Tuesday, 31 January 2017

P. 1

Rates: Positive bias core bonds

Overnight, risk aversion dominates Asian markets after US President Trump fired the acting Attorney General. Risk sentiment on stock markets (more correction?) and evolutions on peripheral bond markets (significant spread widening of late) could overshadow eco data today and be positive for core bonds in an intraday perspective.

Currencies: Global uncertainty dominates currency trading

Yesterday, EUR/USD trading showed two faces. Finally, Trump-related uncertainty weighed more on the dollar than on the euro. Today, the eco data in Europe and in the US might come out strong, but global risk sentiment will continue to dominate USD trading. USD/JPY looks most vulnerable. The picture for EUR/USD is more balanced.

Calendar

• US stock markets closed near opening losses, correcting 0.5%-1% lower.

Overnight, risk aversion dominates Asian markets following Trump’s move to fire the US's top law officer for refusing to defend his immigration policy.

• The White House fired acting Attorney General Yates for telling government lawyers not to defend an executive order signed by President Trump suspending immigration from 7 countries out of concerns that terrorists might enter the US.

• The BoJ made no policy change, saying it would keep interest rates at -0.1%, cap 10-yr bond yields at roughly zero and buy government bonds at a pace of ¥80tn a year. The BoJ forecasts an era of surging economic growth (see FX).

• Greece will only receive more loans from the EMU if the IMF joins its latest aid programme, the head of the bloc's bailout fund said (ESM Regling), spelling out a condition thus far disregarded by Athens's creditors.

• A last-minute mega-deal from Microsoft ($17B) propelled what was already a record January for US investment-grade bond sales to one of the busiest months ever. Blue-chip companies have issued more than $170B of bonds so far.

• Chairman of the EBA, Enria, has called on Brussels policymakers to create an EU “bad bank” to buy billions of euros of toxic loans from lenders to break the vicious circle of falling profits, squeezed lending and weak economic growth.

• Republicans in Congress are moving this week to help President Trump roll back business regulations imposed by the Obama administration, with a focus on the oil, gas and mining industries.

• Today’s EMU eco calendar contains EMU Q4 GDP, unemployment rate and CPI inflation. In the US, focus turns to the Chicago PMI and consumer confidence.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Tuesday, 31 January 2017

P. 2

German inflation falls short of expected 2%Y/Y

Saxony’s very high CPI number scared the Bund in early trading yesterday. The Bund eventually recovered lost ground, as ultimately German inflation printed below consensus (1.9% Y/Y). Risk aversion on stock markets, peripheral spread widening (supply pressure from Italy, Unicredit comments on capital ratio, ECB Nouy comments on insufficient efforts Italian banks and a leaked negative debt sustainability analysis of Greece by the IMF), technical resistance in yield terms (0.50% - 10yr) and end-of-month extension buying played a positive role as well. Despite all these factors core bonds only returned to opening levels, which isn’t a formidable performance. In a daily perspective, changes on the US yield curve ranged between -0.6 bps (2-yr) and +2 bps (30-yr). German yields fell between 1.2 and 1.6 bps. On intra-EMU bond markets, 10-yr yield spreads versus Germany widened 2 to 3 bps (semi-core, non-German core). Peripheral spreads added 6 to 11 bps with Italy/Portugal performing worse (+11 bps) and Greece (+45 bps) sharply underperforming.

European data in focus

The EMU eco calendar is very busy. We expect strong eco data and a rise in inflation. EMU Q4 GDP is expected to have increased by 0.5% Q/Q and 1.7% Y/Y. Spain reported a strong 0.7% Q/Q and 3% Y/Y increase in line with expectations, but slightly down from 3.2% Y/Y in Q3. Belgian GDP growth accelerated in Q4 to 0.4% Q/Q from 0.2% Q/Q in Q3, but the Y/Y reading softened to 1.1% from 1.3%. We side with consensus. We got firm hard and soft data in Q4, but the 0.5% Q/Q consensus is strong too. German inflation rose to 1.9% Y/Y in January from 1.7% Y/Y in December. Belgian inflation surged to 2.65% Y/Y in January from 2.03% Y/Y in December, but has a small weight in EMU inflation. Therefore, we see downside risks for the headline EMU inflation (consensus 1.5% Y/Y), while core inflation should be in line with the 0.9% Y/Y consensus. The US eco calendar contains Q4 Employment Cost Index, the Dec house prices, which are no strong market drivers, contrary to the January Chicago PMI and especially Consumer confidence. The Chicago PMI is expected to have increased to 55 from a revised 53.9 (earlier 54.6) in December. The indicator is quite volatile. The trend is still up, despite the fall in December. The more or less similar Richmond and Philly Fed surveys were better than expected, while the NY one was a bit shy of both the Jan. reading and the consensus. Therefore we put the risks on the upside of consensus. Consumer confidence is expected to have eased slightly to a very high 112.9 from a 15-yr high of 113.7 in December. We see little reasons why the index would decline and don’t exclude a further rise.

