Headlines - Microsoft · EUR/USD breaking north of 1.0715/19 confirms the easing of the ST positive USD momentum. So, we start the week with a cautious/slightly negative bias on the

Monday, 23 January 2017

P. 1

Rates: Technically, sentiment-driven trading

Today’s eco calendar only contains EMU consumer confidence and speeches by ECB’s Draghi en Praet, but we don’t expect them to influence markets. Trading will likely be low-volume, technical in nature and sentiment-driven. The German Bund threatens the 162.62 support (neckline ST double bottom), but another close below is needed to call the support broken.

Currencies: Dollar in the defensive as protectionist Trump speak weighs

The dollar reversed earlier gains on Friday as US president Trump maintained a protectionist rhetoric at his inauguration speech. There are no important data in the US and Europe today, but the dollar remains in the defensive this morning. EUR/USD regains a minor resistance in the 1.0680/1.0719 area.

Calendar

• US equities gained modestly on the president’s inauguration day. Asian

equities opened the week mixed with Japan lower on a weaker yen.

• China's central bank providing temporary liquidity support marks the creation of a new policy tool designed to ease seasonal cash shortages, while sending the signal that monetary policy remains stable and neutral, the Financial News said.

• S&P affirmed the Greek B- rating (stable outlook). It anticipates that Greece will continue to fulfil most of the current programme’s conditions albeit with a delay. The economy remains fragile, but risks to its rating are balanced.

• French Socialist voters swayed to the left in primary elections, inflicting a blow to former PM Valls (31%) and placing leftwinger Hamon (36%) in the front seat to win the beleaguered party’s presidential nomination. Montebourg, another left candidate (18%) asked his voters to vote for Hamon in the 2nd round.

• The Mexican peso reached a two-week intraday high as the dollar weakened in the 1st trading day after Trump’s inauguration. The trade weighted dollar tested the lows. Safe havens like gold and US Treasuries are in demand this morning.

• Britain’s security co-operation with the EU will be part of the Brexit-negotiations, Theresa May has said, as she prepares to meet Donald Trump and lobby for a US/UK trade deal.

• OPEC is sticking to their accord. The countries have already reduced more than 80% of their targeted cutback of 1.8 million barrels a day, agreed on a way to monitor compliance and will present a monthly update.

• Today’s calendar is uneventful. Later this week, attention goes to key eco data (PMI’s, US/UK Q4 GDP), earnings’ results, the UK Constitutional Court’s Brexit ruling and the Italian Constitutional Court’s ruling on the validity of the new electoral law (Tuesday). The Eurogroup will discuss the BMPS rescue deal (Italy).

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Monday, 23 January 2017

P. 2

Core bonds under mild pressure as sentiment soured

On Friday, global core bonds initially stayed under downward pressure, as bond sentiment remained fragile. US Treasuries eventually outperformed Bunds, recouping losses end even eking out modest gains (in tune with stronger yen and weaker equities). Technically, the Bund tested first support (neckline double top) at 162.47 twice, but a break didn’t occur (intraday low 162.20). SF Fed Williams said that shrinking the Fed’s balance sheet will cause rates to go up, but it’s not disruptive in a healthy economy. In conjunction with other Fed speakers it becomes likely that expanding fiscal policy will bring forward the timing of the Fed’s balance sheet shrinkage. In a daily perspective, the German yield curve bear steepened with yields 3 bps (2-yr) to 5.8 bps (30-yr) higher. In yield terms, the German 10-yr yield approaches the post Trump high at 0.45%, while the 30-yr tested yield resistance at about 1.20%. The US yield curve bull steepened with yields flat (30-yr) to 3.3 bps lower (2-yr).

Donald Trump’s inauguration speech was mainly an attack on Washington insiders and political elites. He didn’t give details about future policies. His first executive order directed federal agencies to take any steps to limit or scale back implementation of the Affordable Care Act until Congress repeals it. On his website, the White House laid out what it calls a "bold plan" to create 25 million new jobs over the next decade and return to 4% annual economic growth. It would mark the most jobs created under any U.S. president ever. Specifics are few except that the he will lower tax rates in every bracket, simplify the tax code and reduce the corporate tax rate, beside renegotiating trade deals. In that case, rates might have to be raised faster to keep inflation in check, as the economy is near full employment and close to the inflation target.

Thin calendar to start new week

January EMU consumer confidence is expected to print at -4.8 from -5 in December, following good progress in the past months. It will be the highest reading since March 2015 (start QE) and the second highest since the previous cycle high in June 2007. Belgian consumer confidence for January, released on Friday, improved substantially. We expect a strong figure, confirming that Q1 started on a bright note.

