Tuesday, 14 March 2017

P. 1

Rates: More consolidation on bond markets?

Today’s eco calendar won’t inspire trading ahead of Dutch elections and key central bank meetings (Fed, BoE, BoJ). We expect more consolidation on bond markets. US dealing desks will probably be thinly staffed because of the blizzard. Traded volumes could be lower than usual.

Currencies: Post-payrolls USD softness short-lived. Sterling feels Brexit-headwinds

Yesterday, the dollar gradually found its composure after a disappointing reaction to the payrolls on Friday. The dollar is again better bid going into the FOMC policy decision. Yesterday, sterling showed remarkable strength, but this morning the UK currency is sold as PM May received the green light to start the formal Brexit negotiations.

Calendar

• US equities stock markets ended an uneventful session mixed. Overnight,

Asian markets tread water as well with investors side-lined ahead of key policy meetings later this week (Fed, BoJ, BoE,…)

• British lawmakers removed the final hurdle to PM May’s plan to start talks on the UK leaving the EU, a milestone moment that sets the stage for unwinding 40 years of close and complex cross-Channel ties.

• China's factory output (6.3%) and fixed-asset investment (8.9%) grew more strongly than expected in the first two months of the year, but retail sales (9.5%) disappointed after the government reduced a tax break on small cars.

• German FM Schaeuble sees a threat to Germany's ability to maintain a balanced budget given mounting pressures to increase government spending, the Passauer Neue Presse newspaper reported.

• US Treasury Secretary Mnuchin will push the world’s top economies to abide by existing exchange-rate agreements and promote open and fair trade at a meeting of finance chiefs this week, a senior Trump administration official said.

• A classic “nor’easter” is expected to lash the US East Coast with snow and blizzard conditions today, bringing a late blast of winter to a region where residents only recently thought spring was in the air.

• Today’s calendar contains German ZEW-indicator, US small business optimism and US PPI inflation. The Netherlands taps the bond market.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Tuesday, 14 March 2017

P. 2

Early comeback bonds after Smets comments erased

Global core bonds parted ways yesterday as Bunds outperformed US Treasuries. The Belgian ECB member Smets said that, contrary to the market thinking, the central bank didn’t signal a coming change to its policy mix. He stressed that the outlook for inflation hadn’t improved much since December. The Bund rallied on his comments, but the rally petered out mid-morning. Strange enough, the longer end outperformed the short end. Core bonds gradually slid lower from the start until the end of US dealings. The longer end took the brunt of the (modest) selling, steepening the curve. Positioning ahead of the FOMC and reversing the sell-the-rumour, buy-the-fact post-payrolls move seemed to be the major factor aside abundant fresh corporate supply. The oil price and stock markets didn’t play a role of significance. In yield terms, the US 5-yr (2.12%), 10-yr (2.64%) and 30-yr (3.22%) yield resistances were tested (5-yr) or approached (10- and 30-yr).

In a daily perspective, the German yield curve flattened with yield changes ranging between +2.6 bps (2-yr) and -1.7 bps (30-yr). The US yield curve bear steepened with yields 1.9 bps (2-yr) to 5.1 bps (10-yr) higher. The 30-yr (+4.8 bps) gradually outperformed the 10-year. On intra-EMU bond markets, 10-yr yield spread changes versus Germany ended little changed (+1 to -1 bp), except for Spain (+3 bps) and Portugal (-3 bps).

Eco calendar heats up

The eco calendar contains German ZEW investors’ survey, US NIFB small business optimism & PPI which are no market-moving events. The German ZEW expectation index fell in February, but a slight rebound is expected for March. In February, ZEW pointed to uncertainties about Brexit, US policy and elections as reasons for the decline. While these uncertainties haven’t disappeared, strong eco business sentiment data should have eased concerns, also as German equities did well. Therefore, some modest improvement looks likely. US small business sentiment stabilized in January at a historically very high 105.9 following a 7 points rise in December. For February, another stabilization is expected (105.6). Given the high level, the risks may be slightly skewed to the downside, but without raising concerns. US Producer prices are expected to increase 1.9% Y/Y (0.1% M/M), up from 1.6% Y/Y in January (0.6% M/M). Base effects are the main factor also the core PPI which is expected to be up 0.2% M/M and 1.5% Y/Y, following a 0.4% M/M and 1.2% Y/Y increase in January. We have no reasons to distance us from consensus.

Rates

US yield -1d2 1,38 0,025 2,14 0,0410 2,62 0,0530 3,20 0,04

DE yield -1d2 -0,81 0,025 -0,31 0,0010 0,47 -0,0130 1,24 -0,02

US Treasuries reverse post payrolls gains

ECB Smets comments only temporary support bonds

Upcoming Fed meeting dominates trading

Slight rebound ZEW sentiment

Tame US PPI and slight downside risk small business sentiment

Bund future (black) & EuroStoxx (orange) (intraday): ECB Smets comments push Bund higher, but gains are erased by the closure .

US 10-yr yield back up to key ryield resistance (2.64%) ahead of FOMC meeting. Defining event?

