Friday, 18 November 2016

P. 1

Rates: ECB’s urgency to change QE-rules disappears

ECB governors Draghi and Weidmann could downplay the importance of December’s policy meeting as the bond sell-off following Trump’s election removes the urgency to change rules of the QE-programme. Higher rates widen the scope of bond purchases. Therefore, German Bunds could continue outperforming heavily beaten US Treasuries.

Currencies: USD (trade-weighted) breaks out of MT consolidation pattern

Yesterday morning, the USD rally slowed temporary, but a new rise of US bond yields pushed the dollar to new highs against the euro and the yen. USD/JPY easy cleared the 110 barrier. The trade-weighted dollar broke above the 100.50 range top. The new down-leg in EUR/USD also pushed EUR/GBP to a new correction low in the 0.8550 area.

Calendar

• US equities extended their run yesterday with 0.5%-0.75% gains as the

reflation trade got a new boost with the dollar and US rates also closing higher. Overnight, Asian risk sentiment is less buoyant.

• China's new home prices grew in October at the fastest rate since record-keeping began in 2011, despite a significant slump in property sales volume as local governments stepped up measures to cool skyrocketing prices.

• Hungary’s government is to cut its corporate tax rate to the lowest level in the EU (9%) in a sign of increasingly competitive tax practices among countries seeking to lure foreign direct investment.

• Mexico's central bank hiked interest rates from 4.75% to 5.25%, the highest in over 7 years, and warned that the election of Donald Trump as U.S. president had cast doubt on the direction of Latin America's second-largest economy.

• EU bail-in rules to reduce taxpayers' costs in bank rescues may not be appropriate if a banking crisis is systemic, a top adviser to EC president Juncker on euro zone reform said. This could signal a departure from a German-led model that has caused concerns in southern European countries.

• Germany’s finance minister has set out a tough line on EU divorce talks with Britain on issues from tax breaks to exit costs, dashing Downing Street hopes Berlin would soften Europe’s stance on a UK departure from the bloc.

• The dollar extends its run this morning with the trade weighted greenback above 101, the highest level since 2003. The 10-session winning streak is the longest since April-May 2012, when USD rose a record 14 sessions in a row.

• Today’s eco calendar is empty apart from speeches by Fed governors Dudley, Kaplan, George and Bullard. In EMU, ECB president Draghi and Weidmann 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 November 2016

P. 2

Wait-and-see attitude before US Treasuries sold off

Yesterday, global core bonds had initially an uneventful session, prolonging a fragile wait-and-see attitude that followed a huge sell-off. However, US Treasuries gradually slid lower after stronger US eco data in a move that would only end at the market closure. Claims, housing starts & permits and Philly Fed, were all strong. Inflation was close to expectations, but the Philly Fed prices paid and prices received (sub-indices) rocketed higher. Yellen repeated more or less what the November FOMC statement said, but markets noticed her argument that waiting too long would oblige them to go faster and waiting too long could encourage excessive risk taking. Grist to the mill in the current bearish sentiment, which led to more selling. In a daily perspective, the US yield curve bear steepened with yields 4.1 bps (2-yr) to 9 bps (30-yr) higher. German yields fell 0.4 bps to 1.8 bps (10-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany widened. Italian, Spanish and Portuguese spreads ended 5-to-6 bps higher.

Empty eco calendar, plenty CB speakers

St-Louis Bullard speaks again. He favours one rate hike (in Dec unless accidents happen) after which he considers policy as “neutral”. Kansas City Fed George is a hawk and dissented this year several times in favour of a rate hike. NY Fed Dudley is close to Yellen and will probably hint at a December rate hike while stressing that policy should be tightened very gradually. Dallas Fed Kaplan said two days ago that it is time for the Fed to start normalizing rate policy. Overall, we don’t expect the Fed governors to impact markets completely discounted a December hike. Fed members will avoid comments on fiscal policy and its impact further out on monetary policy. ECB Draghi and Weidmann speak in Frankfurt. Draghi will introduce the session about “How to reform Europe” while Weidmann introduces the session “Monetary policy, which road ahead?”. We think that the recent increase in yields means that there is no urgency anymore for the ECB to fix the scarcity issue for its APP programme. There is no need to say something on tapering neither given the higher yields and the abhorrence to create more volatility. We do expect the ECB to say at the December meeting that it will extend its APP programme, maybe without mentioning the amount of purchases (after April). Draghi may downplay the importance of the December meeting (just like the ECB did with the September meeting) as ECB Mersch suggested yesterday in order to manage expectations. Weidmann is a hawk and may suggest that unconventional policy should be stopped (tapered) as soon as possible.