Rates

US yield -1d2 1,18 -0,035 1,90 -0,0410 2,43 -0,0330 3,02 -0,01

DE yield -1d2 -0,67 0,035 -0,41 0,0310 0,42 0,0430 1,19 0,06

Bund reaches first key support

US T-Note rebounds, but Bund doesn’t

Bund future (orange) and T-Note future (black) (intraday): Negative sentiment affected Bund (and T-Note) but support stopped the slide

lower of the former. US T-Notes rebound.

German 10-yr yield approaches the recent highs as eco data and inflation remain robust and despte ECB’s soft message

Strong EMU consumer confidence

Inauguration speech: No specifics on policy

White House website: bold plan to create 25M new jobs and return to 4% annual growth

Monday, 23 January 2017

P. 3

Higher fuel prices/higher inflation could be negative and therefore we don’t put risks on the upside of consensus. ECB’s Draghi and Praet speak. Following an intended dull meeting and press conference last Thursday, we don’t expect them to break new ground. If eco data continue to improve and inflation moves a bit higher, we expect the ECB’s very accommodative policy stance to come under pressure.

The Netherlands, Germany, Italy and US tap market

This week’s scheduled EMU bond supply comes from the Netherlands, Germany and Italy. Tomorrow, the Dutch debt agency taps the on the run 5-yr DSL (€2-3B 0% Jan2022). On Wednesday, the German Finanzagentur holds a 30-yr Bund auction (€1B Aug2046). On Thursday, the Italian debt agency probably taps the on the run 3-yr and 7-yr BTP in combination with a longer-dated one (15/20/30) depending on market demand. The exact lines and amount on offer still needs to be announced. In the US, the Treasury starts its mid-month refinancing operation tomorrow with a 2-yr Note auction. On Wednesday, they hold a 2-yr FRN and a 5-yr Note auction. The Treasury concludes on Thursday with a 7-yr Note auction.

Technically, sentiment-driven trading

Overnight, most Asian stock markets trade positive with Japan underperforming on the back of a stronger yen. The US Note future has an upwards bias. We expect the Bund to open somewhat stronger.

Today’s eco calendar only contains EMU consumer confidence and speeches by ECB’s Draghi en Praet, but we don’t expect them to influence trading (see above). Trading will likely be low-volume, technical in nature and sentiment-driven. From a technical point of view, we put in place new short positions in the US Note future after the umpteenth failed test of 125-09 resistance. First support kicks in at 122-14+. We expect US markets to further align with the Fed’s scenario of 3 rate hikes this year.

ECB Draghi didn’t alter the ECB’s policy last week, stressing the lack of underlying inflation pressure. Technically, the German Bund closed below 162.62 support (neckline ST double bottom), but recovered in later US trading and opened higher today. We need a more reliable close below to focus on the downside and more particular on the range bottom (160.72). The underlying economic picture in EMU improves further, also suggesting more downside despite the ECB’s bond buying programme.

R2 164,90 -1dR1 164,45BUND 162,83 -0,34S1 160,72S2 159,91

German Bund: close below neck line double top suggests more downside towards range bottom (160.72)

US Note future: 125-09 resistance ‘unbreakable’. Headling towards 122-14+ support?

Monday, 23 January 2017

P. 4

EUR/USD regains minor resistance as dollar trades in the defensive

USD/JPY: rebound aborted. 112.57 support remains within reach.

Protectionist Trump rhetoric weighs on the dollar

On Friday, in absence of eco data releases, the dollar traded slightly softer in Asia, but found a better bid in Europe as risk sentiment improved slightly. The US currency came again in the defensive later in US dealings. Investors turned a bit more cautions on the dollar as US President Trump maintained a protectionist tone in its inauguration speech. EUR/USD closed the session at 1.0703 (from 1.0664). The dollar losses against the yen was modest. USD/JPY finished at 114.62 from 114.86.

This morning in Asia, USD softness prevails. The decline of the dollar/strength of the yen weighs on Japanese equities. Most other regional markets react positively to the softer dollar. The decline of the dollar is also supporting commodities. The overall decline of the dollar hits USD/JPY quite hard. The lost about one yen and is trading in the 113.35 area. EUR/USD is also setting a new short-term correction top and trades in the 1.0750 area.

Today, there are no data in the US. In Europa, the EMU consumer confidence is expected to improve slightly from -5.1 to -4.8. We don’t expect much impact on euro trading, even as EMU data are good recently, but te focus will remain on the dollar. The focus will remain on the first policy actions of the Trump administration. The outcome of the Socialist primary for the presidential election surprised (see headlines). However, we don’t expect it to be a dominant factor for FX trading. For now, the protectionist rhetoric of US president Trump combined with a lack of visibility on the pro-growth agenda of the new administration looks a short-term negative for the dollar. EUR/USD breaking north of 1.0715/19 confirms the easing of the ST positive USD momentum. So, we start the week with a cautious/slightly negative bias on the dollar. If USD./JPY would drop below the 112.57 correction low, it would be an additional dollar negative.

