Monday, 24 April 2017

P. 1

Rates: Markets pleased with Macron-Le Pen run off

Risk sentiment is positive overnight after the French election outcome. The Bund opens weaker, putting the German 10-yr yield more comfortably in the 0.2%-0.5% sideways range. French OAT’s are expected to outperform. We have a negative bias for the US Note future as well as President Trump promised to unveil his tax cut plan this week.

Currencies: EUR/USD and USD/JPY show relief-rebound after French election

Overnight, the euro showed the expected Pavlov reaction as the first round of the French election turned out market friendly. The yen decline as safe haven positions were reduced. USD/JPY returned north of 110. The risk-on reaction might still continue early today, but we doubt that the election outcome will mark the start of a sustained euro rally.

Calendar

• US equities ended close to unchanged on Friday. Overnight, Asian risk

sentiment is positive following the French election outcome. Chinese stocks underperform though as the regulator ordered insurers to focus on risk.

• Emmanuel Macron will go head-to-head against Marine Le Pen in the run-off election to become France’s next president. Opinion polls suggest that Macron would beat the stridently anti-EU Le Pen by a wide margin.

• US President Trump says businesses and individuals will receive a "massive tax cut" under a tax reform package he plans to unveil on “Wednesday or shortly thereafter”.

• Italy’s credit rating was cut closer to junk territory on Friday by Fitch, who cited “weak economic growth” and the country’s “persistent track record of fiscal slippage”. Fitch reduced the rating to “BBB” (stable) from “BBB+”.

• The IMF had a sobering message for Greece: Even if the country secures debt relief from its European creditors—a question that is by no means assured with bailout talks still deadlocked—the nation still needs even more painful economic overhauls than currently planned.

• European officials have revived their push for a European Monetary Fund to tackle future crises in the eurozone in place of the IMF, which has yet to say whether it will join the latest Greek bailout.

• Today’s eco calendar contains German IFO business confidence. The Belgian debt agency conducts its monthly OLO auction and Fed governor Kashkari is scheduled to speak. ‘

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Monday, 24 April 2017

P. 2

Core bonds take day off ahead of French election

On Friday, core bonds showed no appetite to choose direction. The April euro area PMI unexpectedly rose for the sixth consecutive month to a 6-yr high, suggesting that the strong economic momentum isn’t hindered by political uncertainty. US Treasuries climbed steadily, but slowly higher in the US session, ignoring a weaker US ISM and stronger Existing Home sales. US Treasuries changed course to close virtually unchanged after Trump said that he will release his tax reform plan this week. In a daily perspective, the German yield curve bull steepened with yields flat (2-yr) to 1.2 bps (30-yr) higher. Changes on the US yield curve ranged between -0.4 bps (2-yr) and +2 bps (30-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany narrowed up to 4 bps for Portugal. French and Belgian spreads ended flat. Core spreads widened 1 bp.

No surprises in French elections

The French presidential run-off will go between centrist Macron and right-wing Le Pen on May 7. Macron beat Le Pen in the first round. The anti Le Pen front will most likely secure Macron’s victory

(for extensive coverage see flash report).

Three lessons for markets: First, the horror “Le Pen-Mélenchon runoff” in the second round doesn’t materialise. Second, Macron will be most likely beat Le Pen in the second round. Third, Macron has no political party which brings uncertainty and underlines the importance of June’s parliamentary elections.

Thin calendar to start the trading week

The market calendar is thin with only April German IFO business sentiment. The market forecasts a stabilization of the headline figure (112.4) with slightly stronger “expectation” and marginal weaker “current situation” sub-indices. The German PMI for April weakened to 56.3 from 57.1, due to the service sector (54.7), while the manufacturing sector stabilized (58.2). Based on the German PMI outcome, we see some risks for a downward surprise. However, we still expect the index to stay at an elevated level. Fed Kashkari speaks twice. He dissented at the March FOMC meeting against an increase of rates. He didn’t say anything important on Friday and being and given his very dovish profile, he likely won’t be able to move the market. The US data (Chicago National Activity Index and Dallas manufacturing index) are no market movers.

Rates

US yield -1d2 1,25 0,065 1,84 0,0810 2,31 0,0830 2,96 0,07

DE yield -1d2 -0,79 0,005 -0,44 0,0010 0,32 0,0830 1,04 0,09

Calm trading ahead of French elections

Bund (Black) & EuroStoxx (orange): Bund slides modestly lower after official close on Friday, in sympathy with US Treasuries

French-German 10-yr yield spread narrowed somewhat before election. How much more narrowing after results first round?

