Monday, 08 May 2017

P. 1

Rates: Macron’s victory discounted?

Macron’s presidential election victory was largely discounted in markets and could trigger some buy-the-rumour, sell-the-fact reaction amid today’s uneventful eco calendar. Afterwards, bond markets might start positioning towards key, hawkish (?) June ECB and Fed policy meetings, which is negative for the Bund and the US Note future.

Currencies: EUR/USD tests 1.10. Post-Macron consolidation might be on the cards

This morning, EUR/USD and USD/JPY jumped temporary higher on the Macron victory in the French Presidential election. However, European markets already largely anticipated this victory last week. So, if the risk-on rally takes a breather, the recent rebound of USD/JPY and EUR/USD might also shift into a lower gear.

Calendar

• US equity markets ended 0.25% to 0.5% higher with the S&P setting an all-time

closing high. Overnight, Asian bourses gain as well with China underperforming (-1%) and Japan outperforming (+2%), catching up after last week’s holidays.

• Macron has swept to emphatic victory in France’s presidential election, beating Le Pen and clinching 65% of the vote. Mr Macron has never before held elected office and his political movement En Marche! was set up barely a year ago.

• China's exports and imports rose in April, but missed analysts' expectations, as domestic and foreign demand faltered and commodity prices fell. China's FX reserves rose in April for a third straight month as capital controls and a pause in the dollar's rally helped staunch capital outflows.

• SF Fed Williams said his outlook for three or four rate increases in 2017 hasn’t shifted, as the labour market shows signs of expanding beyond its sustainable rate.

• German Chancellor Merkel’s Christian Democrats gained a surprise victory in the north German region of Schleswig-Holstein, giving them a boost ahead of September’s national Bundestag vote.

• British consumer spending growth slowed to one of its weakest rates in the past three years last month, credit and debit card company Visa reported, as higher inflation and weak wage growth squeeze households' disposable income.

• Today’s eco calendar contains only second tier data. Fed governors Bullard and Mester are scheduled to speak.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Monday, 08 May 2017

P. 2

US Payrolls non-event, but Bund loses support

What promised to be an exciting trading day, turned out to be a dull session in the US Treasury market. Neither US payrolls, nor Fed speakers could give the market direction. For the Bund, the same characterization was valid until late European afternoon trading, when the Bund fell through key support. The initial decline after the US payrolls was rapidly undone, but a second selling wave pushed the Bund below key 160.64 support. The move went independent from the sideways US Treasury price action. We didn’t see any particular reason (anticipation on the Macron victory, ECB exit, technically?). Admittedly, equities and oil went higher after an Asian crash (of oil), but that were factors that should have impacted US Treasuries too. Peripherals sharply outperformed German bonds, which might have been another sign of easing political risk, albeit that France didn’t outperform.

In a daily perspective, the US yield curve flattened with yield changes ranging between +0.4 bps (2-yr) and -1.5 bps (30-yr). The German yield curve shifted 1.7 bps (30-yr) to 2.4 bp (10-yr) higher. On intra-EMU bond markets, 10-yr yield spreads versus Germany narrowed marginally for semi-core and non-German core. Spain/Portugal (-6/-7 bps), Italy (-11 bps) and Greece (-15 bps) sharply outperformed.

Thin calendar: Macron next French president

The calendar is not very enticing today. Following a strong 3.4% M/M/4.6% Y/Y increased in February, German orders are expected at a decent 0.7% M/M and 2.1% Y/Y, which would corroborate earlier releases. EMU Sentix investor confidence is expected to increase further as many European bourses have done well in the past weeks. The key US data (CPI, retail sales and Michigan consumer confidence) are scheduled for Friday. Especially inflation will be looked at after the surprise decline (M/M) of core inflation in March. We expect that an Easter effect will push core CPI again higher, even as some structural factors (used car prices and wireless telephone services) may continue to weigh on core inflation. Retail sales should rebound erasing weakness in the past months. Following a strong April payrolls report, that would be another sign growth rebounded after weak Q1. In the euro area, attention will go to the outcome of the French presidential elections and the forecasts for the parliamentary ones in June and how that will shape the outlook for France. On the economic side, we expect good eco data from Germany (orders, production and GDP), but weak production data for the euro-area (March).

Rates

US yield -1d2 1,33 0,035 1,89 0,0210 2,36 0,0230 3,00 0,00

DE yield -1d2 -0,68 0,025 -0,30 0,0210 0,42 0,0230 1,20 0,02

Dull US bond session despite US payrolls and flurry of Fed speakers

German Bund loses 160.64 support

Peripherals outperform sharply

Bund future (black) and equities (orange) (intraday): Some inverse correlation visible, but strangely, US Treasuries keep up despite

strong S&P too. t

EuroStoxx on verge of testing 2015 highs

Positive German orders and EMU Sentix investors’ confidence expected

Monday, 08 May 2017

P. 3

Supply heats up this week

This week’s EMU bond supply comes from the Netherlands, Austria, Germany, Portugal and Italy. Tomorrow, the Dutch debt agency taps the on the run 5-yr DSL (0% Jan2022) for up to €3B. The Austrian treasury auctions the on the run 10-yr RAGB (0.5% Apr2027) and 20-yr RAGB (1.5% Feb2047) for a combined €1.1B. On Wednesday, the German Finanzagentur sells the on the run 5-yr Bobl (€3B 0% Jan2022). The Portuguese treasury puts the 2.2% Oct2022 and 4.125% on offer for a combined €1-1.25B. The Italian debt agency concludes on Thursday. The lines and amount on offer still need to be disclosed.

