Friday, 04 November 2016

P. 1

Rates: Payrolls of marginal importance?

Risks for US payrolls are on the downside of expectations, but the report should be good enough for the Fed to proceed with its plan to hike rates in Dec. For US Treasuries, we expect US eco data to have a smaller impact after the flagged December move. Sentiment will be the key trading factor. Election uncertainty and equity weakness underpin core bonds.

Currencies: Sterling had nice run, but outlook hasn’t changed much

Payrolls and eventually new presidential election news should guide FX trading. Strong payrolls may help stop the rot in the dollar, but next week’s elections will keep traders cautious on the greenback. Weaker payrolls, which we expect, shouldn’t have too much impact unless they’re extremely weak and raise doubts on a Dec. rate increase.

Calendar

• The US S&P 500 notched its longest losing streak since 2008, ending around

0.5% lower and marking the 8th fall in a row. Overnight, Asian stock markets also cede ground with Japan underperforming in a catch-up move.

• Activity in Japan's services sector expanded for the first time in three months in October, suggesting consumer spending is picking up after a series of typhoons kept shoppers at home. The services (PMI) rose to 50.5 from 48.2 in September.

• Oil prices edged up this morning, stabilising after five straight days of falls, although a surge in U.S. crude inventories and doubts over the ability of producers to coordinate output cuts continues to keep a lid on the market.

• The leaders of Turkey’s largest pro-Kurdish party were detained under a counter-terrorist operation, the highest-ranking targets of a wide-ranging assault by President Erdogan on the country’s Kurdish opposition. EUR/TRY tests the all-time high around 3.50.

• Traders of the Australian dollar are in a mild quandary this morning as they weigh up a slight downgrade to the Reserve Bank of Australia’s growth forecasts against solid retail sales data

• The German “Mortgage Credit Directive”, which directs banks not to base the decision to grant a mortgage on expected future increases in the value of the property, is being credited with a sharp decline in mortgages. It sparks debate about the optimal amount of bank regulation

• Bank of Shanghai has raised Rmb10.7B ($1.6B) in an initial public offering that was 763 times oversubscribed, according to exchange filings.

• Today’s eco calendar contains the final EMU services PMI, but most importantly US payrolls. Fed Lockhart, Kaplan and Fischer 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, 04 November 2016

P. 2

Core bonds little changed ahead of US payrolls

Yesterday, German bonds lost some ground, while US Treasuries ended mixed. Risk sentiment slightly improved and UK Gilts suffered from the BoE’s new (hawkish) inflation report. In a daily perspective, the German yield curve shifted 0.1 bp (2-yr) to 2.8 bps (10-yr) higher. UK gilts rose between 0.7 bps (2-yr) and 3.1 bps (10-yr). US yields ended narrowly mixed, the curve steeper and yield changes ranging from -1.2 bps (2-yr) to +3.4 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany were virtually unchanged with Greece still outperforming (-16 bps). Worth adding: risk sentiment turned for the better in Europe after being weak in Asia. However, stocks slid again after a decent start in WS, even as losses remained contained. US weekly claims printed slightly higher than expected, but remain historically low and had no market impact. The US non-manufacturing ISM declined more than feared, from 57.1 to 54.8 and helped US Treasuries erasing modest intraday losses. New US presidential election polls tended to be slightly more in favour of Clinton.

US payrolls eye-catcher

The Fed suggested Wednesday that a December rate hike was very likely, but some progress in achieving its objectives is still desirable. So, a decent US payrolls report (150K) would already be a long stretch towards fulfilling the condition. Consensus expects a net increase of 173K in October, up from a disappointing 156K previously. The unemployment rate is expected to have dropped to 4.9% from 5% and average hourly earnings should show a solid 0.3% M/M and 2.6% Y/Y gain. The main uncertainty is the lingering impact of the hurricane Matthew. Looking to the pointers, initial claims were up 10K in the reporting week when compared to the reporting week of the September report. The ADP private sector payrolls was up 147K in October, following a sharply upwardly revised 202K in the previous month, earlier reported as 154K. The October figure fell short of the 165K consensus expectation. The employment index of the manufacturing ISM rose to 52.9 from 49.7, but the non-manufacturing employment index fell to 53.1 from 57.2, which was however an outlier. Taken this all into account, we have no reason to expect a stronger figure and don’t exclude a slightly weaker figure than consensus.

