Tuesday, 21 February 2017

P. 1

Rates: Underperformance of US Treasuries vs German Bunds?

Risks for EMU PMI data are tilted to the downside of expectations which might trigger a test of nearby resistance at 164.90 though we don’t anticipate a break higher. French election worries might continue to influence (EMU) risk sentiment. In the US, focus will gradually turn to Trumps’ fiscal stimulus plans, causing underperformance of US Treasuries.

Currencies: Dollar extends gradual rebound

Yesterday, EUR/USD and USD/JPY held extremely tight ranges. Political uncertainty caps the topside of the euro. The dollar receives support from hawkish Fed speak as markets await Trumps’ fiscal plans. Sterling is reversing the losses incurred after Friday’s poor retail sales.

Calendar

• US markets were closed for Presidents’ Day yesterday. Overnight, Asian equities

are trading stronger, also Japanese ones despite a stronger dollar. European equities may start positive, but election uncertainty may hold them back.

• China's central bank said that it will extend a preferential scheme for some banks that will free up additional funds for lending, as long as they channel money to weaker, cash-starved sectors of the economy.

• Greece and its international lenders agreed to let teams of experts work out new reforms to Greek pensions, income tax and labour market that would allow Athens to eventually qualify for more cheap loans, euro zone officials said.

• Growth at Japanese manufacturers continued to improve in February as activity in the sector expanded at the fastest rate since early 2014. The preliminary February PMI increased from 52.7 to 53.5.

• Portugal has made a new early repayment of €1.7B to the IMF, meaning it has reimbursed half of the bailout loans provided by the IMF during the 2011 debt crisis, the Finance Ministry said.

• Philly Fed Harker repeated in an MNI interview that he could support a rate increase next month. "I would not take March off the table at this point. We’ll have to see how it plays out in the next few weeks”.

• Issuing another upbeat assessment of the economy, the Australian central bank said it expects wage pressures to rise gradually, but one factor that may force it to raise rates earlier might be an outbreak in catch-up pay demands.

• Today, attention goes to the EMU business confidence (PMI). Fed speakers on duty have recently spoken, but the appearance of Draghi will be scrutinized closely for signs that the election season is affecting policy. US Treasury starts its mid-month refinancing operation (see below).

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Tuesday, 21 February 2017

P. 2

French opinion poll spices dull trading session

Yesterday, global core bonds traded with a small upward bias till early afternoon in a low-volume session. Equities traded with a negative bias following a strong open with the CAC-40 underperforming the DAX. It helped the Bund erase opening losses. The latest French opinion poll suggested a slightly stronger lead for Marine Le Pen in the first round of the French presidential election and a narrower defeat in the second round. It was enough to push the Bund higher and into positive territory. Especially the shorter end of the curve profited from safe haven flows. French bonds fell but could recoup some of the losses later on. US markets were closed for Presidents’ Day and the EMU calendar only contained consumer confidence, which unexpectedly deteriorated, and German PPI that continued to move higher and exceeded expectations. The eco data didn’t have a lasting impact though. In a daily perspective, the German yield curve steepened with yield changes between -3.5 bps (2-yr) and +1.5 bps (30-yr).

On intra-EMU bond markets, 10-yr yield spread changes versus Germany widened up to 3/4 bps (France/Belgium). Peripheral spreads were flat (Italy) to slightly lower (Spain/Portugal) with Greece (-30 bps) outperforming. The French spread increased to 83 bps immediately after the new election poll was released, the highest level since the Summer of 2012. Greek spreads narrowed as the EU now agrees with the IMF on extra structural measures for Greece on tax, labour and pension reform, putting the ball in the Greek camp. "There will be a change in the policy mix, moving away from austerity and putting more emphasis on deep reforms which is also a key element for the IMF," Eurogroup president Dijsselbloem said. A deal is necessary to secure further bailout money. In July, Greece has around €7B bond redemptions.

