Wednesday, 14 September 2016

P. 1

Rates: Sell-off resumes

The sell-off on core bond markets continued. The long end of the European yield curves surged above first resistance levels since last week’s ECB meeting (European taper tantrum?). The move occurs in lockstep with crashing equity markets and declining oil prices. At this stage, it’s still corrective in nature, but key technical levels are lining up.

Currencies: dollar profits slightly from higher LT core yields

Yesterday, the dollar faced conflicting input with higher core yields but at the same time a further decline of equities. The first factor prevailed causing modest USD gains. The dollar might stay well supported short-term, but we don’t expect a break beyond technically important resistance. The sterling correction accelerates after soft UK price data.

Calendar

• US Equities reversed Monday’s post-Brainard gains ending 1-1.5% lower led by

energy shares. This morning, most Asian shares trade lower too on renewed fears central banks might switch to a less accommodative monetary policy.

• The Bank of Japan plans to make its controversial negative interest rate policy the centrepiece of future monetary easing, the Nikkei newspaper reports, as expansions to asset buying nears their limits.

• Portugal’s weak banking sector remains a source of risk to the government, even after the agreement to recapitalise state-owned bank CGD last month, rating agency Moody’s warned, adding that the country’s weakening economy and increasing risks to the debt trajectory are exerting downward pressure on the country’s creditworthiness.

• The People’s Bank of China boosted its cash injections to a five-month high as overnight money market rates climbed before a series of holidays. The yuan rose in both the onshore and offshore market with speculation that policy makers are propping up the currency before the holidays.

• Brent crude oil prices continued its volatile trading pattern, falling 3% yesterday, to close just above $47/barrel. This morning, prices are picking up after API inventory data reported a rise of 1.4 million barrels last week, less than was expected.

• Today, the eco calendar contains the euro zone industrial production data and UK jobless claims. ECB’s Knot & Nowotny are scheduled to speak.

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

Wednesday, 14 September 2016

P. 2

Global market sell-off resumes, including core bonds

Yesterday, initially calm looked restored in global markets after the dovish comments of Fed Brainard on Monday evening. However, doubts apparently lingered on about the prospect of less generous central banks and the sell-off of core bonds, equities and oil resumed mostly in the US session. Those markets were priced to perfection, including ongoing unconditional central bank support and decent eco data. Coming after a long period of low volatility, the smallest doubt may trigger a correction and that’s what played since the ECB meeting, the unusual agnostic comments of ECB Draghi (Thursday) and the unusual hawkish comments of a long-standing Fed dove, Eric Rosengren, coming after weaker-than-expected data. Of course, it is a bit too early to qualify the moves as a complete trend change. It still may be a profit taking move, especially as financial unrest may soon convince central banks to come to the rescue, starting next week with Fed and BOJ. However, the technical pictures (see lower) become infected, suggesting that complacency should be avoided. Interestingly, core bonds could again not profit from lower oil and equity prices.

In a daily perspective, the German and US yield curves bear steepened with German yields 0.5 bps (2-yr) to 4.2 bps (30-yr) higher, while US yields changed between 2.8 bps (2-yr) to 7.4 bps (30-yr). The eco calendar contained only second tier data with both German ZEW indicator and US NFIB small business optimism undershooting expectations without directly impacting markets. The 30-yr US bond auction went roughly, while the oil price slumped starting with an IEA report that saw the oil glut persisting (reversal of earlier assessment) in 2017 and Libya announcing a doubling of its oil production.

Thin, unattractive market calendar

After a rebound in June, euro zone industrial production is expected to have dropped again in July with the consensus looking for a 1.0% M/M decline. German (-1.5% M/M) and French (-0.6% M/M) production disappointed, while Spanish (0.2% M/M) and Italian (0.4% M/M) production surprised on the upside. Overall though, we see no reasons to distance ourselves from consensus. The ECB speakers may be interesting to get more info from last week’s ECB meeting, but it is unlikely they will be really market moving.