Rates

US yield -1d2 0,8177 0,01615 1,2597 0,016210 1,8029 0,014530 2,5926 0,0356

DE yield -1d2 -0,6220 0,01405 -0,4000 0,034010 0,1600 0,034030 0,7812 0,0372

T-Note future: Higher on risk-off in Asia (US election fever), but concerns eased in Europe. Eventually supported by weaker US eco

data..

Decline of Brent crude continued yesterday. Key support at $45.09/barrel should hold to prevent a deterioration of the technical

picture -

Core bonds end mixed as trading missed firm guidance and payrolls loom

Greek bonds continue to outperform

Payrolls expected at 173K

Unemployment to drop to 4.9%

Earnings expected to stabilise at 2.6%

Friday, 04 November 2016

P. 3

Payrolls of marginal importance?

Overnight, risk sentiment remains fragile in Asia with stocks around 0.50% lower and Japan underperforming (-1.50%) in a catch-up move. Oil prices stabilize following a 5-day losing streak, but arrived at key technical support (Brent crude $45.09/barrel). The US Note future has a tiny upward bias. If any, the Bund could open a tad higher as well.

Today’s calendar contains the US payrolls report. Risks are on the downside of expectations, but payrolls should be good enough for the Fed to proceed with its plan to hike rates in December. For US Treasuries, we expect US eco data to have a smaller impact after the flagged December Fed rate move. Sentiment will be the key trading factor. The S&P declined 8 days in a row, the longest losing streak since 2008, underpinning bonds. We’ve put our short term bearish view on core bonds on hold earlier this week because of developments in the US presidential race (narrowing gap Clinton-Trump). The increased level of uncertainty is positive for core bonds at this stage. After the elections, we hope to put on new short positions.

Medium term technical pictures deteriorated. Rising inflation expectations 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 held above key resistance levels at 1.75% and 2.5%. The German 10-yr yield moved above the 0.10% resistance. This break is relevant from a technical point of view and unlocks a new trading range (0.10%-0.30%).

R2 164,3 -1dR1 163BUND 162,13 -0,5200S1 161,37S2 161,11

German Bund: Break below 163 support area suggests more downside, but short term consolidation is preferred ahead of US

elections

US Note future: Bearish view on hold because of developments in US presidential race

Friday, 04 November 2016

P. 4

Dollar rebound aborted as payrolls and elections loom

On Thursday, the dollar tried to fight back, but failed. EUR/USD closed at 1.1105, virtually unchanged from the 1.1097 close on Wednesday. USD/JPY closed modestly lower at 102.98 from 103.30. Risk off reigned in Asia and put the dollar under more pressure. EUR/USD tried to break above the rally high, but couldn’t sustain, as European risk sentiment improved. The dollar fought back and EUR/USD hit a low at 1.1060 coming from a Asian high of 1.1127. However, dollar selling resumed as US eco data disappointed and as risk sentiment slightly deteriorated again later on. EUR/USD moved back to opening levels. A Similar picture in USD/JPY which was guided by the changing risk sentiment during the session, leaving USD/JPY pair slightly lower on the day.

Overnight, Asian stock markets cede slightly ground as risk sentiment remains fragile. Japanese equities lose more, in a catch-up move. Oil stabilizes and US Treasuries are marginally higher. In this context, EUR/USD is little changed at 1.11, while USD/JPY is modestly higher at 103.22.