Rates

US yield -1d2 1,20 -0,015 1,92 -0,0110 2,46 -0,0130 3,06 0,00

DE yield -1d2 -0,68 -0,015 -0,38 -0,0210 0,45 -0,0130 1,17 -0,02

Dull trading session without strong driver

German curve bull flattens

Bund future (black) and S&P future (orange) (intraday): Initial decline on Saxony CPI recouped, but no daily gains despite risk off news

10-yr yields: Crunch time for Italy as 2015 high looms amid political, economic and banking problems. Spread with Spain already 70 bps.

Upside risks Chicago PMI and consumer confidence

EMU inflation to move higher, but downside risks

Strong EMU GDP

Tuesday, 31 January 2017

P. 3

Risk sentiment and EMU bond markets intraday positive

Overnight, risk aversion dominates trading as US President Trump fired the US’s top law officer for refusing to defend his executive order on immigration. Stock markets lose 0.5%-1% with Japan underperforming on the back of a stronger yen. The US Note future and gold price eke out gains. We expect a stronger Bund opening.

Today’s eco calendar contain EMU growth and inflation numbers which should confirm our assessment of an improving economic environment. Risks for US eco data (Chicago PMI and consumer confidence) are on the upside of expectations, but ahead of ISM’s and payrolls later this week we only expect a minor impact on US Treasuries. Risk sentiment on stock markets (more correction?) and evolutions on peripheral bond markets (significant spread widening of late) could overshadow eco data today and be positive for core bonds in an intraday perspective.

From a technical point of view, the Bund’s break below the neckline of a double top (162.62) is negative. We expect the Bund go for a test of the bottom/cycle low. The US Note future trades in the 122-14+ - 125-09 sideways range. We expect also a move towards the lower bound of the range. We hold our negative views on both German Bund and US Note future on the back of accelerating growth and inflation. US investors still have to adapt to the Fed’s 2017 rate hike scenario (3 hikes) while European investors might face another “recalibration” of the ECB’s APP-programme in H2 2017. ECB’s Lautenschlager, Weidmann and Knot opened the debate last week.

R2 164,90 -1dR1 164,45BUND 162,13 0,28S1 160,72S2 159,91

German Bund: break below neckline double top paves way to range bottom?

US Note future: 125-09 resistance ‘unbreakable’. Heading towards December low?

Tuesday, 31 January 2017

P. 4

EUR/USD: no clear trend as both USD and euro face factors of

uncertainty

USD/JPY: NO big impact from BOJ meeting on the yen. Dollar

again losing momentum

Trump-related uncertainty weighs on the dollar

On Monday, the dollar initially remained well bid even as risk sentiment turned negative. Euro weakness prevailed. The rise in intra-EMU credit spreads weighed on the euro. Later, US equities tumbled as US investors were also uncertain on the impact of the US immigration measures. This deepening risk-off sentiment finally also triggered USD selling. EUR/USD reversed the earlier losses and closed the session little changed at 1.0695 (from 1.0699). USD/JPY initially held up quite well but finally dropped below 114 to close the session at 113.77 (from 115.10).

This morning, several Asian markets are still closed. Those open lose ground (risk off). The BOJ kept its policy unchanged The Bank raised its growth forecasts, but the inflation forecast was left unchanged. The weakening of the yen since the November forecast is a positive for growth and for inflation. However, how much room is left for a weaker yen as US president Trump warns on the (global) strength of the dollar? Interesting to see the assessment of BOJ’s Kuroda at the press briefing later this morning. USD/JPY changes hands in the 113.35 area. EUR/USD is holding a tight range near 1.07.