Global context: EUR/USD touched a multi-year low (1.0341) early this month. After the Trump rally, plenty of good USD news is discounted. Interest rate differentials between the dollar and the euro 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.

Currencies

R2 1,1145 -1dR1 1,0874EUR/USD 1,0746 0,0064S1 1,0341S2 1,0000

Dollar stays under pressure in Asia

Eco calendar is almost empty

Protectionist speak of Trump and policy uncertainty weigh on USD.

Dollar in the defensive as Trump maintains protectionist rhetoric.

Monday, 23 January 2017

P. 5

The day-to-day USD momentum is deteriorating as EUR/USD rebounded north of 1.0685/1.07198. A return north of 1.0874 would question the USD positive momentum. On the downside, EUR/USD 1.0341 is the first key support. USD/JPY is trading well off the post-Trump highs (118.60/66). The pair tried to rebound off the 112.57 reaction low last week, but the jury is still out whether this rebound can be sustained. We look out whether the 112.57 correction low will hold. 111.16 marks the 38% retracement of the 99.02/118.66 rally and might be a tough support. An equity correction or a decline in core bond yields might be short-term negatives for USD/JPY.

Sterling stabilizes against the euro

Sterling’s positive bias after May’s Brexit speech eased slightly on Friday as the December UK retail sales were much weaker than expected. EUR/GBP hovered in the mid 0.8640/50 area before the publication of the retail sales and trended cautiously higher later. However, the loss of sterling remained contained. EUR/GBP closed the session at 0.8652 (from 0.8640). Cable profited slightly from global dollar softness and closed the session at 1.2375 (from 1.2342).

Today, there are no important eco data in the UK. There might be quite some debate on a ruling of the Supreme Court over the initiative to trigger Brexit and other pending legal issues. In theory, this kind of institutional uncertainty might be negative for sterling, but the UK currency was very resilient of late. So for now, this is not a good enough reason to expect a sustained decline of sterling. A further rise of EUR/USD might be slightly supportive for EUR/GBP in a daily perspective.

Last week, sterling held strong even as UK PM May hinted on a hard Brexit. We don’t see a big case for a sustained rebound of sterling. We look to sell sterling into strength as long as there is no clear indication that the BoE will take action to fight rising inflation. EUR/GBP 0.8579 marks the 50% retracement of the 0.8304/0.8854 rebound. EUR/GBP 0.8515 is the 62% retracement level with a correction low coming in at 0.8451. This 0.8515/0.8451 area should provide a strong support.

R2 0,9047 -1dR1 0,8881EUR/GBP 0,8640 -0,0007S1 0,8450S2 0,8304

EUR/GBP struggles to find a bottom

GBP/USD rebounds further on USD weakness

Monday, 23 January 2017

P. 6

Monday, 23 January Consensus Previous Japan 05:30 All Industry Activity Index MoM (Nov) A 0.3% 0.2% 06:00 Supermarket Sales YoY (Dec) A -2% 0.8% EMU 16:00 Consumer Confidence (Jan A) -5.0 -5.1 Events Q4 earnings Haliburton (12h50), McDonalds (13:58), Yahoo! (Aft-mkt),… 11:00 Euro Area Third Quarter Government Deficit & Government Debt 12:30 ECB's Draghi Speaks in Torino, Italy 14:15 ECB's Praet Speaks in Brussels

10-year td -1d 2-year td -1d Stocks td -1dUS 2,43 -0,03 US 1,18 -0,03 DOW 19827,25 94,85DE 0,42 0,04 DE -0,67 0,03 NASDAQ 5555,333 15,25BE 0,75 0,04 BE -0,52 0,04 NIKKEI 18891,03 -246,88UK 1,43 0,02 UK 0,19 -0,01 DAX 11630,13 33,24

JP 0,06 -0,01 JP -0,24 0,00 DJ euro-50 3299,44 9,11

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,08 1,70 0,79 Eonia -0,3510 0,00005y 0,15 1,97 1,00 Euribor-1 -0,3720 0,0000 Libor-1 0,7753 -0,001410y 0,74 2,33 1,42 Euribor-3 -0,3280 0,0010 Libor-3 1,0434 0,0133

Euribor-6 -0,2410 -0,0010 Libor-6 1,3582 0,0197

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

EUR/USD 1,0746 0,0064 EUR/JPY 121,74 -0,72 CRB 194,02 1,05USD/JPY 113,29 -1,35 EUR/GBP 0,8640 -0,0007 Gold 1216,20 8,70GBP/USD 1,2438 0,0083 EUR/CHF 1,0728 -0,0004 Brent 55,40 1,21AUD/USD 0,7574 0,0010 EUR/SEK 9,5129 -0,0256USD/CAD 1,3273 -0,0031 EUR/NOK 9,0052 -0,0077

Calendar

Monday, 23 January 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.

Contacts