Monday, 28 September 2015

Core bonds lower on post-Yellen risk-on

Friday, core bonds had some modest losses as equities did well. Equity sentiment soured late in the US session though and keep most Asian equities in the red this morning. As a result core bonds opened higher. We are positive core bonds (end-of quarter extension buying, Catalan election results and possibility US government shutdown).

Catalonia election outcome to be slightly negative for the euro?

On Friday, the dollar returned initial gains as sentiment on risk deteriorated later in the session. Today, the focus for USD trading is on the US income and spending data and on Fed speeches. The gains of the pro-independence parties in Catalonia might be a slightly negative for the euro. Cable is testing the 1.5165 support.

Calendar

• European equities held on to their profits on Friday and closed a volatile week in

a lucrative fashion. US equities had a strong open, but gradually lost most profits later in the session. Asian equities are trading mixed this morning: China slightly positive; Japan in the red.

• On Sunday, Catalonia’s independence movement won a historic victory in the regional parliamentary elections, gaining majority in the seats. However, they did not win the outright majority of the popular vote.

• Chinese August Industrial profits fell by 8.8% Y/Y, the biggest drop since 2011. The decline was due to rising costs and persistent falling prices, adding to signs of weakness in the world’s second largest economy.

• Finland’s credit rating outlook was revised from Stable to negative by Standard & Poors, as the country struggles to revive its economy.

• The Thai economy keeps sputtering, with Thai exports dropping -6.7% Y/Y in August, a lot worse than the expected -3.1% Y/Y. Thai Baht keeps weakening, already down more than 10% this year.

• Today the eco calendar contains the US personal income and spending data and the price deflators. Also in the US Fed’s Dudley & Evans speak on monetary policy and Fed’s Williams on the economic outlook.

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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

P. 1

Monday, 28 September 2015

Yellen’s “clarity” and risk-on push core bonds lower

Global core bonds lost ground as risk-on sentiment dominated after Yellen’s speech. She gave some “clarity” on US monetary policy (still lift-off in 2015) and remarked that the Chinese slowdown won’t have a big impact on the US economy. That helped the return of confidence in the equity markets together with some firm specific news (new CEO VW and denial BMW it had cheated too on emission results). The EMU M3 data were weaker than expected but ignored as lending continued its slow progress. Core bonds bottomed out as another upward revision of Q2 US GDP didn’t see through selling. Both the Bunds and the US Treasuries slowly moved higher again. A stronger Michigan consumer confidence pushed US Treasuries temporary lower, but soon that decline was recouped. At the end of the US session, a big sell-off pushed equities sharply lower, but core bonds didn’t react anymore. In a daily perspective, the US curve bear steepened with yields up to 4 bps higher. The initial bear flattening changed during the day in bear steepening. The German curve bear steepened too with yields up to 6 bps higher. Intra-EMU 10-yr yield spreads narrowed marginally with Portugal (-5 bps) and Greece (-23 bps) outperforming.

US PCE, Fed talk and Catalonia election results key items

Both personal income and spending are forecast to have increased at the same solid pace in the last three months. (0.4% M/M and 0.3%% M/M). We have no particular reasons to distance ourselves from the consensus. The PCE deflator and core deflator (0% M/M & 0.1% M/M) are expected to have remained contained. About the Catalane pro-independence: is the glass half full or half empty? The party under guidance of PM Mas won the elections and has a majority (with CUP) of 72 out of 135 seats. However, with 48% of the popular vote has it a strong enough mandate to claim independence? We don’t think so, but that probably won’t stop the long march towards independence. The region is ever more leaning towards independence and so when a referendum is held in maybe 18 months’ time (constitutionally not allowed) the result will be highly uncertain. PM Mas has said that the next 18 months will be used to prepare independence. The Central Spanish government (PP) anyway should take no solace from the popular vote. As almost 50% of the Catalane people want independence, something has to be done. So difficult negotiations on at least more autonomy are inevitable. For markets, the result is negative for Spanish bonds. However, while the Spanish-Italian spread widened since mid-July, it stabilized last week, despite polls showing a pro-independence win. Therefore, while our instinct is negative Spanish bonds, the damage may be limited for now.

Rates

US yield -1d2 0,6996 0,08645 1,4693 -0,013110 2,1534 0,008930 2,9468 0,0286

DE yield -1d2 -0,2470 -0,00505 0,0150 -0,006010 0,6280 0,008030 1,3500 0,0060

Bund future (black) and S&P future (orange): After weak opening, Bunds slid lower, but recouped most of the intra-day losses. US

equities drop at the very end of the session.

Spanish-Italian yield spread: Will Catalonia election result trigger new spread widening?