Today, EMU Q4 GDP is expected to have increased by strong 0.5% Q/Q and a 1.7% Y/Y. we side with consensus. EMU headline inflation is expected to rise from 1.1% to 1.5% Y/Y. We see slight downside risks after yesterday’s German CPI release. The US, the Chicago PMI is expected to have increased to 55 from a 53.9. The trend is up, despite the fall in December. We put the risks on the upside of consensus. Consumer confidence is expected to have eased slightly from a 15-year high in December. We see few reasons why the index should decline and don’t exclude a further rise. So, he data in the US and Europe will probably be good. A combination of broad-based strong data a is often USD supportive. However, the market focus is shifting away from the eco data to the potential side-effects of the new Trump policy approach, which mean that core bond yield may decline in daily perspective. The jury is still out, but if confidence in the Trump reflation trade would fade, the environment might turn less USD supportive. USD/JPY is most vulnerable. The picture for EUR/USD is more balanced as several (political) issues are coming in the picture in EMU. In a day-to-day perspective, investors might turn more cautious on global risk and on the dollar. So, last week’s USD bottoming out process might stop. The EUR/USD 1.0775 resistance remains with reach and might come again under pressure

Currencies

R2 1,1145 -1dR1 1,0874EUR/USD 1,0691 -0,0029S1 1,0341S2 1,0000

Dollar holding near yesterday’s lows as global uncertainty persists

EMU and US eco data expected strong

Trump-related‘ uncertainty might weigh on the dollar though

Dollar showed mixed picture yesterday as certainty on Trump measures weighed

Tuesday, 31 January 2017

P. 5

Global context: EUR/USD touched a multi-year low (1.0341) early this month. After the Trump rally, plenty of good USD news was discounted while US/EMU rate differentials narrowed (correction), causing a dollar correction. Longer-term, the absolute interest rate support should provide a USD floor, if US data remain good and as long as there are no profound doubts on Trump’s pro-growth policy. The day-to-day USD momentum has become a bit more fragile. A return above EUR/USD 1.0874 would question the USD positive outlook. USD/JPY is trading well off the post-Trump highs (118.60/66). The rebound off the 112.57/53 reaction low was quite constructive, but is losing momentum. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) is a tough support

Risk-off sentiment weighs on Sterling

On Monday, EUR/GBP showed several intraday gyrations as was the case of EUR/USD. Sterling was sold early in the session. EUR/GBP dropped to an intraday low around 0.8490 in line with EUR/USD, but was squeezed during the US session. End of month EUR/GBP buying and a deepening risk-off sentiment were to blame. EUR/GBP finished the day at 0.8566. Cable was also hit hard even as the dollar declined against most majors. The pair closed the session at 1.2486 (from 1.2555).

Overnight, the GFK consumer confidence was reported stronger than expected at -5 (from -7). Today, the UK Money supply and lending data will be published. Lending data were rather good of late, but currency traders don’t give much weight to the data. The global context (risk-off?) will probably again set the tone for sterling trading. Yesterday, sterling initially didn’t know which way to go, but in the end, the global risk-off sentiment proved even more negative for sterling than for the dollar. Markets will also look forward to Thursday’s BoE meeting. Despite recent good eco data, the BoE probably will maintain a wait-and-see stance and give no indication on a rate hike. Sterling momentum was strong of late, but eased a bit at the end of last week. EUR/GBP 0.8579 and 0.8515 supports (50% and 62% retracement of the 0.8304/0.8854 rebound) were broken. The correction low comes in at 0.8451 and should provide strong support. Yesterday’s price action confirms this view. We still look to buy EUR/GBP on dips.

R2 0,9047 -1dR1 0,8881EUR/GBP 0,8555 0,0021S1 0,8450S2 0,8304

EUR/GBP: 0.8450 support remains intact for now

GBP/USD: sterling rally running into resistance as global sentiment turns risk-off

