Currencies: dollar extends correction after rejected test of the recent highs

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1 Rates: Treasuries correct higher, but eyes on US eco data The eco calendar heats up in the US with non-manufacturing ISM, ADP employment and weekly claims. Risks for the ISM are on the upside of expectations, but other data will need to be strong as well to trigger a market reaction ahead of tomorrow s payrolls. This morning, US Treasuries are correcting higher in lockstep with the dollar losing ground. Currencies: dollar extends correction after rejected test of the recent highs Yesterday, the dollar fell prey to broad-based profit taking and this trend continues in Asia this morning. Today s US eco data might come out USD supportive, but the reaction might be guarded ahead of tomorrow s US payrolls. The jury is still out whether the USD correction is the start of profit taking on the global Trump-rally. Calendar Headlines US equities booked good gains that brings the S&P to within a whisker of the all-time highs. Most Asian bourses make modest gains on a stronger dollar, with Japan struggling on the yen appreciation. FOMC minutes showed that almost all officials indicated that the prospects for fiscal stimulus could boost economic growth in the coming years. The timing, size and composition of Trumps plans will decide how to adjust interest rates. S&P Eurostoxx 50 Nikkei Oil CRB Gold 2 yr US 10 yr US 2yr DE 10 yr DE EUR/USD USD/JPY EUR/GBP According to the UK Telegraph, Theresa May will threaten to take Britain out of the single market unless the UK is given full control of its borders in a significant Brexit speech designed to counter claims she has no plan for leaving the EU. Italian banks will be the driving force of a global push to move sour loans off bank balance sheets in 2017 by issuing dramatically more bonds backed by the non-performing debt, according to rating agency S&P. China s services PMI rose in December to a 17-month high (53.4) as activity and new work expanded. The Japanese Services PMI rose to 52.3 in December up from 51.8 previously, with new orders growing the fastest since mid Having spent the morning session wallowing, the offshore renminbi has shot higher and is looking to lock in its biggest one-day rise in a year up. The offshore renminbi, CNH, firmed by 0.6% to Rmb per dollar, The HIBOR for offshore renminbi (CNH) overnight loans jumped to % from % on Wednesday. It is associated with efforts by the PBoC to soak up liquidity and slow the depreciation of the currency. Today, the eco calendar contains US initial claims, the ADP employment and the Non-manufacturing ISM, while in the UK the services PMI will draw attention. Spain and France tap the bond market.. P. 1

2 Rates Listless bond trading after Tuesday s sell-off Core bonds have listless session Strong EMU data ignored, as Tuesday s sell-off needed to be digested. US yield -1d 2 1,20-0,02 5 1,90-0, ,41-0, ,01-0,03 DE yield -1d 2-0,79 0,00 5-0,53-0, ,26-0, ,04 0,02 Yesterday s dull dealings contrasted sharply with Tuesday s eventful trading session. Despite upbeat EMU eco data (CPI & PMI), the Bund traded sideways. US Treasuries moved slightly higher after the release of the December FOMC meeting (even if we consider them to be a bit hawkish; see below), but the up leg lacked conviction and the Note future returned to levels slightly above the official opening. In a daily perspective, the German yield curve bear steepened with yield changes ranging between -0.3 bps (2-yr) and +3.6 bps (30-yr). US yield changes varied between flat (2-yr) and -1.2 bps (5-yr). On intra-emu bond markets, 10-yr yield spreads changes versus Germany ended nearly unchanged (+1 to -2 bps) with Greece outperforming (-10 bps). The Minutes of the FOMC meeting showed that governors were increasingly uncertain about the fiscal outlook. Half of the governors didn t take it into account in their forecasts. Most policymakers found the balance of risk for growth was on the upside due to the prospect of a more expansionary fiscal policy. A potential undershoot of the unemployment rate was recognized, while balance of risks to inflation were more even. Participants agreed that policy adjustments could still be gradual, but emphasized the need to adjust the policy path as economic conditions evolved. A more accommodative fiscal policy could force the FOMC to lift rates higher. This is new and makes the FOMC a bit more hawkish. Markets concentrated though on the uncertainty surrounding the policy outlook. The next big moment might be the March meeting when some uncertainties might have dissipated and the FOMC has new economic information & forecasts. We think that hiking rates in March might frighten markets and incite traders to incorporate even more tightening. The June meeting looks more appropriate. US eco data in the picture, but US payrolls loom Initial claims potentially distorted ADP employment plain vanilla? Non-manufacturing ISM solid, but comparison with strong November result daunting Initial claims jumped to 275K three weeks ago, before easing slightly to 265K two weeks ago. A further easing to 260K is expected. Given the holidays, the figure may be distorted and thus surprise in both directions. The November ADP (private) employment surged by 216K, following a dismal 118K in October. Consensus expects a trend-like increase by 175K for December. We see little reason to distance us from the consensus, but whatever the result one shouldn t draw conclusions for Friday s payrolls, where a number of statistical issue might be at play. The November Non-manufacturing ISM rose sharply to 57.2, the highest since October 2015, from 54.8 previously. Given the strong gains, markets expect a slight decrease to We see upside risks though because of the stronger US manufacturing ISM earlier this week. T-Note future (black) and S&P future (orange) (intraday): T-Note ends close to opening levels after some scrimmages after the Minutes. S&P recovers further and is back near record highs. Payrolls tomorrow referee? P. 2

