Headlines. Tuesday, 10 January Rates: Oil main driver core bonds. Currencies: Dollar and sterling ceding ground. Calendar

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1 Tuesday, 10 January 2017 Rates: Oil main driver core bonds. A declining oil price and fragile risk sentiment mainly benefited US Treasuries yesterday despite upcoming supply. Today s eco calendar remains thin with only US NFIB small business sentiment, suggesting more sentiment-driven trading ahead of Trump s press conference (tomorrow) and US retail sales (Friday). Currencies: Dollar and sterling ceding ground Yesterday, the dollar correction resumed as oil and core bond yields declined. Today, the eco calendar is thin. So, technical considerations will prevail. For now, the dollar didn t break any important levels against the euro or the yen. A flaring-up of Brexit uncertainty weighs on sterling. EUR/GBP jumped north of the resistance. Calendar Headlines S&P Eurostoxx 50 Nikkei Oil CRB Gold 2 yr US 10 yr US 2yr DE 10 yr DE EUR/USD USD/JPY US equities lost slightly ground with Nasdaq outperforming, hitting a new record high. Overnight, most Asian stock markets trade in positive territory with Japan underperforming as investors return from the long weekend. Brent crude declined from $57/barrel to $55/barrel yesterday. A string of negative news items since last Friday, including concerns about rising US output and planned sales from the strategic petroleum reserve, hit oil. China s producer price index grew 5.5% Y/Y last month, the quickest clip since September 2011 as commodities tied to heavy industry and construction drove more than three-quarters of price growth at factory gates. China will not allow non-financial firms' debt to rise beyond current levels, the head of the state planning agency said. The director of the National Development and Reform Commission (NDRC), also said China would step up efforts to push forward debt-to-equity swaps this year. Recovery from the economic crisis is "largely done" and officials should now turn to addressing longer-term issues like how to boost productivity, Atlanta Fed Lockhart said. A measure of short-term U.S. inflation expectations rose sharply in December, and Americans are more optimistic about the labour market outlook and their household finances, according to the NY Fed s survey of consumer expectations. President-elect Donald Trump is hiring his son-in-law, Jared Kushner, as a senior adviser in the West Wing, giving him a sweeping portfolio and status that will make him one of the most influential figures in the administration. Today s eco calendar only contains US NFIB small business optimism. Austria, Germany, the Netherlands and the US tap the market. EUR/GBP P. 1

2 Rates Tuesday, 10 January 2017 Core bonds profit as oil prices drop substantially. Decline in oil favours core bonds. Bund gains very modest, but US curve bull flattered moderately Peripherals outperform New highs in US equity markets. Periphery little changed US yield -1d 2 1,19 0,01 5 1,88 0, ,37 0, ,97 0,00 NFIB small business confidence to improve further Jolts job openings to ease, but from high level DE yield -1d 2-0,73 0,00 5-0,49 0, ,28 0, ,05 0,05 Today, global core bonds corrected higher in a risk-averse, news-poor trading session. Oil declined from mid-morning European time until late in the US session, losing about $2/barrel and pushing core bonds higher and equities lower. The yen typically profited from safe haven flows. However, it wasn t a full-fledged risk off session as peripherals outperformed core Bunds and as equity losses and core bonds gains weren t particularly big. Oil investors are worried that the OPEC production cuts will be less than announced while US shale oil production may fill the gap. In a daily perspective, the German yield curve shifted slightly lower with yield declines between 0.9 bps at the wings and 2.1 bps (10-yr). The US yield curve bull flattened with yields declining between 2.8 bps (2-yr) and 5.1/5.5 bps further out. US Treasuries thus outperformed Bunds and erased most of Friday s post-payrolls losses. On intra-emu bond markets, peripheral 10-yr yield spreads versus Germany declined by 5/6 bps (Italy, Spain, Portugal), with Greece underperforming (+5 bps). Boston Fed Rosengren finalized his hawkish transition by endorsing the Fed s 3 rate hikes scenario. Atlanta Fed Lockhart, who retires next month, said he sees the economy positioned for moderate growth and steadily improving conditions. He set 2 dots (rate increases for 2017), but didn t take into account potential fiscal easing. The latter is an upward risk factor that could warrant three rate hikes in 2017, he added. Eco calendar remains thin The EMU eco calendar contains no real market movers, even as French production for November is interesting. In the US, there are no strong market movers either. NFIB small business confidence is nevertheless interesting. It shot higher after the election of Trump with the main index up 3.5 points to 98.4 in November. For December, the market expects a further improvement to It would confirm the good readings of the ISM surveys which are based on the bigger firms. The JOLTS job opening are expected to remain at a high 5.5 million, off the cycle highs though. The report give gives some information about the labour market which is not available in the payrolls.. T-Note future (black) and Brent oil (orange) (intraday): T-Note future rallies while oil slides lower Oil price drops sharply after setting new high. Small double top appears on chart? P. 2

