Thursday, 06 October 2016

P. 1

Rates: ECB Tapering rumours prime on strong US ISM

Bunds sharply underperformed US treasuries yesterday , still on the tapering story. Attention will now go to tomorrow’s US payrolls release, suggesting a quiet trading session today. Key technical US Treasuries levels come into play. Attention is warranted.

Currencies: USD/JPY extends rally on rise in core bond yields

Yesterday, EUR/JPY and USD/JPY profited again from higher US/EMU yields. EUR/USD didn’t go anywhere. Today, the eco calendar is thin. Recent trends might stay in place, but USD traders might turn a bit more cautious ahead of the payrolls. The decline of sterling slowed intraday yesterday, but the jury is still out whether this is the start of calmer times ahead.

Calendar

• US Equities ended with modest gains yesterday, supported by a strong rebound

in the non-manufacturing ISM. This morning, also Asian shares show moderate gains following WS yesterday.

• The German government is pursuing discreet talks with US authorities to help Deutsche Bank secure a swift settlement over the sale of toxic mortgage bonds, according to sources in Berlin.

• Fed’s Vice-Chair Fischer said “persistent” forces including low productivity growth, damages from the financial crisis may leave the economy saddled with low growth, adding that policies to raise growth and interest rates must be beyond monetary policy.

• The world is swimming in a record $152 trillion in debt, the IMF said, warning that excessive private debt is a major headwind against the global recovery and a risk to financial stability.

• Brent crude oil prices rose yesterday temporarily above $52/barrel after EIA showed US crude stockpiles fell last week for the fifth time in a row despite slowing refinery activity. The Brent edges slightly lower this morning with the $51.87/barrel level still under test.

• Today, the eco calendar is thin with only US initial jobless claims and UK car registrations. The ECB publishes the minutes of its Sep meeting.

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

Thursday, 06 October 2016

P. 2

Rates increase further on strong ISM and higher oil

The combination of higher oil prices, recovering stock markets, a strong US non-manufacturing ISM (57.1 from 51.4 vs 53.0 expected) increases chances of a US tightening soon. Together With Tuesday’s ECB QE tapering rumours it triggered more bear steepening of the EMU yield curve. Chances on a Nov or Dec rate increase went only marginally up to 23.6% and 62.1% respectively. Bunds underperformed US Treasuries sharply, as the reaction on the “tapering” story primed the modest reaction on a better US Non-manufacturing ISM. Yield supports at 2.45%, 1.75% and just above 1.25% on the 30-, 10-, and 5-year held easily, helping to avoid bigger losses. In a daily perspective, German yields rose by 1.1 bps (2-yr) to 6.8 bps (30-yr). The US yield curve shifted 1 bps (2-yr) to 1.6 bps (10-yr) higher. On intra-EMU bond markets, 10-yr yield spread changes versus Germany widened up to 2 bps for Greece, Portugal, Italy and Spain.

Thin calendar ahead of US payrolls tomorrow

Today, only the US initial claims warrant some preview. While it covers the period after the payrolls survey week, big surprises may still cause some repositioning. Initial claims fell last week to a very low 254K and markets are expecting little change at today’s release (256K). Given the sharp fall last week, the risk might be for some upward surprise, but all in all it shouldn’t affect trading too much, as traders will be waiting on tomorrow’s payrolls and shun big positions. The ECB publishes in early afternoon the account of its September policy meeting. Following Mr. Draghi’s rather unusual behaviour at the press conference e.g. saying that QE was not discussed and recent rumours on tapering, it will be interesting to see what participants actually discussed. Of course, our expectations aren’t too high as the Minutes mostly don’t contain surprises. However, one never knows.

Spanish and French bond auctions

Spain will sell , 0.75% July 2021, 1.2% Oct 2026, 4.2% Jan 2037 SPGB bonds for an amount of €4.5B and a 0.3% 2021 linker. Spanish bonds have performed well pushing the 10-year yield spread to its Italian peer to above 30 bps at the 10-yr tenor and further out. They outperformed swaps too in past weeks. This occurred despite the absence of a government.

Rates

US yield -1d2 0,8417 0,02015 1,2516 0,032610 1,7127 0,036730 2,4333 0,0347

DE yield -1d2 -0,6760 0,00505 -0,5180 0,026010 -0,0140 0,033030 0,5997 0,0564

Bund future (black) and EuroStoxx (orange) intraday: European equities recoup most of the initial losses, but the Bund hit further by

tapering story and a bit by stronger US ISM ..

T-Note future (black) & S&P future (orange) intraday: T-Note only hit modestly by stronger services PMI. .

Core bonds down for fourth session

German curves bear steepened, while the US one shifted only marginally lower

Upside risks initial claims

What about the ECB Minutes?