Downside risks IFO

Arch dove Kashkari speaks

Runoff Macron-Le Pen in 2nd round

No surprises

Parliamentary elections now key

Monday, 24 April 2017

P. 3

Belgian OLO auction expected to go well

The Belgian debt agency taps the on the run 7-yr OLO 79 (0.2% Oct2023) and 10-yr OLO 81 (0.8% Jun2027) for a combined €1.8-2.5B. OLO 79 cheapened in ASW spread terms going into the auction, but trades normal on the Belgian curve. OLO 81 traded stable ahead of this tap, but is cheaper than surrounding bonds. We expect that yesterday’s French election outcome will benefit today’s relatively small tap. Tomorrow, the Dutch treasury taps the 10-yr DSL (0.75% Jul2027) for up to €3B. The German Finanzagentur holds a €4B 2-yr Schatz auction (0% Mar2019). On Wednesday, the Finnish debt agency auctions issues the on the run 5-yr RFGB (0% Apr2022) and 30-yr RFBG (1.375% Apr2047) for up to €1.5B. On Thursday, the Italian treasury sells the on the run 5-yr BTP (€2-2.5B 1.2% Apr2022) and 10-yr BTP (€2.25-2.75B 2.2% Jun2027).

Markets pleased with Macron-Le Pen run-off

Risk sentiment is positive overnight after the French election outcome. The US Note future trades lower, the euro strengthens & yen loses and most Asian stock markets eke out gains (China underperforming). We expect a weaker opening for the Bund as well as peripheral spreads narrowing. Italy may underperform its peers after the Fitch rating cut and ahead of fresh supply.

Today’s eco calendar contains German IFO business climate, but markets will respond on the French election outcome. Macron is expected to beat Le Pen with a landslide victory in the 2nd round. If investors price out the “Frexit” risk, it should weigh on the Bund and cause French outperformance. The German 10-yr yield could move higher in the 0.2%-0.5% range. Thursday’s ECB meeting (no hints about policy normalization expected) might dampen the negative impact on the Bund, but in longer term perspective the outcome of the French election may precipitate the ECB exit policy. We have a negative bias for the US Note future as well today as President Trump promised to unveil his tax cut plan on “Wednesday or shortly thereafter”.

Technically: the US 5- and 10-yr yield recaptured lost support levels (1.8% and 2.3% respectively), allowing them to turn higher in the old trading bands as the Fed prepares another rate hike in June and will start to run-off its balance sheet before the end of the year.

R2 164,40 -1dR1 163,99BUND 161,41 -1,45S1 161,88S2 158,28

German Bund: No longer overbought. French election outcome will determine on next move

US Note future: risk aversion boosted core bonds with yields below key levels

Monday, 24 April 2017

P. 4

EUR/USD: testing the 1.0906 range top

USD/JPY regains 110 as sentiment turns risk-on. Bottoming

process in place, but MT picture remains fragile

Can euro sustain initial post-election gain?

On Friday, Thursday’s pro-Europe/France repositioning didn’t continue. EUR/USD and USD/JPY held tight ranges respectively in the 1.07 and the 109 area. Investors kept a wait-and-see modus going into the first round of the French elections. The EMU PMI was strong, but ignored.

Overnight, the outcome of the first round of the French election avoided the negative scenario of a runoff in the second round between Marine Le Pen and Jean-Luc Mélenchon. Macron is largely expected to win the second round against Marine Le Pen. This scenario is market friendly. Early in Asia, the result triggered the expected Pavlov reaction with equities, core bond yields and the euro jumping higher. The safe haven yen was sold. However, except for Japan, most regional equities already lost most gains. Chinese equities even show substantial losses on regulator intentions to curb leveraged trading. EUR/USD jumped north of 1.09, but returned part of the initial gain and is currently trading in the 1.0860 area. A similar reaction was visible in USD/JPY (currently trading just north of 110) and EUR/JPY (119.55 area).

Today, eco calendar is thin. The German April IFO business sentiment is the most important release. The market expects a stabilization of the headline figure (112.4). The decline in the German PMI last week (56.3 from 57.1) suggests some risks for a downward surprise. However, we still expect the index to stay at an elevated level. However, the focus FX trading will likely be on the fall-out from the First round of the French presidential election. Overnight, EUR/USD jumped temporary north of the 1.0875/1.0906 recent range top but no sustained break occurred yet. A euro positive momentum at the start of the European session is likely. However, we doubt that this will be the start of a protracted/sustained euro rebound. Key question is whether the European interest rate market already considers the removal of the French political tail risk a good enough reason for the ECB come closer to policy normalisation. At this week’s ECB meeting, we don’t expect a real positive change in the ECB’s assessment. On the US side of the equation, interest rates also discount a mediocre scenario on the US economy and on the potential of the Trump administration to deliver fiscal reforms. So, there is also room for a rebound in US yields . A slightly narrowing of the interest rate differential between the US and Europe is possible short-term, but we don’t expect the move to go really far. In this context won’t expect EUR/USD to break the 1.10 barrier in a sustained way.

Currencies

R2 1,1145 -1dR1 1,0906EUR/USD 1,0867 0,0152S1 1,0341S2 1,0000

Eco calendar only contains German IFO release

Will euro get enough interest rate support for a sustained rebound?

EUR/USD, USD/JPY and EUR/JPY profit from a market-friendly outcome of the French election

Monday, 24 April 2017

P. 5

For USD/JPY (and EUR/JPY) the day-to-day momentum will probably be constructive as both cross rates will get support from a risk-on context and from higher core bond yields.