Rates

US yield -1d2 0,7983 0,03235 1,2456 0,053910 1,7324 0,074730 2,4688 0,0913

DE yield -1d2 -0,6180 0,01505 -0,4480 0,022010 0,0760 0,047030 0,6763 0,0533

Bund future (orange) and S&P future (black) intraday: sell-off resumes during US session

US 10-yr yield above 1.63% (2013/2015 and early 2016 low) and now testing the pre-Brexit high at 1.75%. If sustainably broken, the new

trading range may become 1.75%-2%

Global sell-off resumes

US & German curves bear steepen substantially

Intra-EMU yield spread changes again minimal except for Portugal (+7 bps).

Weak euro area production expected

ECB’s Knot & Nowotny are scheduled to speak

Wednesday, 14 September 2016

P. 3

Supply from Germany, Portugal and the US

The German Finanzagentur taps the off the run 30-yr Bund (€1B 2.5% Jul2044). Total bids averaged only €1.3B at the previous 4 30-yr Bund auctions and we don’t expect much improvement today given the wild swings at the very long end of the yield curves recently (eg very weak US 30-yr Bond auction; see below). The Bund did cheapen of course over the last week, but trades normal on the German curve. The Portuguese debt agency taps two off the run OT’s for a combined €0.75-1B: OT 4.95% Oct2023 & OT 4.1% Apr2037. The bonds cheapened significantly in ASW spread terms going into the auction and especially the Oct2023 bond is cheap on the Portuguese curve. We expect decent demand. The US Treasury ended its mid-month refinancing operation with a rough $12B 30-yr Bond auction. The auction stopped a full basis point above the 1:00 PM bid side with the smallest bid cover (2.13) since 2009. Bidding details showed very little interest from all categories (dealer, direct and indirect bid)

Sell-off cross markets continues

Overnight, losses on Asian stock markets are limited given WS’s performance yesterday (-1.5%). Brent crude and the US Note future stabilise, but still look fragile.

Today’s eco calendar is empty apart from ECB speakers and bond auctions. The main question will be whether the sell-off on bond & equity markets, initiated after last week’s ECB meeting (European taper tantrum?!), continues. Both US and German long term yields (10yr – 30yr) broke above first resistance levels, suggesting that there’s more upside. This corrective bear steepening also occurs despite that the Fed will likely remain on hold next week. In the current market environment, core bonds don’t profit from safe haven flows if stock markets crash or oil prices dip. All three asset categories currently rise and fall together. At this stage, we think that the move is still corrective in nature as it lacks at a real genuine driver.

Technically, both the Bund and the US Note future extensively tested the important support levels, respectively at 163 and at 130-01+. A break below paves the way for more losses and signals that there’s more going on than just repositioning.

R2 168,86 -1dR1 165,67BUND 162,83 -0,8100S1 162,56S2 161,11

German Bund: Sell-off since ECB meeting. European taper tantrum?!

US Note future: US Note future suffers as well even if the Fed will likely stand put in September

Wednesday, 14 September 2016

P. 4

Dollar records slight gains on higher core bond yields

On Tuesday, developments in equities and on interest rate markets provided a diffuse input for USD trading. European equities didn’t open too bad but sentiment deteriorated again later in the session. US equities closed with substantial losses. At the same time, yields gradually rebounded after Monday’s post-Brainard setback. Especially bonds with lower maturities were sold. Even so, the rise in core bond yields supported the dollar. Volatility/ a decline in the oil prices was also a slightly USD positive. EUR/USD closed the session at 1.1220, marginally softer from the 1.1235 close on Monday. The gains of USD/JPY were slightly bigger, despite the decline of equities. USD/JPY finished the day at 102.56 (101.85 on Monday). Even so, the swings in the dollar were again modest given the volatility on other markets.