The US Treasury starts its mid-month refinancing operation tomorrow with a $24B 3-yr Note auction, followed by a $23B 10-yr Note auction on Wednesday and a $15B 30-yr Bond auction on Thursday.

Macron victory discounted

Overnight, most Asian stock markets gain ground with China again underperforming and Japan outperforming after last week’s public holidays. Oil extends its rebound, closing in on the key $50/barrel mark. The US Note future trades marginally lower. We expect a neutral opening for the Bund.

Today’s eco calendar is second tier. Fed speakers are a wildcard for trading with Mester and Bullard (both non-voters). The outcome of the second round of French presidential elections will get a lot of attention, but should be discounted. There could be some room for a buy-the-rumour, sell-the-fact reaction amid the uneventful calendar. With French election risk out of the way, focus may this month shift to the potentially key June ECB and Fed meetings. Anticipation on hawkish outcomes could push the German 10-yr yield back to 0.5% and the US 10-yr yield to 2.6%. The fragile picture of commodity markets is a risk scenario which could lift safe haven assets in case of a further crash.

Technically, the US Note future is testing 125-04+/03+ support (previous high/38% retracement). A break lower suggests more downside towards the 123-area. Last week’s test failed. The German Bund dropped below 160.64, suggesting return action towards the 158-area.

R2 163,99 -1dR1 162,49BUND 160,28 -0,62S1 158,73S2 158,28

German Bund: ECB exit speculation becomes trading theme. Break below 160.64 suggests more downside

US Note future: testing key support (125-04+/03+)

Monday, 08 May 2017

P. 4

EUR/USD breaks above the recent highs in the 1.0950 area. However,

some post-Macro consolidation might be on the cards

USD/JPY: technical picture improved as the pair regained the

112.20 neckline, but follow-through gains are modest.

EUR/USD tests 1.10. Post-Macron consolidation ahead?

On Friday, the dollar was in the defensive in Asia, but found a bottom later on as European markets were only modestly affected by the decline of commodities and Asian equities. The US payrolls were solid, but not strong enough to inspire a genuine USD rebound. USD/JPY and EUR/USD remained well bid going into the second round of the French election. USD/JPY finished the session at 112.71. EUR/USD closed at 1.0998.

In Asia, risk sentiment is constructive after the victory of Emmanuel Macron in the French Presidential election. Japanese equities show solid gains (2% +) as investors return from the Golden holiday week. The gains elsewhere in the region are more modest. Chinese equities underperform again. Chinese foreign trade data trailed census expectations, but the trade surplus was solid. USD/JPY opened north of 113 on the Macron victory but trades currently again in the 112.75 area. EUR/USD developed a similar pattern. The pair opened north of 1.10, but returned to the 1.0975 area. A Macron victory was largely discounted. The Aussie dollar stabilizes in the 0.74 area, close to recent lows, as industrial commodities including iron ore and copper, struggle to prevent further losses.

Today, there are only second tier data in Europe and the US. EMU Sentix investor confidence may rise further as European bourses have done well recently, but the report will have limited impact on trading. Markets already prepositioned for a Macron victory last week with European (French) equities outperforming. On the FX market this translated in a combined rise of EUR/USD, USD/JPY and EUR/JPY. Sentiment on risk will probably remain constructive at the start of trading in Europe. Even so, the risk-rally of EUR/USD and USD/JPY might run into resistance as investors will gradually turn their focus to the French Parliamentary election and how that will shape the outlook for France. In a day-to-day perspective, USD/JPY and EUR/USD might probably hold near the recent highs. However, the upside momentum might slow. For EUR/USD, some (cautious) profit take on the recent euro rally might be on the cards. For USD/JPY, we keep an eye at global risk sentiment. US equities/equity futures will probably profit only slightly from the French election result. Commodities and China might are a wildcard, but might be a source of uncertainty. On the interest rate markets, a June rate hike is almost completely discounted. So, probably USD/JPY won’t get additional interest rate support. So, Last week’s combined rebound of USD/JPY and EUR/USD might see some modest profit taking. LT the ECB strategy/communication will be important for the fate of the euro. However, as we don’t expect a clear message before the June meeting, further euro gains might be less evident ST.

Currencies

R2 1,13 -1dR1 1,1145EUR/USD 1,0994 0,0012S1 1,0778S2 1,0341

European risk rally of USD/JPY and EUR/USD to slow after the French election?

Dollar fails to gain on solid US payrolls.

