Monday, 15 May 2017

P. 1

Rates: Short term picture neutral for core bonds

The Bund and US Note future moved back above 160.64 and 125-04+/03 levels on Friday, making the technical picture more neutral again. Given this week’s razor thin eco calendar, we expect sideways action. If oil prices extend their rally, they could nevertheless inflict some losses on core bonds.

Currencies: Dollar comeback aborted by weaker eco data

After Friday’s dollar sell-off, we expect more sideways-oriented trading today and maybe also further this week. The eco calendar is razor thin and equity sentiment seems neutral as positives (Merkel’s surprising regional election victory) and negatives (North Korea / cyber-attack) cancel each other out.

Calendar

• US equities closed the session again narrowly mixed after a largely sideways

trading session, shrugging off weaker eco data. Overnight, Asian stock markets trade mixed with China outperforming despite weaker data.

• An unrivalled global cyber-attack is poised to continue claiming victims, even as UK health facilities whose systems were crippled early in the assault are returning to normal operation.

• Chancellor Merkel’s conservatives won a surprise victory in regional elections in Germany’s most populous state (North Rhine-Westphalia) giving Europe’s most powerful leader a boost in the run-up to national elections in September.

• Oil prices jumped after the energy ministers of top producers Saudi Arabia and Russia jointly said that an OPEC-led crude production cut would be extended from the middle of this year until March 2018.

• Chinese eco data disappointed. Retail sales (10.7% Y/Y), industrial production (6.5% Y/Y) and fixed asset investment growth (8.9% Y/Y) all cooled more than expected in April.

• Downside risks to inflation continue to cloud the outlook for interest rates despite an otherwise healthy US economy, Chicago Fed Evans said. He added that he could be fine with two more rate increases this year.

• North Korea fired a ballistic missile early Sunday, just days after South Korea elected a president who vowed to engage with Un’s regime to defuse tensions over its nuclear weapons program

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Monday, 15 May 2017

P. 2

Core bonds rallied on slightly disappointing US data

Global core bonds profited slightly from disappointing US CPI and retail sales on Friday. The end of the Treasury’s financing operation provided an additional boost. US Treasuries outperformed Bunds. The moves were technically relevant for the ST pictures as the T-Note future/Bund re-broke above 125-04+ and 160.64 levels (previous support). The belly of the US curve outperformed with the 5-yr yield down 6.8 bps. The wings fell 4.4 bps (2-yr) and 3.7 bps (30-yr). German yields fell between 1 bp (2-yr) and 4.1 bps (10-yr). On intra-EMU bond markets, 10-yr yield spreads changes versus Germany ranged between 0 and +2 bps with the exception of Greece (+9 bps). US equities and oil were little changed, while European equities eked out gains.

US core inflation was a tad weaker at 0.1% M/M and 1.9% Y/Y, down from 2% Y/Y in March. Headline inflation was marginally softer at 2.2% Y/Y. Inflation was already softer than expected in March and the April figures raise fears that the return of core inflation (PCE) to 2% would take longer. US April retail sales were slightly weaker than expected at 0.4% M/M, but this shortfall was compensated by upward revisions to previous data. The combination was nevertheless good for a short covering rally after the weakness in previous days. Some investors even started doubting whether the Fed would tighten in June or downgraded their expectations for policy further out. Admittedly, keeping policy unchanged is still a tail risk for the June FOMC meeting, as the probability of a hike stands at 97.5% (from 100% before the release). Chances for an additional hike in September dropped to 34% from 45% before the release.

NY Fed manufacturing and NAHB housing survey

Markets expect a modest improvement in the May NY Fed manufacturing survey to 7.5 from 5.2, while the NAHB homebuilders’ sentiment index is expected unchanged at 68. We think that the NY Fed manufacturing index will be little changed, after two exceptionally strong months (February-March). A stabilization suggests a modest expansion in the manufacturing sector, which would be an improvement compared to weakness in 2015/16. Home builders sentiment reached a cycle peak at 71 in March, before slightly losing ground in April to 68. We expect that activity has stabilized, but at a very high level. A reading above 50 signals more homebuilders consider conditions as good than poor. In the past 30 years, levels near 70 have only occurred at the peaks.

Rates

US yield -1d2 1,29 -0,045 1,85 -0,0610 2,33 -0,0530 3,00 -0,02

DE yield -1d2 -0,67 0,005 -0,31 -0,0110 0,40 -0,0430 1,20 -0,02

Strong rally after slightly disappointing US data

US bonds outperform German bonds

Peripheral spreads little changed

T-Note future (black) and S&P future (orange) (intraday): T-Note rallies on weaker eco data and short covering. Equities hold up well

and close only marginally lower.