Overnight, most Asian indices trade in the red, but the losses are contained compared to setback in the US yesterday evening. In Japan, there are press articles that the BOJ is considering making the negative policy rate the centrepiece of its monetary policy going forward. This might be slightly negative for the yen short-term, but there are a lot of questions on the viability of this option in a longer term perspective. USD/JPY maintains its positive bias and trades in the 103 area. The rise in USD/JPY also limits the losses of Japanese equities. EUR/USD still holds in well-known territory in the 1.1225 area.

Today, the eco calendar remains thin today with only euro zone industrial production data. ECB’s Knot & Nowotny are scheduled to speak. After a rebound in June, euro zone industrial production is expected to have dropped 1.0% in July. On the basis of the results already published from members states, we see no reasons to expect a material change from consensus. We don’t expect a big impact on EUR/USD. Over the previous days , the rise in core LT bond yields was slightly supportive for the dollar. Usually, currencies are more sensitive to short-term yields/yield differentials. In a day-to perspective, there is no reason to row against the gradual/cautious rise of the dollar. At the same time we don’t expect this driver (rise in long-term yields) to be enough to push EUR/USD (and USD/JPY) beyond important support/resistance levels unless the market again sees higher chances of a September rate hike.

Currencies

R2 1,1366 -1dR1 1,1327EUR/USD 1,1222 -0,0006S1 1,1123S2 1,1046

The dollar receives conflicting input for other markets

Rise in core bond yields currently slightly USD supportive

EUR/USD maintains tight range despite volatility on other markets

USD/JPY gaining again slightly ground on higher core bond yields

Eco calendar remains thin

Global sentiment on risk and swings in core bond yields will still dominate USD trading.

Wednesday, 14 September 2016

P. 5

Last week, mediocre US data made a September Fed rate hike unlikely even as comments from individual Fed members suggested that the debate wasn’t completely over. EUR/USD rebounded (temporary?) above the resistance at 1.1252. This made us change our short-term bias from USD positive to neutral. The ECB policy decision didn’t change the picture for EUR/USD trading. Range trading in the 1.1123/1.1366 remains favoured. Even so, the topside of EUR/USD still looks well protected. Sentiment on USD/JPY also showed some swings of late. Receding chances of a Fed rate hike and uncertainty about the BOJ’s commitment to ease policy further initially weighed on USD/JPY. The day-to-day momentum in USD/JPY remains fragile/indecisive even after yesterday’s rebound. We expect the 99.54/99.02 area to provide strong support. 104.32 is now the first point of reference on the topside.

Sterling hammered after soft UK price data

On Tuesday, the UK price data were the driver for sterling. The consensus anticipated a substantial monthly rise in prices as the post-Brexit decline of sterling could gradually filter through into domestic prices. However, prices rises in August were slower than expected. So, for now, the price data are no obstacle if the BoE would find it necessary to ease policy further. The publication of the UK price data marked the start of a gradual but protracted decline of sterling. EUR/GBP traded in the 0.8435 area around the publication of the CPI data, but rebounded to the 0.8520 area and closed the session at 0.8504. Cable dropped from the 1.3325 area; set an intraday low around 1.3167 and close the session at 1.3193. USD strength slightly reinforced the cable decline.

Today, the UK labour market data will be published. The report has probably become less important for sterling trading than was the case earlier this year when markets were pondering the timing of a BoE rate hike. A decent report probably won’t help sterling much. A very weak report or very low wage growth might raise the case for additional BoE easing and be (modestly) negative for sterling. We also keep an eye on the impact of oil and global risk sentiment on the performance of sterling.

Sterling had a strong run from mid-August as the UK economy showed resilience post-Brexit. EUR/GBP declined off the 0.8724 post-Brexit top. Gradually a lot of good news was discounted and finally sterling fell prey to profit taking. For the technical picture of sterling against the euro to improve, EUR/GBP should drop below 0.8344/33 and even 0.8251. This looks difficult short-term. A countermove is developing. Cable also showed a positive momentum. A first resistance at 1.3372 was temporary regained, but the gains could not be sustained. For now, we expect the sterling correction on the August rally to continue.