The EMU and US flash PMI business confidence for February are the main eco data release. Markets expect a nearly stabilization at 54.3 for the euro area wide composite indicator. For Germany a stable confidence at 54.8 is expected while in France a slight decrease to 53.8 from 54.1 is likely. We expect a strong outcome, but nevertheless with some downside risks versus consensus. Higher inflation is affecting consumer confidence (released yesterday) and disposable income, while political uncertainty is mounting. The decline of the ZEW and Sentix investors’ confidence points to some modest downside risks. However, EMU GDP may stay in Q1 close to the 0.4% Q/Q growth of Q4 of 2016. The US Markit PMI is no market mover. A slight increase is expected (55.3 vs 55 for manufacturing, 55.8 from 55.6 for services). For the US, where there is still some Trump enthusiasm, we don’t see immediate downside risks. Fed speakers Kaskhari, Harker and Williams spoke recently and likely won’t bring new info.

Rates

US yield -1d2 1,21 0,025 1,92 0,0210 2,44 0,0230 3,04 0,02

DE yield -1d2 -0,84 -0,045 -0,49 -0,0410 0,31 -0,0130 1,11 0,00

German 10-yr yield (black) & French 10-yr yield (orange) (intraday): Publication French election poll disturbed thin markets

German 2-yr yield reaches new all time low on election unceretainty and ECB APP policy.

German bonds slightly higher with short end outperforming

German curve steepened

French polls still driving force, suggesting uncertainty

Slight erosion in EMU business sentiment

US sentiment to keep up

Tuesday, 21 February 2017

P. 3

US starts end-of-month refinancing operation

he US Treasury starts its end-of-month refinancing operation with a $26B 2-yr Note auction. Currently, the WI trades around 1.23%. The Treasury continues on Wednesday with $13 2-yr FTRN and $34B 5-yr Note auctions and concludes on Thursday with a $28B 7-yr Note auction.

Underperformance US Treasuries vs Bunds?

Overnight, most Asian stock markets trade mixed, but mostly positive. US rates and the dollar are higher after yesterday’s US holiday. Hawkish comments by Philly Fed president Harker, even if they were a repeat, slightly boosted the market implied probability of a March rate hike and explain the overnight moves in (thin?) trading. We expect a somewhat weaker opening for the Bund as well.

Today’s eco calendar contains EMU PMI data. Risks are tilted to the downside of expectations, which could push the Bund for a test of nearby 164.90 resistance (0.29% for German 10-yr yield), although we don’t expect a break. Yesterday’s Eurogroup meeting brought an half-and-half solution, but should put the Greek issue to bed for some time. French election worries could continue to dampen (EMU) sentiment.

US Treasuries might once again start underperforming Bunds. Last week’s Yellen testimony (risks of waiting too long to hike rates), hawkish Fed comments and strong US eco data temporary raised odds of a March rate hike to 44% (currently 36%). Especially as we also expect Trump’s phenomenal fiscal stimulus plans in the meantime (Feb 28?), this could pull the US Note future towards the December low around 122-14+ in the run-up to that speech.

R2 165,48 -1dR1 164,90BUND 164,5 0,30S1 160,72S2 159,91

German Bund: EMU worries push Bund back towards key 164.90 resistance. We don’t expect a break higher.

US Note future: new test of 125-09/16 resistance failed. Yellen’s testimony & strong data cap the topside and suggest move lower in

range ahead of Trumps’ fiscal stimulus plans

Tuesday, 21 February 2017

P. 4

EUR/USD: near the ST low on euro softness and USD strength

USD/JPY: off the recent lows, but rebounds in a very gradual way

Dollar extends gradual rebound

On Monday, USD trading developed in thin markets, as US markets were closed for Presidents’ Day. The dollar held very tight ranges against the euro and the yen even as political uncertainty on the French elections persisted. EUR/USD hovered in a narrow range in the 1.0605/30 area. USD/JPY stabilized in the low 113 area, awaiting more guidance from the US today.