Today, US payrolls are the eye-catcher besides the election campaign. The Fed suggested Wednesday that a December rate hike was very likely, but some progress in achieving its objectives is still desirable. So, a decent US payrolls report (150K) would already be a long stretch towards fulfilling the condition. Consensus expects a net increase of 173K in October, up from a disappointing 156K previously. The unemployment rate is expected to have dropped to 4.9% from 5%. (for full coverage see Fixed Income section) We have no reason to expect a stronger than expected figure and don’t exclude a slightly weaker figure, but not weak enough to put into doubt a December rate increase. In case of a strong payrolls report, any positive USD reaction might be limited and short-lived as long as uncertainty on the elections persists. In this context of global uncertainty, we are in no hurry to add USD long exposure. We stay side-lined and await the election outcome.

Currencies

R2 1,1366 -1dR1 1,1127EUR/USD 1,11015 -0,0025S1 1,0826S2 1,0711

Little changes in EUR/USD and USD/JPY

Dollar stabilizes ahead of US payrolls

Slight downside risks for US payrolls

However US elections remain main driver

.

EUR/USD tests first resistance at 1.1127

USD/JPY back in previous sideways range

Friday, 04 November 2016

P. 5

From a technical point of view, EUR/USD dropped below 1.0952/13 support, which was USD positive, but the re-break followed soon, when Clinton’s campaign ran into troubles. The previous range bottom 1.1123 was under test in past days, but didn’t break. Other resistances are located in the 1.12 area. These levels might come into play if global uncertainty persists or payrolls are very bad. USD/JPY’s break above 104.32/87 resistance is undone. Until last week, the rise in core yields dominated USD/JPY and forced a (temporary) break higher. The return of US political uncertainty pushed USD/JPY back in the previous range. We stay side-lined for now.

Sterling enjoys a batch of positive news

Yesterday, the sterling news flow was unequivocally positive. First, the UK services PMI was stronger than expected at 54.5 (from 52.6). Second, even more importantly, the London High Court ruled that the UK government needs the approval of Parliament to trigger a start of the Brexit procedure via article 50 of the Lisbon Treaty. This reduces the chances of a hard Brexit and thus the need for a weaker sterling to compensate for the loss of competiveness in case the UK leaves the EU without negotiating a good trade agreement. Third, the BoE left its policy unchanged and shifted to a neutral bias as the decline of sterling is expected to keep UK inflation above target till 2020. The BoE tolerates some overshoot of its inflation target, but there are limits. EUR/GBP dropped s from the 0.9000 area to an intraday low of 0.8860. Some profit taking and an overall rebound of the euro left the EUR/GBP pair at 0.8912 in the close, down from the previous close at 0.9020. Cable rose too, from an opening of 1.23 to a close of 1.2461, slightly below the intraday high at 1.2494.

Overnight, Asian accounts still reacted to yesterday’s developments pushing sterling stronger against euro and dollar, but the moves have been partially reversed with EUR/GBP, after testing first key support at 0.8880, changing hands at 0.89 and cable at 1.2465. Today, the UK eco calendar is empty, while the EMU calendar contains mainly second tier national data and the final EMU services PMI. So, sterling guidance should come from the overall sentiment and the outcome of the US payrolls. The yield differentials versus euro and dollar were all in all only modestly changed.

Despite the positive reaction of sterling yesterday, the issue of Brexit remains a big uncertainty and thus a stumbling block for a sustained improvement of sterling. Therefore, we aren’t convinced that a multi-day sterling rally is in store. Anyway, the key EUR/GBP support area (0.8880/0.8808) should first be broken before contemplating a change of our sterling skeptical view. Regarding the payrolls; is EUR/USD gains on a weak report, EUR/GBP may be somewhat higher too. In the opposite case, sterling may slightly profit versus the euro, but, of course, cable would still lose ground.

R2 0,9142 -1dR1 0,9068EUR/GBP 0,8909 -0,0090S1 0,888S2 0,8725

EUR/GBP: test of downside with key support at 0.8880/ 0.8808.