R2 0,8725 -1dR1 0,8566EUR/GBP 0,8501 0,0071S1 0,8344S2 0,8251

EUR/GBP: sterling correction accelerates after soft price data

GBP/USD: topside test rejected .

Wednesday, 14 September 2016

P. 6

Wednesday, 14 September

Consensus Previous

US 13:00 MBA Mortgage Applications -- 0.9% 14:30 Import Price Index MoM YoY (Aug) -0.1%/ -2.2% 0.1% / -3.7% Canada 14:30 Teranet/National Bank HPI MoM YoY (Aug) -- 2.0% /10.9% Japan 04:00 Tokyo Condominium Sales YoY (Aug) A -24.7% -30.7% 06:30 Industrial Production MoM YoY (Jul F) A-0.4%/-4.2% 0.0% / -3.8% 06:30 Capacity Utilization MoM (Jul) A 0.6% 1.5% UK 10:30 Claimant Count Rate (Aug) 2.2% 2.2% 10:30 Jobless Claims Change (Aug) 1.8k -8.6k 10:30 Average Weekly Earnings 3M/YoY (Jul) 2.1% 2.4% 10:30 Weekly Earnings ex Bonus 3M/YoY (Jul) 2.2% 2.3% 10:30 ILO Unemployment Rate 3Mths (Jul) 4.9% 4.9% EMU 11:00 Industrial Production MoM YoY (Jul) -0.8%/ -1.0% 0.6% / 0.4% France 08:45 CPI EU Harmonized MoM YoY (Aug F) 0.3% / 0.4% 0.4% / 0.4% Italy 10:00 CPI EU Harmonized YoY (Aug F) 0.0% 0.0% Sweden 09:30 GDP QoQ YoY (2Q F) 0.3% / 3.1% 0.3% / 3.1% Events 09:00 ECB’s Knot Speaks at OeNB/BIS Conference in Vienna 11:00 ECB’s Nowotny Speaks at OeNB/BIS Conference in Vienna 15:50 Bank of England Bond-Buying Operation Results Norway Bond Auction (NOK2B 1.5% Feb2026) (11:05) Germany Bund Auction (€1B 2.5% Jul2044) (11:30) Portugal Bond Auction (€0.75-1B 4.1% Apr2037 & 4.95% Oct2023) (12:30)

Calendar

Wednesday, 14 September 2016

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 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

10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 1,73 0,07 US 0,80 0,03 DOW 18067 18066,75DE 0,08 0,05 DE -0,62 0,02 NASDAQ for Exch - NQI #VALUE!BE 0,31 0,05 BE -0,54 0,02 NIKKEI 16614 16614,24UK 0,92 0,05 UK 0,17 0,03 DAX 10386,6 10386,60JP -0,01 0,00 JP -0,26 -0,03 DJ euro-50 2975 2974,80

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,346 -0,0023y -0,194 1,092 0,493 Euribor-1 -0,37 0,00 Libor-1 USD 0,27 0,275y -0,085 1,234 0,633 Euribor-3 -0,30 0,00 Libor-3 USD 0,38 0,3810y 0,402 1,552 0,980 Euribor-6 -0,20 0,00 Libor-6 USD 0,53 0,53

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,12225 -0,0005 EUR/JPY 115,52 1,18 180,5599 1320,84 47,26USD/JPY 102,97 1,11 EUR/GBP 0,8501 0,0071 - 1d -2,38 -7,62 -0,75GBP/USD 1,3195 -0,0120 EUR/CHF 1,0962 0,0046AUD/USD 0,7477 -0,0052 EUR/SEK 9,5672 0,03USD/CAD 1,3153 0,0092 EUR/NOK 9,2769 0,03