US-German 10-yr yield spread narrows to new 2017 low

Modest expansion manufacturing and brisk growth pace home building. No big surprises expected

Monday, 15 May 2017

P. 3

Supply from Germany, France and Spain

This week’s scheduled EMU bond supply comes from Germany, Spain and France. On Wednesday, the German Finanzagentur taps the on the run 30-yr Bund (2.5% Aug2046) for €1B. On Thursday, the French treasury sells the on the run 3-yr OAT (0% Feb2020) and 5-yr OAT (0% May2022) for a combined €6.5-7.5B. Additionally, they’ll try to raise €1.5-2B via inflation-linked bonds. The Spanish debt agency taps the on the run 3-yr Bono (1.15% Jul2020), on the run 10-yr Obligacion (1.5% Apr2027) and two off the run Obligacions (4.8% Jan2024 & 5.9% Jul2026). The amount on offer still needs to be determined.

Short term technical picture neutral for core bonds

Overnight, most Asian stock markets trade mixed with China outperforming (+0.5%) despite disappointing eco data. Merkel’s surprising regional election victory and the North Korean missile launch & global cyber-attack cancel each other out from a risk perspective. Oil prices gain ground on a joint Saudi-Russian statement in favour of extending production cuts till March 2018, but don’t impact US Treasuries. We expect a neutral opening for the Bund.

Today’s eco calendar only contains less important US eco data, which we don’t expect to impact trading. The Bund and US Note future moved back above 160.64 and 125-04+/03 levels on Friday, making the technical picture more neutral again. Given this week’s razor thin eco calendar, we expect sideways action. If oil prices extend their rally, they could nevertheless inflict some losses on core bonds.

Medium term, policy normalization by the Fed and ECB could push the German 10-yr yield back to 0.5% and the US 10-yr yield to 2.6% ahead of potentially key June policy meetings.

R2 163,99 -1dR1 162,49BUND 160,8 0,30S1 158,73S2 158,28

German Bund: Waiting new impetus ahead of ECB meeting

US Note future: Short term picture neutral as markets almost completely discounted 25 bps June rate hike

Monday, 15 May 2017

P. 4

EUR/USD: EUR/USD fall aborted after weaker eco data

USD/JPY rally takes a breather

Dollar suffers modest loss on small data miss

On Friday, the dollar lost ground against euro and yen after weaker than expected US inflation and retail sales pushed US yields lower, narrowing the yield spread versus Germany (and Japan) somewhat. EUR/USD traded ahead of the data in a tight 1.0860/80 range, but surged after the US data release to 1.0933 in the close, up from 1.0861 on Thursday eve. Equities held up well in the face of the data, but couldn’t avoid USD/JPY weakening either, even if it was slightly more limited than the EUR/USD gains. USD/JPY fell from openings levels at 113.96 to intraday lows around 113.20 before closing at 113.38, a loss of about 50 ticks.

High oil prices support commodity currencies

Overnight, Asian stocks trade narrowly mixed with China outperforming despite weaker data. Increased signs of an extending of the OPEC production cut agreement to March 2018 (see headlines) pushes oil (and many other commodities) higher. This is reflected in modestly higher commodity currencies. USD/JPY pushes higher to 113.36, reversing some of the opening losses, but is still only level with Friday’s close. EUR/USD is little changed at 1.0935.

Calm trading amid thin calendar

Markets expect a modest improvement in the May NY Fed manufacturing survey while the NAHB homebuilders’ sentiment index is expected unchanged at lofty levels. We see no reasons to expect sharp deviations from these data releases, which don’t have strong market moving potential. Friday’s sharp negative reaction of the dollar shows that it remains vulnerable to weaker data. The market slightly reduced Fed rate hike expectations, especially for H2 meetings. The expected chance for a June rate hike is still an overwhelming 97%, according to Bloomberg data. Merkel’s regional election victory in NRW is a euro and equity positive event, while the worldwide cyber-attack and the North-Korean missile launch are equity negative, so they cancel each other out. The uninspiring eco and event calendars suggest technical and sentiment driven range-trading today.

Short term trading assessment

The USD/JPY rebound ran into resistance last Thursday when equities stabilized and Friday on weak US inflation and retail sales. A correction was upcoming after a 6 big figure gain from mid-April to mid-May. The weaker data and stabilizing equities were a welcome trigger.

Currencies

R2 1,13 -1dR1 1,1145EUR/USD 1,0932 0,0061S1 1,0778S2 1,0341

US NY Fed and NAHB survey unlikely to be strong drivers

Dollar rebound aborted after weaker-than-expected US data

Monday, 15 May 2017

P. 5

Some more corrective losses shouldn’t surprise, but as long as USD/JPY 112.20 holds, the outlook for the dollar versus yen remains positive. A buy on dips of USD/JPY near these levels looks appropriate. The Fed will continue to tighten policy and the stronger labour market should ultimately lead to higher wages and inflation. If so, EUR/USD might revisit the 1.0821/1.0778 support (gap). However, Friday’s data poured some cold water on the dollar’s short term comeback chances. The US and EMU eco calendars are unattractive this week, which means trading may be confined to the 1.0821/1.0778 to 1.1023 range.