GBP/USD: bottoming out continues, yesterday helped by BoE and High Court, but resistance at 1.28 is still miles away to speak of a

substantial improvement of the technical picture

Friday, 04 November 2016

P. 6

Friday, 4 November Consensus Previous US 13:30 Trade Balance (Sep) -$38.0B -$40.7B 13:30 Change in Nonfarm Payrolls (Oct) 173k 156k 13:30 Two-Month Payroll Net Revision (Oct) -- -7k 13:30 Change in Private Payrolls (Oct) 170k 167k 13:30 Change in Manufact. Payrolls (Oct) -4k -13k 13:30 Unemployment Rate (Oct) 4.9% 5.0% 13:30 Average Hourly Earnings MoM (Oct) 0.3% 0.2% 13:30 Average Hourly Earnings YoY (Oct) 2.6% 2.6% 13:30 Average Weekly Hours All Employees (Oct) 34.4 34.4 13:30 Labor Force Participation Rate (Oct) -- 62.9% Canada 13:30 Unemployment Rate (Oct) 7.0% 7.0% 13:30 Net Change in Employment (Oct) -15k 67.2k Japan 01:30 Nikkei Japan PMI Services (Oct) A: 50.5 48.2 01:30 Nikkei Japan PMI Composite (Oct) A: 51.3 48.9 EMU 10:00 Markit Eurozone Services PMI (Oct F) 53.5 53.5 10:00 Markit Eurozone Composite PMI (Oct F) 53.7 53.7 11:00 PPI MoM / YoY (Sep) 0%/-1.7% -0.2%/-2.1% Germany 09:55 Markit Germany Services PMI (Oct F) 54.1 54.1 09:55 Markit/BME Germany Composite PMI (Oct F) 55.1 55.1 France 09:50 Markit France Services PMI (Oct F) 52.1 52.1 09:50 Markit France Composite PMI (Oct F) 52.2 52.2 Italy 09:45 Markit/ADACI Italy Services PMI (Oct) 51.5 50.7 09:45 Markit/ADACI Italy Composite PMI (Oct) 51.5 51.1 Spain 09:15 Markit Spain Services PMI (Oct) 55 54.7 09:15 Markit Spain Composite PMI (Oct) 54.3 54.1 Events 13:45 Fed’s Lockhart to Speak to Realtors in Orlando 18:00 ECB’s Constancio Speaks in Chicago 18:00 Fed Kaplan Speaks in Mexico City 21:00 Fed’s Fischer Speaks at IMF Event in Washington 03/11-04/11 IMF Conference Macroeconomics after the Great Recession Sovereign debt rating updates include EU, Switzerland (Moody’s), Turkey (S&P)

Calendar

Friday, 04 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.

Contacts

10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 1,80 0,01 US 0,82 0,02 DOW 17931 17930,67DE 0,16 0,03 DE -0,62 0,01 NASDAQ for Exch - NQI #VALUE!BE 0,41 0,03 BE -0,62 0,01 NIKKEI 16905 16905,36UK 1,21 0,04 UK 0,17 0,01 DAX 10325,88 10325,88JP -0,06 -0,05 JP -0,25 0,00 DJ euro-50 2973 2973,49

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,343 03y -0,105 1,113 0,682 Euribor-1 -0,37 0,00 Libor-1 USD 0,27 0,275y 0,029 1,278 0,809 Euribor-3 -0,31 0,00 Libor-3 USD 0,40 0,4010y 0,535 1,644 1,157 Euribor-6 -0,21 0,00 Libor-6 USD 0,56 0,56

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,11015 -0,0025 EUR/JPY 114,59 0,49 183,3803 1295,91 46,48USD/JPY 103,265 0,64 EUR/GBP 0,8909 -0,0090 - 1d -0,91 -5,96 -0,93GBP/USD 1,2457 0,0103 EUR/CHF 1,082 0,0036AUD/USD 0,7667 -0,0011 EUR/SEK 9,9547 0,06USD/CAD 1,3402 0,0039 EUR/NOK 9,0868 0,00