Overnight, Asian equities show modest gains. The dollar rallied early in Asia as Fed’s Harker reepeated that a rate in March isn’t off the table. USD/JPY rebounded to the 113.70 area and trades currently around 113.55. EUR/USD fell below the 1.06 barrier, currently changing hand in the 1.0580 area. In the Minutes, the RBA was rather positive on the economy, taking into account the positive impact of higher commodity prices on the economy. Even so, the Aussie dollar is trading marginally softer in line with the broader USD rebound after the Harker comments. AUD/USD trades currently in the 0.7670 area.

Today, the advance EMU PMI’s will be published. Markets expect a near stabilization at 54.3 for the EMU composite PMI. German confidence is expected stable at 54.8. For France a slight decrease to 53.8 from 54.1 is expected. The indicator indicates ongoing decent growth, but some downside risk might materialize due to political uncertainty. The US Markit PMI is no market mover. A slight increase is expected (55.3 vs 55 for manufacturing, 55.8 from 55.6 for services). Fed speakers Kaskhari, Harker and Williams spoke recently and probably won’t bring no new info. Over the previous days, political uncertainty in France installed a modest risk-off trade in Europe. It weighed on the euro and was also slightly yen positive. The theme of political uncertainty in Europe will continue to play its role. At the same time, the focus in the US will turn to the Trump fiscal plan and to Fed comments. The combination of both factors suggests further USD buying against a weakish euro. USD/JPY rebounded on the Harker comments this morning. Any further gains probably need support from higher USD bond yields. We maintain a cautious USD positive bias in an day-to-day perspective. This applies especially to USD/EUR.

Currencies

R2 1,1145 -1dR1 1,0874EUR/USD 1,0586 -0,0034S1 1,0341S2 1,0000

Asian equities show modest gains

Dollar rallies on hawkish comments from Fed’s Harker

Eco calendar moderately interesting

Dollar remains better bid on euro uncertainty and ‘hawkish’ Fed comments

EUR/USD and USD/JPY held very tight ranges yesterday

Tuesday, 21 February 2017

P. 5

Global context. The dollar corrected downward since the start of January as the Trump reflation trade slowed down. Two weeks ago , the dollar bottomed out, supported by the ‘Trump tax promise’. Underlying euro weakness due to political uncertainty in the area is a factor too. We see 1.0874 as solid resistance and thus still favour a sell EUR/USD on upticks approach. The downside test of USD/JPY is also rejected. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) remains key support. The comments of Yellen before Congress (and of other Fed members) were USD supportive, but had little lasting impact on yields and/or on the dollar. We keep a cautious USD positive bias, but remain more cautious on the upside potential of USD/JPY compared to USD/EUR.

Sterling fights back after last week’s setback

Yesterday, sterling reversed part of Friday’s losses which were due to poor UK retail sales. We didn’t see a specific driver for this comeback. At the Brexit-debate in the House of Lords, some members want more influence before the final vote, but for now there are no indications that the debate in the House of Lords will profoundly derail PM May’s Brexit strategy. The CBI orders and output data were stronger than expected. The data were maybe a slightly supportive for sterling. EUR/GBP closed the session at 0.8517 (from 0.8561). Cable rebounded to close the day at 1.2463.

Today, the UK monthly budget data will be published. We don’t expect the report to be of lasting importance for sterling trading. Good data might be slightly sterling supportive in a daily perspective. Overnight, the decline of EUR/USD also pushed EUR/GBP back below the 0.85 barrier. EUR/GBP recently hovered in a tight range north of the 0.8450 support, but a break didn’t occur. Sterling sentiment softened slightly of late as the market feels that a BoE rate hike is still very far away. At the same time, euro softness due to political uncertainty is a risk for all euro cross rates, including for EUR/GBP. Longer term, we have a sterling negative view as the Brexit still has to (negatively) impact the UK economy. However, this is no issue at this stage. The test of 0.8450 support is rejected, but the upside momentum isn’t convincing. In case or further EUR/USD softness, a retest of 0.8450 is still possible.

