Monday, 13 March 2017

P. 1

Rates: Consolidation into Fed meeting?

Today’s eco calendar is uneventful and scheduled ECB governors probably won’t touch on monetary policy. We expect US Treasuries to consolidate going into Wednesday’s Fed meeting, keeping US yields below key resistance levels. On European markets, the Bund sell off continued on Friday on rumours that the ECB discussed hiking rates before ending QE.

Currencies: EUR/USD rebounds on USD softness and ECB rate hike rumours

On Friday, solid payrolls were not enough to support further USD gains. At the same time, euro traders were spooked by rumous that some ECB members advocated an ECB rate hike ahead of QE tapering. Today, USD consolidation/softness might be on the cards ahead of the FOMC decision. Will ECB speculation continue to support the euro?

Calendar

• US equities closed the session with modest gains (S&P 0.33%) after a late

session up-move that erased post-payrolls losses. Asian stocks start the week on a positive note as the dollar remains weaker.

• Oil continues its slide for the fourth consecutive session, still on fears that increased shale oil production offsets the OPEC production cut.

• Mr. Macron would get 26% of the vote in the first round of the French elections, up 2% points from a week ago, according to a BVA poll. Ms.Le Pen's support was unchanged (26%), while Francois Fillon’s climbed one point to 20%.

• Contrary to bullish market reaction, the ECB didn’t signal a coming change to its policy mix, because officials concluded that the outlook for inflation hadn’t improved much since December, the Belgian governor Smets told the WSJ.

• ECB policy makers considered whether rates could rise before their bond-buying program comes to an end, according to people familiar with the matter.

• The Icelandic government announced that effective Tuesday it will lift almost all of the remaining capital controls, allowing its citizens, corporations and pension funds full access to the global capital markets.

• Today’s calendar is uneventful, but later this week US data (retail sales and CPI) and central bank meetings (FOMC, BoE, BOJ, Norges Bank, SNB) colour trading.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Monday, 13 March 2017

P. 2

Short covering on US Treasuries amid strong payrolls

On Friday, the bar for payrolls proved to be too high to inflict additional losses on US Treasuries. The US labour market report was strong, but too close to consensus to push US yields above key resistances. A buy the rumour sell the fact reaction pushed US Treasuries modestly higher Some pre-weekend short covering and the FOMC meeting on Wednesday played a role too. Technically, key US yield levels remain 2.12% (5-yr), 2.64% (10-yr) and 3.21% (30-yr). In a daily perspective, US yields declined by 1.9 (2-yr) to 3.5 bps (5-yr), the belly of the curve outperforming.

German Bunds underperformed US Treasuries in the wake of Thursday’s subtle hints of ECB president Draghi towards normalizing monetary policy. Towards the end of dealings, Bunds faced more selling pressure after Bloomberg reported that the ECB discussed if rates could rise before they completed their bond buying programme. The 3-month Euribor strip curve shifted up to 10 bps higher with investors discounting a 25 bps rate hike around mid-2018. The German yield curve ended 2.6 bps (2-yr) to 5.8 bps (5-yr) higher, the 30-yr outperforming (+1.6 bps). On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed up to 3 bps (France/Portugal).

Thin calendar at the start of the week

The eco calendar is uneventful. The event calendar contains speeches of ECB Liikanen, Lautenschlaeger and Draghi, but all three speak about non-monetary policy issues. The Italian BTP auction is of topical interest for Italian bonds.

Later this week, the focus is on the FOMC meeting & Dutch elections In EMU, Dutch parliamentary elections (Wednesday) and especially the score of the far right PVV party of Wilders will get attention. If he scores well, it raises fears about the French elections and the chances for far right Le Pen to do well. It is though highly unlikely Wilders will be part of any new Dutch government. Regarding the FOMC, a rate hike is fully discounted (98%), meaning that the attention will go to the press conference and the economic and rate projections. We have last week raised our expectation to four rate hikes this year, but we doubt that this will already be seen in the median 2017 rate projections (3 hikes). Given the dots of the December rate projections, it is more likely that the 2018/2019 median rate projection show an increase from 3 to 4 rate hikes. An uncertainty is the number of participants, as three governors will retire soon and might stay away from the meeting or from giving projections.

Rates

US yield -1d2 1,35 -0,035 2,10 -0,0410 2,57 -0,0330 3,16 -0,03

DE yield -1d2 -0,83 0,025 -0,31 0,0810 0,49 0,0630 1,25 -0,01

Good payrolls not strong enough to break yield resistances.