From a technical point of view, USD/JPY broke below the 110 key support. We downgraded our USD/JPY assessment to bearish. Next key support (62% retracement) comes in at 107.18. Today’s rebound confirms that a bottoming out process might be in store. However, the pair needs to regain the 112.20 level (neckline ST double bottom) to really improve the technical picture of this cross rate. EUR/USD extensively tested the topside of the MT range (1.0874/1.0906 area) late March, but the test was rejected and EUR/USD returned lower in the 1.0875/1.05 range. The move met support in the 1.06 area and the pair again tested the range top after the French election this morning. We look out how this test turns out, but we are not convinced on a sustained break higher. If EUR/USD would regain the 1.10 barrier next resistance comes in in the 1.1145/1.13 area (US pre/post-election swings).

EUR/GBP returns to the 0.85 area

On Friday, the UK March retail sales declined more than expected, but the damage for sterling was limited. Cable was well bid going into the publication of the report (intraday top of 1.2835) but returned to the big figure after the release. So, for now, soft UK data still have only a modest impact on sterling. Later sterling also ignored hawkish comments from BoE ‘s Saunders. EUR/GBP closed the session at 0.8378 . Cable finished the week at 1.2817.

This morning, the sterling price action was also dominated by the global reaction after the French election. Euro strength prevailed. EUR/GBP jumped to the 0.85 area. Cable lost slightly ground as the dollar gains more from the risk-on repositioning than sterling. Later today, the CBI trends orders will be published. A modest softening from 15 to 12 is expected. Of late, sterling didn’t react to much to eco data. The euro reaction to the French elections will remain the main driver for sterling trading. As we don’t expect a protracted rebound of EUR/USD, further EUR/GBP gains are also not evident short-term. We had a neutral short-term bias on EUR/GBP. Early last week, EUR/GBP dropped below the bottom of the EUR/GBP 0.84 support, improving the sterling picture. The pair came within reach of the key 0.8305 support (Dec low), but. no real test occurred. After this morning’s rebound, the range bottom looks better protected. Longer term, Brexit-complications remain a potential negative for sterling. Of late, this was not the focus of sterling trading. Nevertheless on technical considerations we are inclined to reconsider a cautious EUR/GBP buy-on-dips approach.

R2 0,8881 -1dR1 0,8854EUR/GBP 0,8497 0,0134S1 0,8314S2 0,8304

EUR/GBP: jumps on French election. 0.83 range bottom looks safe for now

GBP/USD: tentative signs of topping out

Monday, 24 April 2017

P. 6

Monday, 24 April Consensus Previous US 14:30 Chicago National activity Index 0.50 0.34 16:30 Dallas Fed manufacturing activity 17 16.9 UK 01:01 Rightmove House Prices MoM / YoY (Apr) 1.1%/2.2% 1.3%/2.3% 12:00 CBI Business Optimism (Apr) 12 15 12:00 CBI Trends Total Orders (Apr) 6 8 12:00 CBI Trends Selling Prices (Apr) 27 29 EMU 11:00 Govt Debt/GDP Ratio (2016) -- 90.4% Germany 10:00 IFO Business Climate (Apr) 112.4 112.3 10:00 IFO Expectations (Apr) 105.9 105.7 10:00 IFO Current Assessment (Apr) 119.2 119.3 Events 11:00 Italy sell inflation-linked and zero-coupon bonds 11:30 Belgium to Sell 0.2% 2023 & 0.8% 2027 Bonds 17:30 Fed's Kashkari Speaks at UCLA in Los Angeles 21:15 Fed's Kashkari Participates in Q&A at Claremont McKenna

10-year td -1d 2-year td -1d Stocks td -1dUS 2,31 0,08 US 1,25 0,06 DOW 20547,76 -30,95DE 0,32 0,08 DE -0,79 0,00 NASDAQ 5910,521 -6,26BE 0,81 0,01 BE -0,51 -0,01 NIKKEI 18875,88 255,13UK 1,03 -0,03 UK 0,09 -0,04 DAX 12048,57 21,25

JP 0,03 0,01 JP -0,21 0,01 DJ euro-50 3440,27 0,24

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,05 1,74 0,61 Eonia -0,3580 0,00005y 0,26 1,97 0,75 Euribor-1 -0,3710 0,0010 Libor-1 0,9906 -0,000610y 0,83 2,28 1,08 Euribor-3 -0,3310 0,0010 Libor-3 1,1562 0,0006

Euribor-6 -0,2490 0,0000 Libor-6 1,4021 0,0114

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

EUR/USD 1,0867 0,0152 EUR/JPY 119,77 2,64 CRB 181,87 -1,17USD/JPY 110,21 0,89 EUR/GBP 0,8497 0,0134 Gold 1275,20 -6,60GBP/USD 1,2789 -0,0022 EUR/CHF 1,0831 0,0128 Brent 52,25 -0,76AUD/USD 0,7558 0,0024 EUR/SEK 9,5994 -0,0326USD/CAD 1,3472 0,0004 EUR/NOK 9,2785 0,0449

Calendar

Monday, 24 April 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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