3 France and Spain tap market R2 165,48-1d R1 164,90 BUND 163,49-0,02 S1 162,62 S2 159,91 The French treasury taps the on the run 10-yr OAT (0.25% Nov2026), 20-yr OAT (1.25% May2036), 30-yr OAT (3.25% May2045) and 50-yr OAT (1.75% May2066) for a combined B. In the run-up to the auction, the bonds cheapened significantly in ASW-spread terms, especially at the very long end of the curve. Compared to peers, only the May2036 OAT trades relatively expensive on the French curve. This large auction will be a second test of investors appetite in very long debt at the start of the year following yesterday s successful 20-yr Irish syndicated deal. The Spanish debt agency taps the on the run 5-yr Bono (0.75% July2021), 10-yr Obligacion (1.3% Oct2026) and 30-yr Obligacion (2.9% Oct2046) for 3-4B. These bonds also cheapened especially at the longer tenors in the runup to the auctions, but both the Oct2026 and Oct2046 Obligacions are rather rich on the curve. However, the amount on offer is relatively low, suggesting a plain vanilla auction given usual stronger demand at the start of the year. Correction at the start, but key eco data ahead Overnight, most Asian stock markets trade mixed near opening levels but other markets show signs of correction. The dollar loses ground and US Treasuries and gold profit. It s unclear what triggered the moves, but it might have something to do with the spike in the key renminbi borrowing rate and surge in off shore yuan (CNH) (see currencies). This time around last year, a spike in the CNH Hibor was considered to be a move by the PBOC to discourage investors to short the Chinese currency. We expect a somewhat higher opening of the Bund. Today s eco calendar heats up in the US with non-manufacturing ISM, ADP employment report and weekly jobless claims. Risks for the ISM are on the upside of expectations. That s negative for US Treasuries, but we think that also ADP needs to be strong to trigger a reaction ahead of tomorrow s payrolls. Yesterday s FOMC Minutes showed that the Fed would be willing to step up rate hikes in case of higher than expected economic growth. A wildcard for trading is the sentiment this morning as we re not sure about what caused it. We nevertheless hold our sell-on-upticks approach in US Treasuries with entry levels around The German Bund bounced into resistance and fell prey to profit taking on higher German inflation data. As the underlying economic picture in EMU improves further, we also expect more downside in the Bund despite the ECB s bond buying programme. German Bund: Sell-off after test of resistance on the back of higher inflation readings US Note future (March contract): new selling if this week s eco data beat expectations (ISM s, ADP, payrolls)? P. 3