Tuesday, 14 March 2017

P. 3

Dutch auction: no impact from looming election

The Dutch debt agency taps the on the run 5-yr DSL (€2-3B 0% Jan2022). The bond on offer traded stable in ASW spread terms going into the auction and sits rather cheap on the Dutch curve. We expect the auction to go well and don’t fear a negative impact from tomorrow’s election.

Consolidation into Fed meeting?

Overnight, most Asian stock markets tread water, ignoring mixed Chinese eco data. Approaching policy meetings of major central banks (Fed, BoJ, BoE) keep a lot of investors at bay. The US Note future and Brent crude give no indication for the start of Bund dealings. We expect a neutral opening.

Today’s eco calendar contains German ZEW-indicator and US NFIB small business optimism, but we don’t expect them to impact trading. US dealing desks might be thinly staffed because of a huge blizzard. On US markets, we forecast more consolidation going into Wednesday’s Fed meeting. US yields are expected to remain below the cycle high resistance levels (5y 2.12%, 10y 2.64%, 30y 3.21%). The Fed will probably hike its policy rate by 25 bps to 0.75%-1% and could increase the dots for 2017 (wildcard), 2018 & 2019. Therefore, we hold our sell-on-upticks approach (bond prices) and position for a sustained break of yields above the cycle highs next week.

The Bund sold off after the ECB meeting. ECB Draghi suggested that the ECB has the intention to start a discussion on when and how the ECB might begin the process of exiting its current extraordinary easy monetary policy. The ECB meeting comforts our call that another “calibration” of the ECB’s QE programme will happen in H2 2017 despite ECB Smets downplaying the market reaction. Therefore, we have a long term bearish view on Bunds as well. Technically, the German 10-yr yield moves at a rapid pace from the 0.2% lower bound of the sideways range towards the 0.5% upper bound.

R2 164,40 -1dR1 163,12BUND 159,08 -0,04S1 158,28S2 157,28

German Bund: Sell-off intensified last week as Draghi hints at future end ultra-easy policy

US Note future: Consolidation into Fed meeting? Rate hike discounted.

Tuesday, 14 March 2017

P. 4

EUR/USD: no follow-through gains after (temporary) break of 1.0679

resistance

USD/JPY: range top remains within reach ahead of the FOMC

decision

Post-Payrolls USD correction didn’t go very far

On Monday, the euro reversed part of Friday’s gain as speculation on an ECB rate hike eased. There was little news from the dollar side of the story. Even so, global bond yields moved higher during the US session, but it had only limited impact on the major USD cross rates. EUR/USD closed the session at 1.0653 (from 1.0673 on Friday). USD/JPY held in the upper half of the 114 big figure and closed near the intraday highs (114.88 from 114.79 on Friday). USD traders waited for the Fed.

Overnight, Asian equities show a mixed picture. Regional markets basically remain in a wait-and-see modus ahead of the policy decisions from the Fed (Wednesday) and the Bank of Japan (Thursday). USD/JPY hovers in t tight range slightly below 115. EUR/USD trades around 1.0655.

Today, eco calendar is only modest interesting. German ZEW investors sentiment (expectations) is expected to rebound from 10.4 to 13. Any euro impact should be very limited. In the US, the NIFB small business confidences is expected to stabilize at a historically very high level (105.6 from 105.9). US PPI data probably have most market moving potential. For the headline figure, a modest rise from 1.6 Y/Y to 1.9% Y/Y is expected. An upward surprise might cause some nervousness on the bond markets and be slightly supportive for the dollar as markets are more sensitive for price data (compared to activity data). However, we don’t expect USD investors to adapt positions in a profound way one day before the FOMC policy decision. That said, the disappointing USD price action of the USD after the payrolls is apparently more or less digested. So, the dollar might regain slightly ground in case of a further rise in core bond yields or in case of USD supportive eco data. For now, the Dutch elections are no big issue for FX markets. Uncertainty might be slightly negative for the euro.

Of late, USD/JPY profited most from higher core/US bond yields. The 115.62 range top came within reach on Friday, but a real test didn’t occur. Some short-term consolidation might be on the cards ahead of the FOMC policy decision. The dollar apparently needs some additional positive news to start a new up-leg (e.g. a higher Fed rate hike path/dots). Recent gains of the dollar against the euro were less convincing. A first intermediate resistance at 1.0679 was (temporary?) broken as markets were haunted by rumours that the ECB was considering a rate hike before ending the APP. We still assume EUR/USD 1.0829/74 will be difficult to

Currencies

R2 1,1145 -1dR1 1,0874EUR/USD 1,0642 -0,0065S1 1,0341S2 1,0000

Asian equities show no clear trend

USD/JPY little changed waiting central bank decisions

Calendar is modestly interesting

Dutch elections and the FOMC policy decision next milestones

Euro rebound stalls

USD profits only marginally from a rise in US yields

Tuesday, 14 March 2017

P. 5

regain. A sell EUR/USD on upticks remains favoured, even as we have to admit that the USD/EUR momentum isn’t convincing. At the same time, the dollar still enjoys the supported of a massive interest rate differential, discouraging USD short positions.

Sterling to feel more Brexit headwinds?