Catalane pro-independence parties gain majority, but independence not for tomorrow. Period of heightened uncertainty starts

Moderate losses for core bonds

US equity end positive session

P. 2

Monday, 28 September 2015

Italy, Finland, Spain and France tap market

This week’s scheduled EMU bond supply comes from Italy, Finland, Spain and France. Tomorrow, the Italian debt agency kicks off by tapping the on the run 5-yr BTP (€1.5-2B 0.70% May2020), 10-yr BTP (€2-3B 2% Dec2025) and launching a new floating rate note (€2.5-3.5B Dec2022). On Wednesday, the Finnish treasury taps two long-date RFGB’s for up to €1B (0.75% Apr2031 & 2.625% Jul2042). This weekend, rating agency S&P changed the outlook on the Finnish AA+ rating from stable to negative. It said that Finland will experience a protracted period of below-average growth compared with other countries at a similar stage of economic development, despite the government's commitment to structural reforms. On Thursday, the French debt agency taps the on the run 10-yr OAT (1% Nov2025) and creates a new 15-yr OAT (1.5% May2031) for a combined €7-8B. The Spanish Treasury taps two on the run Bono’s (0.25% Apr2018 & 1.15% Jul2020) and an off the run Obligacion (4.65% Jul2025). This week’s auctions will be supported by a €10.5B Belgian redemption.

Today: Cautious start to the week?

R2 160,62 -1dR1 156,84BUND 155,67 0,0000S1 152,75S2 151,87

Overnight, most Asian stocks markets trade with losses extending weakness on WS on late Friday. The US Note future is marginally higher. The Catalonian vote, while in line with expectations, can trigger a soft safe haven bid at the start of European trading.

Today’s eco calendar contains US PCE deflator and several Fed speakers (Dudley, Evans & Williams). Any deviations in the deflator won’t pass by unnoticed, while the Fed talk is expected to be dovish. End of month & end of quarter extension buying is a positive technical element for core bonds as is the uncertainty about the 2016 budget (starting 1 October), which may cause a government shutdown. Finally risk sentiment on equity markets (more weakness in car sector and basic resources?) is a wildcard for trading. Taking everything into account, we have a positive bias for today’s core bond trading.

More general, both the ECB and the Fed hang on to very easy policies. The Fed keeps extending its ZIRP while the ECB keeps the door open to additional QE. Therefore we believe that recent lows (Bund: 152.75; US Note future 126-16+) put a floor under the core bond market. While a return towards the recent highs (Bund: 156.84; US Note future 129-10+) is likely, we don’t turn outright bullish bonds. Range bound trading can be expected.

German Bund: dovish ECB underpins Bund

US Note future: trapped between 126-16+ and 129-10+

P. 3

Monday, 28 September 2015

Mixed picture for the dollar

On Friday, EUR/USD returned close to the week lows after Yellen confirmed that a 2015 rate hike remains an option and as risk sentiment was positive for most of the session. A further upward revision of the US Q2 GDP reinforced the dollar positive momentum at that time. Later in the session, the dollar lost some momentum as US equities fell prey to profit taking. EUR/USD closed the day at 1.1195 (from 1.1230 on Thursday). USD/JPY ended the week at 120.59 (from 120.07 on Thursday ).

This morning, Asian risk sentiment is again mostly risk off. China shows a mixed picture even as Chinese industrial profits dropped 8.8% Y/Y in August, reinforcing doubts on growth in the country. Risk-off sentiment supports the yen as Japanese equities underperform. USD/JPY trades currently in the 120.30 area. EUR/USD trades little changed in the 1.1185 area. Investors look out for the impact from the elections in Catalonia on European markets and maybe also on the euro. The pro-independence parties succeeded a majority in the regional parliament.

Today, the eco calendar is moderately interesting. There are only second tier eco data in Europe. In the US, the personal income and spending data will be published. Decent growth is expected (0.4% M/M and 0.3% M/M respectively) Markets will also keep an eye at the price deflators. A bigger than expected rise in the price components (which are expected very low on a monthly basis) might be a slightly positive for the dollar. During the day, several dovish Fed members will speak.

In Europe, we look out whether there is any substantial impact from the elections in Catalonia on European markets and/or on the euro. Ahead of the elections, the expected victory of the pro-independence parties had very little impact on global markets. Today, some widening of Spanish spreads can be expected. In theory this should also be a slightly euro negative even as the link between the euro and (negative) risk sentiment was very instable of late.

Currencies

R2 1,1714 -1dR1 1,146EUR/USD 1,1173 0,0005S1 1,1087S2 1,1017

Dollar off the short-term highs as risk sentiment deteriorated late in the session on Friday.

USD shows a mixed picture in Asia this morning

US eco data might be marginally USD supportive

Catalonia a source of uncertainty for the euro?