4 Currencies Dollar falling prey to profit taking Modestly hawkish Fed Minutes didn t help the dollar Markets apparently focused Trump uncertainty USD correction accelerates in Asia Yuan strengthens R2 1,0874-1d R1 1,0653 EUR/USD 1,0554 0,0140 S1 1,0341 S2 1,0000 US eco calendar interesting, but USD investors might stay cautious ahead of tomorrow s payrolls Dollar correction accelerates in Asia. On Wednesday, the dollar fell prey to profit taking as Tuesday s test of the recent highs against the euro and the yen was rejected. Late in the session, the Fed minutes indicated risks for a tighter monetary policy if US growth would accelerate due the fiscal measures of the new administration. However, the FOMC Minutes didn t really help the dollar. Markets apparently focused on the Fed warning that the new policy and its impact on the economy contain a high degree of uncertainty. The dollar closed the day well in the red. EUR/USD finished at (from ), USD/JPY ended at from Overnight, Asian equities show a modest gains after a good performance in the US. December services PMI s in Japan and China improved slightly but failed to give clear guidance for regional trading. There was again very active yuan trading this morning. The PBOC fixed the yuan substantially stronger at USD/CNY (from ). Both the on-shore and the off-shore yuan rebounded sharply. Investors scaled back yuan shorts on recent measures of Chinese authorities to halt the decline of the Renminbi. Yesterday s broad USD profit taking continued in Asia. USD/JPY is trading in the area. EUR/USD is changing hands around Today, the US calendar is nice, but risks being overshadowed by tomorrow s payrolls report. Initial claims are expected to decline further 260K after an uptick two weeks ago but the figure might be distorted due to the holidays. The November ADP (private) employment surged by 216K, following a dismal 118K. Markets expect a trend-like increase of 175K for December. We see little reason to distance us from the consensus. The November Non-manufacturing ISM rose sharply to a high 57.2, the highest since October 2015, from 54.8 previously. Given the strong gains, markets expect a slight give-back to We understand the reasoning, but the manufacturing ISM surprised on the upside, which often precedes an upside surprise of the Non-manufacturing ISM too. Yesterday, the dollar fell prey to profit taking even as there was no fundamental news to support the move. For now, this is nothing more than a natural setback after a good run. The jury is still out whether this USD profit taking might be an indication that investors are turning more cautious on the Trump rally. The president elect will give a news conference next week. In a day-to-day perspective, some further dollar caution might persist going into to tomorrow s US payrolls. EUR/USD rebounds after rejected test of the cycle low USD/JPY topside test rejected P. 4

5 Global context: EUR/USD touched a new multi-year low at on Tuesday, but no sustained break occurred. This was the sign for ST profit taking. After the Trump rally, there is already a lot of good USD news discounted. Interest rate differentials between the dollar and the euro remain very high, but didn t widen anymore of late, slowing the rise of the dollar. Some further USD consolidation/correction might be on the cards short-term. Even so, the absolute interest rate support should provide a solid USD bottom as long as US data remain good and as long as there are no profound doubts on the ability of the Trumpadministration to execute a pro-growth agenda. EUR/USD is the first reference. A test of parity remains possible MT. EUR/USD /70 is a first resistance. A return north of would question the USD positive momentum. USD/JPY also faced a substantially setback over the last 48 hours. The LT trend remains up, but the break below a first minor support of suggests that the correction might have some further to go. EUR/GBP trending further north R2 0,8708-1d R1 0,8668 EUR/GBP 0,8548 0,0052 S1 0,8450 S2 0,8304 On Wednesday, sterling trading was again mainly driven by the broader moves in the dollar and the euro. The UK eco data were mixed and had no lasting impact on sterling trading. Cable trended higher in the 1.22 big figure as the dollar declined off Tuesday s correction top. EUR/GBP hovered in a sideways range around the 0.85 pivot. The pair closed the session at (from ). Today, the UK Markit services PMI is expected to ease slightly from 55.2 to Of late, most UK data surprise on the upside. Even so, we are a bit cautious to position for a stronger than expected figure. At some point, the domestic economy might feel some headwinds from higher import prices due to the post- Brexit weakening of sterling. The overnight rebound of EUR/USD will also put some upward pressure on EUR/GBP. So, EUR/GBP might gain further ground. Sterling held strong in November and December, but lost some momentum in the second half of last month. The euro remains soft across the board, but EUR/GBP is holding a sideways trading pattern in the 0.85 area. For now, we see no trigger for a clear directional move. Uncertainty on the next steps in the Brexit debate make sustained sterling gains difficult in the run-up to the end of March article 50 deadline. We slightly prefer a buy-on-dips strategy in case of return action toward the ST range bottom. EUR/GBP trending higher in the 0.85 big figure GBP/USD: rebounds on global USD correction P. 5