Thursday, 06 October 2016

P. 3

The resignation of the Socialist leader Sanchez raises of course chances for the formation of a (minority) government. Yesterday the IMF upgraded its Spanish growth forecasts while downgrading most other EMU countries. So, the general sentiment is positive. We expect most interest in the Oct 2026 SPGB, The July 2021 looks a bit rich and the Jan 2037 may feel a negative impact from the recently issued 50-yr BTP. France taps the Nov 2026, May 2031 and May 2066 OATs for an amount of €7.5B. The French auctions usually go well and this might also be the case today. Most issues give some value versus OLO or versus the curve

Awaiting the US payrolls?

Overnight, Asian stock markets follow WS higher with modest to moderate gains amid a news-poor Asian session. Oil trades slightly lower following a stellar performance in past days, but stands still above $51.50/barrel (Brent). So, risk sentiment looks neutral to slightly positive but without negative impact on core bonds, the USD/JPY or gold. The T-Note future trades about unchanged and we expect the Bund to open little changed.

Today’s eco calendar is uneventful. Only the ECB Minutes might be interesting. They could help us understand why Draghi remained silent at the Sep meeting about a possible QE extension, especially after this week’s tapering story. It might help investors forming their views about the outcome of next meetings. Admittedly, the Minutes often fell shy of expectations. Given the dearth of the market calendar and the release tomorrow of the payrolls, we bet on a range-bound session. Core bonds have fallen for four sessions, which calls for some respite.

Technically, the Bund fell back in that longstanding range and tests the 164.29 level. A break would open the way for a return to the range bottom at 163 (if payrolls would be very strong enough). For the US yields, 1.27% for the 5-yr, 1.75% for the 10-yr and 2.50% are strong yield supports. Rumours about the end of an era of unprecedented monetary easing could become run-of-the-mill in the run-up to the October/December ECB meetings and cap the topside in the Bund market. The trading range for the US Note future is expected to be 130-01+ to 132-05. With more positioning for a December rate hike likely, we expect a move towards the lower bound of the range and possibility of a break in case of a strong payrolls report.

R2 167 -1dR1 166,36BUND 164,35 -0,4400S1 164,29S2 163

German Bund: back within longstanding sideways channel after ECB QE tapering rumours, but risk for a drop to range bottom increases

US Note future: Near bottom range. Payrolls to decide whether range remains in place or new trading range is in formation

Thursday, 06 October 2016

P. 4

USD/JPY and EUR/JPY profit from higher core yields

On Wednesday, the rise in core bond yields still dominated global trading. However, the impact on EUR/USD was limited as the fear for ECB tapering more than counterbalanced anticipation of a Fed rate hike. EUR/USD settled again in the low 1.12 area. A strong non-manufacturing ISM pushed to pair only marginally lower. EUR/USD closed the session at 1.1205, almost unchanged from Tuesday. USD/JPY (and EUR/JPY) were again the main beneficiaries of higher core bond yields. USD/JPY finished the session at 103.50 (from 102.90).

Overnight, Asian equity markets trade modestly positive, in line with the US yesterday. The rise of USD/JPY supports a positive risk sentiment in Japan and in the broader region. The pair trades in the 103.55 area, holding within reach of the recent highs. EUR/USD is holding little changed in the 1.12 area. Commodity currency like the Aussie dollar don’t profit from the rise in oil prices as higher core bond yields weigh on the currency.

Today, only the US initial jobless claims warrant some preview. The report covers the period after the payrolls survey week, but big surprises may still cause some repositioning. Initial claims fell last week to a very low 254K. Markets expect little change for today’s release (256K). Given the decline last week, the risk might be for an upward surprise. Even so, the impact on the dollar might be limited as traders will be waiting on tomorrow’s payrolls and shun big positions. The ECB will publish the Minutes of the September policy meeting. It will be interesting to see what participants actually discussed as Mr. Draghi at the press conference said that QE was not discussed and given recent rumours on tapering. Usually, the minutes have limited impact on currency trading, but we the issue deserves some attention.

Yesterday, the rise in core bond yields in particular supported the likes of EUR/JPY and USD/JPY. EUR/USD settled again in a very tight sideways range near 1.12. Higher European yields due to ECB tapering speculation, supported the euro. Today, we expect some consolidation on the recent moves as investors are counting down to tomorrow’s key US payrolls. Recent good US eco data keep the dollar well supported ahead of the payrolls, suggesting EUR/USD

Currencies

R2 1,1366 -1dR1 1,1279EUR/USD 1,1195 -0,0020S1 1,1123S2 1,1046

USD/JPY takes lead in the USD rally

ECB tapering fears block downside in EUR/USD

USD/JPY holding near the recent correction high

EUR/USD still going nowhere

Consolidation of recent moves on the cards amid empty eco calendar

Higher yields fail to inspire EUR/USD trading

USD/JPY: propelled higher in the range as interest rate support rises

Thursday, 06 October 2016

P. 5

range-trading. Questions remains whether the USD/JPY rebound can continue if volatility in US equities would pick up. For now, the damage from higher yields on equities remains contained, which is a ST positive for USD/JPY.