3 Supply heats up R2 165,48-1d R1 164,90 BUND 163,17-0,37 S1 162,62 S2 159,91 The Dutch and Austrian debt agencies kick off this week s scheduled EMU bond supply by respectively tapping the on the run 30-yr DSL ( 1.25B 2.75% Jan2047) and the on the run 10-yr RAGB (0.75% Oct2026) & 30-yr RAGB s (1.5% Feb2047) for a combined 1.1B. The Jan2047 DSL cheapened in ASW spread terms in the run up to the auction and trades relatively cheap on the Dutch yield curve. Both RAGB s also gave some concession going into today s tap and the Oct2026 RAGB is rather cheap on the Austrian curve. Overall, we expect plain vanilla auctions. Portugal s finance minister Centeno said yesterday that a syndicated bond issue is likely to be launched soon. In the, the US Treasury starts its mid-month refinancing operation with a $24B 3-yr Note auction. Currently, the WI trades around 1.475%. Slow start to trading, but downward bias remains Overnight, Asian stock markets trade mixed with Japan underperforming on the back of a stronger yen and catching up with yesterday s losses (Japan closed on Monday). The decline of the oil price halted and the US Note future stabilizes. Overall, we expect a neutral opening for the Bund. Today s eco calendar remains uneventful with only the US NFIB small business optimism. Heavy supply in EMU and US is a minor negative for core bonds this week. Oil prices and general risk sentiment will likely define intraday price swings ahead of Trump s press conference (tomorrow) and the US retail sales (Friday). Medium term, we expect US markets to further align with the Fed s scenario of 3 rate hikes this year. We hold our negative bias for US Treasuries with entry levels around (tested after payrolls). In EMU, the German Bund bounced into resistance at the start of the year 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): failed test of triggered new selling after strong payrolls P. 3

4 Currencies Dollar correction resumes Dollar declines off the recent high on weaker risk sentiment and oil Dollar correction continues in Asia R2 1,0874-1d R1 1,0653 EUR/USD 1,0596 0,0019 S1 1,0341 S2 1,0000 Eco calendar is again thin. How far will the USD correction go? On Monday, risk sentiment deteriorated. Oil, core yields and the dollar declined. The correction first appeared in USD/JPY. The pair touched in intraday top of early in the session, but closed the session at Initially the loss of the dollar against the euro was limited, but EUR/USD rebounded later in the session. The pair closed the day at (from on Friday). So, the payrolls didn t provide a lasting support for the dollar. Overnight, Asian equities are trading mixed. The Chinese December price data were mixed with CPI declining from 2.3% Y/Y to 2.1% Y/Y, but producer prices jumping from 3.3% Y/Y to 5.5%Y/Y, the highest level in 5-year. China set the yuan fixing against the dollar slightly stronger at despite a weak dollar. The correction of the dollar continues in Asia. USD/JPY dropped to the area and trades currently around EUR/USD trades currently again north of Today, the EMU eco calendar contains no market movers. This is also the case in the US. NFIB small business confidence is nevertheless interesting. It shot higher after the election of Trump. For December, the market expects a further improvement to It would confirm the good readings of the ISM surveys which are based on the bigger firms. The JOLTS job opening are expected to remain at a high 5.5 million. The data will only have a limited impact on USD trading, if anything. On Friday, a decent US payrolls report put a temporary floor for the USD correction in the run-up to the report. Most Fed comments at the end of last week were also moderately hawkish/usd supportive. Even, so, the dollar correction resumed yesterday. We don t think that the current USD setback will mark the start of a real trend reversal. However, the USD momentum clearly eased and the correction can still go a bit further. In this respect, we keep an eye on the European interest rate developments as spreads between the US and Europe show signs of topping out. Wednesday s speech president elect Trump is a wildcard for global markets and thus also for the dollar. EUR/USD:USD correction resumes, but no key resistance has been broken. USD/JPY: drifting lower, nearing the support area Global context: EUR/USD touched a new multi-year low at last week. After the Trump rally, there is a lot 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. P. 4