Technical notes

From a technical point of view, USD/JPY broke the 112.20 resistance, improving the technical picture. The rebound continues in a gradual way, but looks quite robust. Next intermediate resistance comes in at 115.51. EUR/USD extensively tested the topside of the MT range (1.0874/1.0906 area) late March. The pair finally broke above the 1.09/1.0950 resistance last week, but the break wasn’t confirmed and a correction kicked in. A sustained break higher would improve the ST picture. Next resistance stands at 1.1129 (62% retracement) and at 1.1366 (correction top). A decline below 1.0821 suggests that the dollar is regaining traction against the euro.

Post-BoE repositioning pushes EUR/GBP closer to 0.85

Sterling remained under pressure versus the euro during the Friday’s session Investors adapted positions further as they concluded after Thursday’s policy meeting that the BoE won’t tighten soon, hampered by parliamentary elections and second and Brexit negotiations. EUR/GBP rose further after the weaker US eco data (inflation and retail sales) as EUR/USD outperformed cable. EUR/GBP started the day at 0.8430 to close at 0.8476, with an intraday top at 0.8488, a 47 pips daily gain. Cable fell in the morning on sterling weakness, but recovered after the US eco releases when dollar weakness dominated. Cable closed nearly unchanged at 1.2890.

There are no eco data in the UK or EMU today and the US data are second tier and likely near consensus. Technical considerations and sentiment should drive the price action. Sterling gained against the euro and dollar overnight, likely as a reaction to Friday’s losses. Cable re-takes the 1.29 handle, EUR/GBP drops to 0.8467. We consider it as consolidation which might be the dominant theme in today’s session. EUR/GBP is locked in a ST broad sideways range (0.83/0.85) after a substantial decline in March/April. Recent price suggest a bottoming out of EUR/GBP with 0.84/0.8330 a solid bottom. To improve the EUR/GBP picture, we need to see a break of 0.8508/31 (previous ST tops). On technical considerations, we slightly prefer a EUR/GBP buy-on-dips approach at levels closer to 0.83. Longer term, Brexit-complications remain potentially negative for sterling.

R2 0,8881 -1dR1 0,8854EUR/GBP 0,8475 0,0039S1 0,8314S2 0,8304

EUR/GBP: Sterling loses on follow through post BOE selling and EUR/USD outperforming cable after weaker US data

GBP/USD: Inability to gain on dollar weakness suggest weak underlying sterling sentiment. Consolidation today is likely

Monday, 15 May 2017

P. 6

Monday, 15 May Consensus Previous US 14:30 Empire Manufacturing (May) 7.5 5.2 16:00 NAHB Housing Market Index (May) 68 68 Japan 01:50 PPI MoM / YoY (Apr) A 0.2%/2.1% 0.2%/1.4% China 04:00 Retail Sales YoY / YTD YoY (Apr) A10.7/10.2% 10.9%/10.0% 04:00 Fixed Assets Ex Rural YTD YoY (Apr) A 8.9% 9.2% 04:00 Industrial Production YoY / YTD YoY (Apr) A 6.5%/6.7% 7.6%/6.8% Italy 10:00 CPI EU Harmonized YoY (Apr F) -- 2.0% Events 13:45 ECB Praet speaks in Brussels on pension seminar 11:00 Slovakia to Sell 2027 & 2031 Bonds

10-year td -1d 2-year td -1d Stocks td -1dUS 2,33 -0,05 US 1,29 -0,04 DOW 20896,61 -22,81DE 0,40 -0,04 DE -0,67 0,00 NASDAQ 6121,232 5,27BE 0,80 -0,04 BE -0,52 -0,01 NIKKEI 19869,85 -14,05UK 1,09 -0,07 UK 0,11 -0,01 DAX 12770,41 59,35

JP 0,04 0,00 JP -0,17 0,01 DJ euro-50 3637,52 13,97

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,04 1,69 0,62 Eonia -0,3580 0,00305y 0,23 1,91 0,80 Euribor-1 -0,3730 0,0010 Libor-1 0,9924 0,003910y 0,81 2,26 1,17 Euribor-3 -0,3290 0,0000 Libor-3 1,1796 -0,0014

Euribor-6 -0,2510 -0,0010 Libor-6 1,4366 -0,0055

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

EUR/USD 1,0932 0,0061 EUR/JPY 124,05 0,37 CRB 181,69 1,25USD/JPY 113,47 -0,30 EUR/GBP 0,8475 0,0039 Gold 1231,70 5,10GBP/USD 1,29 0,0013 EUR/CHF 1,0947 -0,0008 Brent 51,58 0,77AUD/USD 0,7399 0,0014 EUR/SEK 9,6631 0,0111USD/CAD 1,3675 -0,0018 EUR/NOK 9,3531 0,0042

Calendar

Monday, 15 May 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 VIA OUR KBC RESEARCH APP (iPhone, iPad, Android) 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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