EUR/USD tested the 1.1123 support before the Fed, but the test was rejected. The Fed decision didn’t change the broader picture for EUR/USD. Markets look out whether the data support the case for a December rate hike. Swings in December rate hike expectations will probably remain the main driver for USD trading. The downside of the dollar looks well protected as long as the market implied probability of a Fed rate hike remains at current levels. The ECB tempering debate makes USD gains against the euro less easy. We prefer more range trading in the 1.1123/1.1366 band and a sell-on-upticks approach. USD/JPY remained in the defensive immediately after the BOJ meeting. However, a rise in US/European yields put the yen under downward pressure. We stay cautious on USD/JPY long exposure. However, the 99.54/99.02 area remains a strong support. 104.32 is the first main resistance. Sentiment improved over the previous days, but we expect the 99.89/104.32 range to hold.

Sterling decline slows, at least temporary

Yesterday, the decline of sterling slowed. Sterling touched new lows against the euro and the dollar early in Europe. The rise in US/EMU bond yields and fears for a hard Brexit were still to blame. An aid of Brexit Secretary Davis floated the idea of four red lines for the coming EU talks: immigration, no EU budget payments, independent law-making and freedom from the jurisdiction of the EU court. With this agenda, a hard Brexit is inevitable. However, there were few additional losses for sterling. The UK services PMI was slightly better than expected, but with no immediate impact on sterling selling. UK PM May questioned the merits of ultra-low interest rates and suggested that this could change. Monetary policy remains the responsibility of the BoE, but the remarks might have caused sterling shorts to lock in some profits. EUR/GBP closed the session at 0.8790 (from 0.8803). Cable finished the day at 1.2749 (compared to an intraday low of 1.2685.

Today, there are only second tier eco data in the UK. The sterling decline took an intraday breather yesterday, but the UK currency is again losing ground this morning. So we look out whether the recent lows against the euro and the dollar hold. This could signal some consolidation after recent steep losses. The longer term picture remains sterling negative (Brexit debate, higher yields in the US and Europe). However, we become more cautious on the sterling sell-off as the move as been very aggressive and ‘one way’ of late.

R2 0,9084 -1dR1 0,8843EUR/GBP 0,8807 0,0002S1 0,8725S2 0,8333

EUR/GBP: rally to slow?

GBP/USD holding near 31 year low

Thursday, 06 October 2016

P. 6

Thursday, 6 October Consensus Previous US 13:30 Challenger Job Cuts YoY (Sep) -- -21.8% 14:30 Initial Jobless Claims (Oct 1) 256K 254k 14:30 Continuing Claims 2081K 2062k 15:45 Bloomberg Consumer Comfort (Oct 2) -- 41.6 UK 10:00 New Car Registrations YoY (Sep) -- 3.3% 10:30 Unit Labor Costs YoY (2Q) -- 1.9% Germany 08:00 Factory Orders MoM YoY (Aug) 0.3% / 1.6% 0.2% / -0.7% Sweden 09:30 Average House Prices (Sep) -- 2.964m Greece 10:00 Unemployment Rate (Jul) -- 23.4% Events Chinese Markets are Closed for National Holidays 13:30 ECB account of the monetary policy meeting Spain Bond Auction (1.3% 2026) France Bond Auction (0.25% 2026; 1.5% 2031 and 1.75% 2066)

10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 1,71 0,04 US 0,84 0,02 DOW 18281 18281,03DE -0,02 0,04 DE -0,67 0,01 NASDAQ for Exch - NQI #VALUE!BE 0,26 0,04 BE -0,65 -0,01 NIKKEI 16899 16899,10UK 0,81 0,04 UK 0,09 0,02 DAX 10585,78 10585,78JP -0,06 0,00 JP -0,27 0,01 DJ euro-50 3026 3026,28

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,342 0,0023y -0,201 1,125 0,463 Euribor-1 -0,37 0,00 Libor-1 USD 0,26 0,265y -0,105 1,251 0,546 Euribor-3 -0,30 0,00 Libor-3 USD 0,38 0,3810y 0,355 1,545 0,840 Euribor-6 -0,20 0,00 Libor-6 USD 0,54 0,54

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,11925 -0,0021 EUR/JPY 115,96 0,55 188,7822 1264,41 51,61USD/JPY 103,64 0,70 EUR/GBP 0,8808 0,0008 - 1d 1,48 -7,93 0,29GBP/USD 1,2702 -0,0036 EUR/CHF 1,0928 -0,0040AUD/USD 0,7584 -0,0041 EUR/SEK 9,6297 0,01USD/CAD 1,3196 0,0014 EUR/NOK 8,9942 0,04

Calendar

Thursday, 06 October 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 Joke Mertens +32 2 417 30 59 Institutional Desk +32 2 417 46 25 Mathias van der Jeugt +32 2 417 51 94 France +32 2 417 32 65 Dublin Research London +44 207 256 4848 Austin Hughes +353 1 664 6889 Singapore +65 533 34 10 Shawn Britton +353 1 664 6892 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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