6 Calendar Thursday, 5 January Consensus Previous US 13:30 Challenger Job Cuts YoY (Dec) % 14:15 ADP Employment Change (Dec) 175k 216k 14:30 Initial Jobless Claims 260k 265k 14:30 Continuing Claims 2051k 2102k 15:45 Markit US Services PMI (Dec F) :45 Markit US Composite PMI (Dec F) :00 ISM Non-Manf. Composite (Dec) Japan 00:50 Monetary Base YoY (Dec) A 23.1% 21.5% 00:50 Loans & Discounts Corp YoY (Nov) A 2.63% % 01:30 Nikkei Japan PMI Services (Dec) A :30 Nikkei Japan PMI Composite (Dec) A :00 Vehicle Sales YoY (Dec) 10.8% 13.9% UK 10:30 Markit/CIPS UK Services PMI (Dec) :30 Markit/CIPS UK Composite PMI (Dec) EMU 11:00 PPI MoM / YoY (Nov) 0.3%/-0.1% 0.8%/-0.4% Germany 09:30 Markit Germany Construction PMI (Dec) China 02:45 Caixin China PMI Composite (Dec) A :45 Caixin China PMI Services (Dec) A Events 10:30 Spain to sell 0.75% 2021, 1% I/L 2030, 1.3% 2026 and 2.9% 2046 bonds 14:50 France to sell 0.25% 2026, 1.25% 2036, 3.25% 2045 and 1.75% 2066 bonds P. 6

7 10-year td -1d 2-year td -1d Stocks td -1d US 2,41-0,05 US 1,20-0,02 DOW 19942,16 60,40 DE 0,26-0,01 DE -0,79 0,00 NASDAQ 5477,005 47,92 BE 0,67 0,02 BE -0,69-0,02 NIKKEI 19520,69-73,47 UK 1,34 0,00 UK 0,15 0,01 DAX 11584,31 0,07 JP 0,06-0,01 JP -0,20-0,01 DJ euro ,52 2,50 IRS EUR USD GBP EUR -1d -2d USD td -1d 3y -0,10 1,65 0,73 Eonia -0,3450 0,0030 5y 0,09 1,91 0,94 Euribor-1-0,3690 0,0010 Libor-1 0,7733 0, y 0,69 2,25 1,33 Euribor-3-0,3200-0,0010 Libor-3 0,9987 0,0008 Euribor-6-0,2240-0,0030 Libor-6 1,3177 0,0000 Currencies td -1d Currencies td -1d Commodities td -1d EUR/USD 1,0554 0,0140 EUR/JPY 122,39-0,42 CRB 192,98 2,83 USD/JPY 115,97-1,96 EUR/GBP 0,8548 0,0052 Gold 1178,90 16,60 GBP/USD 1,2347 0,0089 EUR/CHF 1,0732 0,0033 Brent 56,32 0,51 AUD/USD 0,7315 0,0072 EUR/SEK 9,5683 0,0294 USD/CAD 1,3265-0,0172 EUR/NOK 9,0315 0,0209 Contacts Brussels Research (KBC) Global Sales Force Piet Lammens Brussels Peter Wuyts Corporate Desk Mathias van der Jeugt Institutional Desk Dublin Research France Austin Hughes London Shawn Britton Singapore Prague Research (CSOB) Jan Cermak Prague Jan Bures Petr Baca Bratislava Research (CSOB) Marek Gabris Bratislava Budapest Research David Nemeth Budapest ALL OUR REPORTS ARE AVAILABLE ON This non-exhaustive non exhaustive information information is based on short-term is based forecasts on for expected short developments term forecasts on the financial for expected markets. KBC Bank developments 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. P. 7