Tuesday, 31 January 2017

P. 6

Tuesday, 31 January Consensus Previous US 14:30 Employment Cost Index (4Q) 0.6% 0.6% 15:00 S&P CoreLogic CS 20-City MoM SA / YoY NSA (Nov) 0.6%/5.04% 0.63%/5.1% 15:45 Chicago Purchasing Manager (Jan) 55.0 53.9 16:00 Conf. Board Consumer Confidence (Jan) 112.9 113.7 Japan BOJ Short-Term Policy Rate -- -0.100% BOJ Long-Term Policy Rate -- 0.000% 00:30 Jobless Rate (Dec) A 3.1% 3.1% 00:30 Job-To-Applicant Ratio (Dec) A 1.43 1.41 00:30 Overall Household Spending YoY (Dec) A -0.3% -1.5% 00:50 Industrial Production MoM / YoY (Dec P) A 0.5%/3.0% 1.5%/4.6% 05:00 Vehicle Production YoY (Dec) A 4.2%-- 6.6% 06:00 Housing Starts YoY (Dec) A3.9% 6.7% 06:00 Small Business Confidence (Jan) A 48.3- 48.8 UK 01:01 GfK Consumer Confidence (Jan) A -5 -7 01:01 Lloyds Business Barometer (Jan) A 29-- 39 10:30 Net Consumer Credit (Dec) 1.7b 1.9b 10:30 Mortgage Approvals (Dec) 69.2kk 67.5k 10:30 Money Supply M4 MoM / YoY (Dec) --/-- 0.4%/6.4% EMU 11:00 Unemployment Rate (Dec) 9.8% 9.8% 11:00 GDP SA QoQ / YoY (4Q A) 0.5%/1.7% 0.3%/1.7% 11:00 CPI Estimate YoY (Jan) 1.5% 1.1% 11:00 CPI Core YoY (Jan A) 0.9% 0.9% Germany 08:00 Retail Sales MoM / YoY (Dec) 0.6%/0.5% -1.7%/3.2% 09:55 Unemployment Change (000’s) (Jan) -5K -17k 09:55 Unemployment Claims Rate SA (Jan) 6.0% 6.0% France 07:30 GDP QoQ / YoY (4Q A) 0.4%/1.1% 0.2%/1.0% 08:45 CPI EU Harmonized MoM / YoY (Jan P) -0.5%/1.2% 0.3%/0.8% 08:45 Consumer Spending MoM / YoY (Dec) 0.2%/2.1%-- 0.4%/3.3% Italy 10:00 Unemployment Rate (Dec P) 11.8% 11.9% Belgium 11:00 Unemployment Rate (Dec) -- 7.6% Spain 09:00 CPI EU Harmonised MoM / YoY (Jan P) -1.6%/2.2%-- 0.5%/1.4% Events Chinese markets closed for Lunar New Year Q4 earnings Pfizer (12:45), Exxon (14:00), Mastercard (14:00), Apple (22:30),… 07:30 BOJ Kuroda press conference & BOJ outlook report 11:00 Italy sells €2.75B 0.35% 2021, €2.25B Floating 2024 & €4B 2.2% 2027 23:20 BOC Poloz speaks at Alberta university

Calendar

Tuesday, 31 January 2017

P. 7

10-year td -1d 2-year td -1d Stocks td -1dUS 2,46 -0,01 US 1,20 -0,01 DOW 19971,13 -122,65DE 0,45 -0,01 DE -0,68 -0,01 NASDAQ 5613,711 -47,07BE 1,02 0,01 BE -0,41 0,01 NIKKEI 19041,34 -327,51UK 1,44 -0,03 UK 0,15 -0,01 DAX 11681,89 -132,38

JP 0,09 0,00 JP -0,20 0,01 DJ euro-50 3262,72 -40,61

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,05 1,70 0,83 Eonia -0,3500 0,00105y 0,19 1,99 1,04 Euribor-1 -0,3720 0,0000 Libor-1 0,7783 0,000010y 0,82 2,37 1,45 Euribor-3 -0,3280 0,0000 Libor-3 1,0390 0,0000

Euribor-6 -0,2440 -0,0010 Libor-6 1,3588 0,0000

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

EUR/USD 1,0691 -0,0029 EUR/JPY 121,51 -1,34 CRB 191,26 -2,17USD/JPY 113,65 -0,94 EUR/GBP 0,8555 0,0021 Gold 1201,50 7,20GBP/USD 1,2497 -0,0065 EUR/CHF 1,0645 -0,0050 Brent 55,16 -0,07AUD/USD 0,7556 0,0007 EUR/SEK 9,4439 -0,0251USD/CAD 1,3102 -0,0030 EUR/NOK 8,8936 -0,0291

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