Rates

US yield -1d2 1,0555 0,05415 1,7722 0,121310 2,3351 0,133830 3,0377 0,1140

DE yield -1d2 -0,6370 -0,00205 -0,3350 0,005010 0,2920 0,006030 0,9479 0,0382

T-Note future (black) S&P future (orange) (intraday): Sell-off Treasuries resumes and S&P approaches highs

10-yr US TIPS (inflation-linked) real rates move to 0.43%, about 33 bps higher since Trump’s election victory. This suggests that markets

also expect a stronger economy, not only inflation.

US curve bear steepens after stronger US eco data and Yellen comments

Eco calendar is empty

ECB speakers may move the markets.

ECB APP scarcity issue off the table?

Tapering asset purchases after March unlikely to be decided in December

Friday, 18 November 2016

P. 3

ECB’s urgency to change QE-rules disappears

Overnight, Asian stock markets trade mixed. Risk sentiment is far less buoyant than in WS yesterday. Only Japan outperforms with USD/JPY above 110.50. The US Note future trades volatile, but slightly lower. We expect a somewhat weaker opening for the Bund as well.

Today’s eco calendar is empty apart from central bank speeches. Given that Yellen flagged a near-term rate hike yesterday, Fed comments lost market impact. ECB governors Draghi and Weidmann could downplay the importance of December’s policy meeting as the bond sell-off following Trump’s election removes the urgency to change rules of the QE-programme. Higher rates widen the scope of bond purchases. Therefore, German Bunds could continue outperforming US Treasuries. Overall core bond sentiment remains negative as rising inflation expectations and rising US real rates (the reflation trade) are dominant. Sell-on-upticks.

Medium term technical pictures deteriorated. Better eco data, rising inflation expectations (Trump’s reflation trade) and central banks’ change of tone (extraordinary policy won’t last forever) triggered the sell-off which started at the beginning of October. The US 10-yr and 30-yr yields broke above 2% and 2.75% resistance. Next targets are 2.50% and 3.25%. The German 10-yr yield tests the upper bound of the trading range (0.10%-0.33%). A break opens the path to 0.50%

R2 163 -1dR1 161,69BUND 160,52 -0,0400S1 159,14S2 158,67

German Bund: deteriorating technical picture. Outperformance vs US Treasuries as urgency ECB action disappears

US Note future: Core bonds suffer after Trump’s election victory.

Friday, 18 November 2016

P. 4

USD extends ascent as do US bond yields

Yesterday, the dollar initially declined slightly, but the move had no strong momentum. EUR/USD settled in the lower half of the 1.07 area for most of the day. USD/JPY hovered around the 109 pivot. US inflation was as expected, but the activity data were strong. US bond yields resumed their uptrend later in US dealings and so did the dollar. The dollar set new highs against the euro and the yen. EUR/USD closed the session at 1.0626 (from 1.0691). USD/JPY finished the day at 110.12 (from 109.08)

Overnight, dollar strength remains the dominant factor. The USD rally is supported by a further rise of US yields. The impact on other markets is a bit diffuse. Asian equities show limited gains. Japanese equities profit most from the USD/JPY rally as the pair jumped will north of the 110 psychological level (currently 110.65). The rise of the dollar is putting pressure on the commodity complex, but for now the negative impact on regional Asian equities remains modest. The PBOC weakened the yuan fixing for the 11th day in a row. The yuan declines further with USD/CNY trading at 6.8905. The global rise of the dollar is also hammering EUR/USD, that dropped below the 106 big figure.

Later today, there are no important eco data in the US and in Europa. ECB’s Draghi gives a speech in Frankfurt. We don’t expect him to hint on any policy details. If anything, he might further downplay the importance of the December policy meeting. Any indication that ECB tapering might be delayed further out in 2017 is euro negative.

Since the US election result, the dollar trended decisively higher propelled by rising US bond yields as the Trump-driven reflation trade unfolded. Mid this week, the rise in core/US bond yields slowed temporary, but the dollar ascent remained firmly in place. The dollar is setting new highs against the euro and yen. The trade-weighted dollar broke beyond the 100.50 top of a 2-year consolidation pattern. A sustained break beyond this area would be a significant from a technical point of view. So, underlying sentiment remained USD constructive. In case of a consolidation in core bond yields, the dollar rally may also temporary slow. However, for now there is no signal of a correction. Regarding EUR/USD, we also have the impression that some euro softness is at work (less chance for ECB tapering, political uncertainty)

Currencies

R2 1,13 -1dR1 1,1145EUR/USD 1,0598 -0,0091S1 1,0524S2 1,0458

USD rally reaccelerates as US yields extend rise

USD/JPY jumps north of 100

EUR/USD tumbles below 1.06

Commodities hurt by USD rally

No important eco data

Draghi speech might be a wild card.