Modest US yield correction

German Bunds sell-off post ECB

Euribors discount 25 bps rate hike by mid-2018

Uneventful market calendar today

FOMC & Dutch elections (Wednesday) highlights of the week

T-Note future (black) & S&P future(orange) (intraday): Treasuries gain as strong payrolls were not strong enough to continue sell-off.

EU 5-yr swap rate (sensitive to the monetary policy outlook) shoots above 0.22% yield resistance

Monday, 13 March 2017

P. 3

Italy starts busy supply-week

The Italian debt agency kicks off this week’s EMU bond supply by launching a new 7-yr BTP (€3-3.5B 1.85% May2024) and tapping the on the run 3-yr BTP (€2.25-2.75B 0.05% Oct2019), on the run 15-yr BTP (2.45% Sep2033) and off the run BTP (3.25% Sep2046). The target for the latter two BTP’s combined is €2-2.75B. Grey trading suggests that the new BTP will be priced with an attractive 21.5 bps pick in ASW-spread terms over the previous 7-yr benchmark (0.65% Oct2023). That corresponds with a 24 bps pick-up in yield terms. The other BTP’s on offer cheapened in ASW spread terms going into the auction, but the two longer-dated BTP’s are rather expensive on the Italian curve. We expect decent auctions. The Netherlands (tomorrow), Germany (Wednesday), Spain & France (Thursday) tap the market later this week.

Consolidation into Fed meeting?

Overnight, most Asian stock markets eke out small gains with China outperforming. Brent crude remains under selling pressure after last week’s technical break below $54.72/barrel support and currently trades around $51/barrel. The US Note future steadies around Friday’s closing levels.

Today’s eco calendar is uneventful. Scheduled ECB-speakers normally won’t touch on monetary policy. On US markets, we expect consolidation going into Wednesday’s Fed meeting. US yields are expected to remain below the cycle high resistance levels (see above). 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. Rumours suggested that the ECB had a discussion about hiking rates before/during tapering QE. The ECB meeting comforts our call that another “calibration” of the ECB’s QE programme will happen in H2 2017. 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 159,12 -0,55S1 158,28S2 157,28

German Bund: Sell-off intensifies as Draghi hints at future end ultra-easy policy

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

Monday, 13 March 2017

P. 4

EUR/USD: rebounds despite soft payrolls as markets ponder rumours

on ECB rate hike

USD/JPY: test of range top rejected

EUR/USD 1.07 on USD softness and ECB rumours

On Friday, the strong US payrolls, confirming a healthy labour market, was largely discounted and unable to trigger another up-leg in yields. The dollar even fell prey to a buy-the-rumour, sell the fact reaction. At the same time, there were rumours that (some) ECB members had discussed the scenario of a rate hike before ending the bond buying programme. These rumours also supported the euro. EUR/USD finished the session at 1.0673 (from 1.0577). USD/JPY dropped back low 115 to close the day at 114.79.

Overnight, Asian equities show modest to moderate gains. The soft reaction (yields & USD) to Friday’s payrolls is supportive for regional markets. The dollar is holding near the post-payrolls lows. USD/JPY trades in the 114.70/75 area. EUR/USD remains also well bid on ECB rumours (see higher). ECB’s Smets in a WSJ interview said that the ECB didn’t signal a change in policy stance. Even so, EUR/USD trades near1.07.

Today, speeches of ECB Liikanen, Lautenschlaeger and Draghi will address non-monetary policy issues. Later this week, the focus is on the FOMC meeting & Dutch elections. In the Dutch parliamentary elections (Wednesday) the score of the far right PVV party of Wilders will get attention. If he scores well, it might raise fears that Le Pen might also do well in the French election. Regarding the FOMC, a rate hike is fully discounted (98%). Attention will go to the press conference and the economic and rate projections. We raised our expectation to four rate hikes this year, but we doubt this will already be seen in the median 2017 rate projections (3 hikes). It is more likely for the 2018/2019 median projection to be raised from 3 to 4 rate hikes. The payrolls were not strong enough to trigger further USD gains. At the same time, rumours on a future change in the ECB policy supported a euro rebound. Short-term, the dollar needs additional positive news to start a new up-leg (e.g. a higher Fed rate hike path/dots). As such a signal won’t come before Wednesday, some USD softness might persist. The Dutch elections are in theory a negative for the euro. However, the market is currently more nervous on the ECB rate hike rumours. We maintain a USD positive bias MT/LT, but we don’t feel to rush in to add EUR/USD shorts at this stage. The correction might have some further to go.

Currencies

R2 1,1145 -1dR1 1,0874EUR/USD 1,0707 0,0118S1 1,0341S2 1,0000

Dollar near the post-payrolls’ lows

Euro better bid after ECB rumours.