R2 0,9047 -1dR1 0,8881EUR/GBP 0,8501 -0,0040S1 0,8471S2 0,8304

EUR/GBP: new test of 0.8450 support avoided, but rebound fails to convince

GBP/USD topside test rejected, but no clear trend.

Tuesday, 21 February 2017

P. 6

Tuesday, 21 February Consensus Previous US 15:45 Markit US Manufacturing PMI (Feb P) 55.3 55.0 15:45 Markit US Services PMI (Feb P) 55.8 55.6 15:45 Markit US Composite PMI (Feb P) -- 55.8 Japan 01:30 Nikkei Japan PMI Mfg (Feb P) A53.5 52.7 05:30 All Industry Activity Index MoM (Dec) A -0.3% 0.3% 07:00 Nationwide Dept Sales YoY (Jan) A-1.2% -1.7% UK 10:30 Public Finances (PSNCR) (Jan) -- 36.3b 10:30 Public sector net borrowing (Jan) £-14.5B £6.4B EMU 10:00 Markit Eurozone Manufacturing PMI (Feb P) 55.0 55.2 10:00 Markit Eurozone Services PMI (Feb P) 53.7 53.7 10:00 Markit Eurozone Composite PMI (Feb P) 54.3 54.4 Germany 09:30 Markit/BME Germany Manufacturing PMI (Feb P) 56 56.4 09:30 Markit Germany Services PMI (Feb P) 53.6 53.4 09:30 Markit/BME Germany Composite PMI (Feb P) 54.8 54.8 France 08:45 CPI EU Harmonized MoM / YoY (Jan F) -0.2/1.6% -0.2%/1.6% 09:00 Markit France Manufacturing PMI (Feb P) 53.5 53.6 09:00 Markit France Services PMI (Feb P) 53.9 54.1 09:00 Markit France Composite PMI (Feb P) 53.8 54.1 Events ECB Draghi participates in dialogue in Brussels 01:30 RBA Feb. Meeting Minutes 09:00 Riksbank's Ingves Gives Speech 14:50 Fed's Kashkari Speaks on Economy in Golden Valley, MN 18:00 Fed's Harker to Speak on Economic Outlook 21:00 US to Sell $26B 2-yr Notes 21:30 Fed’s Williams Speaks to Students in Boise, Idaho 22:30 RBA’s Lowe Speech in Sydney

Calendar

Tuesday, 21 February 2017

P. 7

10-year td -1d 2-year td -1d Stocks td -1dUS 2,44 0,02 US 1,21 0,02 DOW 20624,05 0,00DE 0,31 -0,01 DE -0,84 -0,04 NASDAQ 5838,578 0,00BE 0,87 0,03 BE -0,49 0,01 NIKKEI 19381,44 130,36UK 1,23 0,02 UK 0,10 0,01 DAX 11827,62 70,60

JP 0,10 -0,01 JP -0,24 0,00 DJ euro-50 3312,39 3,58

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,07 1,76 0,67 Eonia -0,3540 0,00105y 0,14 2,03 0,85 Euribor-1 -0,3690 0,0020 Libor-1 0,7794 0,000010y 0,75 2,40 1,27 Euribor-3 -0,3290 0,0000 Libor-3 1,0523 0,0000

Euribor-6 -0,2380 0,0010 Libor-6 1,3574 0,0000

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

EUR/USD 1,0586 -0,0034 EUR/JPY 120,18 0,03 CRB 192,12 0,00USD/JPY 113,52 0,39 EUR/GBP 0,8501 -0,0040 Gold 1235,60 0,40GBP/USD 1,2453 0,0018 EUR/CHF 1,0642 -0,0008 Brent 56,23 0,15AUD/USD 0,7672 -0,0014 EUR/SEK 9,484 0,0262USD/CAD 1,3137 0,0058 EUR/NOK 8,8454 -0,0114

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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