5 The big absolute interest rate support should provide a solid USD bottom as long as US data are good and as long as there are no profound doubts on the ability of the Trump-administration to execute its pro-growth agenda. A buy the dollar on dips strategy remains preferred. EUR/USD /70 is a first resistance. A return north of would question the USD positive momentum. On the downside, EUR/USD is still the first reference. A test of parity remains possible MT. USD/JPY started a correction last week and this move resumed yesterday / marks a first support. A break below that level would be a short-term negative. We stay USD/JPY positive long-term, but are in no hurry to rush in right now. An equity correction and a further decline in core yields might be a short-term negatives for USD/JPY. The /66 resistance has probably become a strong resistance short-term. EUR/GBP jumps above resistance. R2 0,9047-1d R1 0,8851 EUR/GBP 0,8724 0,0180 S1 0,8450 S2 0,8304 On Monday, headlines on a hard Brexit in the wake of comments from PM May during the weekend weighed on the UK currency. The UK Prime Minister said her comments were misinterpreted, but the relief for sterling was only temporary. The combination of Brexit uncertainty and a less positive global risk sentiment kept sterling in the defensive. EUR/GBP Jumped above the resistance and close the session at (from ). Cable also remained under pressure even as the dollar traded soft. The pair closed the session at (from ). Overnight the BRC like for like sales rose from 0.6M% Y/Y to 1.0% Y/Y. However it doesn t help sterling. EUR/GBP extends its rebound north of Cable stabilizes in the area. Today, there are no important eco data on the agenda in the UK. So sterling will again be driven by global factors and by headlines on the Brexit debate. Over the previous days, sterling obviously became again more sensitive to negative headlines on Brexit. Sterling held strong in November and December, but lost some momentum in the second half of last month. The EUR/GBP held a sideways trading pattern in the 0.85 area. Uncertainty on the next steps in the Brexit debate area again weighing on sterling in the run-up to the end of March article 50 deadline. We prefer a buy-on-dips strategy for EUR/GBP. If the break beyond is confirmed, it would improve the picture for EUR/GBP. EUR/GBP breaks beyond a first resistance GBP/USD: fails to profit from USD weakness P. 5

6 Calendar Tuesday, 10 January Consensus Previous US 12:00 NFIB Small Business Optimism (Dec) :00 Wholesale Inventories MoM / Trade Sales MoM (Nov F) 0.9%/-- 0.9%/1.4% 16:00 JOLTS Job Openings (Nov) Japan 06:00 Consumer Confidence Index (Dec) A: UK 01:01 BRC Sales Like-For-Like YoY (Dec) A: 1.0% 0.6% France 08:45 Industrial Production MoM / YoY (Nov) 0.6%/-0.2% -0.2%/-1.8% 08:45 Manufacturing Production MoM / YoY (Nov) 0.7%/-0.2% -0.6%/-1.5% China 02:30 CPI YoY (Dec) A: 2.1% 2.3% 02:30 PPI YoY (Dec) A: 5.5% 3.3% 10JAN-15JAN Money Supply M0 YoY (Dec) 7.0% 7.6% 10JAN-15JAN Aggregate Financing CNY (Dec) b b 10JAN-15JAN New Yuan Loans CNY (Dec) 676.8b 794.6b Norway 08:00 CPI MoM / YoY (Dec) -0.1%/3.9% 0.2%/3.5% Sweden 09:30 Industrial Production MoM / NSA YoY (Nov) 1.5%/0.0% -1.3%/-0.5% Events 11:15 Austria to sell 0.75% 2026 & 1.5% 2047 Bonds 11:30 Germany to sell 1B 0.1% I/L 2026 Bonds 11:30 Netherlands to sell up to 1.25B 2.75% 2047 Bonds 19:00 US to sell $24B 3-yr Notes 10-year td -1d 2-year td -1d Stocks td -1d US 2,37 0,01 US 1,19 0,01 DOW 19887,38-11,91 DE 0,28 0,03 DE -0,73 0,00 NASDAQ 5531,818 43,88 BE 0,68-0,01 BE -0,62 0,02 NIKKEI 19301,44-152,89 UK 1,34 0,04 UK 0,18 0,05 DAX 11563,99-20,95 JP 0,06-0,01 JP -0,23-0,03 DJ euro ,97-7,50 IRS EUR USD GBP EUR -1d -2d USD td -1d 3y -0,10 1,67 0,71 Eonia -0,3510 0,0030 5y 0,11 1,92 0,93 Euribor-1-0,3710-0,0020 Libor-1 0,7633-0, y 0,70 2,24 1,33 Euribor-3-0,3220-0,0010 Libor-3 1,0101 0,0050 Euribor-6-0,2300-0,0040 Libor-6 1,3243 0,0028 Currencies td -1d Currencies td -1d Commodities td -1d EUR/USD 1,0596 0,0019 EUR/JPY 122,64-0,30 CRB 190,60-3,10 USD/JPY 115,75-0,47 EUR/GBP 0,8724 0,0180 Gold 1186,80 11,80 GBP/USD 1,2145-0,0234 EUR/CHF 1,0741 0,0036 Brent 54,93-1,82 AUD/USD 0,7361 0,0048 EUR/SEK 9,5735 0,0291 USD/CAD 1,3224-0,0041 EUR/NOK 9,0572 0,0583 P. 6

7 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 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. P. 7