On Monday, sterling sentiment improved even as the news flow was obviously UK/sterling negative. EUR/GBP traded in the 0.8785/75 area before the start of European trading, but soon dropped back to the mid 0.87 area. The global EUR/USD decline played a role, but sterling was strong across the board. We consider it a short squeeze in a market that had become a bit too much sterling short. During the day, Scottish PM Sturgeon announced she will take steps next week for a second independence referendum which might take place between autumn 2018 and spring 2019. Later in the session, the House of Comments voted the Brexit bill that allows PM May to trigger Article 50 of the Lisbon Treaty. The reaction of sterling was remarkably mild. EUR/GBP finished the session at 0.8725 near the intraday low.

This morning, there is not much left of yesterday’s constructive sterling sentiment. The UK currency is facing heavy headwinds both against the euro and the dollar. We don’t see specific headlines, but markets apparently adapt positions for tough Brexit negotiations. The rift between London and Scotland on the Second independence referendum might be a negative, too. There are no important UK eco data, suggesting trading will be dominated by the Brexit headlines. Sterling sentiment softened of late. The euro was in better shape helping EUR/GBP to break the 0.8592 resistance, which improved the technical short-term EUR/GBP picture. We don’t expect a sustained EUR/USD rebound , but a combination of temporary euro consolidation and ongoing sterling softness as the Brexit negotiations are nearing, might trigger some more ST EUR/GBP gains. The break north of 0.8645 reinforces the ST positive momentum. The 0.8854 correction top is the next key resistance.

R2 0,8881 -1dR1 0,8854EUR/GBP 0,8760 -0,0009S1 0,8592S2 0,8304

EUR/GBP uptrend continues despite yesterday’s pause. 0.8854 remains next key reference

GBP/USD: new downside test as Brexit is coming closer?

Tuesday, 14 March 2017

P. 6

Tuesday, 14 March Consensus Previous US 11:00 NFIB Small Business Optimism (Feb) 105.6 105.9 13:30 PPI Final Demand MoM / YoY (Feb) 0.1%/1.9% 0.6%/1.6% 13:30 PPI Ex Food and Energy MoM / YoY (Feb) 0.2%/1.5% 0.4%/1.2% 13:30 PPI Ex Food, Energy, Trade MoM / YoY (Feb) 0.2%/-- 0.2%/1.6% Japan 01:01 Manpower Survey (2Q) A 23 23.0 China 03:00 Retail Sales YTD YoY (Feb) A 9.5% 10.4% 03:00 Fixed Assets Ex Rural YTD YoY (Feb) A 8.9% 8.1% 03:00 Industrial Production YTD YoY (Feb) A 6.3% 6.0% EMU 11:00 Industrial Production SA MoM / WDA YoY (Jan) 1.3%/0.9% -1.6%/2.0% 11:00 ZEW Survey Expectations (Mar) -- 17.1 Germany 08:00 CPI EU Harmonized MoM / YoY (Feb F) 0.7%/2.2% 0.7%/2.2% 11:00 ZEW Survey Current Situation (Mar) 78.0 76.4 11:00 ZEW Survey Expectations (Mar) 13.0 10.4 Spain 09:00 CPI EU Harmonised MoM / YoY (Feb F) -0.3%/3.0% -0.3%/3.0% Sweden 09:30 CPI MoM / YoY (Feb) 0.6%/1.7% -0.7%/1.4% 09:30 CPI CPIF MoM / YoY (Feb) 0.6%/1.9% -0.7%/1.6% Events 10:00 Riksbank's Ingves, Ohlsson Give Speeches 14:45 Riksbank Jansson speech 11:30 Netherlands to Sell 0% 2022 Bonds

Calendar

Tuesday, 14 March 2017

P. 7

10-year td -1d 2-year td -1d Stocks td -1dUS 2,44 0,00 US 1,19 0,00 DOW 19762,6 0,00DE 0,18 -0,03 DE -0,79 -0,02 NASDAQ 5383,117 0,00BE 0,51 -0,04 BE -0,69 -0,02 NIKKEI 19114,37 0,00UK 1,24 0,00 UK 0,08 0,00 DAX 11575,57 94,51

JP 0,05 0,00 JP -0,18 0,00 DJ euro-50 3302,48 11,96

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,11 1,69 0,69 Eonia -0,3290 0,00005y 0,06 2,00 0,86 Euribor-1 -0,3680 0,0000 Libor-1 0,7717 0,000010y 0,64 2,34 1,23 Euribor-3 -0,3190 0,0000 Libor-3 0,9979 0,0000

Euribors-6 -0,2210 0,0000 Libor-6 1,3177 0,0000

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

EUR/USD 1,0487 -0,0036 EUR/JPY 123,15 0,11 CRB 192,51 0,00USD/JPY 117,43 0,52 EUR/GBP 0,8510 -0,0015 Gold 1151,70 0,00GBP/USD 1,2326 -0,0018 EUR/CHF 1,0714 -0,0008 Brent 56,82 0,00AUD/USD 0,717 -0,0040 EUR/SEK 9,5408 -0,0323USD/CAD 1,3417 -0,0024 EUR/NOK 9,0556 -0,0236

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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