Eco calendar is thin today

Dutch elections and the FOMC policy decision next events

USD falling prey to profit taking despite strong US payrolls.

Monday, 13 March 2017

P. 5

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. Recent gains of the dollar against the euro were less convincing. A first intermediate resistance at 1.0679 is broken. We still assume EUR/USD 1.0829/74 will be difficult to regain. A sell EUR/USD on upticks remains favoured, but the correction might have some further to go.

EUR/GBP extends uptrend on euro strength

On Friday, the UK data were close to expectations and didn’t change the assessment of the UK economy. Their impact on sterling was negligible. Sterling basically continued the trends from the previous days. EUR/GBP extended its gradually uptrend. Rumours that the ECB might consider raising rates before the end of the APP programme accelerated the EUR/GBP rebound. The pair closed the session at 0.8776 (from 0.8695). Cable hovered near the recent lows mostly in the upper half of the 1.21 big figure. The inability of the dollar to make any progress on the payrolls blocked the downside. The pair closed the session at 1.2167.

Today, there are no important UK data. The focus will again be on Brexit, as the debate on the Brexit bill returns to the House of Commons. It will debate on the amendments of the House of lords. There is still some uncertainty whether PM will have enough backing from her own conservative Party to overrule the amendments of the Lords. The internal rift in the Conservative party is a slightly negative for sterling. However, main scenario remains that Article 50 will be triggered before the end of March. 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 might trigger some more ST EUR/GBP gains. The break north of 0.8645 reinforced the ST positive momentum. The 0.8854 correction top is the next key resistance.

R2 0,8881 -1dR1 0,8854EUR/GBP 0,8769 0,0059S1 0,8592S2 0,8304

EUR/GBP uptrend continues. 0.8854 Jan. top is next key resistance

GBP/USD bottoming out on USD softness

Monday, 13 March 2017

P. 6

Monday, 13 March Consensus Previous US 15:00 Labor Market Conditions Index Change (Feb) 2.5 -- Japan 00:50 PPI MoM / YoY (Feb) A 0.2%/1.0% 0.6%/0.5% 00:50 Machine Orders MoM / YoY (Jan) A-3.2%/-8.2% 6.7%/6.7% 05:30 Tertiary Industry Index MoM (Jan) A 0% R -0.3% Italy 10:00 Industrial Production MoM / WDA YoY (Jan) -0.8%/3.2% 1.4%/6.6% Sweden 08:00 PES Unemployment Rate (Feb) -- 4.1% China CH - 10MAR-18MAR Foreign Direct Investment YoY CNY (Feb) -4.2% -9.2% Events 11:00 Italy to Sell 0.05% 2019, 1.85% 2024, 2.45% 2033 & 3.25% 2046 BTP’s 12:00 ECB's Liikanen Speaks at Seminar (on Rome Treaty) in Helsinki 13:45 ECB Sabine Lautenschlaeger Speaks in Dublin (banking regulation after the crisis) 14:30 ECB Mario Draghi Speaks in Frankfurt (opening remarks: Fostering innovation…)

10-year td -1d 2-year td -1d Stocks td -1dUS 2,57 -0,03 US 1,35 -0,03 DOW 20902,98 44,79DE 0,49 0,06 DE -0,83 0,02 NASDAQ 5861,726 22,92BE 0,99 0,05 BE -0,49 0,05 NIKKEI 19633,75 29,14UK 1,23 0,01 UK 0,09 -0,01 DAX 11963,18 -15,21

JP 0,09 0,00 JP -0,26 0,00 DJ euro-50 3416,27 6,38

IRS EUR USD GBP EUR -1d -2d USD td -1d3y 0,04 1,93 0,72 Eonia -0,3520 0,00105y 0,32 2,20 0,91 Euribor-1 -0,3720 0,0000 Libor-1 0,8906 0,032810y 0,91 2,55 1,29 Euribor-3 -0,3290 0,0000 Libor-3 1,1212 0,0122

Euribor-6 -0,2410 0,0000 Libor-6 1,4260 0,0050

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

EUR/USD 1,0707 0,0118 EUR/JPY 122,67 0,47 CRB 182,65 -0,57USD/JPY 114,56 -0,85 EUR/GBP 0,8769 0,0059 Gold 1209,90 12,50GBP/USD 1,2211 0,0053 EUR/CHF 1,0792 0,0068 Brent 51,25 -1,30AUD/USD 0,7586 0,0062 EUR/SEK 9,6004 0,0246USD/CAD 1,3442 -0,0059 EUR/NOK 9,1641 0,0546

Calendar

Monday, 13 March 2017

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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