USD 1,1784 -0,0068S1 1,1662S2 1,1311

Dollar gained gradual ground on Tax reform hopes.

Dollar trades higher this morning

Yen declines on Abe victory

EUR/USD hover sideways despite political uncertainty in Spain

Eco calendar is thin

Euro traders look forward to the ECB

Spain, the US tax reform and the succession of Yellen are wildcards

Monday, 23 October 2017

P. 5

114 barrier, but for now, the rally shows no strong momentum. We start the week with a catuious EUR/USD negative bias as we see a case for some by default USD buying (tax speculation)/euro selling (Spain). However, there is no sign that the dollar (EUR/USD and even USD/JPY ) are ready for a technically singificant move.

From a technical point of view, EUR/USD dropped below the 1.1823/ 1.2070 consolidation pattern but there were no sustained follow-through gains which was disappointing for EUR/USD bears. We maintain a cautious sell-on upticks bias. The pair needs to drop below the 1.1670/62 support to give comfort to EUR/USD bears. The USD/JPY momentum was constructive in September. The pair regained 110.67/95 (previous resistance), a short-term positive. The 114.49 correction top is the next important resistance. Sentiment improved further last week, but we still assume that a break beyond 114.49 will be difficult.

GBP rebounds, but uncertainty remains omnipresent

Sentiment on the UK currency improved gradually on Friday. European investors apparently drew some comfort from reconciliatory remarks of German Chancellor Merkel on Brexit. The monthly UK public finance data were also better than expected. EUR/GBP drifted again below the 0.90 barrier. Euro softness on Spain was maybe also a slightly negative for the cross rate. EUR/GBP finished the session at 0.8931 (near the intraday low). GBP/USD finished the week at 1.3190.

Today, the CBI Business optimism and trend orders will be published. Orders are expected little changed (9 from 7). This CBI report has usually only limited impact on sterling trading. Even so, after some disappointing eco data, markets are trying to find out how much room the BoE has to hike rates. Investors will also look out whether UK PM May gets backing to make further steps that might help to unlock the stalemate in the Brexit negotiations. At least this weekend’s political headlines didn’t show that things are becoming easier. Sterling still trades with a slightly positive bias against the dollar and the euro this morning. We don’t expect this trend to go far, unless the euro suffers from political uncertainty (Spain).

EUR/GBP staged a strong uptrend from April till late August and set a top at 0.9307. Rising UK inflation data and hawkish BoE comments reinforced a sterling rebound, but this rebound has run its course. EUR/GBP supports at 0.8743 and 0.8652 proved difficult to break. The recent rebound above 0.89 improved the ST technical picture of EUR/GBP, but for now there were no convincing follow-through gains. EUR/GBP 0.9026 is 50% retracement of the recent countermove.

R2 0,9415 -1dR1 0,9307EUR/GBP 0,8931 -0,0076S1 0,8743S2 0,8657

EUR/GBP: test of 0.9000 barrier rejected, for now.

GBP/USD: consolidation within established range

Monday, 23 October 2017

P. 6

Monday, 23 October Consensus Previous US 14:30 Chicago Fed Nat Activity Index (Sep) -0.10 -0.31 Japan 07:30 Nationwide Dept Sales YoY (Sep) A 4.4% 2.0% UK 12:00 CBI Business Optimism (Oct) -- 5 12:00 CBI Trends Total Orders (Oct) 9 7 12:00 CBI Trends Selling Prices (Oct) -- 18 EMU 11:00 Govt Debt/GDP Ratio (2016) -- 89.2% 16:00 Consumer Confidence (Oct A) -1.1 -1.2 Events Q3 Earnings Halliburton (12:45),… 11:30 Belgium to Sell 0.2% 2023, 4.5% 2026 & 1.6% 2047 Bonds

10-year Close -1d 2-year td -1d Stocks Close -1dUS 2,38 0,07 US 1,58 0,05 DOW 23328,63 165,59DE 0,45 0,06 DE -0,72 0,01 NASDAQ 6629,053 23,99BE 0,71 0,05 BE -0,57 0,01 NIKKEI 21696,65 239,01UK 1,33 0,05 UK 0,44 0,02 DAX 12991,28 1,18

JP 0,07 0,00 JP -0,14 -0,01 DJ euro-50 3605,09 3,01

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0,05 1,94 0,92 Eonia -0,3610 -0,00105y 0,24 2,10 1,08 Euribor-1 -0,3730 0,0000 Libor-1 1,2379 -0,001010y 0,90 2,36 1,37 Euribor-3 -0,3290 0,0000 Libor-3 1,3648 0,0023

Euribor-6 -0,2740 0,0000 Libor-6 1,5549 0,0042

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

EUR/USD 1,1784 -0,0068 EUR/JPY 133,77 0,39 CRB 184,12 0,05USD/JPY 113,52 0,98 EUR/GBP 0,8931 -0,0076 Gold 1280,50 -9,50GBP/USD 1,319 0,0031 EUR/CHF 1,1602 0,0031 Brent 57,75 0,52AUD/USD 0,7817 -0,0061 EUR/SEK 9,6184 -0,0139USD/CAD 1,2627 0,0142 EUR/NOK 9,4079 0,0068

Calendar

Monday, 23 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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