Initial post-Macron rebound of EUR/USD and USD/JPY quickly reversed.

Monday, 08 May 2017

P. 5

From a technical point of view, USD/JPY bottomed out in April and regained the 112.20 resistance last week. This improved the technical picture. However, follow-through gains were modest. Next intermediate resistance comes in at 115.51, but it might be too early for a retest of this level. EUR/USD extensively tested the topside of the MT range (1.0874/1.0906 area) late March. The pair returned to the range top after the first round of the French election and broke above the 1.09/1.0950 resistance at the end of last week. If confirmed, this break would improve the ST picture. Next resistance stands at 1.1129 (62% retracement) and at 1.1366 (correction top). A decline below 1.0821 would suggest that the dollar is regaining traction against the euro. A ST EUR/USD correction might occur as the pair is moving into overbought territory.

EUR/GBP fails to regain the 0.85 barrier for now

On Friday, there was no important UK news to guide sterling. The conservative party made good progress in local elections, indicating that PM May might secure a comfortable majority at next month’s Parliamentary. Cable held strong and drifted to the high 1.29 area. This suggests a slightly positive impact on sterling. The soft reaction of the dollar after the payrolls also supported cable. EUR/GBP traded with a slightly negative intraday bias. The pair closed the session at 0.8473.

Today; only the Halifax house prices are on the UK agenda. A rather soft report (0.1% M/M and 36% Y/Y) is expected. So, sterling trading will probably again be driven by the global trends in the euro and the dollar after the French election. Cable has been very strong of late, so there might be room for some consolidation to digest recent gains.

Two weeks ago, EUR/GBP dropped below EUR/GBP 0.84 support, (temporary) improving the sterling picture. The pair came within reach of the key 0.8305 support (Dec low), but no real test occurred. After a late April EUR/GBP rebound, the range bottom is better protected. Longer term, Brexit-complications remain potentially negative for sterling. On technical considerations we slightly prefer a EUR/GBP buy-on-dips approach.

R2 0,8881 -1dR1 0,8854EUR/GBP 0,8477 -0,0022S1 0,8314S2 0,8304

EUR/GBP: downside better protected after recent rebound

GBP/USD: holding near the recent top on USD softness

Monday, 08 May 2017

P. 6

Monday, 8 May Consensus Previous US 16:00 Labor Market Conditions Index Change (Apr) 1 0.4 Japan 07:00 Consumer Confidence Index (Apr) A 43.2 43.9 China Trade Balance CNY (Apr) A 262.3b 164.34b Imports YoY (Apr) A 11.9% 20.3% Exports YoY (Apr) A 8% 16.4% Trade Balance (Apr) A $35.05b $23.93b 08MAY-18MAY Foreign Direct Investment YoY CNY (Apr) -- 6.7% UK 09:30 Halifax House Prices MoM & 3Mths/Year (Apr) 0.1%/3.6% 0.0%/3.8% EMU 10:30 Sentix Investor Confidence (May) 25.2 23.9 Germany 08:00 Factory Orders MoM / WDA YoY (Mar) 0.7%/2.1% 3.4%/4.6% Norway 08:00 Industrial Production MoM / WDA YoY (Mar) --/-- -0.5%/1.2% 08:00 Ind Prod Manufacturing MoM / WDA YoY (Mar) 0.5%/-- 0.0%/-1.4% Events 10:30 Bank of Portugal Governor Speaks at Conference in Lisbon 14:35 Fed's Bullard Speaks on Panel on Interest Rate Policy 14:45 Fed's Mester Speaks at Chicago Council on Global Affairs

10-year td -1d 2-year td -1d Stocks td -1dUS 2,36 0,02 US 1,33 0,03 DOW 21006,94 55,47DE 0,42 0,02 DE -0,68 0,02 NASDAQ 6100,758 25,42BE 0,81 0,02 BE -0,52 0,00 NIKKEI 19895,7 450,00UK 1,12 0,00 UK 0,14 0,03 DAX 12716,89 69,11

JP 0,03 0,01 JP -0,19 0,01 DJ euro-50 3658,79 30,91

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,01 1,77 0,68 Eonia -0,3570 0,00005y 0,26 1,99 0,85 Euribor-1 -0,3740 0,0000 Libor-1 0,9944 0,002810y 0,87 2,31 1,21 Euribor-3 -0,3290 0,0000 Libor-3 1,1804 0,0092

Euribor-6 -0,2480 0,0020 Libor-6 1,4327 0,0053

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

EUR/USD 1,0994 0,0012 EUR/JPY 123,98 0,74 CRB 177,92 0,92USD/JPY 112,77 0,55 EUR/GBP 0,8477 -0,0022 Gold 1229,80 -4,40GBP/USD 1,2969 0,0047 EUR/CHF 1,0870 0,0031 Brent 49,81 2,53AUD/USD 0,7415 0,0039 EUR/SEK 9,6641 -0,0434USD/CAD 1,3645 -0,0142 EUR/NOK 9,4412 -0,1167

Calendar

Monday, 08 May 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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