EUR/USD holds near the recent lows

USD/JPY holds close to the 120 pivot

Tion P. 4

Monday, 28 September 2015

A the start of the new trading week, the picture for EUR/USD looks a bit mixed. However, we see the US data potentially slightly positive for the dollar. Catalonia is a slightly negative for the euro. Global sentiment will apparently be negative with US futures pointing to further losses. This is less negative for the euro. In the end, we still assume that the topside in EUR/USD remains rather tough. Global sentiment might be a negative for USD/JPY

In a broader perspective, the global picture for the dollar (EUR/USD) hasn’t changed. The dollar rebound ran into resistance at the end of last week, but we still don’t see a trigger for a sustained short-term trend reversal in favour of the euro and against the dollar. Some short-term consolidation might be on the cards as EUR/USD nears a first important support at 1.1087/1.1017. In a longer term perspective we keep our cautious EUR/USD negative bias as we think that policy divergence is still in play (risk for ECB easing). The risk-on/risk-off theme was less of a guidance for EUR/USD trading of late and we expect risk sentiment to remain an ambiguous factor for EUR/USD trading.

Cable testing the 1.5160 support

There was again no important economic news from the UK on Friday. Trading initially was directionless in nature. Relative USD strength pushed cable temporary below the 1.5165 support, but a sustained break didn’t occur yet. EUR/USD initially dipped to the low 0.73 area, but the pair succeeded a nice rebound later as EUR/USD came off the lows. At the same time, cable underperformed EUR/USD, too. So, the global picture for sterling remained a bit fragile. Cable closed the session at 1.5180 (from 1.5242 on Thursday). EUR/GBP closed the day at 0.7380 (from 0.7368).

Today, there again are no eco data in the UK. So, global factors will drive sterling trading. Sterling wasn’t in good shape recently. We continue to look out whether the UK currency will be able to find a bottom. An easing of global tensions might support sterling against the euro. From a technical EUR/GBP is again trading in the upper part of the trading range which is marked by the 0.7423/0.7483 area. In line with EUR/USD, a cautious sell-on upticks approach remains favoured longer term. EUR/GBP 0.7196 is a first support.

R2 0,7483 -1dR1 0,7423EUR/GBP 0,7354 0,0022S1 0,7196S2 0,715

EUR/GBP: holding near the range top

Cable: testing the 1.5165 support

P. 5

Monday, 28 September 2015

Monday, 28 September Consensus Previous US 14:30 Personal Income (Aug) 0.4% 0.4% 14:30 Personal Spending (Aug) 0.3% 0.3% 14:30 Real Personal Spending (Aug) 0.4% 0.2% 14:30 PCE Deflator MoM/YoY (Aug) 0.0%/0.3% 0.1%/0.3% 14:30 PCE Core MoM/YoY (Aug) 0.1%/1.3% 0.1%/1.2% 16:00 Pending Home Sales MoM/NSA YoY (Aug) 0.4%/7.8% 0.5%/7.2% 16:30 Dallas Fed Manf. Activity (Sep) -9.5 -15.8 Japan 07:00 Leading Index CI (Jul F) -- 104.9 Germany Import Price Index MoM/YoY (Aug) -1.5%/-3.1% -0.7%/-1.7% Italy 10:00 Consumer Confidence Index (Sep) -- 109.0 10:00 Business Confidence (Sep) -- 102.5 10:00 Economic Sentiment (Sep) -- 103.7 China 03:30 Industrial Profits YoY (Aug) -- -2.9% Leading Index (Aug) -- 98.70 Sweden 09:30 Trade Balance (Aug) -- 0.3b 09:30 Retail Sales MoM/NSA YoY (Aug) --/-- 0.5%/5.9% Events 14:30 US - Fed's Dudley Speaks on Monetary Policy in New York 19:30 US - Fed's Evans Speaks on Monetary Policy in Milwaukee 23:00 US - Fed's Williams speaks at UCLA on Economic Outlook

10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 2,15 0,01 US 0,70 0,09 DOW 16315 16314,67DE 0,63 0,01 DE -0,25 -0,01 NASDAQ for Exch - NQI #VALUE!BE 0,95 0,00 BE -0,18 0,00 NIKKEI 17645 17645,11UK 1,84 0,09 UK 0,57 0,04 DAX 9688,53 9688,53JP 0,35 0,02 JP 0,02 0,00 DJ euro-50 3113 3113,16

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,143 03y 0,135 1,045 1,153 Euribor-1 -0,11 0,00 Libor-1 USD 0,51 0,515y 0,365 1,471 1,483 Euribor-3 -0,04 0,00 Libor-3 USD 0,58 0,5810y 0,993 2,113 1,903 Euribor-6 0,03 0,00 Libor-6 USD 0,75 0,75

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,1173 0,0005 EUR/JPY 134,41 0,04 195,7119 1145,8 48,04USD/JPY 120,31 -0,03 EUR/GBP 0,7354 0,0022 - 1d 3,34 -1,76 -0,41GBP/USD 1,5183 -0,0041 EUR/CHF 1,0953 0,0017AUD/USD 0,7019 0,0008 EUR/SEK 9,4111 0,00USD/CAD 1,3323 0,0008 EUR/NOK 9,5535 0,08

Calendar

P. 6

Monday, 28 September 2015

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.

Contacts

P. 7