USD(trade-weighted) breaks out of LT consolidation pattern

EUR/USD nearing the LT range bottom

Friday, 18 November 2016

P. 5

From a technical point of view, EUR/USD easily cleared intermediate resistance at 1.0851 and 1.0711 (2016 low) improving the picture of the dollar. A Fed December rate hike is a done thing, while it is unlikely that the ECB will announces a tapering of its asset buying at its meeting. We maintain a sell-on-upticks bias for EUR/USD. The break below 1.0710 and now below 1.06 brings the cycle low of 1.0524 on the radar. The picture for USD/JPY also improved. Interest rate differentials rather than the risk-on/risk-off paradigm are currently main driver for USD/JPY. The trend looks well supported as long as the dollar receives interest rate support. However, what will be the reaction of USD/JPY if equity sentiment turns less positive? We don’t jump on the USD/JPY rally at current levels.

EUR/USD still drives EUR/GBP lower

On Thursday morning sterling basically drifted sideways despite the publication of remarkably strong October UK retail sales. Headline sales rose 1.9% M/M and 7.4% Y/Y (0.5% M/M and 5.3% Y/Y was expected). Sterling spiked temporary higher after the publication of the report but as was often the case of late, the data were not able to kick-start a directional move of sterling. EUR/GBP soon returned to the tight range near 0.8600. Toward the end the European session, a buying wave in the dollar hammer EUR/USD. As was often the case in the post-Trump repositioning, cable resisted the rise of the dollar much better than EUR/USD. EUR/GBP set a new correction low and closed the session at 0.8557 (from 0.8592). The correction in cable was much more moderate. The pair closed the session at 1.2417.

Today, there are no important eco data in the UK. BoE’s Broadbent speaks in London. Sterling trading will probably remain at the mercy of broader market developments, especially the swings in the dollar. Sterling held very strong in the post-Trump USD rally. It ceded hardly ground against the dollar and rebounded strongly against the euro as the decline of EUR/USD weighed on EUR/GBP. EUR/GBP dropped below the 0.8725 previous top. This made the short-term picture sterling friendly. The pair is currently setting new correction lows in the 0.8850 area. The rise of sterling/decline of EUR/GBP slowed this week, but the jury is still out whether this level will mark a correction bottom. We are not convinced on the sustainability of the GBP rebound, but we wait for more convincing signs that EUR/GBP is bottoming out. In this respect, the decline of EUR/USD also continues to weigh. We stay side-lined for now. Underlying euro weakness currently also weighs on the EUR/GBP cross rate

R2 0,905 -1dR1 0,8708EUR/GBP 0,8548 -0,0051S1 0,8333S2 0,8117

EUR/GBP dropped below 0.8725 support. EUR/USD decline continues to

weigh

GBP/USD: sterling holds strong despite overall USD rebound.

Friday, 18 November 2016

P. 6

Friday, 18 November Consensus Previous Canada 14:30 CPI SA MoM /YoY (Oct) 0.2%/1.5% 0.2%/1.3% 14:30 CPI Core SA MoM / YoY(Oct) 0.3%/1.8% 0.1%/1.8% EMU 10:00 ECB Current Account SA (Sep) -- 29.7b Germany 08:00 PPI MoM / YoY (Oct) 0.2%/-0.9% -0.2%/-1.4% Events 09:00 ECB's Draghi Speaks at Euro Finance Week in Frankfurt 11:30 Bundesbank's Weidmann Speaks at Euro Finance Week in Frankfurt 11:30 Fed's Bullard, SNB's Maechler Speak on Panel in Frankfurt 15:30 Fed's George Speaks in Houston 15:30 Fed’s Dudley Gives Welcoming Remarks, Answers Questions in NY 19:30 Fed’s Kaplan Speaks in Houston

10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 2,34 0,13 US 1,06 0,05 DOW 18904 18903,82DE 0,29 0,01 DE -0,64 0,00 NASDAQ for Exch - NQI #VALUE!BE 0,70 0,04 BE -0,57 0,01 NIKKEI 17967 17967,41UK 1,42 0,02 UK 0,22 0,06 DAX 10685,54 10685,54JP 0,04 0,03 JP -0,13 0,00 DJ euro-50 3042 3041,79

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,349 0,0073y -0,055 1,474 0,773 Euribor-1 -0,37 0,00 Libor-1 USD 0,26 0,265y 0,130 1,769 0,974 Euribor-3 -0,31 0,00 Libor-3 USD 0,40 0,4010y 0,680 2,158 1,349 Euribor-6 -0,22 0,00 Libor-6 USD 0,57 0,57

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,0598 -0,0091 EUR/JPY 117,23 0,43 182,3387 1208,76 46,22USD/JPY 110,65 1,34 EUR/GBP 0,8548 -0,0051 - 1d -0,74 -17,46 -0,33GBP/USD 1,2389 -0,0035 EUR/CHF 1,0686 -0,0032AUD/USD 0,7388 -0,0085 EUR/SEK 9,8205 0,00USD/CAD 1,3543 0,0113 EUR/NOK 9,0873 0,02

Calendar

Friday, 18 November 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 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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